September 1, 2000
By Robert Linnell
Both Governor Bush and Vice President Gore have announced major plans for changing Social Security (SS). Neither candidate has provided details although the Gore plan, as announced, includes more detailed features. We need to keep in mind the old saying, "the devil is in the details". However, we can make some meaningful comparisons based on published information.
In the Bush plan an individual investment account would replace some SS benefits. Assuming this plan would follow the ideas of the noted economist, Martin Fieldstone (a Bush advisor) funds would come from 2% of earnings up to the maximum taxed for SS (currently $76,200.). Individuals would manage their own investments from an approved pool. The expectation is that these investments would yield far more gains than the loss of SS income from the reduced taxes paid in. This entails some individual risk and it might be that the government would need to guarantee normal SS benefits putting the risk instead on all taxpayers. In order for individual investment accounts to build up sufficient funds, individuals would need many years of participation so this plan would only be useful to younger workers. Since SS is a pay-as-you-go program, the diversion of tax income to individual investment accounts, would cause a shortfall of funds for current retirees, estimated at about $1 trillion. Covering this shortfall is a problem. Since low income workers pay less SS taxes, the amount they have for investment would be small and thus the benefit over time, even with good investments, would be smaller. These workers could not afford any loss due to a declining stock market. Workers paying SS taxes at the maximum level would have the largest sums to invest and the most to gain in a rising market. This plan does not address the issue of the projected bankruptcy of SS toward the middle of this Century.
The Gore plan preserves the guarantees of the current SS system (disability, widows and orphans and retirement benefits) but instead sets up investment accounts, government subsidized, similar to 401(k) plans popular with many employers. Savings by individuals would be matched by income tax credits, for total savings up to $2,000. per year ($4,000. for couples). Couples with $30,000. or less per year would receive a three for one match, a $3,000. tax rebate for a contribution of $1,000. Couples with incomes of $30-60,000. would qualify for a one to one match or $2,000 for $2,000 in savings. Couples with incomes of $60-100,000. would qualify for a $1,000. match for $3,000. in savings. Individual contributions would be tax free but withdrawals would be taxable. Withdrawals would be permitted for buying a first home, college expenses, catastrophic illness and retirement. Investments could only be made in selected broad based funds. Like the Bush plan, Gore does not address the projected bankruptcy of SS by mid Century.
Gore would only benefit those with family incomes of less than $100,000. whereas the Bush plan would primarily benefit those with incomes greater than that amount. The Bush plan creates a short-fall in paying current retiree SS benefits, estimated at $1 trillion and the Gore plan requires $200 billion in government funding over the next decade and larger sums after that time. Neither plan addresses the projected longer term financial problems of SS.
This is one of those rare times when a political slogan appears to be actually true when Gore states, "my plan is SS plus and his is SS minus".
Reproduced with permission from: www.my-oped.com