DRAFT
THIS
DRAFT SHOULD NOT BE RELIED UPON FOR ACADEMIC, SCIENTIFIC, LEGAL OR OTHER USES.
THIS DRAFT CONSISTS OF UNVETTED, UNVERIFIED STATEMENTS THAT COULD CHANGE AT ANY
TIME.
Will
privatizing the Social Security program
as proposed by President Bush be economically beneficial?
Can privatization maintain benefits and employment taxes?
Table of Contents
Introduction
|
|
The
Idea of Privatization |
|
Examination
and Evaluation |
|
Control
Risk |
|
Mathematical
Accuarcy |
|
Substantiation
|
|
Mathematical
Accuracy : Argument's Validity |
|
Unstated
Assumptions |
|
Additional
Conclusions Can Be Drawn |
|
Substantitation:
Facts and Findings |
|
Substantiation
of Assumptions by facts |
|
Conclusion
|
|
Comments
|
|
Footnotes
|
Download
Underlying Financial Data (Excel 97-2000 format)
In 1934 the "Social
Security Act" was enacted as a transfer-payment program that allowed
covered workers to receive benefits according to their level of participation.
Enrollment to this unique transfer program began in 1936, and was quickly
considered to be a success. In 1940 Congress expanded the coverage of employed
workers, a trend that continued until 1965 when the Medicare program was
introduced, gaining popularity among employees and employers alike(1).
The Social Security program
was enacted as a supplementary benefit for retired employees. It was not
intended to be a whole retirement program; further, it is based on a
fund-transfer structure. In a fund-transfer program, employees who are
currently receiving benefits from the fund are able to do so because other
employees continue to contribute to the fund. There is not a personal-account
in the program as is there is in an Individual Retirement Account (IRA) or
other pre-tax retirement accounts.
In the past decade, the
debate on the future of the fund became heated: many critics of the program and
its administration have argued that the system is flawed and should be changed.
In particular, the critics said, it should become a privatized system where
funds are invested in an open market. Although the argument for privatization
of the Social Security program are numerous, this paper examines and critiques
only one such proposal. The proposal set forth by President George W. Bush was
picked for this examination because, as a vocal critic of the Social Security
program, and as President of the United States, President Bush is in a position
to make changes that many have said are needed. Bush's proposal(2)
is one argument among many for the need for privatization of the Social
Security program. This paper intends to examine the substance of the Bush
proposal and evaluate its validity; through the process of examination and
evaluation, the paper hopes to make concise and clear some of the issues that
are now facing the Social Security program.
The Idea of Privatization
Overall, the issue of
privatizing a retirement fund, in whatever scope and capacity, touches on the
role of Government in redistributing funds, or its attempt to divorce itself
from its current role of 'fund manager'. The U.S. government is now seen by
many as an all-around provider of a their retirement. This notion goes to the
issue of personal responsibility vis-a-vis reducing the intervention of the
government in personal life. Although, strictly defined, the role of the
goverment is not within the scope of financial theory, this aspect shapes the
future of any implementation of the privatization of the Social Security fund.
Similarly, the issue is of
administration of any changes to the Social Security program has significant
financial consequences. Because any change in the financial landscape, simply
by the mere order of magnitude of the actual dollars managed in the Social
Security fund, has side effects for the economy. Further, if a change in the
management of the fund is carried out, there is unpredictable risk of financial
change that could be a result of vast amount of dollars changing position in
the economic cycle (from public to private hands, essentially). For example, it
is possible to see in the immediate and intermediate time-lines, that changing
the venue of the fund from public to private hands will create an inflation in
the prices of equities that the private sector will pursue with the newly
injected money.
Another example of the
possible effects of a privatization change is the "doomsday" scenario
in which a private fund has poor yields, or even become insolvent. Under such
circumstances, there is the question of responsibility for the retirement of
the affected employees who contributed to that insolvent fund. The
"doomsday" scenario also goes to the issue of personal responsibility
and the financial accountability of the U.S. government.
Other concrete side-effect can
also be involved in any change of the Social Security fund, namely that the
U.S. demography is about to see its largest retirement wave as the "baby
boomers" start to retire in the next two decades. Change in the structure
of the Social Security program comes into doubt in light of the introduction of
the large group into the benefit-receiving side of the fund. The ramification
of any proposed change in the structure of administration of the fund is not
only affecting the contribution population, but also that of the retirees,
specifically casting a shadow on continuing the current level of benefits.
