The Corner

Offset V. Clawback

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Subject: Washington Post on Social Security

Rich, I thought I’d help to clarify some of the confusion surrounding the Post’s article this morning. Jonathan Weisman’s error was due to a misunderstanding of the differences between a “clawback” and an “offset.” As initially described this morning, a “clawback” provision takes a certain amount of a worker’s final equity return and uses it to pay for benefits elsewhere. Using this mechanism, if you earned 10 percent over the lifetime of the account, the government could take some portion of that 10 percent and spend it elsewhere. However, from my conversations with administration officials, that is NOT what the White House is advocating.

What they are proposing (and this is not new at all – it’s part of almost every reform proposal including personal accounts) is that the defined benefit portion of Social Security will be offset for each dollar that is placed into a personal account. For example (and I don’t know if these numbers exactly represent the White House proposal), for every one dollar that you put in your personal account, you will receive one less dollar from Social Security’s traditional defined benefit. However, one dollar fifty years from now is going to be less than one dollar today. Given that your personal accounts would be annuitized only once when you retired, each dollar that you contributed to your personal account over time would have to be indexed to inflation. If I contributed one dollar today, and withdrew that dollar 30 years from now, the Social Security Administration would have to apply inflation to that dollar over 30 years in order to figure how to offset my traditional defined benefit upon withdrawal.

I understand that it’s a very arcane and wonky difference, but there is a HUGE difference between an offset and the clawback that was described this morning. I’m glad to see that there will be no discussion of clawbacks. Many of us around here were shaking our heads when we saw the article this morning because 1) clawbacks were just not going to happen and the whole discussion seemed to come out of nowhere, and 2) offsets are not new; there was no “new” news here. Par for the course for Weisman. Hopefully this clarifies some things.

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