Snake Oil

Atrios points us to two Washington Post articles that address the realities of Bush’s proposed Social Security reform plan. I’m going to quote some highlights here, and hopefully our resident economic expert, Demosthenes, will weigh in later with analysis that’s actually based in genuine expertise, as opposed to my less critical analysis: This is bullshit, man!

First, in their SOTU address wrap-up, the WaPo reports:

Even more curiously, a "senior administration official" who briefed reporters on the Social Security proposal earlier today disclosed details of the White House plan that I don't think will play well in Peoria. Most significantly, this official revealed that most or all of the earnings from new "personal" or privatized accounts will be paid not to the holder of the account, but to the government. The senior official called this a "benefit offset." It's one way to finance the creation of these private accounts, but it's going to cause quite a political stir, I think.

This certainly seems to contradict the president’s assertion made in the SOTU address:

And best of all, the money in the account is yours, and the government can never take it away.

I suppose it’s technically true of the principle, but they would be taking away earnings above principle. You’re better off in a 401(k), where the government can keep its filthy hands off both.

Secondly, is a more detailed analysis of the plan:

Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately get to keep only the investment returns that exceed the rate of return that the money would have accrued in the traditional system.

The mechanism, detailed by a senior administration official before President Bush's State of the Union address, would hold down the cost of Bush's plan to introduce personal accounts to the Social Security system. But it could come as a surprise to lawmakers and voters who have thought of these accounts as akin to an individual retirement account or a 401(k) that they could use fully upon retirement.

[…]

The plan is more complicated. Under the proposal, workers could invest as much as 4 percent of their wages subject to Social Security taxation in a limited assortment of stock, bond and mixed-investment funds. But the government would keep and administer that money. Upon retirement, workers would then be given any money that exceeded inflation-adjusted gains over 3 percent.

That money would augment a guaranteed Social Security benefit that would be reduced by a still-undetermined amount from the currently promised benefit.

In effect, the accounts would work more like a loan from the government, to be paid back upon retirement at an inflation-adjusted 3 percent interest rate -- the interest the money would have earned if it had been invested in Treasury bonds, said Peter R. Orszag, a Social Security analyst at the Brookings Institution and a former Clinton White House economist.

"I believe you should be able to set aside part of that money in your own retirement account so you can build a nest egg for your own future," Bush said in his speech.

Orszag retorted: "It's not a nest egg. It's a loan."

Under the system, the gains may be minimal. The Social Security Administration, in projecting benefits under a partially privatized system, assumes a 4.6 percent rate of return above inflation. The Congressional Budget Office, Capitol Hill's official scorekeeper, assumes 3.3 percent gains.

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's.

Pretty tasty, huh? Forget 401(k)—you’d be better off sticking it under your mattress.