Another example of possible ramification is the one of accumulation of wealth:
can the investment of funds in the private sector be simply an empty promise of
"easy money"? Are the yields on such investments really going to
provide a higher level of personal funds for retirement along with an
accumulation of wealth? Finally, any investigation of the Social Security fund,
and in particular changes to it, needs to take in account the effect such a
change will have on the inflow of money to the Federal Government -- will a
privatization action take any toll or, conversely, improve, the funding of the
U.S. government?
Examination and Evaluation
The paper asks the following
question: The scope of the paper is within these two elements: (1) the level of
"benefits" distrubuted (from fund transfer) and (2) the level of
payroll taxation. Within this scope, will privatizing the Social Security
program enhance (or maintain) the benefits and reduce or maintain the
employment taxes? If a valid
and substantiated
answer to this question is yes, then the conclusion of this paper will be that
the proposal by President Bush should be implemented.
This core question as stated
above will be answered in respect to the proposal made by President Bush. The
method of using the Bush proposal to answer the question is as follows: the
Bush proposal, or any other proposal, was made under certain assumptions. Once
these assumptions are stated, certein arguments are made, arriving at the
conclusion. The paper will utilize an "audit program" model to
evaluate the Bush proposal overall. As in a financial audit, the auditor takes
three general steps to evaluating the assertion made by the auditee. After the
three general steps are completed, a conclusion about the validity of the
assertion can be made.
Control Risk
First, the paper will
evaluate the level of Control Risk, mapped to the political agenda of President
Bush. However, because of the inherit instability of politicized proposal, it
is fair to evaluate control risk as "high" which, under this audit
model neccessitates in the auditor a high level regarding skepticism to any
assertion.
Mathematical Accuarcy
The second step in an audit
is one of Mathematical Accuracy mapped to the validity of the argument. The argument
presented by President Bush needs to be valid and complete. An example of an
invalid argument will be one where the conclusion does not follow from the
assumption of the Bush proposal. Or, if there are internal contradiction
between assumptions or conclusion, the argument is rendered invalid. An
incomplete argument is one where additional conclusions can be drawn from the
assumptions stated, or if there are unstated assumptions that lead to any
conclusion. If the latter occurs, an investigation of the effect of such
unstated assumptions has to take place to see if they invalidated any argument
or a portion of it. For example, in his argument president Bush declares that
statistic "A" had been cited (low unemployment) and that statistic
"B" had been cited (the Social Security existed for four decades.) No
relationship between "A" and "B" is shown. The Bush proposal
goes on to argue that the presence of "B" is a proof for the presence
of "A". This of course is completely unreasonable and is discarded
from serious debate as an invalid argument.
Overall, this step is purely
logical: the paper will present assumptions, arguments and conclusions made by President
Bush as the "building blocks" of the proposal. These building blocks
are an important tool to understand the issue at large -- they can provide
simplification and clarification of the issues on hand.
Substantiation
The third step in the
"audit program" model is Substantiation of assertions, mapped to the
accuracy of the assumptions. A substantiation is simply a confirmation of the
assumptions by facts and reality. If an assumption is found incorrect by
factual data, then it is rendered invalid and any argument based on that
assumption is too, invalid. Further, a vague assumption can be rendered invalid
if a precise definition of the assumption leads to invalidating the argument it
supports. For example, the Bush proposal refers to "Taxes paid by Families".
It is not specific enough: are "Taxes" monies actually paid? Are they
taxes actually owed? Are "Taxes" money paid also to State and Local
authorities? In this example, the definition of "Taxes" -- as used in
the the assumption -- is vague, leading to a potential invalidation of the
argument that is based on this particular assumption.
Finally, by following the
audit program through its three general steps: evaluation of control-risk,
computation of validity and substantiation by facts, the auditor -- this paper
-- will render an opinion on whether the Bush proposal as presented herein is
overall valid and substantiated. The conclusion of this critique is not
intended to answer the question of whether all proposals for privatizing social
security are good or bad. This paper introduces the subject through a
particular proposal, one to be expected to be close to the final proposal, if
any, because of the supported of the newly elected president. Thus, the
conclusion of this evaluation will address the validity of this particular proposal by
President Bush, citing its strengths and weaknesses.
