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02/04/2005 Archived Entry: "Interesting comment on Social Security Proposal"

This insight on the proposed "privatization" of Social Security comes from a post by Matt Stoller on the MyDD blog. Key words: "benefit offset."

Stoller writes, It's finally clear to me what this Social Security fight is about. It's a tax increase to pay for the war and the distribution of capital upward. Here's how they do it....[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.

Atios spotted the glaring weakness in the Bush plan, the 'benefit offset'. It's a very simple concept. If you invest money in their privatization scheme and do well, the government simply takes the surplus. That's right - if you do badly, you're on your own, but if you do well, the government takes your winnings anyway.

Sure, your account will grow and it'll look really cool. But when you actually try to use it for, say, retirement, it will be taxed away. Meanwhile, your guaranteed benefits will have been eviscerated because well you should have been saving in the private accounts, right?

This is the way they pay for their tax cuts and wars. They raise taxes on the rest of us, but they don't call it a tax. Instead, they hide it through confusing frauds like their scheme to privatize Social Security. At the end of the day, it's both a benefit cut and tax increase, as written by con men with legislative aptitude. Their scheme has never been about building a retirement security for Americans. Their scheme is about forcing us to subsidize an inefficient economy designed for the superwealthy while keeping the rest of us in the dark.

Bear with me while I try to get an exact handle on how the "benefit offset" would work. There is some confusion spreading around the Internet because the Washington Post misreported the story in its print edition on February 3rd and, so, had to print a prominent retraction and correction later that same day in its online version. The corrected article opens, Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately earn benefits more than those under the traditional system only if the return on their investments exceed the amount their money would have accrued under the traditional system.

The Fort Wayne Journal offers a slightly different description. 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 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 might be minimal. The Social Security Administration, in projecting benefits under a partly 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.

The most accurate explanation may be found in the White House Press Release entitled BACKGROUND PRESS BRIEFING ON SOCIAL SECURITY. But I can't read anymore of it without glazing over...

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