Great Debates debates the Debate (Part 1)

Great Debates
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Dignan, the plan is to allow people to invest a certain percentage of THEIR retirement fund. There would be strict guidelines on what you can or can’t invest in. (IPO’s, for instance, would be impossible, because you could only move your money on a semi-annual, annual or quarterly basis.)

There are precedents for this type of thing. In Ohio, government employees have a system called PERS (Public Employees Retirement System) where the individual can pick from a selection of mutual funds. Some have more foreign exposure, some have more bonds, others have just large cap, some have a mixture of small cap and large cap. You just have to pick from the mix. One year my return was 20%. Another year it was flat. Averaged out, it beat a 2% return by a handy margin.

The stock market doesn’t offer you a guaranteed return on your money, that’s true. But conservative investers could invest in vehicles that offer very little risk to principal. For instance, 1 year c.d.'s were being advertised at 7% recently, $5,000 minimum. A c.d. is not risky, and a 7% beats the pants off a 2% return.

In the end, as Bush said, it’s OUR money and we should be entrusted to invest it, at least some of it, as we see fit.

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The only problem is, social security is not a retirement investment program. The money collected from your check is used to pay current benefits. The percentage that Bush’s plan would allow you to invest personally never reaches the social security trust fund. At present, social security s running a surplus so that the lack of revenue for the trust fund would not require immediate borrowing. The problem, of course, lies in teh demographic distribution of the working population; when the boomers retire, the surplus vanishes and the money in the trust fund is necessary to pay for promised benefits. If that amount has been reduced by the personal retirement accounts in Bush’s plan, then the surplus will obviously be exhausted at a faster pace.

That is the debate.

All else is obfuscation and name calling.

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To continue Spiritus’s point, look at this microcosmically:

In the tiny country Analogia, five citizens every Monday morning contribute ten dollars each to an account. The next Monday afternoon, however many of those five citizens that are still alive got to the account and withdraw twelve dollars. Their ability to withdraw, however, is dependent on five citizens that morning depositing ten dollars each to the account, because the fifty dollars of the past week has already been taken by the citizens who had deposited the week before that. Hmm…it seems like this could be clearer.

Anyway: What if, beginning one week, citizens only deposited five dollars to that account, and were free to invest the other five dollars in a booming bull market that was obviously going to last forever (sorry, couldn’t resist). Anyway, since only twenty-five dollars has been deposited that Monday morning, rather than the usual fifty, the citizens from the past week who had deposited fifty found insufficient funds in the account to cover their expected benefit. To cover the transition between “fifty dollars being deposited weekly in the account” and “twenty-five dollars being deposited in the account,” the government of Analogia would either have to find an alternative source of funds in order to give those affected citizens their full benefits, or else reduce benefits for those citizens. Not hardly fair, but there’s a significant transition cost involved in dramatically altering the input of a “pay as you go” system.

What do y’all propose be done about that?

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Not to beat a dead horse, since I think others have explained this pretty well…But, social security is an intergenerational contract, not an investment fund. Those working today are paying for those who are retired and then those who are working when we retire will be paying for us.

Want to invest money for your retirement? Great, that’s what 401K’s are for…and IRAs…and Roth IRAs! But the money you are paying into social security ain’t “your money” money to invest, unless you want to do away with the whole social contract idea and just screw over some generation.

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You’ve met the generation who will be screwed by Social Security and it is us. When the system was created, over 40 workers supported 1 retiree in providing benefits. Now that figure is 4, I believe, and will eventually be less than 2.

So in order to maintain solvency of SS, we’ll need to pay dramatically more payroll taxes, shift a large portion of the current surplus into Social Security and/or get a better rate of return on this pool of money. Personally I think a combination of all will ultimately be necessary, but Bush proposes doing the latter 2. Gore advocates issuing bonds to cover the debt, which is a shell game because eventually the bonds will have to be paid.

By allowing individuals to direct a portion of their 12.4% contribution into funds offering a better return, Bush is giving us the opportunity to stave off HUGE payroll increases. An increase in the rate of return by just 2% can make a huge difference when you consider the huge sums of money that are being collected every pay day.

I think if we can apply strict guidelines to how the money is invested, we can increase the rate of return dramatically. And that can only help those who pay into the system, namely us. We’ll still need to increase SS taxes, undoubtedly, but it will help.

