Thursday, February 10, 2005

# Posted 1:13 PM by Ariel David Adesnik  

REAGAN ON SOCIAL SECURITY: What follows is a letter, dated February 9, 1983, from the President to George Burns, the well-known actor and octogenarian:

Dear George:

I just had to answer your letter knowing how concerned you are about Social Security. Now that I've reached the age of eligibility you can rest assured I've done something about it. I've made sure it will be on a solid basis for all you young fellows when your turn comes.

February 6 was my birthday -- I finally made PAR-72 the hard way.

Nancy sends her love and so do I.


Source: Reagan: A Life in Letters, Page 162.

Reagan's letter provides an interesting contrast to the message in which FDR declared that private annuities should ultimately replace Social Security. According to OxBlog reader AS, this website and others have fundamentally misunderstood the sort of program that FDR was advocating. Drawing on this report by the official historian of the Social Security Administration, AS comments that:
FDR's proposal of "voluntary contributory annuities" was for insurance-type annuities, to be issued and guaranteed by the government. Income from this program "would go into the trust fund along with the payroll taxes collected under the mandatory program." This is essentially just a voluntary extension of what we now know as traditional Social Security...

FDR proposed a program with money held by the government, and a return guaranteed by the government. In stark contrast to what FDR proposed, the Bush proposal is for money held by Wall Street and returns are guaranteed by no one.

FDR proposed allowing workers to voluntarily increase the size of their government-guaranteed retirement account. Bush, on the other hand, proposes decreasing the size of the government-guaranteed retirement account, and instead entrust the money to Wall Street. The two proposals are diametrically opposed, yet you're still treating them as equivalent.
AS points to numerous important contrast, but also overlooks some important similarities between the two proposals. First of all, FDR did envision the reduction of guaranteed benefits, although such a reduction would take place in the indefinite future. Now, almost seven decades later, we are living in that indefinite future.

AS is correct to point out that FDR's proposal made no provision for Wall Street. Then again, in 1935, how could anyone have reasonably proposed that investing in the stock market was a safe and secure course of action?

One should also point out that under the still-to-be-defined Bush plan, one can invest in US government bonds. In fact, it seems that private account holders will be able to invest entirely in government bonds should they so choose. If they do so, the returns will be guaranteed by the United States government and not by "no one".

Finally, I believe that AS overlooks a very important similarity between the FDR and Bush proposals, namely that the investor will be in full possession of the benefits, which the government will never be able to take away. Under the current system, the government retains the right to reduce benefits, raise the retirement age or alter the system in any number of ways. Both the private annuities described by Roosevelt and the private accounts proposed by Bush would be immune from such action.

That said, I want to emphasize that these comments are not intended as a defense of the Bush administration's approach to this issue. Rather, I believe it is important to dispel certain myths and misperceptions perpetuated by the President's critics. Or for that matter, by the administration itself.

UPDATE: Matt Yglesias counters via e-mail that:
The statement that under the Bush plan you'll be allowed to invest in US government bonds is true, but misleading. The personal accounts will be financed in the short term through government borrowing (since we need to keep paying benefits to people 55 and over). This will open up a new hole in federal finances over and above the existing one. The Bush plan involves first closing the existing gap in some unspecified way. The second gap will be made up by a further reduction in guaranteed benefits for people who choose to start a private account. The second reduction will be calculated by determining the size of your account contributions and tacking on a three percent annual interest rate, three percent being the interest rate on the bonds that the government will need to sell in order to let you start your account.

This has the benefit of ensuring that, over the long term, the transition costs will be managed. The downside is that in order to make money with your account, you need to invest in assets that have a higher rate of return than do bonds. The only assets that do so are riskier assets (either stocks or corporate bonds). So while you'll be permitted to invest your money in Treasury Bills, there would be no point in doing so since your reduction in guaranteed benefits would be exactly equal to the rate of return on the bonds you purchased, minus the administrative fees on your account. The choice, then, is a bit illusory.

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