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Psst: Wanna Buy a $5000 Nest Egg for only $5000?

Discussions here have led me to believe that many of us really don’t understand how social security works. Suppose it was simpler? could we understand it then? Suppose instead of Social Security, we had “Simple Security” - a program we could actually understand? Then it would be easy to see through the smoke-and-mirrors sham of “privatization”.

Simple Security started in 1930, when Bob retired. Every month, he got $1000 from Uncle Sam as a Simple Security payment. Every month, his son Charlie paid Uncle Sam $1000 in Simple Security taxes. (I'm telling the story in 2003 dollars, of course.)

In 1960, Charlie retired, and around the same time, Bob died. Every month, Charlie got $1000 from Uncle Sam as a Simple Security payment. And every month, his daughter Dorothy paid Uncle Sam $1000 in Simple Security taxes.

In 1990, Dorothy retired, and around the same time, Charlie passed on. Now every month, Dorothy gets $1000 from Uncle Sam as a Simple Security payment. And every month, her son Ed pays Uncle Sam $1000 in Simple Security taxes.

Let's look at a couple of questions. First, is this an umbrella scheme? is it going to collapse? It sure doesn't look like it - I can't see any reason why Ed can't retire in 2020, why Fernando can't retire in 2050, and why Zed can't retire in year 2680.

Next, who wins and who loses? Charlie and Dorothy both paid $1000/month for about 30 years, and received $1000/month for about 30 years, so just they about break even. But there is one big winner - ol' Bob, who started collecting in 1930 without ever paying in. (Of course, Bob had to take care of his parents too - his mother-in-law, Alice, even moved in with him, back before Simple Security started - so you can't really call him a winner. But if we just look at the Simple Security system, he came out ahead.) So, if there's a winner, there has to be a loser, right? who's the loser?

Well, it's not hard to work out. There is no loser - until, or unless, the Simple Security system gets shut down. Suppose for instance that it's shut down now, in 2005. Ed loses everything he paid since 1990, since he'll never collect his Simple Security payments. Dorothy loses too, since she contributed for 30 years, and only collected for 15. And this is pretty much what the story would be like for real Social Security: whoever is IN the system when it cuts shut down, be they taxpayer or beneficiary, stands to lose what they've contributed so far. That would be us, people.

So, of course, Bush's plan to phase out social security and replace it with government-controlled IRAs doesn't just cut off benefits to the Dorothys of the world. Instead, those payments are going to continue, and (he promises) they will not be cut. Instead Uncle Sam is going to pick up the slack for the Eds of the country, who will be paying in less. Well, let's work this plan out for Simple Security, and see what happens.

Say that Ed STOPS paying into Simple Security. Every month, he puts $1000 into a bank. And every month, Uncle Sam pays Deborah $1000 in benefits. But of course, Uncle Sam doesn't HAVE $1000, so really, Uncle Sam also borrows $1000 each month. So, in 2020, when Deb dies and Ed retires, Ed was his lovely nest egg - from paying $1000/mo, every month for 15 years, plus compound interest. And Uncle Sam has that nasty 'ol debt, from paying out $1000/mo, every month for 15 years, plus compound interest. Nice deal for Ed - unless it turned out that in the end, he has to actually pay Uncle Sam's debts. Which, of course, he will, one way or another, eventually.

If you think it through, it's not an accident that Uncle Sam's debts and Ed's nest egg exactly balance. Right now, every month, the Simple Security system balances, so payments in match payments out - just like the real Social Security system. And in any national pay-as-you-go system, including real Social Security if you cut payments IN and shift that money to privatized accounts, without cutting payments OUT, then for every dollar sent to a private account, there will be a dollar added to the national debt.

That private "nest egg" is nothing but smoke and mirrors--not part of an ownership society, but an owe-nership society. Republicans are sounding the horn of doom about demographic changes, and increases in life expectancy. But whether they're right or wrong about that - how on earth do privatized retirement accounts help? If we all live to 100 and retire at 60 without offspring, how those government-mandated nest eggs help us any - since every dollar we collectively save is balanced by a dollar we have to borrow?

If you pay your debts, and aren't planning on shafting the current generation of seniors, there's just no way that privatization can IMPROVE the financial situation. We can argue about projections, whether we're all live to be 1000 and stop having kids, or whether we start cloning humans and colonize Mars and Jupiter, and how that affects Social Security - but borrowing money to put in savings accouts still won't make any sense.

Posted by William Cohen at February 4, 2005 4:58 PM