The point you bring up is an excellent one and represents a sticky wicket. No matter how optimistically you calculate it out, it is unlikely that current investors in my plan are going to recieve their principle back. I consider this more a recognition of a reality rather than an inherent fault in my proposal.
Like everything else the success of such a hypothetical proposal will be subject to the skill with which it’s executed. The toughest part is to calculate the present value of the future obligation that SS has already incurred. Then, one needs to take that assumption and then work it into some assumptions about working populations, wages, and wage growth in order to calculate out what proportion of current SS income needs to be reserved against present and future obligations.
One could probably do the math and come up with wildly different figures that would be defensible depending on the assumptions you use.
In order to do it properly one would need to use a self correcting formula that recalculate the sum and review the assumptions annually.
Again, if one did it properly, the final result would probably resemble something like a long term mortgage. In the early years of implementation the bulk of inflows would need to be reserved or go to pay out current obligations, leaving only a very little available to create potentially new benefits for payees. as current obligations get paid off by mortality of recipients a proportionately larger portion of SS income could be utilized for future benefits until eventually 100% of it could do so.
It’s even possible that the numbers will allow you to adjust for future aging of the obligation so that you can hold back less than you would normally think.
Those who support the current SS system, answer a couple of questions for me:
It is a giant pyramid scheme (new investors payoff the old investor). This of course is illegal to do if you are NOT the government since the whole thing eventually collapses. What assurance do we have that THIS pyramid scheme won’t collapse?
A major objection to privatization is that those who are already paid in will “lose their investment”. What about the generations after us that lose THEIR investment when SS runs out of money?
I worked before becoming a teacher and got my 40 quarters. However, since I have a government pension (with mandatory pay-in), I have to pick EITHER social security OR my pension (known as social security offset). Why should I lose my benefits simply because I have another mandatory retirement plan?
The first person to collect monthly benefits was Ida May Fuller. She contributed a total of $24.75 and collected a total of $22,888.92 before she died. Shouldn’t someone had realized that this was a sign of things to come?
This ends up being the stopping point in the argument for me. Yes, people have the right to succeed or fail on their own. They already have plenty of opportunity to do that though. People today have far greater control of their retirement savings than ever before. What social security has become, is the safety net. For those people who never saved, or managed their retirement poorly or screwed up in whatever other way you can imagine…they’ll still have something to keep them from living on the street. Personally, I’m just not comfortable letting them screw that up too.
Whatever you believe about the investing acumen of the general public, it’s undoubtable that some people will fail. They’ll invest poorly. Whether that’s a high percentage of the population or a low one, letting individuals manage their own safety net will ultimately lead to more people being left without one. One way or another, society is going to end up taking care of those people.
I don’t really like SS, but I guess I can answer this question. There is a good reason to beleive that the concept of a ponzi scheme doesn’t really apply to the government. We have a fiat currency, and the government controls the money supply. SS inflows versus the outflows represent a statement of government monetary policy whether or not the government wants it to.
Inflation is a natural consequence of the value added of liquidity/fungibility aspect of a fiat currency situation. Money, as a medium of exchange has an inherent value beyond the goods and services that it can be used for. If the government does not extract a form of compensation for providing this medium of exchange it creates an inefficiency which can and will be exploited by somebody else.
For example, you raise pigs for a living. You need to sell those pigs for everything you need in life, food, gas, clothing, etc. Let’s say you want to buy a shirt. Without money you need to exchange a pig for a shirt. If the guy that is selling shirts doesn’t need a pig you need to find somebody who does need a pig and exhange your pig with that person for something that you can trade with another person for something that you can trade with another person, etc etc, until you end up with something that you can trade for a shirt.
Money saves you all this time and effort and work. Because of this, it is worth something.
Because of this, it means that the government must extract value when it administers the currency, otherwise, a pig’s worth of dollars is inherently worth more than a pig. You must always exchange a pig for less than a pig’s worth of dollars. The difference is the value of exchange (fungibility.) The government does this by controlling the money supply. If there is a thousand dollars worth of goods and sevices to be exchanged the government might issue $1,100 dollars worth of cash and spend the extra hundred dollars. This ensures that dollars are always less desirable than the goods and services they can be exchanged for. This stops people from hoarding dollars and is absolutely necessary to the well-being of the economy. A deflationary environment (where dollars can buy more tomorrow than today) is bad for the economy.
