The bottom line is that Social Security is more financially sound today than it has been throughout most of its 69-year history, according to Social Security trustees' numbers. If workers in 2050, who will be earning on average 68 percent more in real, inflation-adjusted dollars than they are today, have to pay 1 or 2 percent more of their income in taxes -- as they have in the past -- they won't be able to complain much. They will still enjoy higher living standards than we do today.
In other words, keeping sticking the older generation's hand in the younger generation's pocket. We've done it for over 60 years now, and it's been fun, so let's have more.
The indexing wipes out a large and growing portion of the benefits promised to our kids. And the option to invest comes at a big penalty. According to the fine print, every dollar invested leads to a further loss of Social Security benefits equal to that dollar compounded at a 2 percent rate of return after inflation. If our kids invest in a safe manner, they'll be lucky to earn 2 percent after inflation. Indeed, the current real yield on long-term inflation-protected U.S. Treasury bonds is less than 2 percent.
The investment option is no real option at all. It's a side show to divert attention from the main point of the plan -- wiping out most of our kids' benefits and thereby raising their net taxes.
Kotlikoff wants to see some increased taxes now, so that the current elderly bear some of the burden for the huge debts that the government has incurred on behalf of future generations.
the attempt to create private Social Security accounts is essentially conservative social counter-engineering. Government should help provide for unforeseeable contingencies: tsunamis, unemployment, open-heart surgery. But if there is one event in all of life that is wholly foreseeable, it is the advent of old age. Why, then, shouldn't people save for their own retirements, instead of relying on welfare from the government -- which is what Social Security, as currently constituted, really is?
By providing a clearer link between individuals' Social Security contributions and the benefits that employees receive, personal accounts could increase the perceived rewards for work and thus boost economic activity.
...If the transition to personal accounts were partially funded from new revenue or decreased spending, then national saving -- and thus the size of the economic pie -- would increase.
Laura D'Andrea Tyson favors private accounts in addition to Social Security, which is a position that other former Clinton officials seem to take (in contrast with hard-liners like Paul Krugman, who appear to think that private accounts are anathema). Tyson writes,
[Private accounts in addition to Social Security] could address the dilemma of what to do about inadequate retirement saving among moderate and low-income families by supplementing, not replacing, traditional Social Security benefits. Contributions to these accounts would be voluntary but would be encouraged by generous tax incentives and federal matching contributions to enable households of modest means to build adequate retirement savings.
The experience with 401(k) plans in the United States is even more telling. People make bad decisions at each step. A quarter of those eligible to participate choose not to do so. Less than 10 percent of those who do participate contribute the maximum. Over half fail to diversify their investments, many over-invest in company stock, and almost none re-balance their portfolios in response to age or market returns. In addition, the majority of participants "cash out" their balances when they change jobs.
...A spartan system with government administration would hold down costs. Limiting investment options would control costs and lead to better investment choices. And life-cycle funds that automatically rebalance would prevent individuals getting stuck near retirement with too much in equities if the market suddenly tanks.
For Discussion. Should Social Security continue to be an intergenerational transfer?