This plan has three serious flaws which we always reject. First, it uses general funds to subsidize the Social Security system. There is no reason that any taxpayer who cannot collect from Social Security should be asked to pay a penny into it. If the system is a failure - it needs to fail on its own. Second, this plan contains guarantees of personal investments. This is the free risk that caused the 2008 financial crisis. Subsidizing risk is bad economic policy. Third, it creates a significant benefit for a sub-set of Americans. If you are 50, you get the benefits. If you are 51 you will pay for them.
How Does It Work?
The government will put money into the privatizied accounts of younger workers with the believe that private accoutns will outpace the cost of funds. The government will borrow the money, or cut other government spending to finance the private accounts. This plan works as long as the investment returns outpace the cost of funds. If this sounds familiar, it is because it is exactly what Bear Stearns did believing that mortgage-backed bonds would outpace the cost of funds.
This plan improves the nation's capital allocation. Yes this is a bad idea, but it is a much worse idea to have Social Security invested in a single asset class which has enjoyed a 30 year bull market.
This plan will increase the size of the benefits package. The plan is so generous that the Chief Actuary assumed for his study that 100% of the eligible workers would accept the deal. We suspect that the benefit increase is substantial enough to induce more workers and employers to join the system. Clearly as benefits go up, the barrier to participation goes down.
The plan guarantees the private investment of workers. This guarantees that the money will float to the most risky assets allowed. Once the question of risk is considered the government will intervene on behalf of the safety and soundness of the system. Snap, crackle, and pop you will have a government agency set-up to protect retirement savings that will do just as well as Freddie and Fannie did at promoting the housing market.
We always oppose using general funds to support Social Security. There are millions of tax payers who are not part of Social Security - and there is no reason that they should be asked to support a failed system.
Supporters of this plan have made statements about debt reduction. This plan has no debt reduction in it. In fact, this plan shifts cost-savings from wasteful government programs from actual debt reduction to life support for Social Security.
McCotter's website says : "The Social Security Chief Actuary CONFIRMED the bill will save Social Security without raising taxes or lowering benefits". The bill will keep taxes the same, and lower the amount of government in return. That is a tax increase, one paid by many Americans who have no stake in Social Security.
McCotter's website says : "The Social Security Chief Actuary CONFIRMED the bill will save Social Security without raising taxes or lowering benefits". That isn't exactly what the Chief Actuary says. The letter says that the cost of the guarantees which covers 50% of the total benefits is unknown so they are treated as zero. Basically Social Security is fine, but this plan may bankrupt the nation instead of Social Security.
What is the assumed rate of return of private accounts?
What are the government programs that will be cut in order to support Social Security?