Further, this paper will
attempt to shed light on points or issues that are additional to the Bush
proposal itself, by way of footnotes and comments, in an informal manner.
Mathematical Accuracy :
Argument's Validity
In order to examine the
validity of the proposal, a complete copy of the proposal is attached with this
paper (exhibits "I" and "II"). The proposal, titled
"Saving Social Security and Medicare" is roughly divided into three
parts: discussion of Social Security, discussion of Medicare and a section of
tables, quotes and other miscellanea. In order to create the "building
blocks" of assumptions, arguments and conclusion within the Bush proposal,
the paper concentrates on the first section, immediately following the
Executive Summary in "I. Challenge and Opportunity."(3)
The following paragraphs have
been mapped to labels to further assist in reconstructing the Bush proposal (the
first two paragraphs are a reiteration of the argument, and because they are
stated later on, they were not labeled). They are classified as assumptions or
argument and displayed graphically in exhibit "II":
A. The Baby Boomers
generation is about to retire soon, increasing the population of Social
Security recipients
B. Overall, life expectancy
has increased in the United States since 1935, when the Social Security program
started.
C. As a result of A and B
above, the ratio of contributors to recipients, has declined from 42:1 in 1945
to 3:1 in 1999 and is expected to decline below 2:1 in 2030.
D. (i) The Social Security
program was enacted in 1935. (ii) Poverty has declined since 1960 from 35% to
11%. Because of (i) and (ii) above, the Social Security program is successful.
E. Because of D(i) and D(ii)
above, the program needs "modernization".
F. The Social Security is a
Fund-Transfer ("pay-as-you-go") structure.
G. The Social Security
borrows money from the U.S. goverment to meet its financial obligations. This
causes accrued interest and principle to be paid at a later time. The interest
payments require the Social Security Administration to "raise taxes, cut
spending or borrow from the public".
H. The reduced ratio as
stated in C above, is only possible because of economic expansion. However, in
2025 that ratio is expected to be below 1:1 of contributors to recipients.
"The resulting deficit will grow over time and the fund will become
insolvent in 2037."
I. (ii) "As a result [of
interest payments stated in G, above] nearly 80% of working families already
pay more in payroll taxes than in income taxes". (ii) This paragraph is a
rebutted of former Vice President Gore's proposal. It has no bearing on the
Bush proposal.
J. President Bush recommends
that young employees would be allowed "to invest a portion of their
payroll taxes in stocks and bonds, these accounts will generate higher rate of
return thus helping to increase retirement income..."
K. The rate of return from
the Social Security fund is "less than 2 percent".
L. Allowing accounts to be
created as proposed in J will also allow workers to "accumulate
wealth"
M. J,K and L above represent
a "huge opportunity" for workers to invest towards their retirement
instead of paying "over 12 percent of their income into the Social
Security System."
Directly related to the level
of skepticism employedb by this paper's "audit", the set the
control-risk is set at "high." An auditor should exercise this
skepticism in examing the validity of the argument -- its "Mathematical
accuracy" -- in terms of logic. Each of the above paragraphs relating to
the Social Security program (the Medicare portion of the speech is outside the
scope of this paper) can be classifed as an assumption, an argument or a conclusion.
The three-tier classification makes the examination of the argument three-fold
as well:
First, the paper examines any
invalid arguments or arguments. These are presented in a graphic format in
exhibit "III":
a. Does the enactment of the
program in 1935 (D(i)) and The decline of poverty since 1960 (D(ii)) lead to
the conclusion that the Social Security program needs modernization and that
the program is "most successful in US History"? It is clear that the
two events are independant of each other and the Bush proposal attempt to make
a cause-and-effect between them is a weak effort.
b. The Bush proposal states
that the Social Security program is underfunded by borrowing from the fund in
prior decades. It argues that future repayment needed to keep the fund at
standard level will require existing taxes. It then states as evidence that
because of past repayment requirements, that payroll tax level is above income
tax level: Is this really the case? Is this intermediate argument reasonable?
The answer to this question, data has to be presented. Accordingly, data will
be presented to support or defy this notion.
