Let it not be said that Berkeley Square Blog will not stand up to the tough problems. Here is a platform for Social Security reform that, as a sideline, obviates the gay marriage contretemps.
My plan is to assetize Social Security, moving it from an unfunded liability to an actual personal asset. The vehicle to begin this process was suggested by Holman Jenkins in the OpinionJournal Political Diary on December 6:
Don't finance the creation of new private accounts with payroll tax revenues. Keep sucking this revenue stream into Washington and paying it out to current beneficiaries. But now, instead of a worker's payroll contributions disappearing annually without so much as a receipt from the federal government, he'd get back a Social Security Administration zero-coupon bond with a face value equal to a proportion of his future Social Security benefit. These bonds would be fully tradable, fully liquid, and would go right into an IRA account for each worker (to make sure the money is saved for retirement). Workers would be free to hold the Social Security bonds or cash them out and reinvest the money in a stock mutual fund, Treasury bond or any other approved savings vehicle.Presto, under the current whackadoodle system of federal accounting, there'd be no cash transaction that would increase the visible federal deficit. In fact nothing would change except that a worker's individual Social Security entitlement would now become a liquid asset.
Now, it's absolutely essential that these Social Security bonds be issued as what's called "agency debt" -- they would NOT be backed by the full faith and credit of the federal government like a U.S. Treasury bond. They'd be obligations of the Social Security Administration. That's because the problem we're trying to recognize is the long-term unsustainability of Social Security's current benefit structure. Not only would our approach have the cosmetic advantage of not relying on a cash transaction that would appear to increase the federal deficit, but the market value of the bonds would reflect a realistic assessment of Social Security's ability to meet its promises out 10 years, 20 years, 30 years, etc. Each worker could judge for himself. He'd be free to bet on these bonds being honored at face value when he retires -- or free to sell them at the market value and reinvest the funds for a better expected long-run return.
The key is assetization, Jenkins is absolutely right to take the unfunded liability of Uncle Sam's promise to keep me in guitar strings in my dotage and formally recognize that as an asset. A zero is a perfect vehicle; and issuing them from SSA and not the Treasury is correct.
The problem is the gub'mint's statistical expectation of my mortality. If my SS is given to me as a bond and I die on my 65th birthday, they have given me money I wouldn't otherwise collect.
I have left this bond to my wife (and presumably kids, mutatis mutandis). This money will no doubt be a great comfort to them. Especially since the jk plan eliminates spousal and dependent child benefits for Social Security.
All benefits accrue to the worker, the family will not get benefits (unless they work and retire) -- but they will have the breadwinner's benefits as a real asset.
This fixes Social Security, recognizes exigencies in contemporary family arrangements, gives the SSA a true accounting and transparent visibility of future obligations, and gets the government out of the marriage business as the worker can bequeath his/her retirement assets to anybody he/she chooses.
Most importantly, it changes SS from a welfare program to a retirement program. The enacting or future Congresses can shape the liquidity of these bonds, what percentage can be traded for private assets and the like. But President Bush, with help from jk and Holman Jenkins, Jr., has done the heavy lifting of converting unfunded liabilities to assets. Everything else will follow.
I keep looking for the catch. Wow, it looks like it could actually work. Would estimating a future social security benefit be incredibly difficult?
Posted by: Silence Dogood at December 22, 2004 08:57 AMYou can calculate your expected benefits at:
http://www.socialsecurity.gov/retire2/AnypiaApplet.html
This plan reminds me of that famous scientific cartoon showing, in the midst of a seemingly endless series of seemingly incomprehensible mathematical equations, the words "then a miracle occurs."
Where's the catch? How about here: SSA ZCB "with a face value equal to a PROPORTION of his future Social Security benefit." What proportion? What benefit? Or here: "Presto ... a worker's individual Social Security ENTITLEMENT would now become a liquid ASSET." While you're at it, I've got some base metal that I'd like converted to gold.
The simple fact is that we already have an instrument we can use to 'assetize' our retirement (ahem) 'entitlement' as well as a mechanism for increasing its value. The instrument is called the 'dollar' and the mechanism is referred to as 'investment.' Any additional layers inserted between these items and the individual have no purpose but to enable corruption and thievery, i.e. redistribution.
Finally, I don't think you've been paying close enough attention to the SS reform debate to notice that the greatest stumbling block amongst wobbly Republicans is any reduction whatsoever in the existing entitlement. (Never mind the fact that indexing future benefits to inflation is not a reduction in benefits, but the elimination of an artificial and automatic HIKE in benefits.) This JKSSR plan - "the family will not get benefits" - while absolutely fair and just, is even MORE unacceptable politically. If Dubya is "heartless" for proposing the inflation indexing of benefits then you would certainly be deemed completely bodyless for your 'mean spirited' proposal.
On a positive note, your work on "JKDA" and "SilenceSecure" ('First, They Came for Merck' - December 18, 2004) was truly inspired!
Posted by: johngalt at December 23, 2004 12:25 PMJust the miracle of financial instruments. Bonds may be arcane but they are useful. And they *are* dollars, they are just "future dollars" is all.
As far as the "proportional" criticism, you are quoting Mr. Jenkins's plan. I should have clarified another area of departure. I am giving (annually) a zero coupon bond for a fixed dollar value indexed to my current estimated Social Security entitlement.
The purpose here is to be revenue neutral: to change the structure of payments and holdings from a promise to an asset. This does not "fix" social security, you are right. But it does put it on a platform where it can be adjusted and privatized without "transition costs." In the process, assetization fundamentally changes the character of the plan without changing its costs.
Every politician of every party is right to be scared of the blue-hair lobbies. The AARP is a powerful group to pander and demagogue toward. Yet President Bush sys he's a leader, and the tax cuts in the first term stand as empirical proof.
If I implied it will be easy, I'm sorry. But my way is easier than a straight privatization of a fixed percentage because it does not raise the visible de_bt.
I'm sorry JK, but you still need to explain to me how "indexed" to a "current estimated SS entitlement" differs from "a proportion" of a "future SS benefit." What is an index but a proportion, and what is being estimated but the entitlement/benefit's future value?
Setting aside this aspect, both plans aim to make SS entitlements/benefits an asset that may be traded on the open market. Jenkins writes, "Each worker could judge for himself. He'd be free to bet on these bonds being honored at face value when he retires - or free to sell them at the market value and reinvest the funds for a better expected long-run return." Now, what happens to the market value of these bonds when not only workers, but investors, conclude that a better long-run return can be expected somewhere - anywhere - else? Can you say "government bailout" boys and girls?
Posted by: johngalt at December 26, 2004 09:54 AMIf my expected benefit is $1200/mo, give me a bond that is worth $14,400 upon maturity in 2025. I think that there will be sufficient liquidity in those bonds. I find it hard to imagine the government's not paying the full amount. But the more people want out, the more the prices will go down -- and somebody will snap them up if the d i s c o u n t is sufficient. The market will take care of that aspect.
I think that there will have to be a limit on how much you can trade, not because of liquidity but rather to ensure that participants do not trade too much into speculative investments.