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Friday, March 25, 2005

Bowling for Personal Accounts

Brad DeLong notes that the Bush administration is considering changing their social security personal accounts proposal. The current proposal allows people to divert parti of their FICA to personal accounts and reduces the guaranteed benefit by the amount plus 3% real interest. In polls, people don't seem interested in the accounts and Robert Shiller thinks they are wise to avoid them.

3% real is a guess on the T-bill return. The idea is that, this way, account holders will pay for the extra public debt needed to replace their contibutions to the Social security trust fund. Now the White House is considering claiming that they think that the return is going to be 2% real making personal accounts a better deal for participants and worse for the social security administration.

I think this is important for one reason. The claw back rate means that money in personal accounts is not at all protected from greedy boomers.

In comments to Brad's post Riggsveda writes "I just saw another CNN report where Bill Schneider interviewed young people in a trendy bowling alley (!) and asked them what they thought about SS privatization. The prevailing feeling was one of thoughtless cynicism, something along the lines of "There's no way the money I contributed is going to be there when I retire. I'd rather have private accounts so those baby boomers can't get their hands of my money." I would have thought "trendy bowling alley" was a contradiction in terms. Riggsveda's summary of the reason many young people support private accounts is plausible to me. So I think that the kids are confused. Money in a personal account is not protected at all. It can be taxed (anything can be taxed). Less blatantly, the claw back rate can be changed. Nothing prevents us boomers from telling the kids "you got a nice return on your personal account kid. We are going to raise the interest we charge you on the diverted money to 6.5%. Try to beat that sucker."

A personal account whose value depends on a parameter set by law is no protection.

Also trying to guess the T-bill rate is crazy. The idea is that the treasury and private citizens will take huge bets against each other on the T-bill yield. This risk is unattractive to private citizens and serves no purpose. It would make more sense to claw back money diverted plus interest on the average treasury security.

To see how silly charging a fixed real rate is, imaging someone who invests the personal account in Treasury securities. If the Bush administration's second guess is right this is a mean return zero low (but positive) risk investment and really dumb.

It is theoretically possible for personal accounts to be a good deal both for the SSA and participants if stock is currently underpriced. The reason is that the SSA is not allowed to buy stock and personal accounts participants would be allowed to buy stock. The gains would come at the expence of current stock owners who would stupidly sell underpriced stock. Such gains would come to participants in personal accounts only if they want to buy more stock than they currently own and something is blocking them from doing so (this is not quite logically impossible). However, there is no point in using personal accounts to buy treasury securities in a Balanced portfollio. It seems obvious to me that shifting from a large balanced portfollio to one with the same amount of stock and no bonds would avoid pointless administrative costs and mutually risky bets against the SSA on yield on treasury securities.

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