Saturday, March 05, 2005

The Complexity Curse

I've been meaning to do research into the various Social Security proposals being floated about, but keep putting it off. Of course, the need to finish decorating my kitchen after the remodel last August has been a higher priority than blogging, along with sleep, work, exercise, and laundry.

I realized today that a big part of my reluctance to wade into the morass of details is simply the sheer complexity of the issue. And none of the proposals I've seen make Social Security any easier to explain, administer, or collect.

The President's push for creating private accounts with part of the SS tax is commendable, since the current system has no guarantees at all. However, I'm already saddled with a standard IRA, Roth IRA, 401(k), annuity, and a pension; all with different rules on age eligibility, payouts, taxes, and heritability. The thought of yet another retirement account to deal with does not fill my heart with glee--although it probably warms the cockles of the hearts of accountants, financial advisors, and lawyers! As it is, I probably pay less attention to my retirement accounts than is fiscally prudent: the boggle factor is the primary reason.

Did I mention that I've never really expected Social Security to provide much income in my retirement? My dim view of its future wasn't helped by Congress extending the age at which I'm eligible for full benefits past 65. Moreover, I was in Civil Service when the Thrift Savings Plan was introduced. I had to laugh at the literature that proclaimed that Social Security was the foundation of my retirement savings, and TSP was a supplement. That was obviously written by bureaucrats who had never, ever, paid into Social Security, nor understood that it was always meant as a "safety net", not as the primary source for retirement income.

I wonder how making Social Security more complex will hinder the drive to simplify the tax code. So much of the logic behind the legislation for various IRAs, Keoghs, 401(k)s, etc., is based on encouraging long-term savings by manipulating the tax code. Would there be a greater or lesser incentive to save for retirement if savings and investment income weren't subject to income or capital gains taxes at all?

We all pay for complexity in our governance. For example, did you do your own taxes by hand this year, or did you buy software, or use a professional tax advisor? At the other end of the process, the IRS's staff is not known for providing correct answers to tax questions at anything approaching a Six Sigma quality level (3.4 Defects Per Million Opportunities). How much heartburn, attorney's fees, and uncertainty could be avoided by a flat tax described fully in a hundred pages of regulations? How much human capital would be freed for more productive pursuits?

Oh, sorry, I keep forgetting that legislators like to keep their brethren of the bar fully employed. Complexity is their friend. Just look at McCain-Feingold and the latest flap about whether political commentary on blogs that link to candidates' sites should be subject to the same limitations as paid ads. (Captain's Quarters and Powerline have several posts each.)

The Constitution of the United States is a model of clarity, because it defines first principles for organizing the government. President Bush's speeches typically describe his vision and principles, rather than nitty-gritty. Unfortunately, it's in the muckwork of writing legislation, rules, and regulations that the over-arching principles get lost--and ordinary citizens tune out anything beyond the sound-bites from mainstream media.

The effort to reform Social Security will likely be a classic case of good intentions getting mangled in the sausage grinder of Congress. Few will dare breathe the thought that the whole Ponzi scheme should be rethought from first principles, namely, why do we consider it necessary for the federal treasury to be the retirement fund for the masses? It's not the 1930's anymore. And if simplifying the entire tax code is also a good idea, shouldn't changes to Social Security that impact that tax code aim for simplification too?

Just wondering.