The government controls the money supply in a lot of ways which we don’t need to go into, but the end result is a healthy level of inflation.
This means that not only is it ok, but that it’s generally necessary that the government spend more money than it takes in in order for the economy to run effectively.
So, in reality the idea that the government will not be taking in enough to cover SS and will need to print the difference or get it from somewhere else is not by itself inherently alarming or improper. It only becomes so, if the government needs to move inflation to an unhealthy level in order to meet its obligations.
That’s grossly simplified but I hope it helps.
They don’t necessarily. The government can spend more than it takes in.
Because certain people like teachers and other government workers get a special deal with their pension which makes it more desirable than what is generally available in the private sector and that advantage is funded by the inflows of the government.
I’m not saying this part is true. You can argue its merits, but the theory is that a teacher’s pension equals a private sector pension plus SS, so therefore you shouldn’t get SS on top of it unless something is done to offset the advantage of the extra features of your pension.
Is this actually true and fair and a good argument? Beats the fuck out of me, but that’s the way it is.
Heh. That was a selling point. It was designed and sold to do that. SS was largely sold to the public in two ways. The first was as a retirement benefit. The second was as a moral imperative. There were a lot of older folks who were wiped out in the great depression and who were too old and infirm to take care of themselves or work to support themselves. Should those people be left to suffer and dies, or should a compassionate society create some kind of system to ensure their well-being? The idea was that we could use the current inflows to help those who needed the pension now, and there would always be a growing base of workers paying in to keep the thing running.
It’s actually a good system as I’ve described it and it would have worked fine if left like that. The problem is that people’s life expectancy has increased dramatically so that the average payout period is longer than expected, the population is not increasing at the same rate as it used to, instead of investing the initial surpluses they were used in effect as an additional tax to create government revenue, what was put aside was taken out and spent to pay for the Vietnam war.
Beleive it or not, I acually fully agree with you. Social Security as it exists now happens to be a bad system for fixing the problem you describe.
Let me make up some numbers to illustrate an example. Let’s say that we both agree that everybody has the right to succeed or fail on their own. Let’s also say that those that succeed have an inherent responsibility to ensure the well-being of those that fail by providing a safety net.
So, let’s take ten people as a sample and say that 9 people succeed to varying degrees ranging from superrich to just reasonably ok, and one person fails miserably. We need a system to provide a safety net to the poor guy who fails, and would suffer and die in misery if we didn’t do something, right?
System #1 is Social Security. Under this system we take a little bit of money from everybody while they are working, and then we give them back something less (on average, and adjusted for inflation when they are not working,) and we pocket the rest so that we can invade Iraq. The people that were most successful were able to pay into the program fully and completely with little burden to their well-being and the money they get back is not needed or necessary. For purposes of a safety net this money is wasted. For the people who marginally successful, the paying in was a real burden, and what they get back is not proportional to that effort, especially considering what they could have done with it on their own. For these people the net effect of Social Security is that it has weakened the quality of their retirement. For a really marginal person right on the ragged edge between viability and failure this program might have been a net positive. For the guy that is the total failure, it’s possible that his failure is so bad that he’s not getting a full benefit, and even if he is, the benefit is maybe on the bare fringe of survivability. It’s not quite enough to live on.
System #2 is we tax everybody a much smaller amount, still take our cut so that we can invade Iraq, and only give money to that last guy who’s really failing because he’s the only who really needs it, and we give him enough to live on with dignity.
Which system do you think is better? Sadly we have the first system. We catch everybody in the safety net whether they need saving or not. Do Warren Buffett or Bill Gates need Social Security? Are we helping them? What we have is a safety net that is nothing but a total pain in the ass and a waste of time and a huge and costly inconvenience to those that don’t need, and a bit of a failure to those that do.
