Fred Thompson has become the first major Presidential candidate to actually provide a detailed plan for solving a specific problem; in this case, Social Security.

First, let me say kudos, and it's high time we have somebody talking about an issue in concrete detail, instead of the abstract (or namby-pamby, whichever you prefer) method of arguing which candidate is more patriotic. I'm also pleased that somebody is willing to talk about Social Security. There is a serious and very realistic fear that Social Security and Medicare will not be touched until they explode simply because most elderly people (A) feel grossly entitled to them; (B) do not understand the specific problems they pose; but (C) vote like the dickens.

But, Fred, I'm afraid that in proposing concrete reforms, you leave yourself open to specific rebuttals.

Thompson's plan contains three parts:
1) Indexing Social Security to inflation instead of wages
2) Allowing for "add-on" personal savings accounts in addition to Social Security
3) Mandating a Social Security Trust Fund

First, let it be known that even Thompson himself admits his plan only delays the problems of the Social Security program; it does not fix the program itself. In other words, passing his reforms would only be a temporary fix, and at some point we will find ourselves back in this same position, only it would be later instead of sooner.

Currently, Social Security is indexed to wages, meaning that the rate at which Social Security benefits increase is proportional to the increase in wages. Wages rise faster than inflation -- logically, if wages rose at the same rate as inflation, no one would ever get a pay increase in real dollar terms. And of course if wages rose slower than inflation it would be equivalent to a real dollar pay decrease.

Regardless, Thompson wants to change the way benefits are figured to reflect inflation, which rises slower. He claims this will delay the immediate burden posed by Social Security, and mathematically he's correct; however, when comparing wage indexing to inflation indexing, the real-dollar equivalent is simply a benefit decrease over time. You can come up with whatever name you want for it, but ultimately you're decreasing benefits for future Social Security payees. This will not go over well, let me guarantee.

Too many senior citizens use Social Security not only as a primary but a sole income for retirement. It was never intended to be used as such, and that is the main reason this problem is not simpler to solve. With Americans having been guaranteed Social Security their entire career, and having paid taxes for current retiree's benefits, everyone feels entitled to their Social Security check. But that amount was meant to supplement, not supplant, retirement income. But, be that as it may, that's the situation we find ourselves in. Now, what are we to do about it?

Decreasing future seniors' benefits will not solve the problem, and will only create more poverity-stricken senior citizens, especially as the cost of healthcare and prescription drugs continues to rise in the face of decreasing Social Security income.

On the second part of his plan, the addition of a retirement savings account apart from Social Security, let me say that the benefits will not be substantial. First, if the account is voluntary, you cannot decrease Social Security benefits for retirees with a large savings account. This means that the savings accounts do not address the solvency issues present with the system itself. Secondly, the taxes for Social Security already represent a huge portion of an employee's paycheck, and most will be remiss to allow the government to take more of that pie. And why should they? Anyone wanting a retirement savings account to provide retirement income already has one -- you can get them readily in the private sector. And I bet private sector 401(K)s or IRAs will offer much better returns than government-run investments. The risk may be higher in the short term for a private sector investment, but retirement investing is typically done in the long term, and spreading your investment over a period of 20 years or more makes the risk differential negligible.

Lastly, mandating an Al Gore-ish "lockbox" for Social Security is perhaps the most profoundly stupid idea in the history of the debate, save perhaps the original program itself, Ponzi scheme that it is. The government can't save money the way you and I save money; if the government were to put money "away" it would effectively take that money out of circulation. Taking a large amount of money out of circulation would cause outrageous deflation, and the value of the dollar would skyrocket, leaving wages to plummet and massive unemployment. You wouldn't be able to buy money with diamonds. Further, if the government at any point ever dumped that money -- wholly or in part -- back into circulation by paying it out to retirees, there would be outrageous inflation to the point that the retirees might actually have less real dollars than before the government paid them. The value of the dollar would crash like an elevator with a slashed cable, and the money that you before couldn't purchase with diamonds would be worth less than the paper it was printed on.

Point being, the government can't actually put money in a "trust fund" the way you and I can because it prints the money. So it would have to spend it. The way the Thompson plan (and in the interest of fairness, all similar plans I've seen) spends Social Security money put in a lockbox is by investing it. That's right, thanks to the government's help we have established an extra step in the investing process we talked about before with Roth IRAs. Instead of us taking our paycheck to our broker and having him put the money in an IRA, we send our money to the government, who sets up an agency, hires a staff, buys some computers and phones, erects a building, and then forwards our check on to that same broker who invests it in that same IRA. The only difference is that you have given up control of your money to the government -- in the private sector, you can cash in your IRA at any point you wish for any reason. I highly doubt the government would let you cash in your Social Security trust fund balance if the mood struck you.

The only possible benefit to a government-run trust fund is that the Thompson plan has the government matching your contributions to the trust fund: "On the personal accounts, 2 percent of workers’ paychecks would automatically be entered. The government would give the employee $2.50 for every $1 contributed into the account, up to $1,000 per month or $12,000 per year. After that point, 50 cents would be matched to every $1. This money would be paid for by the current Social Security fund, Mr. Thompson said." (Alexovich, NY Times, 11/9/07)

Where are these matching funds coming from? The whole reason for reforming Social Security is because it's not solvent! You can't fix a deficit program by spending more money, any more than an obese person can lose weight by eating more food.

In 2002, the average monthly Social Security benefit check was $895. (US Census Bureau 12/11/03) I think we can safely assume it's increased since then; let's assume for the purposes of discussion that it's an even $1000 per month. Thompson's plan to include government matching of $1000 per month would DOUBLE the Social Security deficit.

There is no trust fund now. The money not spent in the form of benefits to current retirees is spent in other ways -- more than you'd like to know, that money is spent on government programs instead of invested as an actual hedge against baby boomer retirees overloading the system. The government can't save any extra Social Security funds, remember? All money the government takes in during a given year, whether from Social Security taxes, income taxes, or any other means has to be spent.

I'm glad that someone is talking about Social Security -- no matter how much the elderly will be enraged come Election Day, Social Security has to be fixed and the solution isn't going to be pretty. The entire system was designed to live on borrowed time, it's no accident that it ended up this way, and it's deplorable that so many people have not the foresight to have planned for their own retirement apart from government assistance. But now we're all in for a rude awakening, and while senior citizens may not appreciate having their checks decrease -- or disappear -- I certainly don't appreciate paying taxes into a system that I know will never benefit me in my life, or even send me as much as a dime.

Let's keep talking about it, and hopefully, one of these days, a serious candidate will propose the only serious solution.

Complete privatization.

Labels: Election 2008, General Politics, Social Security