More on Social Security, "ownership," and the cost of phase out

Like the rest of the blog world I have posted previously on Social security. But here are a few more thoughts.

• Bush misuse of federal resources for propaganda purposes
  The New York Times reports that the Bush administration is at it again, using federal resources to promote its own political priorities.

  Over the objections of many of its own employees, the Social Security Administration is gearing up for a major effort to publicize the financial problems of Social Security and to convince the public that private accounts are needed as part of any solution.

  So many people have been talking about this, that I don't see the need to add anything.
  
  
• Paul O'Neill
  The Times also published an op ed piece by Paul O'Neill, Bush's first Secretary of the Treasury. He too wants to privatize Social Security.

  Financial security begins with ownership of real assets; so the money saved each year in [a revised version of Social Security] would be the property of the person who saved it.…
  
  The money would then be invested in broad-based index funds with an objective of matching the overall rate of return for all investments in the United States.

  It's not clear how this would be different in effect from the current plan except that money would be invested in stocks rather than in government bonds. Under O'Neill's plan the federal government would manage the account, and O'Neill wouldn't allow the account "owners" to withdraw money or to do anything based on their ownership authority. So what's the difference?
  
  We could invest the current trust fund in index funds. The result would be the same — except that O'Neill wants the federal government to contribute one trillion dollars to get started. We could do that now also. Let the federal government contribute one trillion dollars to the current trust fund. As far as I can tell, the result would be the same.
  
  
• Ownership?
  O'Neill and the Bush people would claim that the difference is ownership. That's false (but as usual, effective) framing. Everyone currently in the social security system is owed retirement benefits by that system. Or to put it in Bush-speak, those people own an obligation of the federal government to pay them money. They own that obligation in the same way that one owns an obligation of the federal government when one owns a federal bond. There is very little difference. In both cases, owning a bond and owning an entitlement, one is still the beneficiary of someone else's liability. For example, when a senior is applying for a loan, he or she presumably lists his or her social security income in the income section. That's just as real as any other source of income — and one has just as secure an interest in it as in any investment that generates income.
  
  The primary difference is that when I own a bond, I can presumably sell it, but I can't sell an entitlement. In this case, though, that difference is meaningless: no one would be allowed to sell their retirement account. After all, the point of a retirement account is to provide for one's retirement. If one were allowed to sell it, what would one live on when one retired? Presumably the federal government would then be obligated to provide some other retirement benefit. So selling one's retirement account would not be allowed, and the ownership privilege becomes meaningless.
  
  
• The cost of phase out
  However, a question did occur to me. Suppose one wanted to replace social security with some other system. It's not clear to me what the new plan would do or how it would guarantee everyone an adequate retirement. After all, one problem with individual accounts is that some people would lose money on their investments. What would we do for those people when they are ready to retire. We can't just say "tough luck." The point of social security is that it is a social security plan; it guarantees (to the extent that the government can guarantee anything) that everyone will have a retirement income.
  
  But let's skip over that problem. If we did want to replace social security with some other system, how much would it cost to phase it out? For example, how much would it cost to close the current social security plan to everyone currently under 18 and keep it exactly as it is for everyone currently 18 or over. Younger workers as they enter the workforce will be put into whatever the new plan is. Workers currently in the social security system would stay in it. As the trust fund dwindles the government will make up the difference.
  
  Will that cost more than Bush's current plan? It certainly wouldn't require an immediate infusion of one trillion dollars to get it started. It will only require federal funds when the current trust fund is exhausted. Even with no new workers, that probably won't happen until 2030 or so — or perhaps later. (Someone will have to figure that out.) From that point on, the federal government will be on the hook to provide the difference. But that obligation is self-limiting and will end when all workers currently under social security die.
  
  Here are some questions* I would like to have answered about this approach.
  1. When would the trust fund run out.
  2. What would be the annual liabilities of the system to its current workers from that point on until the current workers were all dead?
  3. What would the present value of that liability be if the federal government were to borrow that amount now?
  4. If that liability were to be funded by a constant-rate tax from now until it ended, what would be required?
  It isn't that I'm proposing this system — since it would entail ending social security as we know it with no clear idea of how it's replacement system would work. But it would be interesting to find out how much it would cost to phase out the current plan by limiting it to workers currently covered by it.

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*The Social Security Administration has a page that lists a number of Stochastic models that one can use to do one's own projections. I haven't figured out how to use any of them to answer my questions, though.