11b_Generation_X - The New Republic GENERATION X Does Bush...

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The New Republic October 23, 2000 GENERATION X Does Bush Understand His Social Security Plan? By John Geanakoplos Social Security is the third rail of American politics. So why hasn't George W. Bush been harmed for proposing to transform it into a system of private accounts? Probably because his plan relies on simple and seemingly compelling logic. Today, retirees get a measly 2 percent rate of return (in the form of Social Security benefits) on the money they paid into the system (via payroll taxes). Since even ultrasafe bonds offer much better returns, Bush says, people would be better off investing their money themselves. In an era of dizzying stock market heights, this argument has the virtue of being timely. Unfortunately, it does not have the virtue of being true. Under Social Security, the money you put into the system during your working years doesn't actually sit there collecting interest, waiting for you to claim your checks at age 65. Most of it goes back out as benefits for today's retirees. This is why Social Security is called a "pay-as-you-go" system: Today's workers pay for today's retirees; when today's workers retire tomorrow, tomorrow's workers will pay for their benefits; and so on. It's an imperfect design. In an ideal world, each generation would pay for its own benefits. In other words, each worker would pay into the system, have his or her money accumulate interest (either as part of one giant trust fund or in individual accounts), and then take it back out upon retirement. Indeed, when FDR created Social Security in the 19305, he envisaged a system more or less along those lines. But there was a problem. It was the Great Depression; many elderly people literally faced starvation. They had made virtually no Social Security contributions, but Roosevelt felt they needed relief. So Congress decided to pay the destitute elderly of the '305 and early '40s with the contributions of contemporary workers, with the understanding that those workers would get their retirement benefits from the next generation of workers, and so on. As a result of this decision, the first generation of Social Security recipients got a windfall-receiving full benefits after paying little into the system. Of course, once Congress started paying out full benefits, it couldn't stop. The elderly of the 19505, '60s, and '70s
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This note was uploaded on 12/08/2009 for the course ECON 251 at Yale.

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11b_Generation_X - The New Republic GENERATION X Does Bush...

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