Thursday, February 03, 2005

Plan 2

The benefit offset which woke our intrepid Post reporter up isn't new. It was a feature of "Plan 2," the previously floated plan which has essentially been the basis of the whispered Bush plan. It's that feature which left some of us scratching our heads awhile back, as we couldn't actually comprehend that the expected total benefits of the magical plan 2 were as bad as the study said. I was in an email exchange with a couple of people trying to figure out if they just screwed up the table. But, they didn't. As CBO described it:

CSSS Plan 2 would introduce IAs by:

Allowing workers to divert 4 percentage points of their payroll taxes, up to $1,000, to a personal account, which would belong to covered workers;

Disbursing the principal and interest in those accounts--in the form of annuities that would supplement Social Security benefits--to workers at retirement or to their heirs if they died before retirement; and

Reducing the traditional benefit by the annuitized value of a notional (or theoretical) account, equivalent to the diverted payroll taxes accrued at the Treasury interest rate minus 1 percentage point.

Participation in IAs would be voluntary, but there is an unambiguous incentive for individuals to participate. In this analysis, CBO assumes 100 percent participation.

CSSS Plan 2 would lower benefits relative to current law by changing the computation of benefits from wage indexing to price indexing starting in 2011. CSSS Plan 2 would partially offset the benefit reduction resulting from price indexing by:

The point in bold is the key point. There isn't necessarily a one for one match here. It's not clear whether the plan itself or the scoring of it reduces benefits "by the annuitized value of a notional" instead of your actual account, but much of the impact is the same.

By how much was "plan 2" expected to cut your total retirement income? Not your guaranteed benefit, but the guaranteed benefit plus your private account annuity?

Here's a handy table from CBPP (on Senator Graham's modified plan 2 legislation):

The first column under the Graham plan says it all. That's the total retirement income generated -- both from your guaranteed benefit and your private account

And we're supposed to support this why?

Some added explanation: "Scheduled Benefits" are what are promised under current law. "Payable Benefits" are what the system is expected to be able to afford to pay once it "goes bankrupt."