Attempting to understand the Bush plan

Yglesias does an excellent job explaining this sort of thing, but, if I have it right, I found it simpler to think of "phase three" in terms of a math equation. (And if I have it wrong, hopefully someone will stop by and point that out, too.) I'm going to, for simplicity's sake, disregard the 3% rate of return you would have to earn to break even.

First, you have guaranteed benefits. Call them x.

Then, you have the money you invest in these "private accounts," called y.

Now your guaranteed benefits are (x-y). So if you lose all your money with the private accounts, you now are given (x-y) as your benefit.

Let's say now your rate of return keeps pace with the rate of return for Social Security. For simplicity's sake, you would earn y back. But now the government will take that y and apply it to your guaranteed benefits. So you get (x-y+y), or x back. In other words, it's a wash.

Now say you earn more than the going rate for Social Security. Call it (y+z). Retirement time, and the government "takes" "y" back to make up for the money you invested. Now you are still guaranteed x, and the z portion goes into the annuity.

That is where the whole "loan" idea comes from. There is only one real way under this scenario that you benefit, and that's the last one. Of course, this is only after that guaranteed benefit is cut so you can play with the money in these accounts.

In essence, that "x" number we started with already has you in the hole. So you now have to hope that "z" you earned is greater than the initial cut that Bush is proposing.

That's why private accounts don't really help the system. Bush's fix, in essence, is cutting your benefits. Rather than give you a dollar, he wants to give you fifty cents and the Wall Street Journal. If you gamble with and keep the fifty cents, that's what's considered a wash. Even though you end up short fifty cents. If you can make that money back and earn more, congratulations! If you lose that money, well, at least you can sleep under the paper.

*UPDATE* Here's Krugman:

For years, privatizers - including Mr. Bush - have claimed that people would do better with private accounts than with traditional Social Security even if they played it safe and invested in U.S. government bonds (which yield 3 percent after inflation).

But the official at the briefing made it clear that his boss was fibbing: if you invested your private account in government bonds, you would face benefit cuts equal in value to your investment, so you would be no better off than under the current system.

The only way to get ahead would be to invest in risky assets like stocks, and hope for higher yields. But if the investment went wrong and you earned less than 3 percent after inflation, your benefit cuts would leave you poorer than if you had never opened that private account.

So it's important to remember when you talk about private accounts earning this and Social Security earning this that you are starting from two different numbers. Your current Social Security payments would remain untouched without Bush's mad scheme. Your private account has to make up for the funds cut plus the 3% that Social Security would make in order for you to get ahead of the current system.

*UPDATE* So I think I got it right, then, so no one has said otherwise, and this post at Eschaton seems to mirror what I've written, only with numbers instead of variables.

*UPDATE AGAIN* So I misspoke above. The "x" portion becomes the annuity part, and you cannot pass that forward. The "z" part is the inhertible bit. That's coming from an MSNBC article that also features this:

John Rother, director of policy and strategy for AARP, says if personal accounts are approved by Congress they probably would require even more annuitization than described by the White House because Social Security benefits likely would be cut to achieve long-term solvency.

“Almost all the money for most people is going to be required to be annuitized, and it will look a lot more like Social Security,” he said. “If you have to annuitize it anyway, why are you going through the higher expense and higher risk than you would if you just fixed Social Security in a straightforward manner?”

The annuity would have enough money to apply to keep you above the poverty line for your projected lifespan. So money in your private account, you must make enough to pay you more than a poverty wage in order to pass along your earnings. Which makes it sound even worse.