ArcaMax

Well, once again, the idea of privatizing Social Security is in the news. It's a topic that delights some people, angers others, and confuses just about everyone. I've discussed it many times in the past. But I guess it's time to clarify things once again.

One form of "privatizing" Social Security has to do with how the fund's assets are invested. Some claim that Social Security should be managed more like other public pension funds. Most of those funds have a diversified portfolio, with a variety of investments. But every nickel of Social Security assets is invested, by law, in U.S. Treasury notes, considered by everyone the safest place to stash your cash. What most folks who advocate putting Social Security funds into private markets can't comprehend is the immense size of the Social Security trust funds. Compared to large public pension funds (like many teachers' retirement funds or police and firefighter funds), Social Security is like Fort Knox, and these public funds are just big piggy banks. Those funds may have millions or even billions of dollars in assets. But Social Security has trillions. That's a big difference, and you simply can't compare them.

Or put it another way. Social Security accounts for approximately one-fourth of the entire federal budget of the United States. You just don't take a quarter of our country's budget and put it on Wall Street. After all, would you want the federal government, via the Social Security trust fund, to be the major owner of Chevron stock or the primary investor in Phillip Morris?

A more reasonable approach to "privatizing" Social Security would allow individual taxpayers to use private, or managed accounts, to supplement future Social Security benefits. And when you hear talk of such proposals, you must remember to ask this question: Is it a "carve out" plan or an "add-on" plan? There is a huge difference.

Both plans involve requiring younger workers to contribute money to an IRA-type account that would offer several investment options. The worker could choose a safe but generally low-yielding account or a riskier but potentially more rewarding one. The investments from this account would then be used to augment Social Security retirement benefits.

But the difference lies in the funding details. In a carve-out plan (these are usually the plans touted by Republicans), the worker's IRA investment would be funded with a portion of his or her Social Security payroll tax. For example, currently, 6.2% of a worker's salary is deducted for Social Security taxes. A carve-out plan might specify that 4.2% continue to be used to fund Social Security, while 2% would be funneled into the private account. In other words, this plan gets its funding by carving it out of the current Social Security system.

On the other hand, an "add-on" plan (the plans usually touted by Democrats) would require a worker to contribute an extra amount to fund the private account investments. So, 6.2% of his or her salary would still be deducted to finance Social Security benefits. But in addition, that worker would be required to chip in an extra percentage point or two of salary to fund the Social Security supplement. So this plan gets its funding by adding on to the current Social Security system.

Each plan has its pluses and minuses. The downside to an add-on plan is that more out-of-paycheck spending would be required from workers to fund their retirement portfolio. But the advantage of the plan is its greater rewards. Most "add-on" proposals are modeled after the highly successful "Thrift Savings Plan," an add-on IRA that has been available to federal government workers for years and has given many of them the kind of financial security in retirement not usually associated with middle-class civil servants.

The upside to "carve out" proposals is that no extra financial burden would be placed on young workers to finance the supplemental benefits. But the often unexplained downside is that huge reductions would be necessary in future Social Security benefits. It's just simple math. If you are going to carve out about one-third of the Social Security payroll tax to fund a worker's private supplement, then obviously future Social Security benefits for that same worker are going to have to be cut by at least one-third.

But carve-out advocates always say they won't cut benefits. And that leads to impossible transition costs. Remember: Social Security is a "pay-as-you-go" program, meaning the money deducted from today's workers' paychecks is used to fund benefits to current retirees. So, if you cut the amount of money going into the system, and say you will not cut benefits, you must somehow come up with the funds to pay those promised benefits to CURRENT AND FUTURE retirees. And if taxes aren't raised to cover those costs, experts estimate the transition costs would add trillions of dollars to the federal debt. (That's what sunk former President George W. Bush's carve-out privatization plan in the 1990s.)

But here is the most important point I need to make about proposals for private accounts -- whether carve-out or add-on. Although they are often mentioned in the same breath as other proposals to "save Social Security," they do nothing of the sort. Social Security's long-range financing problems are the result of baby boomers quickly turning into senior boomers. For years, Social Security has been working extremely well with a ratio of three workers supporting one retiree. But by the time all the boomers retire, there will be only two workers supporting each retiree. The system simply cannot work AS IT'S CURRENTLY STRUCTURED at a two-to-one ratio.

As I've pointed out many times to my readers, many relatively modest proposals for reform will keep the system running for many more generations. All those possible solutions involve either slight tax increases or moderate cuts in benefits. None of them involves the creation of private accounts for Social Security beneficiaries. I am not saying the private accounts are a bad idea. I am saying that they have nothing to do with the future financial health of the program.

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If you have a Social Security question, Tom Margenau has two books with all the answers. One is called "Social Security -- Simple and Smart: 10 Easy-to-Understand Fact Sheets That Will Answer All Your Questions About Social Security." The other is "Social Security: 100 Myths and 100 Facts." You can find the books at Amazon.com or other book outlets. Or you can send him an email at thomas.margenau@comcast.net. To find out more about Tom Margenau and to read past columns and see features from other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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