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Social Security: Bush Using Neo-Voodoo Econ?

The Washington Post thinks it knows how Bush is going to fix the Social Security “crisis”. Once again, whoever made this policy decision is pretty astute. While it still involves “cutting benefits” in essence, this strategy seems to solve a few problems. One, it preserves Social Security as a government program and does not materially change the FICA tax rate. Two, it ensures that Social Security is more or less going to provide a safety net so that seniors will still have something at the end of the month. By not rewarding higher wages however, it’s going to encourage investment in private accounts. It used to be that if you earned more at your job, you got more SSI when you retired. Now, you wouldn’t have to open a private saving account (PSA) but the more money you make the more tempting a PSA would look.

So why oppose the PSA idea? Well the reason is because it would favor the wealthy tremendously. Unless the rules are different than say a Roth-IRA, there won’t be much choice involved with PSAs. That inflexibility means the firms that sell them will make a healthy profit, while people with more discretionary income (rich people) can make other investments to offset a lackluster PSA. At present there is no deterrent for smart people of little means to pick a better investment choice, but it seems like there almost wouldhave to be one. Unless of course, Bush really intends to empower people and not simply payback the millions in election cash he received from companies like Morgan Stanley.

The other possibility is that inflation is going to be much higher than anticipated. However, since the number of workers is likely to fall in the future, wages would still surge ahead of inflation. But in either case, whether the labor age population rises or falls, higher inflation might still derail this strategy. This is because Social Security uses Treasury bonds that have a fixed return. If inflation in a given year exceeds the return, problems ensue. It last happened in the 1970s when the amount of wage earner dwarfed people receiving Social Security. It made the already terrible inflation worse, but was not responsible for causing devaluation in the first place. That was due to government borrowing for domestic spending and Vietnam Given how profligate we’ve been in the face of these federal income tax cuts, the parallels between then and now is almost palpable. If Bush hits the brakes hard on spending and interest rates rise he might get around this problem. But given that Iraq doesn’t look resolved that seems unlikely. Secondly should interest rates ascend too fast, we’re looking at pretty stank-smelling recession. Ironically, it would be the opposite of a jobless recovery: hiring would continue to rise because of demographic shifts

So again, this preliminary leak could be wrong. But if it isn’t, it appears Bush is using some serious voodoo economics to claim he’s “reforming” Social Security. It appears instead of reducing the real size of government FICA revenue, he’s just creating a tax loophole to get people to once again tepidly buy those mutual funds they left four years ago after it was clear Wall Street was taking them for all they had in their 401(k)s. If that’s “reform”, what is the status quo?
posted by Thomas at 1:30 AM 0 comments