Unstated Assumptions
c. The Bush proposal states
in G that "Payroll taxes paid greater than Income tax". This
assertion begs the definition of "Income Taxes". It is not clear to
what type and level of Income Tax does the Bush proposal refer. The concise and
clear definition can render this "intermediate conclusion" invalid,
weakening the flow of the argument from G (borrowing money from the goverement)
through K (lower rate of return by the investment in the Social Security
program.) Once defined, an answer based on data can be sought to validate or
refute this argument.
d. The anticipation that the
ratio of contributors to beneficiaries is decreasing and that subsequently the
Social Security fund will be insolvent is not automatically connected. Is it
possible that the required ratio of contributors to recipients is below 1:1? Is
it possible that productivity can prolong the life of the fund beyond the
demarkation of a 1:1 ratio? A positive answer to the latter will weaken the
conclusion that the Social Security fund will become insolvent. The paper
addresses such possible answer in the "Substantiation" section below.
Additional Conclusions Can
Be Drawn
e. It is not clear from the
conclusion in J that "these accounts will generate higher rate of
return". The possibility of a "doomsday" where a privatized
Social Security fund, invested in the free market, will be temporarility (i.e.
for a short term) below its anticipated value or yielding returns below the
required amounts for a sound retirement. If such a doomsday scenario is to take
place, what can be said about the guarantee of future benefits? Can a private
Social Security fund be stable enough to replace the existing level of
benefits? This is an inherit problem for any investment. The answer is
two-fold: first, the Bush proposal is not specific on the implementation of the
revised Social Security privatization. Second, as addressed in the
"Comments" section to this paper, some assurances can be built in to
an investment portfolio of a privatized Social Security fund.
f. It is not clear from the
Bush's proposal in J (or elsewhere) what will be the treatment of the
accumulated of wealth. Will such wealth be considered capital asset or a
pension fund? Will it be regulated to the extent of investment strategy or
class, or will it have a free-for-all style? This question, as in (e) above, is
not specified in the Bush proposal. A proposition is detailed below, within the
"Comments" section of this paper.
Substantitation: Facts and
Findings
This paper attempts to gather
collaborating, contradicting or otherwise related findings of facts that relate
to the assertions made by the Bush proposal. Specifically, the paper attempts
to answer questions (a) through (f) raised during the "mathematical
accuracy" section, above. In order to gain understanding of the issues,
and to obtain some unqualified and unbiased findings, some opinions and
articles were obtained, with an emphasis on post 1997 publications. The
emphasis of "newer" opinions was made because the effect of such
issues as the Workfare Act, the 1997 Taxpayer Relieve Act, the actual start of
the baby-boomers retirement et cetera, are all more pronounced in the later
opinions than in earlier writings that attempt to project, not reflect, an
opinion.
However, the ultimate source
of the data to answer the questions raised by the critique in this paper are
from Statistical data from non-partisan sources. Primarily, data was collected
from government agencies, presumed to have the lowest level of political
interest, such as the Social Security administration, the Internal Revenue Service
and the Department of Health. Data presented by other sources should correspond
to the governmental findings. For efficiency and speed in obtaining the data,
there was a great reliance on sources published on World Wide Web.
There are three main arguments
presented by President Bush. Referring to Exhibits "II" and
"III" they are divided into the following "cycles" of
logic:
Argument No. 1: The "Program is Most
Successful" argument, stemming from paragraph D. This argument is so weak
that it does not merit a substantiation; no real argument is presented by the
Bush proposal to relate this paragraph to the rest of the proposal except the
vauge notion of "modernization" which is no where else defined or
referred to.
Argument No. 2: The "Taxes must be raised"
argument, stemming from paragraphs G and I. Exhibit "IV" details this
section of the argument which essentialy claims that because the Social
Security fund borrows from U.S. goverment, it must raise employment taxes to
pay interest and repay the principle. In turn, the argument goes, most families
must pay more in employment taxes than in income taxes.
Argument No. 3: The "Fund-Transfer structure
leads to no accumiliation of wealth" argument, stemming from paragraphs
A,B,C,F and L. This arguments, shown in exhibit "V", cautions that
because the increase of recepients from the fund (the "Baby
Boomers"), compounded with a longer life span (which translate to more
years of recipienship) and a declining ratio of contributors to recipients,
that the fund will be insolvent in either 2025 or 2037.
Exhibit "IV"
presents a detailed graphic presentation of the findings and the assumptions or
arguments they relate to.