If I had more confidence that nine out of ten would succeed to varying degrees, I’d feel a lot better about your hypothetical. Here’s where my lack of confidence in the investing acumen of the general public comes in. If most people managed their own privatized social security account with the skill I’ve seen them exhibit in their own 401k accounts, I think that what’s more realistic is that four fail to varying degrees…from complete failure to just barely enough to keep themselves alive. I just don’t think there’s any evidence that suggests most people will do as well for themselves as you suggest.
Well, allow me to help you feel better. It’s not anywhere near as bad as you think. I didn’t simply pull that 10% figure out of my ass. I got it from the census bureau. According to their figures the poverty rate for people 65 and older runs at 10.1%
Though Scylla answered this (and has done a very good job of holding up his side of this debate…IMHO anyway), its really irrelevent to his arguement. Even if you are right (obviously you aren’t) and its 4 out of 10 that fail miserably and presumably 2 who are marginal, with everyone else a success to one degree or another, his option two is still the better system…because it helps those 4 who failed to a greater degree (i.e. the money is focused on them), instead of helping all 10 to a lesser degree. Go back and re-read what he said and you’ll see that your above statement has no impact on the arguement. Even if you were right.
And there’s the rub. How good will individual investors be at determining which group they’re in? Doesn’t it go without saying that there are hordes of people out there who think they know how to beat the market, but will fall on their faces if they actually start investing on their own?
Again, that’s assuming they’re smart enough to know their limitations. I contend you’ll have a sizable minority who aren’t that smart.
And how do you do that?
Suppose, for instance, that I look to see which mutual funds have beaten the indexes over the past X years, for your choice of X. What percentage of those will beat the indexes over the next X years? Let’s say we go back to March 2002, and look at the top 15% of mutual funds over the 3/97 to 3/02 period. What percentage of that elite will have performed better than an index fund over the five years from 3/02 until now?
Sorry, but that statistic does not allay my concerns. It’s not the people that are already 65 years old that I worry about. It’s the people that will be 65 thirty years from now that concern me. Those people will have managed their own retirement to a far greater degree than today’s retirees. I currently am not witnessing 89.9% of those people managing their 401k assets with a lot of skill. And I’m only basing that opinion on the people that have had the opportunity or the good sense to participate in employer plans. I don’t expect the additional people you propose to force into managing their retirements to do any better job.
It’s not odd at all when you consider the nature of social security. It doesn’t make sense to just consider it like any other tax. It’s unique.
I did read your proposal, several times. It just doesn’t make sense. After reading this post I still have no idea what you are talking about. Where does the money for private accounts come from? Where does my 14.4% tax go if I opt to have a private account? Why can’t you answer these basic questions?
Don’t blame me for not reading it when it’s you who has done a bad job of explaining it.
In the last thread, I provided a cite from the SS FAQ page where they explain how it’s only a small amount that gets invested. It might sound large if you look at as a stand alone number, but it’s certainly not a large percent of the total amount collected. It’s scraps.
Well, I don’t know if I ever said that, exactly. People pay into Social Security expecting to get that money back. That’s an investment.
People love to come into these threads and state emphatically that Social Security is insurance, not an investment. I think that’s silly. Insurance is an investment.
Or, looking at it another way, one could say that the problem with Social Security is that it isn’t really treated as an investement by the government.
Yeah. That’s the only part about your proposal that I don’t like, Scylla. I’m not so pessimistic. I think it’s possible to get us out of the mess we’re in without taxing a whole generation with no payback to bail us out of it.
I bet we could pay for lots of it with means testing of bennies, removal of the cap, and taxing the returns of the private accounts.
The compounding interest created by the private accounts would make so much money that you could tax it and they’d still be much better off than if they just continued along in the current system. That revenue could pay for the bennies for those who did stay in the current system, and it would be needed since by that time basically nobody would be paying into the current system anymore. They’d all have private accounts.
Well, no. It’s collecting taxes now, to pay out on program expenses now, just like pretty much any other Federal program.
The difference is not between Social Security and other Federal programs; the difference is between both of the above and the thing that you want instead of Social Security.
Then you could have at least raised your objections after the point that addressed them. Sheesh.
Sorry about that; I’m inclined to consider the source of the complaint here, to be honest.
