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02/04/2005 Archived Entry: "The new retirement scam"
Wendy's blog entry about the Bush Social Security plan prompted my curiosity. Is the proposed deal as shady as it sounds? So I took some time to wade through the lengthy background briefing to see if it offered more detail.
On the subject of "benefit offset", it doesn't appear that the feds will take the first 3%, or anything above 3%. What they seem to be saying is, if your "personal account" earns more than 3%, then you're better off choosing that than staying in the traditional Social Security system.
The way that the election is put before the individual in a personal account structure of this type is that in return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system.
Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase as a consequence of making that decision.
Now this sounds like, if you open a personal account, you also continue to receive normal Social Security benefits, but those benefits are reduced by an amount corresponding to a 3% rate of return on your personal account. How they're going to calculate that is an unexplained mystery. Will they compute how much your investments would have earned at 3%, and subtract that "gain" from your personal account before paying your benefits?
(I notice they're perpetuating the fiction that there is a Social Security "trust fund" whose bonds pay 3%. Is there anyone who isn't aware that SS is a pay-as-you go system, and your SS contributions are "loaned" to the federal government?)
Speaking of gains...the "senior administration official" evaded a question about whether capital gains tax will be payable on these personal accounts.
what we have been assuming in all of our modeling runs is that the taxation of Social Security benefits, whether from the traditional system or from the personal account system, would not change. But that's, obviously, that's a policy decision that extends beyond the 10 years that we're looking at right now.
That "would not change" dodges the question: will these accounts be taxed as Social Security benefits, or as investment accounts, under the current rules? And of course he leaves an out for the Administration to change the rules later.
One thing is abundantly clear: you won't own your account. You won't be able to take money out of your account freely, or borrow against it. If your investment has grown to the point where it can pay you an (unspecified) monthly benefit, and have some cash left over, then you are permitted to withdraw that excess cash only.
The limitation that we're putting is basically on those who have a total amount of money beyond that, so that they cannot, by spending down the personal account, place themselves into poverty as a consequence.
Obviously, if the overall benefit were below the poverty level, they would basically have to annuitize all of it and take it all as a monthly stream of benefits.
The implication here (and elsewhere in the briefing) is that at retirement, the feds will convert your investment account into an annuity sufficient to pay your benefits until you die, and the rest is yours, to reinvest or to leave as an inheritance. But if you die early, the feds -- not your heirs -- will keep any leftovers out of that annuity:
Q: But at death, what happens to the annuity? Does it go to the federal government?
SENIOR ADMINISTRATION OFFICIAL: The annuity part would not come back, obviously, but the rest could be inherited.
Remember, it's the feds offering the annuity, not an insurance company. Now all the feds have to do is play games with their actuarial esimates -- say, by "budgeting" for a lifespan of 100 years, in the name of being "conservative," of course -- to ensure that there will be a tidy pool of cash left over as people die.
Every aspect of this scheme will be operated, controlled, and regulated by the federal government, and there's no end to the ways the numbers can be jiggered to incomprehensibly pilfer money from the participants. There's also no limit on what changes they may unilaterally impose in the future -- unlike an insurance company or investment fund, the feds are not bound by contract or by fraud statutes. Say this much for Social Security: it's obviously a racket, apparent to anyone with a high-school education. This new racket may require an advanced degree in forensic accounting to untangle.