Social Security forum

Tonight I went to the Social Security Forum at the Marriott, presented by the Federal Reserve Bank and sponsored by Mpact. This was a nonpartisan attempt to explain to the public what is going on with Social Security reform. It was the best Mpact event I’ve been to this year, except for Impacto (where there was free liquor and one of the Promote Memphis pillar chairs had on a tube top). Here are highlights of what I learned:

– When Social Security payroll taxes exceed paid-out benefits, the extra money goes into a trust fund by law. But the government simply buys T-Bills and in fact uses the excess for current federal spending. So the “trust fund” is nothing but debt – the government takes out loans to itself.

– Right now, payroll tax revenue > benefits paid out. But by 2018 (assuming no change in payroll taxes or benefit formula) benefits will be > payroll tax revenue. At that point the government will begin cashing in the IOUs to itself – which means it will have to come up with extra money through higher taxes, reduced spending or more debt.

– In 2041, the trust fund will run out. At that point, benefits paid will amount to 74% of scheduled benefits, if payroll taxes and benefit formula remain as they currently are, because income will have to equal expenses. By 2079 it will go down to 68%.

– One proposal is not to use private accounts, but to do one or more of the following: increase the payroll tax, increase the retirement age, raise or eliminate the $90,000/year income cap on Social Security payroll tax, reduce benefits for higher-income earners, or switch benefit formula from wage indexing to price indexing. We learned that, although the cost-of-living raises for retirees and the maximum yearly contribution cap are indexed by inflation, the benefit formula determining how much you get as you’re about to retire is indexed by wages. In general wages grow more quickly than prices. This proposal would preserve the current system for at least another 75 years.

– Other proposals allow for a portion of your 6.2% old-age Social Security contribution to be invested in financial markets – generally 2 to 4 of the 6.2%. People will have options in terms of risk, but options will be limited. The private accounts could be either voluntary or mandatory – under the Bush plan, they’re voluntary.

– Diverting dollars to private accounts will mean less money is going into the trust fund – so the government will have to borrow even more over time.

– Some people feel that the no-privatization plan will reduce economic growth because it will mean increasing taxes and increasing the cap on contributions.

– On the other hand, there’s a public fear about retirement income depending on the market.

– Private accounts will be able to pass from one generation to the next, as 401(k)s do.

– Private accounts are not guaranteed to restore the long-run solvency of the system – we can’t be sure the market will actually go up.

– The reform plan most likely to pass is the one that is favored by the age/income cohort wielding the greatest political influence. As we move closer to 2018 this is going to become a hotter and hotter political issue.

– In the long long run, private accounts will almost certainly outperform the non-privatization solution. But in the gap between now and then, it will cost trillions.

And those are the notes I took. I’ll maintain the nonpartisan stance from the presentation and let you draw your own conclusions. Thanks to the Federal Reserve Bank for a most informative presentation. I learned a lot.