Monday, February 07, 2005
Why does the White House keep undercutting its own case for private Social Security accounts? Isn't Karl Rove supposed to be a genius?
(Or: More fun with notional accounts for Tom Maguire)
[Warning: a long post -- if you really aren't interested in this subject, thanks for visiting but you'll be happier elsewhere today. ]
As a long-time supporter of private accounts in Social Security, I've been pretty disappointed by the White House's arguments for them to date. And the performance of the Mr. Senior Administration Official last week explaining them to the press before the State of the Union Address didn't make me feel much better about it.
At best the picture of the White House's intentions that emerged is confusing. At worst, if some of Mr. SAO's statements are to be taken literally, the White House proposal would significantly limit the benefit that private accounts would provide to workers in comparison to the status quo -- and thus reduce the merits of the program and undercut the political support it can expect to draw.
From the start the White House has been leading with the wrong foot, it's major strategy being to keep talking about Social Security's "bankruptcy" of 40 years from now, or lack of resources in 20 years.
But precious few voters (and even fewer in Congress) worry much about 20 or 40 years from now. And private accounts in fact do little to close Social Security's long-term funding gap. So this is an argument that is weak both politically and on the merits.
The killer argument for private accounts that reformers do have -- both politically and on the merits -- is that Social Security is right now becoming a terrible deal for the young at best, and will make many of them outright poorer on a lifetime basis -- especially after the 30% underfunding of the young's low scheduled returns is considered.
Moreover, this is a major new change in the system that has treated everyone up until now much better -- a change that Democrats are absolutely loathe to admit because it contradicts both long historical practice and the very founding principles of SS as pronounced by FDR himself.
Private accounts can fix this new failure of Social Security by providing positive returns to the young, as all prior generations have had, and do so in a way that doesn't worsen the funding gap -- not cure the gap, but not worsen it either, and maybe help some. (Private accounts are fundamentally neutral for the funding gap, which has to be closed otherwise even under the status quo.)
Now, paleo-liberals are smart enough to realize how helpless they are on this issue of Social Security becoming a terrible deal for the young, as the status quo has no possible answer for it. That's why paleos like Krugman keep so virulently attacking the higher returns possible from private accounts, trying to discredit them, while never, ever mentioning the sub-bond-rate-returns and outright losses now assured to workers by the status quo. They know they've been dealt the politically losing card on this.
Yet the White House just doesn't seem to know how to present its own case -- how to play against that losing card. Let's look at how last week's White House briefing mucked things up further. (The whole briefing is available through the prior post).
Here's the key issue: Under the White House proposal, a worker could voluntarily place up to $1,000 into a private account instead of the traditional Social Security program. But of course a person doing that can't expect to retire with both that money (plus earnings on it) in a private account and a full traditional Social Security benefit too -- as if the same $1,000 had been contributed to the traditional program too. Thus, contributing to a private account must reduce the standard benefit in some proportional manner.
But exactly how?
Mr. SAO, to our confusion, seems to give us two contradictory answers in one presentation.
The first logical answer that comes to almost everyone is that future traditional benefits will be reduced by the amount the individual did not pay into the traditional program (but instead placed in a private account) plus the rate of return on that amount that would have been paid by traditional Social Security.
Thus, if one puts $1 into a private account rather than traditional Social Security 20 years before retiring, and traditional Social Security earns for one 2% annually, then upon retiring 20 years later one's traditional benefit will be reduced by $1.49, while one's private account will hold that $1 plus whatever it has earned -- hopefully more than $1.49.
This seems to be exactly how the White House proposal was reported in the Washington Post -- in a corrected story, after the White House had had two chances to get its message across to it (with key comments emphasized):
That sure reads to me like a statement that contributions to Social Security under the "traditional" current system earn the real rate paid on federal bonds, 3%. Therefore workers with private accounts will come out ahead to the extent their private investments earn more than 3%, the bond rate, which is what their money "would have made it if had stayed in the traditional plan."
But such a statement is just plain wrong, and works to undermine the case for private accounts.
Contributions to today's Social Security do not earn the federal bond rate -- they are not invested in federal bonds. They receive a formula return that is less than the federal bond rate on average, and which declines the younger you are, moving into outright negative territory for some -- such as for the average male born after 1970.
For charts showing returns for participants of various ages and descriptions see here (.pdf).
Look at where 3% is on those charts compared to where you are.