BTW, as I said before, a lot of government workers don’t pay into Social Security at all. They have their own, far more lucrative system, set up. Police and firemen in Ohio, for instance, currently get 75% of their final salary in retirement benefits each month through the Police and Firemen Pension and Disability Fund. And most police and firemen retire in their 50’s. One difference is that workers can invest the funds privately, within strict guidelines.

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If you want to know my opinion on the matter, just read my sig line. And the answer to both questions is “Not necessarily.”

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PunditLisa,

the problem is, the privatization plan does not do what you said. The percentage that Bush says workers will be able to invest personally will generate a return, but that return will have an effect only upon the individual’s own payout. If social secruity were a pension fund, then that would make sense.

But social security is not a pension fund. Whatever increased rate of return is gained will not have any beneficial effect upon the trust fund, which means it will have no beneficial effect upon the demographic crunch to come when the boomers retire. In fact, since there will be no gain to the trust fund from the return, but there will be a loss of revenue from the reduced payroll taxes, the plan will cause any increase in the payroll tax or decrease in the received benefits to happen sooner.

It has been said so many times, but let me say it again. Social security is not a pension fund.

Solutions that make sense for pension funds do not necessarily make sense for social security. Now, that does not mean that some form of privatization doesn’t make sense, but any responsible plan would have to account for the lost revenue used for current and near future payouts, not just provide an alternative for long term benefits. Bush’s plan does not do this.

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I have read…but would have to dig out the references on this…that the whole social security crisis is quite a bit overblown and that only rather modest changes would be needed to keep it solvent far into the future. In particular, just eliminating the income cap beyond which earnings are untaxed would apparently go a fair bit of the way. (I once figured out that the CEO of the company that I work for only pays Social Security tax on his first paycheck…After that, he’s home free!!)

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I promised some references to the Social Security issue…and although there hasn’t exactly been a clamor to take me up on it, here they are.

First, on the social security “crisis”, check out http://www.tompaine.com/img/op_ad_000530_large.jpg. You can also check out the book “Social Security: The Phony Crisis” on Amazon.com. (Haven’t read the book myself, and can’t vouch for its correctness but at least it presents another point of view.)

Second, on the issue of George Bush’s solution, I give you the following quote from a short article by Richard C. Leone in The American Prospect (Sept 25–Oct 9, 2000 issue, p. 18)

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Sorry…I am always too quick to post…and then I find more stuff! Here are some additional references:

A summary by the authors of their arguments in Social Security: The Phony Crisis—
http://208.55.75.172/columns/weisbrot/social_security_the_phony_crisis.htm

On arguments related to Bush’s plan—
http://www.cepr.net/Social_Security/press_release_061400.htm

Happy reading!

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jshore: All that does is illustrate just how good the earliest retirees had it.

I’m not as familiar with the American system, but in Canada we have a similar program. It was instituted in 1961, and originally workers had to pay 2% of their salary, and employers had to match. So a worker retiring in 1981 would have only had to contribute 4% of their salary for the last 20 years of employment.

The rate has slowly increased, and is projected to increase to 12%. Remember, the employer matches it. So, a person entering the workforce today will pay an average of perhaps 20% of their salary for 45 years to receive the same benefits as a the earliest retirees got for contributing only 4%.

It’s no surprise to me that there was no way the market could have done better for the earliest retirees - they were the beneficiaries of being the people at the top of the pyramid of a giant Ponzi scheme. The question is whether current workers could do better by investing their money elsewhere.

And the answer is unquestionably YES, because Social Security is a TERRIBLE deal for young people. They’ll never get back a decent return on their investment. In Canada they won’t even get back the money they put in without interest. But we can’t let them opt out, because the money they put in now is not being invested, but is being used to pay for the benefits of current retirees.

Assuming my salary doesn’t increase, by the time I retire I will have paid well over $100,000 into the Canada Pension Plan before I retire. For that, I can look forward to getting back about $600 per month from the age of 65 until I die. Unless the age of eligibility is increased, which is likely. If it gets increased to 70, I’ll get $600/mo for 14 years until I hit the average lifespan of a Canadian male.

If I invested that money privately, that $100,000 would easily be double or tripled. If I drew that down over a 14 year period, my income would be double or triple what I can expect from Canada Pension.

And of course, if I invested it privately and then died at 64, my family would get all that money back.