For the early years of the program, that’s what you decide, which you did:
As before, I object to your reducing Social Security benefits in order to finance your program, but that was your answer to your question.
And it isn’t enough, that’s your problem, and not the problem of those of us who’ve paid into the Social Security system all these years. Which was kinda the point. Every proposal I’ve seen for private accounts basically sticks us who’ve paid in with a great deal of risk of not being on the receiving end of the benefits we’ve financed for our predecessors.
When the Social Security tax gets to the point where it has a permanent surplus over Social Security benefits, the excess (which will eventually reach 100%) goes to funding the private accounts.
Post 29:
Post 46:
What’s not clear about that? The Social Security tax will fund Social Security benefits, until not all of it’s needed for Social Security benefits, at which point the excess will help (along with your additional source of revenue) fund private accounts. As persons who’ve elected to stay with Social Security die off, that surplus will gradually grow to 100%, at which point the Social Security tax will go 100% to private accounts.
Anyone else confused by this? So far, we’ve got a sample of size 1.
An expectation and an investment are two distinctly different things. Just because one thinks of something as an investment, doesn’t mean it is one.
But it’s a funny sort of investment, because it’s one where you hope it never pays off. Whole life insurance (does anyone buy whole life anymore?), as opposed to term life insurance, is an actual, bona fide investment, but it’s a weird hybrid of an investment and traditional insurance. Every other sort of insurance I can think of is the kind you’d be perfectly happy to have a -100% ROI on.
IIRC, certain governmentally-funded pensions were allowed to substitute themselves for Social Security, and the participants in those pension programs paid into the pension programs, instead of into Social Security, which they did not pay into.
That, IIRC, was the special deal, and it’s only fair that if they want Social Security, they forfeit their benefits that they paid for in lieu of Social Security.
It doesn’t make sense. If I have to pay the taxes no matter what, why would I opt out of getting benefits? Even though they are bad returns, it’s still better than nothing.
If additional sources of revenue outside of payroll taxes are funding the private accounts, then why wouldn’t everyone opt to have private accounts? Who would turn down free money?
Your system cuts the connection between peoples’ contributions and how the money is spent. Its odd to say the least.
You guys are too hung up on the skills required to invest properly. People don’t need to be day trading stocks or cleverly analyzing companies to do well in the market. Follow the advice of Vanguard, and others: Just buy index funds that hold lots of stocks and don’t sell them until you are ready to retire. You’ll make money. It’s that simple.
Sure, picking managed funds that overperform the indexes is great. Making 14% instead of 12% (after expenses) is a good thing. But, it just isn’t necessary.
Any financial advisor will tell you: Picking the right stocks to invest in doesn’t matter. It’s picking the right type of investment that matters. A twenty year old who’s afraid of the market buying bonds instead of stocks. A 65 year old who’s about to retire putting 100% of his money into stocks. These are the pitfalls to avoid. Mistakes like this cost investors much more than simply picking the wrong stocks or mutual funds.
The key is buying the right type of investment for the amount of time that you have. Long term, it’s stocks all the way.
In order to participate in the system of private accounts that you so deeply desire, which would (according to you) receive the same funding as if your Social Security taxes were invested in the private accounts directly.
I thought you said they were 0%.
Because they’d have to choose between private accounts and Social Security.
If I, at the age of 53, opt for private accounts, and I retire at 68, I have 15 years for investments the size of my Social Security taxes to produce a return equal to my legally mandated Social Security benefits. Ain’t gonna happen.
That’s why people would choose to stay with Social Security.
The whole point is, you say the 50-year gap between today’s Social Security tax dollar funding today’s benefits, and today’s Social Security tax dollar being invested for your distant retirement, can easily be funded.
What I’m saying is that I’m all for that, as long as the risk of the ‘gap funding’ being insufficient falls on the new system of private accounts, rather than the existing Social Security system.
Once the ‘gap’ has passed, there will be no cutting of the connection that you refer to. But in the meantime, you’ve got to pay double for 50 years to get the new system going while funding the old one. You say it’s not that hard. So your funding funds your system.
If you believe it works, then you should be willing to take the risk of its not working - not me.