Now, if the White House is trying to say that workers with private accounts will gain to the extent that earnings on their contributions to private accounts exceed what the same contributions would have earned in traditional Social Security -- which is entirely logical -- then it is a big mistake for Mr. SAO to say contributions to today's Social Security earn the rate paid on federal bonds -- because it makes today's Social Security look much better than it is.
To quote the author of the charts cited above...
That is no small difference compounded over 40 years. A three point increase in investment return for funds invested at an even rate over that time doubles the amount of money in the end. Why doesn't the White House want its proposal to get credit for this?
Why is the White House underselling the benefits to workers of its own proposal?
Moreover, this mistake plays right into the hands of the anti-reformers who keep saying: "Do you want your money in safe, secure government bonds or in risky stocks?"
That's a false argument -- but it sounds convincing to a great many voters out there who still believe that their FICA taxes somehow actually do get invested for them in safe government bonds in the trust fund.
Hey, the White House should be out there every day pounding home the fact that Social Security pays less than government bonds -- and that workers with private accounts would be better off than today even if they invested their private accounts in government bonds.
Unless the other possibility that can also be read from the literal statements of Mr. SAO is true. This is: the White House plan actually does intend that private accounts will provide a net gain to their owners only to the extent that they provide a return higher than 3% -- no matter how low one's return from traditional Social Security would be.
Mr. SAO in fact explicitly says this:
(Mr SAO tries to weasel out of saying this by contending that the status quo won't be able to pay this benefit either, but reality is maybe, maybe not -- let's be honest, that's a weasel.)
Now, this would be the case if a contribution to a private account reduces your future benefit from the traditional system by the amount of the contribution multiplied by an interest rate equal not to how much your contribution would have actually earned in traditional Social Security, but equal to the federal bond rate, which is higher. For some, much higher.
But if this is true, we have an entirely different story from our first one.
If your return from traditional Social Security is only 1%, but you will benefit from a private account only to the extent that it performs in excess of 3%, then if you have a private account the government is taking that 2% difference.
This has big consequences. Imagine you are the average male born 1970, age 35 now, scheduled to get a 0% return on your contributions to traditional Social Security. A 0% return is not good -- any return beats that! This sure makes you a prime target to be won over as a supporter of private accounts. Look at the proposition in dollar terms:
The Social Security actuaries project a real 4.6% average return from private accounts, after all expenses. Now, $1 invested per year for 40 years earning 4.6% provides $115 at the end. In contrast, traditional Social Security with a 0% return gives you only $40 for the same investment after 40 years. You are almost three times better off with a private account! Does that get your vote?
The prospect of tripling one's money compared to a receiving a miserable 0% return would hold the promise of gaining many votes among the young, one would think.
But wait -- suppose you benefit from your private account only to the extent that the return in it exceeds 3%. At that rate, $1 invested per year for 40 years grows to $78. Subtract the interest portion of this ($38) from the appreciation on the funds invested at 4.6% ($75) and the net gain in excess of a 3% return is only $37.
(The mechanism here is, apparently, that your private accounts ends up with $115 consisting of your $40 of contributions plus 4.6% earned on it, but your traditional benefit is reduced by $78 consisting of the $40 you didn't contribute to it plus 3% interest on that -- leaving a net gain of $37).
More than half the gain from switching to a private account is gone. And a proportional amount of the political support for switching to private accounts will be gone too, you can bet, as a direct result.
Even worse, it's now possible to lose outright from a private account even if its return is higher than you'd get from traditional Social Security!
Say your return from traditional Social Security is 0%, but your private account earns 2.5%. Since you benefit from it compared to traditional Social Security only to the extent that its return exceeds 3%, you lose compared to traditional Social Security by 0.5% compounded over 40 years. (By $4 of your $40 contributed -- a 10% loss compared to a 0% return from traditional Social Security.) Even though your private account paid 2.5% more annually than traditional Social Security!
This is extraordinarily unlikely to occur for those who make long-term equity investments -- there's never in the last 200 years been a period where equities returned less than government bonds even over 20 years, much less 40 years -- yet the possibility exists, and you can expect the opponents of private accounts to pound on it.
Moreover, this set-up really does destroy the attraction of many safe investments in private accounts for the shorter term, turning them into losers.
Imagine that as retirment nears you want to move much of your savings out of stocks, and that the outlook for bonds over the next few years is poor, capital losses are expected because rates are rising (that's easy, as it's the case right now). To avoid risking a capital loss on bonds you put your money in an investment paying less interest than bonds -- such as a money market account, CD or T-bill.