Substantiation of
Assumptions by facts
Because argument No. 1 above
becomes immaterial, the paper is left with two main arguments to deal with in
its audit of the Bush proposal. Argument No. 2 claims that the Social Security
program must continue to borrow from the U.S. goverment and in turn, raise
taxes or cut benefits in order to remain balanced. Because it continues to do
both, the argument goes, American families are required to pay more and more in
Employment Taxes.
In examining the data that
relate to this argument the paper has the following findings:
The Social Security
Administration is required, by law, to invest its funds in the most secure form
of investment. In financial terms, this means that the Social Security must
invest its funds in Long Term U.S. Obligations(4),
also known as "U.S. Bonds". The Bush proposal labels these as
"IOU": a debt that the Social Security owes to the U.S. goverment.
There is no evidence that the Social Security fund borrows from the U.S.
goverment in order to finance its activity. Therefore, this purchase of U.S.
bonds is the investment instrument, not a debt instrument(5).
From 1969 (the earliest year
available from the I.R.S.) to 1997, Federal taxes (Payroll, Income) grew in
parallel. This growth is (6) contradictory with
Bush assertion; The data shows that since 1969, Income Taxes always have been
higher than Payroll taxes. Also, since 1995 payroll taxes have grown at a
constant rate while income taxes grow at accelerated rate(7).
See exhibit "VII".
Employment Tax, also known as
F.I.C.A. is in aggregate 12.5%. However, only one half of this percentage,
6.25%, is the rate of employment taxes that the employee must pay. The other
half of the F.I.C.A. employment tax is paid by the employer. Thus, the
assertion in paragraph M that "despite [employees] paying over 12 percent
of their income into the Social Security system" might be provocative, but
is incorrect.
In examining the levels of
Average Income Tax the data suggests that the average tax rate declined, while actual Income Tax received
by the Goverment increased because of income levels (especially for the poor)(8). Exhibit "IIX" shows the latter
assertion but in fact, the average rate per family decreased as the marginal
and average tax collected decreased from a marginal of 70% in 1982 to 39% in
1997 (although absolute dollars collected increased). This data also weakens
the argument that Employment Taxes are higher than Income Taxes because in absolute
dollar, Employment Taxes were always less than Income Taxes (exhibit
"VII").
The data shows only
insiginficant correlation between Income Taxes and Employment Taxes. Exhibit
"IX" relates the two types of taxes collected since 1937 and then
focuses on the more active period, since 1979 to 1999. Exhibit "IX"
plots the percentage change in the benefits paid and contributions received to
the Social Security fund. It also shows the percentage of change to the Income
Tax collected at the same period. As can be gleaned from exhibit
"IX", there is no corrolation between the two types of taxes. This
data, too, weakens the argument that the Employment Taxes were raised in order
to support the borrowing of the Social Security from the U.S. goverment; if the
argument was correct, then indeed Employment Taxes would have to be increasing
faster, or in absolute dollars - higher than Income Taxes. However, the data
shows no indication of such a trend.
Through a set of five
viewpoints(9), this paper tried review the
argument in the Bush proposal that claims that the Social Security fund is
borrowing from the U.S. goverment and in turn, in order to pay its debt raises
employment taxes. Through these five view points, the Bush argument No. 2 can
be at best classified as weak. There is little data to show that any of the
assumptions, assertions and arguments in this segment of the Bush proposal has
merit. Therefore, they are rendered invalid and unsubstantiated.
Next, the paper will examine
the segment of the Bush proposal that is labeled here the "Fund-Transfer
structure leads to no accumiliation of wealth" argument (No. 3, above.)
This argument has fewer weak points (exhibit "V") except for the
possible question of productivity. If it can be shown that an increased
productivity is such that the assumed ratio of contributors to recipients falls
below 1:1, then this weakens the Bush proposal's conclusion that the Social
Security fund will be "insolvent" by 2037.
Overall, there is little
debate that the rate of recipients of benefits from the Social Security is
increasing (Exhibit "X") . Although the increase from 1933-1995
has not accelerated, it has started to accelerate from 1995-1997. Thus, the
demographic belief that "the Baby Boomers are coming" (or retiring,
depending on the view point) might be appropriate. The increase of benefits
distributed (in absolute dollar and in the number of recipients) has been on
the rise since 1983.
