Tuesday, October 12, 2010

Chapter 6 of Toomey's Book (Social Security)

Partial review of The Road to Prosperity: How to Grow Our Economy and Revive the American Dream, by Patrick J. Toomey and Nachama Soloveichik. NY: Wiley, 2009.

A few years ago I wrote a lengthy multi-part review of Rick Santorum’s book. I’d like to do something similar for Toomey’s Road to Prosperity. Each post will discuss one or more chapters of the book with a post at the end with a linked list of all the entries and some final thoughts.

Chapter 6 is "Transforming Social Security" (121 – 145).

The first part of the chapter gives an overview and history of the social security program. Workers who pay into the system are not saving for their own retirement but paying the retirement of those who have already retired. Toomey says the program will eventually go broke due to longer retirements and a lower birthrate. To sum up his view of the situation:

Imagine being forced to pay into a retirement program for your entire working life only to end up decades later getting less back from the program than what you paid in! (127)

Toomey also cites the Supreme Court case of a Bulgarian immigrant who paid into the system for 19 years and was then deported a year after his retirement and the checks stopped. The court case said he was not entitled to the monies he had paid in. Toomey also points out that the money paid into the system cannot be inherited. If you die before becoming eligible for social security your heirs do not get the money you paid in.

The next section is on personal accounts. First off, Toomey says those who have already paid into the system are entitled to receive the standard benefits they were promised. However, younger workers should be given a choice between the traditional program or they can put a portion of their payroll taxes into a personal account. As even younger people entered the work force they would automatically be enrolled in the private account system. Then
When these workers decide to retire, they could take their accumulated savings and convert some or all of it to a monthly payment stream, or annuity, through a creditworthy financial institution. (129)

Here’s my first question – who decides what is a “creditworthy” financial institution? Is there an approved list? Who maintains it? Who reviews the institutions to see if it remains creditworthy? Toomey agrees that “there are complex details that have to be addressed in a reform such as this” (130).

The benefits are dignity for those receiving the benefits, flexibility in deciding when to retire, and these decisions would be made by the individual not the government. As an additional bonus Toomey believes those receiving benefits would use their excess funds to invest in their communities, which would especially be a boon in poorer neighborhoods.

Toomey writes that 20 other countries have already enacted a system similar to the one he proposes. To provide an example he goes into some detail on the system enacted in Chile. In addition to the information in the book, here are three sites to investigate: pro (Cato Institute), con (from the Social Security Network, a Century Foundation Project)), neutral (Knowledge @ Wharton).

In anticipation of opposition Toomey has prepared answers to questions people might have. First off is a response to those who think this is an invented crisis, he provides data to support his contention that social security is likely to run out in the near future. Second is a concern about the volatility of the market. He writes:
It is true that the average worker is no expert on the stock market and is unqualified to construct a prudently diversified investment portfolio. But this is no reason to deny him the opportunity to accumulate savings and investments – he need only hire the services of those who are qualified.” (139).

He favors “a broad set of regulations” (139) for the financial and investment services involved and that the portfolios involved be low risk and diversified, possibly shifting the amount of risk based on the age of the employee. personally, I have concerns about trusting the banking and investment industries not to do something shady.

Transitioning to the new system would require borrowing to pay benefits to older workers but this would be short-term.

He ends with a list of political obstacles. the most important of these is that older people vote in higher numbers than younger people, and older people do not seem to want anyone tinkering with their social security. Politicians (read: Democrats) use scare tactics to keep senior citizens from understanding that their benefits won’t be cut. The AARP and labor unions are also invoked as needing to keep their members feeling dependent. If workers realized they could be financially independent without union help then union membership would drop. Or so thinks Toomey. The last few pages are devoted to smacking down Democrats.

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