Even if it pays more than you would have earned from traditional Social Security -- say, 2% versus 1%, you lose because your traditional account is docked by the amount of your contribution plus 3%, as per Mr. SAO.
This is bad on the merits if the intent of private accounts is to help workers escape the miserable low returns of the status quo -- and it sure as heck is bad politics for those who support private accounts. It can't help but sap support for private accounts among many voters who would support them if such accounts gave them the full gain over what Social Security will provide them, without diminished gains and risk of outright loss due to the 3% hurdle.
So if it's bad both for workers on the merits and politically too, why would the White House make such a plan?
Well, the government's pocketing the 3% on contributions to private accounts would help do something to close the long-term funding gap -- presumably by covering the interest cost of bonds issued to finance private accounts. (Note that this take by the government would actually reduce the funding gap, not simply keep it from growing, since under the status quo the government is incurring corresponding "implicit debt" in the form of unfunded promised benefits and doing nothing at all to cover their costs.)
But this idea just doesn't make much sense. First, taking that first 3% won't close the $10 trillion funding gap by much -- and the political cost in loss of support for private accounts today is sure to be much larger than the small solvency gain that won't be realized for decades.
Second, the White House has finally -- sensibly, honestly and accurately -- gotten around to admitting that private accounts are not about closing the funding gap, they are neutral towards that.
But then what's the point of docking the traditional benefits by contributions not made to it plus 3%, instead of only the returns that would have actually been earned -- a policy that would in fact be solvency neutral in the long run? It makes no sense.
Why has the White House made such a plan?
Well, maybe it hasn't.
When the second type scenario was reported in the Washington Post's original story on Mr. SAO's briefing, a small firestorm resulted which produced a retraction of the original claim and a corrected description of a scenario more like our first one -- here's the tale of those events.
So what's the real plan?
Will contributions to private accounts reduce traditional benefits by the amount of the contribution plus "the amount the money would have accrued under the traditional system", or plus the federal bond rate? Both of which have been stated.
The fact is I'm still not entirely sure.
And that's got to be bad for the White House. Because no matter what its plan is, it has to sell it convincingly to millions of doubting voters -- yet so far it can't even explain it to little ol' me.
But I do have an odd guess as to what's gone on here. Back to the WaPo correction...
But it all becomes right -- and all the confusion and conflict is explained -- if one thing is true: Mr. SAO believes benefits accrue on contributions in the traditional Social Security system at the federal bond rate, 3%.
Occam's razor: That explains what the WaPo correction's continued error and everything in Mr. SAO's comments.
But how could the White House's leading spokesman for private accounts believe something that is so false?
Well, no, I don't believe that either.
Here's my advice for Mr. SAO on private accounts: Reduce traditional benefits by the amount contributed to a private account plus the actual amount that would have been earned on it in traditional Social Security. If it's too complicated to work out for individuals use the average return per retirement cohort by year as is known and was cited above 1%, 0%, etc.
Really, how difficult is that? And why would one want to do anything different?
Oh, and by the way, 3% isn't the federal bond rate either, another fact that has consequences throughout -- but, mercifully, not to be discussed here.
(Or: More fun with notional accounts for Tom Maguire)
[Warning: a long post -- if you really aren't interested in this subject, thanks for visiting but you'll be happier elsewhere today. ]
As a long-time supporter of private accounts in Social Security, I've been pretty disappointed by the White House's arguments for them to date. And the performance of the Mr. Senior Administration Official last week explaining them to the press before the State of the Union Address didn't make me feel much better about it.
At best the picture of the White House's intentions that emerged is confusing. At worst, if some of Mr. SAO's statements are to be taken literally, the White House proposal would significantly limit the benefit that private accounts would provide to workers in comparison to the status quo -- and thus reduce the merits of the program and undercut the political support it can expect to draw.
From the start the White House has been leading with the wrong foot, it's major strategy being to keep talking about Social Security's "bankruptcy" of 40 years from now, or lack of resources in 20 years.
But precious few voters (and even fewer in Congress) worry much about 20 or 40 years from now. And private accounts in fact do little to close Social Security's long-term funding gap. So this is an argument that is weak both politically and on the merits.
The killer argument for private accounts that reformers do have -- both politically and on the merits -- is that Social Security is right now becoming a terrible deal for the young at best, and will make many of them outright poorer on a lifetime basis -- especially after the 30% underfunding of the young's low scheduled returns is considered.