Productivity is a "soft
statistic" and one can be hard pressed to define it and further to find
substantial data to measure productivity in an economy of scale such as a
United States. The measure of productivity was obtained as reported by the
United States Department of Labor (10). Overall,
output per hour is influnced by many factors, even if its measurement is
consistent. Thus, it is hard to rely on. Nontheless, this paper attempts to use
this data to show if productivity can possibly be a factor in the future of the
Social Security program.
In Exhibit "XI",
Output-per-hour is plotted against the rate of contribution to the Social
Security program, and a correlation of the latter was computed with the index
of output per hour. There is very low correlation (Adjusted R-square = 0.02)
between the rate of contributions to the Social Security fund to the
Productivity. Therefore, increased productivity (since 1992) can not weaken the
Bush proposal that claims that a reduced ratio of contributors to recepients
will ultimatly render the Social Security fund bankrupt.
Conclusion
The Bush proposal, as
presented in President Bush's speech in May 2000, supports in general a
privatization of the Social Security program. It does not specify the method in
which a transition can be made, nor is it specific on amounts, percentages or
regulatory guidelines for the privitization process. In a sense, it is an
abstract argument for the privatization of the Social Security program (or
parts of it). As such, this paper has used the abstract argument for two purposes:
to show the points in which it claims a valid and substantiated argument, and
the points where it has failed to do so.
By arguing that the Social
Security program requires borrowing from the U.S. goverment and in turn,
Employment taxes are raised, the Bush proposal failed to show a clear and valid
argument for the privatization. The argument is flawed on several points and is
not supported by the data found by this paper.
By arguing that the Social
Security fund is in a "fund-transfer" structure that inhibits a
higher yield on investment and curbs accumulation of wealth, the Bush proposal
succeeded in showing a valid and substantiated argument for the privatization
of the Social Security program. This paper found no flaws in the latter nor did
it found any data to contradict the proposal's assumptions.
In a sense, the Bush proposal
can be seen as valid on the one hand and invalid on the other. However, because
the two segments (referred above as Nos. 2 and 3) are really not related, there
is no reason to invalidate the entire proposal just because argument No. 2
failed. Had argument No. 2 been the premise of argument No. 3, then the failure
of the former would have meant a failure of both. However, this is not the case
and the argument for privatizationof the Social Security program, as presented
from the view point of segment No. 3, is valid.
In conclusion, referring back
to the definition of the question -- "will privitizing the Social Security
program enhance (or maintain) the benefits and reduce or maintain the
employment taxes?" -- the answer from the Bush proposal seems to be
affirmative. Referring to Exhibit "V", which outlines the valid
segment of the Bush proposal, a valid argument can be made that the increase in
the population of retirees, combined with an increase of life expectancy in the
U.S., will cause the ratio of contributors to recipientsto decline. This ratio,
once below the ability of the Social Security program to support the recipients
enrolled, will force the Administration to either reduce benefits, increase
employment taxation, or both. This argument is both valid and substantiated.
Comments
In going about considering
practical implementations of the (now validated and subtantiated) change,
caution and consideration to additional factors is required. The Bush proposal
tells little of possible alternatives other than to describe the positive in
these alternatives, without delving into much detail. Some suggestions and
concerns are discussed in the preceeding paragraphs.
Seeing that the cause for
impeding crisis in the Social Security program is with decreasing rate of
contributors to recipients is not replaced, i.e. the fund-transfer structure is
replaced by a personal-account structure. Thus, it is reasonable to argue that
the bankruptcy of the Social Security program is eminent. Although some
statistical data suggest that the increase in the population of retiriees is
complemented by an increase of a second wave of new employees, which will
extend the livelihood of the Social Security fund, herein lies the risk in
discussing these matter in absolute terms: the diminishing ratio of
contributors to recepient is only based on actuarial tables. Becauase the
insolvancy of the Social Security fund is projected into the future, such a
projection is based on certein assumptions. Thus, the insolvancy of the Social
Security fund is predicted anywhere from 2020 to 2042(11).
Attempting to predict the timing of these events can only result in tentative
results, and they should be accepted with caution.
