Personal Social Security Accounts

I continue to find more supporting evidence for my proposals on how to handle Personal Social Security Accounts. Briefly, I would create such accounts and also increase the amounts individuals could contribute beyond the President’s proposal by gradually eliminating the mortgage interest deduction on your income tax. Here are links to articles in The Wall Street Journal (once again, I do not know if they work for non-subscribers - Can I get a little help here, Lee?).

This article from the 2/4/05 edition, page A5 has a sub-headline “Bush's Social Security Plan Requires More Than 3% Real Rate of Return To Come Out Ahead” That’s not too tough! Can anyone find a period where long term fixed mortgages cost less then a 3% real annual rate? Prepaying is the financial equivalent to Einstein’s General Theory of Relativity. Reducing your obligations is the reverse side of the investing coin!

This opinion piece by Peggy Noonan from the 2/4/05 edition, page A8, asks “Here I raise a question about human nature that I cannot answer. Republicans tend to assume that everyone hungers for more investment accounts to handle. This is because Republicans like personal autonomy and authority, and are good at math. Others might reasonably wonder if life isn't complicated enough. The beauty of the Social Security system is its almost idiotic simplicity: They take your money from your paycheck and then 40 years later when you're old they start giving some back each month. Personal accounts are less simple.” So using the funds to prepay your mortgage, an already existing account, solves your problem doesn’t it, Peggy?

This column by James H. Hagerty from the 1/31/05 edition, page A2 notes “…it is time to rethink the deduction. Defenders of the deduction depict it as a way of helping more people afford to buy a home. In fact, the deduction does little to boost homeownership. The vast bulk of the benefits go to people who could easily afford a home even without a tax break. Nearly 80% of the benefits from the mortgage-interest and property-tax deductions go to the top 20% of taxpayers in terms of income, according to the Institute on Taxation and Economic Policy in Washington. Only 5% of the benefits go to people in the bottom 60% of the income scale -- those who may be struggling to afford a home.

"People making over $100,000 are the biggest beneficiaries," says Bart Harvey, chief executive of the Enterprise Foundation, Columbia, Md., which helps fund housing for low-income people. "No one says, 'This is ridiculous. This doesn't compute.' "
The cost of the mortgage-interest deduction for owner-occupied residences, in terms of forgone revenue for the government, is estimated at $69.9 billion for fiscal 2005. The deduction for property taxes costs an additional $16.7 billion, while the tax-free treatment of capital gains on sales of principal residences comes to $18 billion. Together, these breaks are by far the biggest government subsidy for housing.
One reason the benefits go mainly to the rich is that the mortgage-interest deduction is available only to people who itemize deductions on their tax returns. Few low-income people itemize because they can do better by taking the standard deduction. As a result, the mortgage-interest deduction serves largely to encourage wealthy people to spend more on housing because it cuts their aftertax cost of borrowing. That encourages builders to concentrate more of their resources on luxury homes and less on ordinary ones.
Another reason the wealthy benefit disproportionately is that the tax code allows homeowners to deduct the interest on mortgage debt totaling as much as $1 million. That makes it easier for the well-heeled to also deduct the interest on a second home.”

He notes further
“Though the deduction is considered untouchable by most U.S. politicians, Britain managed to phase out a similar break for mortgage interest over 12 years, ending in 2000. There was no crash in house prices, which kept rising, and no taxpayer revolt. In the U.S., the problem with proposals for even modest change is that some of the country's most powerful lobbies oppose any reduction in the tax benefits.” So it is politically possible!