Moreover, this is a major new change in the system that has treated everyone up until now much better -- a change that Democrats are absolutely loathe to admit because it contradicts both long historical practice and the very founding principles of SS as pronounced by FDR himself.
Private accounts can fix this new failure of Social Security by providing positive returns to the young, as all prior generations have had, and do so in a way that doesn't worsen the funding gap -- not cure the gap, but not worsen it either, and maybe help some. (Private accounts are fundamentally neutral for the funding gap, which has to be closed otherwise even under the status quo.)
Now, paleo-liberals are smart enough to realize how helpless they are on this issue of Social Security becoming a terrible deal for the young, as the status quo has no possible answer for it. That's why paleos like Krugman keep so virulently attacking the higher returns possible from private accounts, trying to discredit them, while never, ever mentioning the sub-bond-rate-returns and outright losses now assured to workers by the status quo. They know they've been dealt the politically losing card on this.
Yet the White House just doesn't seem to know how to present its own case -- how to play against that losing card. Let's look at how last week's White House briefing mucked things up further. (The whole briefing is available through the prior post).
Here's the key issue: Under the White House proposal, a worker could voluntarily place up to $1,000 into a private account instead of the traditional Social Security program. But of course a person doing that can't expect to retire with both that money (plus earnings on it) in a private account and a full traditional Social Security benefit too -- as if the same $1,000 had been contributed to the traditional program too. Thus, contributing to a private account must reduce the standard benefit in some proportional manner.
But exactly how?
Mr. SAO, to our confusion, seems to give us two contradictory answers in one presentation.
The first logical answer that comes to almost everyone is that future traditional benefits will be reduced by the amount the individual did not pay into the traditional program (but instead placed in a private account) plus the rate of return on that amount that would have been paid by traditional Social Security.
Thus, if one puts $1 into a private account rather than traditional Social Security 20 years before retiring, and traditional Social Security earns for one 2% annually, then upon retiring 20 years later one's traditional benefit will be reduced by $1.49, while one's private account will hold that $1 plus whatever it has earned -- hopefully more than $1.49.
This seems to be exactly how the White House proposal was reported in the Washington Post -- in a corrected story, after the White House had had two chances to get its message across to it (with key comments emphasized):
Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately earn benefits more than those under the traditional system only if the return on their investments exceed the amount their money would have accrued under the traditional system...All fine -- except for the very odd statement that 3% is the rate "that the money would have made if it had stayed in the traditional plan" -- and going on further to identify it as the federal bond rate.
The original story (available here) should have made clear that, under the proposal, workers who opt to invest in the new private accounts would lose a proportionate share of their guaranteed payment from Social Security plus interest. They should be able to recoup those lost benefits through their private accounts, as long as their investments realize a return greater than the 3 percent that the money would have made if it had stayed in the traditional plan.
That 3 percent level is the interest rate earned by Treasury bonds currently held by the Social Security system....
That sure reads to me like a statement that contributions to Social Security under the "traditional" current system earn the real rate paid on federal bonds, 3%. Therefore workers with private accounts will come out ahead to the extent their private investments earn more than 3%, the bond rate, which is what their money "would have made it if had stayed in the traditional plan."
But such a statement is just plain wrong, and works to undermine the case for private accounts.
Contributions to today's Social Security do not earn the federal bond rate -- they are not invested in federal bonds. They receive a formula return that is less than the federal bond rate on average, and which declines the younger you are, moving into outright negative territory for some -- such as for the average male born after 1970.
For charts showing returns for participants of various ages and descriptions see here (.pdf).
Look at where 3% is on those charts compared to where you are.
Now, if the White House is trying to say that workers with private accounts will gain to the extent that earnings on their contributions to private accounts exceed what the same contributions would have earned in traditional Social Security -- which is entirely logical -- then it is a big mistake for Mr. SAO to say contributions to today's Social Security earn the rate paid on federal bonds -- because it makes today's Social Security look much better than it is.
To quote the author of the charts cited above...
The study finds that ... those born in the early 1970's will average about a 1 percent real rate of return, and those born at the end of this decade will average essentially a zero rate of return.So such owners of private accounts should benefit to the extent that their returns in them exceed 1%, or 0% ... yet Mr. SAO is saying participants will gain only to the extent returns exceed 3%.
That is no small difference compounded over 40 years. A three point increase in investment return for funds invested at an even rate over that time doubles the amount of money in the end. Why doesn't the White House want its proposal to get credit for this?
Why is the White House underselling the benefits to workers of its own proposal?
