Alternatives
Paul Ryan
"Roadmap For America's Future"
Endorsement
We cannot endorse this plan. This plan doesn’t fix Social Security. It pays for it. The privatization component is less effective than most privatization ideas in the market. This plan uses general taxpayer subsidies to support the system – we which always reject.
How Does It Work?
The Ryan plan works by cutting benefits – workers retire later and get lower benefits. It offers a privatization component to get people out of the system.
Strengths
This plan admits that there is a problem, but then fails to deal with it.
Weaknesses
Like all plans in DC, Paul Ryan’s plan has a vote buying component. “[Low Income Americans] who remain in the current system, and those who opt for personal savings accounts, will receive increased benefits.” Paul Ryan would clearly like to increase the welfare component of Social Security.
The plan increases benefits for older workers. Specifically it creates a guarantee for those 55 and older that does not exist today. It is open-ended, unlike the system today. When Social Security runs out of money, benefits are reduced. Once in the general fund, benefits willnot be reduced. They will generate dollar for dollar deficit spending for future workers to pay. This guarantee is a terrible deal for younger workers.
The privatization component has two things that we really dislike. First, it guarantees of benefits to people who want to take risk. So the worker gets the benefit if the investments do well, and the government gets stuck with the losses – that is a general taxpayer subsidy. The plan also gives Washington more control over the capital markets. “a list of managed investment funds approved by the government for soundness and safety” – Freddie and Fannie should make you doubt the government’s ability to manage soundness and safety of anything.
The plan includes a guarantee of investment which is a terrible idea. Guarantees create risky behavior and investment lists concentrate that risky behavior in a select group of companies. Washington learned nothing from 2008. See our blog piece, "Guarantees and Private Accounts".
Distortions
Paul Ryan’s discussion uses the word bankruptcy incorrectly. Social Security can be insolvent, but it cannot go bankrupt.
He pushes the standard myth about Americans living longer, and the need to cut benefits. “When Social Security was enacted, the average life expectancy for men in America was 60 years; for women it was 64. Today, average life expectancy has increased to 75 years for men and 80 years for women (2007 figures).” The number 1 factor in increasing life expectancy is lower infant mortality rates. So Ryan's plan would cut benefits because fewer babies are dying.
Open Questions
What is the higher rate of return promised by the Ryan Plan? Is it realistic? We are trying to find out.