Several other proposals for
privatization of the Social Security program call for the government, not
individuals, to manage the fund in the private sector. These scenarios bring to
the fore the possibility of substantial government intervention in the
financial world and an active and interested
participants in the economic scene. These two effects can seriously
hinder the objective role that a sovereign government should take in the
economy.
Compounded with the effects
of reduced contributors to recipients ratio, at least in the intermediate
range, yield from a privatized fund -- perhaps in an extended form of I.R.A.
funds (which is classified as a pension, not a capital asset) -- will be higher
than the two percent average yield of the Social Security fund.
Some other hurdles remain on
the road to changing fund-transfer element in the Social Security structure: it
is clear that on the one hand, low wage earners such as women, singles and
low-income families will benefit the least from such a privatzation move(12). On the other hand, creation of capital
through succession will be more readily available when a portion of the Social
Security funds are invested rather then transferred to recipients.
It is also not clear how will
a guaranteed level of payments be possible, if an entire "account" of
an individual suffers a "doomsday breakage". Whether the
responsibility in such a scenario lies with the goverment or the account holder
is a moral question that is beyond the scope of this paper. One possible
solution for a personal account portfolio can be a combined purchase of an
annuity and other investments. The portion of invested monies that are
earmarked towards annuities might be able to provide a minimum level of income
to the recpient. Further, albeit skewed, some research suggests(13)
that while investors are irresponsible especially in times of economic
expansion, further research can be done to the effect of regulation on private
investors and the possible pit-falls it might have in light of a personal
retirement account.
Overall, any implementation
of change must take into consideration social and financial factors, both
quantified and ethical.
©
2000-2002
Yigal Rechtman
Duplication of this paper without
written consent is prohibited
Required Circular 230 disclosures
1.
History
of the Social Security Program.
(2001).
Available: HTTP: http://www.ssa.gov.
2.
Bush,
George W. Speech given in Rancho Cucamonga
(May 15,
2000). Available: HTTP: http://www.georgebush.com.
3.
Unfortunatly,
the pages are not numbered in the orginal.
4.
Q&A
About the National Debt. (1999-2001).
"The
deficit is the fiscal year difference between what the Government takes in from
taxes and other revenues, called receipts, and the amount of money the
Government spends, called outlays. The items included in the deficit are
considered either on-budget or off-budget. (The off-budget items are typically
comprised of the two Social Security trust funds, old-age and survivors
insurance and disability insurance, and the Postal-Service fund.) Generally,
on-budget outlays tend to exceed on-budget receipts, while off-budget receipts
tend to exceed off-budget outlays.
You can
think of the total debt as accumulated deficits plus accumulated off-budget
surpluses. The on-budget deficits require the Treasury to borrow money to raise
cash needed to keep the Government operating. We borrow the money by selling
Treasury securities like T-bills, notes, bonds and savings bonds to the public.
Additionally, the Government Trust Funds are required by law to invest
accumulated surpluses in Treasury securities. The Treasury securities issued to
the public and to the Government Trust Funds (Intragovernmental Holdings) then
become part of the total debt. "
Available:
HTTP: http://www.publicdebt.treas.gov/opd/opdfaq.htm
5.
United
States Budget for the fiscal year 1999. (1999).
Chart 4-4:
Interest Costs as a Precent of Income Tax Revenue.
6.
Personal
Income Part Capital 1990-1999 [Online]
(1999)
Available: HTTP: http://www.irs.gov.
7.
Federal
Taxes Paid 1969-1998. (1998).
HTTP:
http://Internet: www.irs.gov.
8.
Internal
Revenue Service: Income, Taxes and Tax Progressivity. Petksa and Strudler,
authors. N.D.
9.
Requirement
to Invest in U.S. Bonds, Average Tax, Employment Tax rate for the employee,
Income and Employment tax correlation.
10.
Web
printout: National Indicators Labor Productivty (2000).
HTTP: http://www.liveablecommunities.gov
HTTP: http://fedstat.gov.
11.
The
Bush proposal falls in to this pit when it uses inconsistant years for
predicting the insolvency of the fund. These predictions are inconsisitant
because they rely on different actuarial tables.
12.
Weller,
Christian E., Journal of Policy Analysis and Management, v19, n2 (Spring 2000),
pp.263-273.
13. Journal of Accountancy, American Institute of Certified Public Accountants, (January 2001), Survey: Most American can not wisely invest their own money. p.21.