The Hagel Plan

A good friend asked me what I thought of the Social Security plan advanced by Senator Hagel of Nebraska. I was vaguely aware that he had put forth one but knew nothing of its content, so I agreed to look at it. The details can be read here.
The plan is distinctive in that it is the only one out there. Bush doesn't have one and the dems certainly don't have one to compare with Sen. Hagel's, so about all one can do is look at the plan itself. The first thing every casual reader will notice is the retirement age would be raised to 68 from 67 in 2023. That is something the liberal demogogues will focus on in order to kowtow to their labor support, but it really is not too onerous since Hagel would leave the option to start getting benefits at age 62 for those who want to retire from labor intensive employment. They would get 63% of full benefits rather than the 70% that I get, however. Another feature of the Hagel plan is to revise the way Social Security benefits are calculated. We now use the wages earned over a 35 year period (up to a rising maximum) and the wage rate of current workers to determine benefit levels. Hagel would add a factor which accounted for what we can predict will be a rising life expectancy for the general population. This simply makes actuarial sense and is one of the problems the system faces now. Here again, the demogogues will protest in full throat that Hagel is going to reduce your benefits. That is true and inevitable if you don't have something to supplement your retirement funds. That is also why he proposes retirement accounts be made an OPTION for young workers (under 45 years old). It is the latter which the liberals oppose so vehemently. Hagel anticipates this and lays out in considerable specificity how the retirement accounts would work and they are largely proposed to mimic the ones now available to government workers via the Federal Thrift Saving Plans. There would be a Board which would manage the accounts and negotiate low administrative fees which should be low since the worker's money would only go into index funds which are naturally low fee ways to invest. In essence, the money would go into funds which invest in either stocks, bonds or a combination of both with very low risk profiles. Hagel even proposes a Default Account which would invest in say 80% stocks and 20% bonds when you are young and in later years would slide toward a more conservative mix of say 35% bonds and 65% bonds. The investment examples which Hagel gives have 10 year average returns of 5.45% to 11.9%, but his projections like all the others I have seen under estimate the potential of such accounts by ignoring the mathematical advantage over simple averages which are provided by dollar cost averaging. When you put a constant amount from your paycheck into a pool of money with unit costs which vary over time, you wind up buying more shares in the fund when stocks or bonds are down and fewer shares when they are up. Over a 30-40 year period, this can have an almost magical enhancement that is exceeded only by the phenomenon of compounding. Bush doesn't have the communication skills required to explain this to the country and the average individual is too ignorant of math to appreciate it, but if everyone did understand these positive aspects of investing, nobody could be against private accounts except liberals who don't want you to have any control over any aspect of your life except abortion.
In conclusion, I think the Hagel plan is quite reasonable in that it recognizes that something has to be done which lowers the benefits or increases the income for Social Security. His plan opts to decrease benefits slightly in the distant future and allows the worker to invest in himself and his or her heirs via a personal account which will more than make up for the reduced benefits. Since the amount you put into Social Security is now a tax (the money goes into the general revenues) the liberals will want to raise that rather than reduce benefits which are offset by investments. Another reason the liberals are so against private accounts, and you won't see this written down in a lot of places, is they know that their base is too stupid to opt in to something to provide intelligently for their retirement.