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Wednesday, May 04, 2005

Worthless IOUs: A great investment

Posted by: Hammer / 3:07 PM

Molly Ivins sums up the Bush Social Security plan:
...Bush said, "I know some Americans have reservations about investing in the stock market, so I propose that one investment option will consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government." These are exactly the same treasury bonds that currently guarantee Social Security and have been described by Bush, including in the very same press conference as, a cabinet full of "worthless IOUs."

Brad DeLong, the blogging economics professor who specializes in this subject, ran the numbers. "The safest long-term investment the U.S. Treasury offers is the 20-year, inflation-protected TIP. ... What Bush is not telling you is that, under the Bush plan, if you divert $1,000 from your Social Security to private accounts, that amount is clawed back -- charged to an account associated with your normal Social Security benefit, that amount is then compounded at 3 percent per year plus the rate of inflation, and then after you retire, deducted over time from you normal Social Security benefit.

"If you are 45 and if Bush's plan were available today ... follow George W. Bush's advice, divert $1,000 into your private account, invest it in TIPS, and at the 1.85 percent per year interest rate you will indeed be able to collect an extra amount worth $10.11 a month in today's dollars when you retire at 65. ...

"But the clawback would reduce your normal Social Security benefit by $14.16 a month. You're $4.05 a month behind."

That's why privatizers never mention the clawback.

Basically, you have to beat 3 percent plus inflation to come out ahead, and the only way to do that is to gamble in the stock market.

All along, we've been promised a choice in the Bush plan -- those who wanted to invest their money in stocks could do so, while those who preferred a defined benefit could elect that option. Assuming the worst-case scenario -- the Bush plan passes while Brett Favre breaks both legs on the last day of training camp -- I planned to not invest my Social Security funds. I'd prefer to build my own retirement funds on top of a set annuity.

If one of the investment options is a treasury bond, I suspect that the option of forgoing the privatization scheme altogether has been scrapped. At that point, Id have to invest my Social Security money more aggressively, to avoid losing out to the dreaded clawback.

Yeah. The more I think about it, the more I think we should leave Social Security more or less as it is. Tweak the edges, ensure at least 90% of the promised benefits, and move on. Privatization is not only too risky and too expensive, it's also becoming personally inconvenient. That I won't have.

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