Wednesday, January 05, 2005

Benefits under privatization

Kevin Drum decides to get into the debate after all(* See update below) by posting this chart of expected benefits under a likely privatization plan called CSSS2 as reported by the Congressional Budget Office (click all charts to enlarge):



Drum says, "Private accounts still aren't as good as simply doing nothing." Doesn't look too good does it? Nassty Republicanses taking away our benefitses.

But he leaves out one little detail:

The diagonally hatched area represents the projected range of scheduled benefits as a percentage of GDP under current law; the shaded area represents the projected range of proposed benefit payments under CSSS Plan 2.
So Drum's definition of "as good" pension benefits means as much percentage of GDP going to pensioners, without regard to GDP growth, fiscal condition, retiree population, or retiree lifetime contribution versus lifetime benefit.

Note, throughout this discussion, "current law" and "trust fund-financed benefits" mean our current situation where the Social Security System goes into deficit around 2020 and is broke around 2050. At that time the system is assumed to clamp its outlays to its revenues. "Scheduled benefits" means the benefits that are promised to future retirees, but cannot be paid due to the 2050 train wreck. Scheduled benfits are substantially higher than than trust fund-financed benefits.

Let's look at few more charts.

First, here is Figure 4B from the report, Potential Range of the Ratio of Lifetime Benefits to Lifetime Taxes by Birth Cohort and Earnings Level Under Current Law and CSSS Plan 2 (Trust-Fund-Financed Benefits):


So, the benefit to tax ratios look pretty similar under the CSSS2 plan, at least in the Trust Fund-Financed scenario. Interesting.

Now let's look at Figure 1B, Revenues and Outlays as a Share of GDP, 1985-2105 (Trust-Fund-Financed Benefits):


Under current law, the system goes into defecit somewhere around 2020. The train wreck happens around 2050 when benefits must be massively scaled back (as a percentage of GDP) to get the system back down to a true pay-as-you go. Revenues (also known as "taxes") decline slightly from 5% of GDP throughout the century.

In the CSSS2 plan, revenues immeidately drop then slightly decline, ending the century below 4% of GDP. The system is in defecit for the first part of the century but is generating ever growing surplusses after that.

Returning 1% of the GDP to the private sector while keeping the benefit to contribution ratio essentially the same looks like a big win to me.

Even though the contribution to benefits ratios are about the same in both scenarios, the CSSS2 plan does reduce the initial benefits and total benefits retirees can expect to receive. Drum points out (emphasis his):

For a middle-income earner born today, first-year benefits even under the crisis scenario of Social Security "bankruptcy" would amount to $19,900. Under the private account scenario, initial benefits would amount to $14,600.

I'll add that the present value of the lifetime benefits of the same earner go from $217,300 under current law to $190,600 under CSSS2.

So the question is, is reducing the tax burden by 1% of GDP, stabilizing the Social Security System, and eliminating the 2050 train wreck worth that reduction in benefits, and will todays infants and preschoolers have time to prepare for the change?

DGCI, Neal Boortz, and Don Lambro have new items on this, mainly relating to an AARP campaign trying to scare current retirees. Most AARP members won't be around for the train wreck, I suspect.

Debate on!

(*) UPDATE: The "decides to get into the debate after all" snark leading this item is a narrow reference to Drum's earlier post thanking God that, "even centrist Democrats are backing off from any cooperation with Bush's privatization plan." Sorry if it appears to be a general criticism. Drum is certainly more engaged than Robert Scheer was in this article.

UPDATE 2: More on the AARP from Pawigoview via Blogs for Bush. Pawigoview presents a very thoughtful piece from a senior citizen who mentions the federal government's Thrift Savings Plan as an example of privatized accounts. Good point!