Moreover, this mistake plays right into the hands of the anti-reformers who keep saying: "Do you want your money in safe, secure government bonds or in risky stocks?"
That's a false argument -- but it sounds convincing to a great many voters out there who still believe that their FICA taxes somehow actually do get invested for them in safe government bonds in the trust fund.
Hey, the White House should be out there every day pounding home the fact that Social Security pays less than government bonds -- and that workers with private accounts would be better off than today even if they invested their private accounts in government bonds.
Unless the other possibility that can also be read from the literal statements of Mr. SAO is true. This is: the White House plan actually does intend that private accounts will provide a net gain to their owners only to the extent that they provide a return higher than 3% -- no matter how low one's return from traditional Social Security would be.
Mr. SAO in fact explicitly says this:
SR. ADMIN. OFFICIAL: Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent real rate of return...There we are. And what happens if your private account earns less than 3%?
Q.: So he would only get a benefit to the extent that his portfolio performed in excess of 3 percent?
SR. ADMIN. OFFICIAL: Right.
OK, off of this it seems unambiguous that if you don't get 3% from your private account you lose compared to the status quo, period. No matter how little the return it promised you, even zero.Q.; Short of 3 percent, would he make whole or would he get less than the current guaranteed benefit?
SR. ADMIN. OFFICIAL: Well, there's a implication at the end of your question which -- you have to remember, the current system can't pay the current guaranteed benefit-- ...
Q.: So people who don't -- people who choose not to take a personal account are not guaranteed the current schedule of benefits, they're --
SR. ADMIN. OFFICIAL: Under the current system, they are definitely not.
Q.: And they're not under this --
SR. ADMIN. OFFICIAL: Under no scenario are they -- could they be. Unless you posit a very large tax increase.
(Mr SAO tries to weasel out of saying this by contending that the status quo won't be able to pay this benefit either, but reality is maybe, maybe not -- let's be honest, that's a weasel.)
Now, this would be the case if a contribution to a private account reduces your future benefit from the traditional system by the amount of the contribution multiplied by an interest rate equal not to how much your contribution would have actually earned in traditional Social Security, but equal to the federal bond rate, which is higher. For some, much higher.
But if this is true, we have an entirely different story from our first one.
If your return from traditional Social Security is only 1%, but you will benefit from a private account only to the extent that it performs in excess of 3%, then if you have a private account the government is taking that 2% difference.
This has big consequences. Imagine you are the average male born 1970, age 35 now, scheduled to get a 0% return on your contributions to traditional Social Security. A 0% return is not good -- any return beats that! This sure makes you a prime target to be won over as a supporter of private accounts. Look at the proposition in dollar terms:
The Social Security actuaries project a real 4.6% average return from private accounts, after all expenses. Now, $1 invested per year for 40 years earning 4.6% provides $115 at the end. In contrast, traditional Social Security with a 0% return gives you only $40 for the same investment after 40 years. You are almost three times better off with a private account! Does that get your vote?
The prospect of tripling one's money compared to a receiving a miserable 0% return would hold the promise of gaining many votes among the young, one would think.
But wait -- suppose you benefit from your private account only to the extent that the return in it exceeds 3%. At that rate, $1 invested per year for 40 years grows to $78. Subtract the interest portion of this ($38) from the appreciation on the funds invested at 4.6% ($75) and the net gain in excess of a 3% return is only $37.
(The mechanism here is, apparently, that your private accounts ends up with $115 consisting of your $40 of contributions plus 4.6% earned on it, but your traditional benefit is reduced by $78 consisting of the $40 you didn't contribute to it plus 3% interest on that -- leaving a net gain of $37).
More than half the gain from switching to a private account is gone. And a proportional amount of the political support for switching to private accounts will be gone too, you can bet, as a direct result.
Even worse, it's now possible to lose outright from a private account even if its return is higher than you'd get from traditional Social Security!
Say your return from traditional Social Security is 0%, but your private account earns 2.5%. Since you benefit from it compared to traditional Social Security only to the extent that its return exceeds 3%, you lose compared to traditional Social Security by 0.5% compounded over 40 years. (By $4 of your $40 contributed -- a 10% loss compared to a 0% return from traditional Social Security.) Even though your private account paid 2.5% more annually than traditional Social Security!
This is extraordinarily unlikely to occur for those who make long-term equity investments -- there's never in the last 200 years been a period where equities returned less than government bonds even over 20 years, much less 40 years -- yet the possibility exists, and you can expect the opponents of private accounts to pound on it.
