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Sunday, May 01, 2005

Social Security 2.0

Bush gave an indication of where he wants to go with Social Security reform. Two of the ideas that have been bandied about on cable news were mentioned. Private accounts make up the main plank, but it has now been bolstered with progressive indexing. In short, payments to retirees will be subjected to increases in prices, not incomes. Those with higher wages will get comparatively lower benefits.

The President managed to pull a fast one on me. Earlier, I wrote that Social Security should either be a social welfare program or a retirement plan. Either means test it or start private accounts. He managed to reinforce both with a means test and private accounts. What's more, one of the voluntary account options would be investment in treasury bonds.

Although it is an imperfect solution, it was fun to see Democrats have to answer the age old Social Security question: cut benefits or raise taxes? Protests have moved on from the idea that stupid Americans will put their retirement in magic beans to the one where progressive indexing hurts the middle class.

So, what's the middle class? My inexperience with the IRS website couldn't give me a clear indication, but here's some data from 2002. The median income in the US is $28,654. That means if you make more than that, you're doing better than 50% of people who file. If you make less, you're in the lower class somewhere. The top 10% of wage earners make $92,663 or more. That's close to the cutoff for Social Security requirements. The top 1% the Democrats often site make over $285,424. The middle class example sited by Nancy Pelosi this morning was an individual making $58,000. That would be at about the 65th percentile.

The positive part is that there are no actual rate increases. The optional investment account would be drawn from 4 percent of the social security tax. That works out to about 0.5% (or 0.25%, I'm not sure if it's taken from the 6% that comes out of the check or the 12% that is actually taken) of annual income. Assuming that figure, it would be $5 for every $1000 of income, or about $143 for the median earner.

Democrats have now begun to settle into the argument that no change at all is necessary. Estimates this morning were that the Treasury says 100% of benefits can be paid until 2050. The number last month was 2040. I guess Bush's tax cuts really did spur the economy. At that far off date, 80% of benefits can still be paid. Again, last month they were saying 70%. I predict by Election 2006, Congressional Democrats will say Social Security can pay 200% of benefits until the year 3000.

There are 2 ways to balance Social Security, bring in more money or pay out less. In 1983, the solution was to raise taxes and cut benefits. Under Bush's plan, if you make less than $30,000 neither concession is on the table.


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