[Homestead] Social Security as of 2/23/05

Gene GeRue genegerue at ruralize.com
Wed Feb 23 09:54:03 EST 2005

I think the interested among us now have sufficient information to 
determine the facts of what the president proposes for changes to the 
Social Security system. Here is what I believe I know as of right now:
1) The proposed changes would not diminish the projected long-term SS 
system shortages;
2) Private accounts would be managed by someone other than the account 
holders, so individuals would not control investment decisions regarding 
their accounts;
3) Those private accounts would have to earn three percent above inflation 
to create a break-even retirement benefit;
4) Individuals would have very little control of the private accounts, even 
extending to bequeathing them to their heirs;
5) The private accounts would not, in the final effect, be personal after 
all, but would be merely a different accounting system;
6) The Wall Street investment community would make more profits;
7) There would be an increased capital pool for American and international 
8) Congress would have to raise everyone's taxes to make up for the capital 
drain from the SS system needed to fund the private accounts.

That's what I think right now. Here's a NYT's editorial giving more details:



As he stumps for Social Security privatization, President Bush always gets 
a big round of applause for promising that the money in a private account 
could be passed on to one's heirs.

If those happy clappers only knew the details.

Under the president's proposal, when you retired you would not be able to 
start spending the money in your private account until after you bought an 
annuity, a financial contract in which you hand over a lump-sum payment 
and, in return, get a monthly stream of income for life. The upside of 
buying such an annuity would be that you'd be protected against outliving 
all of your money. The downside is that even if you died immediately after 
retirement, the most your heirs would inherit would be the amount that 
remained in your private account after you had paid for the mandatory 
annuity. (If you lived longer, of course, you might well need to spend the 
remainder to supplement the annuity's low monthly payout. )

The idea of making the private accounts part of one's estate is 
particularly appealing to low- and middle-income earners, who may not have 
all that much to leave to their heirs under normal circumstances. But those 
are exactly the people who would have to use the largest share of their 
accounts to buy annuities. The government would require that annuities be 
large enough to keep recipients above the poverty line for life. The less 
you had to start with, the less you'd have left over after buying the 
mandatory annuity.

What if you died before you retired? As with many claims Mr. Bush makes 
about Social Security privatization, the fate of your private account in 
the event of your untimely death is unclear. But one issue that raises big 
doubts about whether that money could be inherited is the question of how 
the trillions of dollars the government would have to borrow to set up a 
privatized system would be repaid.

Under the president's proposal, when you retired, your traditional Social 
Security retirement benefit would be cut by an amount equal to all the 
deposits you had made into your private account plus interest. (The 
interest would be three percentage points higher than the rate of 
inflation.) The benefit cut would be each person's contribution to repaying 
the huge debt the Bush administration would take on to "pay for" privatization.

But if you died before you retired, you would have already used some of 
that borrowed money to set up the private account and yet would never have 
made any contribution to repaying the debt. So in that case, how would the 
government recoup your share of the amount it had borrowed? Well, it could 
let your share of the debt go unpaid - in effect bequeathing to your heirs 
and their fellow citizens ever-higher deficits. Or your spouse could 
inherit your private account and the benefit cut that went with it. Or the 
government could take its cut from your private account before the money 
went to your survivors - a grab that could wipe out your stash.

The White House would hotly deny that the last alternative could happen. 
Nothing freaks out the Bush administration more than the suggestion that 
the government would ever tap someone's private account - even for money 
that is owed to the government. It doesn't, however, seem too bothered 
about gutting your traditional benefits. Go figure.


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