Saturday, February 05, 2005

Social Security Reform

I also found Ramesh Ponnuru's cover story for National Review, entitled "An Idea Whose Time Has Come," to be helpful. It's not online, and I won't reprint all of his arguments and counter-arguments, but here are some things I found helpful:

"Pay as you go" vs. "Pre-funding" models
We currently operate under a "pay as you go" program. Today's workers (through payroll taxes) finance the retirements of today's senior citizens. In other words, each generation funds the retirement of the next generation. President Bush is proposing a "pre-funding" model, whereby each generation saves in advance for its own retirement.

The number of workers who support each retiree
In 1950, 16 workers supported each retiree.
In 2005, 3.3 workers support each retiree.
In 2040, only 2.1 workers will support each retiree.

How much additional money would the government have to spend now in order to make Social Security permanently solvent?
Depending on the calculation, between $10 to $11 trillion. (Larger than our entire economy.)

How much would it cost to delay reform for one more year?
Andrew Biggs, a commissioner at the Social Security Administration, figures just a one-year delay would cost $600 billion. (And that cost goes up each year.)

Under the current system, how much money does a young worker get in return?
The program can afford to give a middle-income 25-year-old only 91 cents for every dollar he is going to put in over the course of his working life.

But won't there be risks if people can invest the money on their own?
Many things can be done to reduce the risk: (1) diversifying stock portfolios; (2) buying index funds; (3) buying bonds as well as stocks.

But stocks can still be volatile, right?
It's an established fact that stocks grow less volatile over the long run: There is no 20-year period in American history in which the stock market has declined. The average annual return on stock has been 6.7 percent above inflation.

Can the legislation pass?
What makes it hard to see Bush prevailing is that there isn't a Democrat on Capitol Hill who is afraid to oppose him on this issue. Bush will probably need at least five Senate Democrats to beat a filibuster and enact a bill.

But if it does pass?
If he manages to get that policy enacted, it will not only be the signal domestic achievement of his presidency. It will be the biggest legislative victory in the modern history of conservatism.