Moreover, this set-up really does destroy the attraction of many safe investments in private accounts for the shorter term, turning them into losers.
Imagine that as retirment nears you want to move much of your savings out of stocks, and that the outlook for bonds over the next few years is poor, capital losses are expected because rates are rising (that's easy, as it's the case right now). To avoid risking a capital loss on bonds you put your money in an investment paying less interest than bonds -- such as a money market account, CD or T-bill.
Even if it pays more than you would have earned from traditional Social Security -- say, 2% versus 1%, you lose because your traditional account is docked by the amount of your contribution plus 3%, as per Mr. SAO.
This is bad on the merits if the intent of private accounts is to help workers escape the miserable low returns of the status quo -- and it sure as heck is bad politics for those who support private accounts. It can't help but sap support for private accounts among many voters who would support them if such accounts gave them the full gain over what Social Security will provide them, without diminished gains and risk of outright loss due to the 3% hurdle.
So if it's bad both for workers on the merits and politically too, why would the White House make such a plan?
Well, the government's pocketing the 3% on contributions to private accounts would help do something to close the long-term funding gap -- presumably by covering the interest cost of bonds issued to finance private accounts. (Note that this take by the government would actually reduce the funding gap, not simply keep it from growing, since under the status quo the government is incurring corresponding "implicit debt" in the form of unfunded promised benefits and doing nothing at all to cover their costs.)
But this idea just doesn't make much sense. First, taking that first 3% won't close the $10 trillion funding gap by much -- and the political cost in loss of support for private accounts today is sure to be much larger than the small solvency gain that won't be realized for decades.
Second, the White House has finally -- sensibly, honestly and accurately -- gotten around to admitting that private accounts are not about closing the funding gap, they are neutral towards that.
Great, that's clear enough then. Private accounts are not trying to deal with the solvency issue. And that statement, at least, is indeed progress for the Administration -- it gets a false issue out of the way.Q.: ... am I right in assuming that in the way you describe this, because it's a wash in terms of the net effect on Social Security from the accounts by themselves, that it would be fair to describe this as having -- the personal accounts by themselves as having no effect whatsoever on the solvency issue?
SR. ADMIN. OFFICIAL: ... that's a fair inference.
But then what's the point of docking the traditional benefits by contributions not made to it plus 3%, instead of only the returns that would have actually been earned -- a policy that would in fact be solvency neutral in the long run? It makes no sense.
Why has the White House made such a plan?
Well, maybe it hasn't.
When the second type scenario was reported in the Washington Post's original story on Mr. SAO's briefing, a small firestorm resulted which produced a retraction of the original claim and a corrected description of a scenario more like our first one -- here's the tale of those events.
So what's the real plan?
Will contributions to private accounts reduce traditional benefits by the amount of the contribution plus "the amount the money would have accrued under the traditional system", or plus the federal bond rate? Both of which have been stated.
The fact is I'm still not entirely sure.
And that's got to be bad for the White House. Because no matter what its plan is, it has to sell it convincingly to millions of doubting voters -- yet so far it can't even explain it to little ol' me.
But I do have an odd guess as to what's gone on here. Back to the WaPo correction...
Even the WaPo correction is plain self-contradictory right there in its opening -- as we've seen already, at too much length.Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately earn benefits more than those under the traditional system only if the return on their investments exceed the amount their money would have accrued under the traditional system....
They should be able to recoup those lost benefits through their private accounts, as long as their investments realize a return greater than the 3 percent that the money would have made if it had stayed in the traditional plan.
That 3 percent level is the interest rate earned by Treasury bonds currently held by the Social Security system.
But it all becomes right -- and all the confusion and conflict is explained -- if one thing is true: Mr. SAO believes benefits accrue on contributions in the traditional Social Security system at the federal bond rate, 3%.
Occam's razor: That explains what the WaPo correction's continued error and everything in Mr. SAO's comments.
But how could the White House's leading spokesman for private accounts believe something that is so false?
Well, no, I don't believe that either.
Here's my advice for Mr. SAO on private accounts: Reduce traditional benefits by the amount contributed to a private account plus the actual amount that would have been earned on it in traditional Social Security. If it's too complicated to work out for individuals use the average return per retirement cohort by year as is known and was cited above 1%, 0%, etc.
Really, how difficult is that? And why would one want to do anything different?
Oh, and by the way, 3% isn't the federal bond rate either, another fact that has consequences throughout -- but, mercifully, not to be discussed here.
