Thursday, February 03, 2005

CHRIS SUELLENTROP has a very lucidly written piece in Slate about Bush's plan for Social Security, as he presented it in his State of the Union address last night. I say "lucid" because I actually understood it, and I find the entire issue of Social Security -- how it works, what privatization means, and so on -- extremely confusing. Basically, as Suellentrop tells it, Bush is cynically pandering to baby boomers 55 and older while simultaneously giving the shaft to young wage earners as well as the generations to come. As Suellentrop puts it, it should be called the "Screw Your Grandchildren Act."

...The president painted his plan to alter the Social Security system as a grand bargain in which the current generation of older Americans, like parents saving for their children's college tuition, would forgo some small benefit so that the next generation could reap huge rewards.

Sounds terrific. Except what Bush proposed is actually the exact opposite: His plan would allow the current generation of retirees and near-retirees to keep the current system, the one where they receive far more money than they put in during their lifetimes, while requiring the next generation to subsist on their own earnings for retirement. This isn't the equivalent of parents saving for Johnny's 529 plan. This is Mom and Dad asking Johnny to invest part of his allowance so that they won't have to bother with paying for college.
After reading this, I decided maybe I should educate myself a bit more about how Social Security works. Yeah, I'm 54 and I was shaky on it. Shame on me. So I went over to HowStuffWorks and read up. Be warned, though: The article on Social Security here is a bit biased toward the idea of private accounts.

Currently a worker pays 7.65% of his or her gross income into the Social Security system (with a cap at a gross income of around $70,000), and the employer pays another 7.65% for the worker as well. If you could take that 15.30% of gross income and invest it in a 401(k) plan for the same period of time, it would generate an immense sum of money based on historical returns -- far more than a person with average income (or greater) would get from Social Security.
When you understand (as I did not before, but do now) that Social Security is completely unlike a private account, you can grasp immediately what is wrong with this statement. Social Security doesn't belong to individuals, as private accounts do. The checks that are going out to retirees now were funded years ago, when this generation of retirees was young. The younger generations in the workforce now are funding Social Security for future generations -- for their grandchildren, you might say. When an individual puts 15%, or 4%, or any percent, of her income in a private account, that account's growth is only as good as that individual's employment. It's very misleading to say that a 401(k) generates higher returns than Social Security. What happens if wage-earners lose their income or work in low-paying jobs? Since 1935, the idea behind Social Security has been that everyone pays into the system, for everyone's benefit -- albeit a postponed benefit. The risk, and the benefit, is spread over the entire society. Now the Bush administration wants to make everyone responsible for his or her own financial security after retirement -- sink or swim; you're on your own; each man for himself.

Still not sure what this whole deal is about? Daily Kos has a Social Security for Dummies page: check it out.

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