Thursday, February 10, 2005

David Brooks' Social Security welfare plan

David Brooks, the NY Times conservative columnist, outlined his version of a replacement for Social Security.
[T]he government would open tax-deferred savings accounts for each American child, making a $1,000 deposit at birth, and $500 deposits in each of the next five years. That money could be invested in a limited number of mutual funds, but it couldn't be withdrawn until retirement.

Over decades, it would grow and grow, thanks to the wonders of compound interest, so that by the time workers retired, they would each have a substantial nest egg, over $100,000, waiting for them.

The KidSave idea was an early venture in what has become a broad intellectual movement that goes by an infelicitous name: asset-based welfare.

The idea behind asset-based welfare is that we are living in the midst of a social revolution. It used to be that only the rich owned financial assets like stocks. But over the last 20 years, the number of American households with money invested in the stock market has more than tripled.

But people in the bottom half of the income scale don't get to join in to take advantage of compound interest. They don't get a share of the growing national economy. They don't get the psychological benefits of ownership.
In other words, the government would give each child $3,500, which according to Brooks, would grow to about $100,000 by the time the child was ready to retire. The arithmetic seems a bit optimistic, but not unreasonable.

How much would it cost? According to CIA - The World Factbook -- United States, the US birth rate is more than 400,000 people per year. So at $3,500 per child, this program would cost about $14 billion per year. Hardly a drop in the bucket compared to the rest of the Federal budget. (According to Tax Policy Center | Tax Facts, current payroll tax receipts are about $500 billion/year for the retirement portion of Social Security.)

How do the plans compare? According to the Social Security Administration's Quick Calculator, if you are ready to retire now, and if your current income is $40,000/year (the default on the page), benefits would be a bit more than $12,000 year — not really enough to live on, but that's the way it is. Under Brooks' plan one could get the same benefit rate with a $100,000 annuity for perhaps 10 years. (Presumably Brooks would apply to benefits derived from his plan the same income tax policy as that applied current to Social Security benefits. Fifty percent of Social Security benefits are taxable if you are single and earn between $25,000 and $40,000 per year. Eighty five percent are taxable if you are single and earn more than $40,000. For married couples the dividing lines are $32,000 and $50,000.)

Since the average American lifespan is less than 75 years, everything works out fine as long as those who die early give the unused portion of their retirement package to people who live longer than 75 years.

Would Brooks be willing to include that feature as part of his plan? If so, we could start tomorrow. Everyone currently alive would stay under the current Social Security program. Everyone born tomorrow or later, would be under the Brooks plan. The current system could be terminated gracefully, and the transition cost to the new system would be minimal.

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