Economic Snapshot | Retirement

The DeMint plan to raid the Social Security trust fund

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Snapshot for July 6, 2005.

The DeMint plan to raid the Social Security trust fund

Led by South Carolina Senator Jim DeMint, a number of senators and representatives have coalesced around a plan to create private accounts to the extent of the Social Security surplus.  The program would start next year when the surplus is projected to be about $85 billion and continue for the projected eleven years of surpluses.  Proponents tout this plan as a way to “stop the raid” on Social Security, but, like other privatization proposals, it diverts money from the trust fund1 and relies on infusions of general revenues2 to avoid worsening the trust fund balance.

This proposal to create very small private accounts over a limited period makes little sense as a policy.  As the figure below shows, credits in the accounts would start at 2.2% of payroll in 2006 and shrink thereafter, dropping below 2% by 2009, below 1% in 2014, and to zero in 2017.  Over 11 years, the typical worker would probably accumulate about three to five thousand dollars in such an account and face a comparable debt to the government.  Tens of millions of people would accumulate only a few hundred dollars in these self-directed accounts.  The account of a young person would have to be managed for decades until retirement.  The money to set up the account would be loaned to the taxpayer.  The “clawback” arrangements for its repayment are complex, and many of the people who opt for such an account would lose money.  Even those accounts that survived the clawback would be too small to contribute meaningfully to retirement income.

DeMint plan: percent of payroll assigned to account

The government would pay large paperwork costs to maintain the records for, initially, an estimated 130 million people under age 55.  That number would grow over the next 11 years as people enter or re-enter the labor market.  As people change jobs, leave the labor market, retire, opt in, opt out, and change the allocation of their investments, the administrative work gets complicated. Social Security Administration actuaries have conservatively estimated that administrative costs will be 0.3% of assets.  That estimate most likely understates what actual costs would be because it’s the same percentage that SSA has used for the long-run costs for proposals with larger contributions on a permanent basis.  Even so, that 0.3% would add up to administrative expenses of $17 billion through 2016—and costs would continue to mount long after 2016 when contributions to the accounts would stop.

The rhetoric of “protecting the Social Security surplus” with private accounts rings hollow without policies that improve the overall budget balance.  Instead of doing that, the DeMint plan simply claims general revenues—more federal borrowing—to keep the trust fund whole as Social Security revenues are shifted away from the trust fund.  As a practical matter, the plan amounts to a raid on the trust fund to create truncated private accounts.

1.   The House bill has not been introduced yet, but one of its co-sponsors (Clay Shaw) has described the bill as double-counting the surplus funds, not only financing private accounts but also going into the trust fund.

2.   The standard term “general revenues” (meant to distinguish from dedicated revenues such as Social Security taxes) is misleading.  In this case, it means increased federal borrowing to the extent that people do not invest in federal debt.  Because the clawback charge is based on government interest rates plus a 0.3% charge for administrative expenses, people who invest only in government bonds would almost certainly lose money.

Today’s Snapshot was written by EPI research director Lee Price and research assistant David Ratner.

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