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February 23, 2005

Cato's Daily Debunker

From the Cato Institute: In an editorial in this morning's edition, the New York Times claims the inheritability of personal retirement accounts - one of the most attractive features of Social Security reform - is a raw deal for American workers, especially low earners. There is a lot to debunk in this Times editorial, starting with its basic premise that the money you earn isn't actually yours. We'll take it paragraph by paragraph.

"The idea of making the private accounts part of one's estate is particularly appealing to low- and middle-income earners, who may not have all that much to leave to their heirs under normal circumstances. But those are exactly the people who would have to use the largest share of their accounts to buy annuities. The government would require that annuities be large enough to keep recipients above the poverty line for life. The less you had to start with, the less you'd have left over after buying the mandatory annuity."

The Times is correct on this point as it relates to President George W. Bush's proposal. But the Cato plan, the 6.2 Percent Solution, offers programmed withdrawals to avoid the problem of uninheritable annuities. The 6.2 Percent Solution is now one of the leading bills in Congress. It is sponsored by Congressman Sam Johnson (TX).

"What if you died before you retired? As with many claims Mr. Bush makes about Social Security privatization, the fate of your private account in the event of your untimely death is unclear. But one issue that raises big doubts about whether that money could be inherited is the question of how the trillions of dollars the government would have to borrow to set up a privatized system would be repaid. "Under the president's proposal, when you retired, your traditional Social Security retirement benefit would be cut by an amount equal to all the deposits you had made into your private account plus interest. (The interest would be three percentage points higher than the rate of inflation.) The benefit cut would be each person's contribution to repaying the huge debt the Bush administration would take on to 'pay for' privatization."

The cut in scheduled benefits is not at all similar to you "repaying" the government or "paying for" privatization. You have paid less into the traditional system and you therefore get less back. Take the following example: You divert $100 per month into a 401K plan. Under the Times' logic, that is effectively a loan from your checking account, where the money otherwise would've gone. So when you don't have as much to spend in your checking account because of your 401K contributions, the Times calls it a "repayment" of your debt. The goods and services that you're missing out on because of the smaller amount of money in your checking account "pays for" your 401K. No one would use the terms "loan" and "repayment" to describe that process though -- you put less money into your checking account, so you have less to spend. The same is true of your traditional benefits under a personal retirement account system. This twisting of logic underscores the New York Times' default position on your income: the money you earn isn't yours, it is the government's, and it is returned to you at the government's discretion in the form of a loan.

"But if you died before you retired, you would have already used some of that borrowed money to set up the private account and yet would never have made any contribution to repaying the debt. So in that case, how would the government recoup your share of the amount it had borrowed? Well, it could let your share of the debt go unpaid - in effect bequeathing to your heirs and their fellow citizens ever-higher deficits. Or your spouse could inherit your private account and the benefit cut that went with it. Or the government could take its cut from your private account before the money went to your survivors - a grab that could wipe out your stash."

This is equally misleading, mostly because it buys into the faulty logic of the previous paragraph that you're "borrowing" money from the government. But it is also misleading in that it ignores the fact that if you die before you retire, the government doesn't have to pay you your traditional benefits, the 2.4% plus interest not diverted into your PRA. Since the four percent diverted into your account wasn't the government's to start with, there is actual a net gain to the government if you die early--it gets 2.4% of your lifetime income with no strings attached!

"The White House would hotly deny that the last alternative could happen. Nothing freaks out the Bush administration more than the suggestion that the government would ever tap someone's private account - even for money that is owed to the government. It doesn't, however, seem too bothered about gutting your traditional benefits. Go figure."

Why is there money owed to the government? Why is the Times assuming that the borrowing for these accounts will necessarily have to be paid for by clawbacks? It doesn't make sense unless the Times begins with the assumption that the money you earn is not your own.

Posted by Andrew Roth at February 23, 2005 1:17 PM | Print

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