If I'm for SS Privatization..

[RTFirefly]

@Debaser

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.

And that works great - for those who hear and believe you.

Now, can you go around and give your little spiel to every Joe and Jane Sixpack in the country? Didn’t think so. If you could, would all of them believe you? Hardly.

This is the problem with great advice like this: it works wonderfully one-on-one. But we’re talking about the behavior of people in large numbers. If you’ve got over 100 million investors, all of whom are free to invest their retirement portfolio however they want, tens of millions of them won’t have a clue, and they’ll be bombarded with pitches from all sorts of places.

There would be a nontrivial number of people who wind up blowing it all because they got suckered into the wrong investment, just like there are a nontrivial number of people today who thought they were getting an equally secure mortgage loan at a lower rate, but they wound up losing their house because of the fine print that the mortgage broker glossed over.

The question is, once those people get too old and infirm to work, and have no Social Security or any private account worth mentioning, what do we do with them?

This is the societal problem that Social Security dispenses with. You can save and invest the rest of your earnings as you please, and make a bundle if you can. But if you fall flat on your face and lose it all, you still have Social Security coming to you. It won’t be a fortune, but you won’t starve.

[Debaser]

@RTFirefly

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.

Don’t say according to me! This is your plan. I’ve offered some suggestions, but I still don’t fully understand where you think the money is coming from. It seems odd to me to have “private accounts” that are paid for by money other than ones Social Security contributions.

How do you tell how much each person gets? Would it be based on earnings? Your idea is interesting but very odd and I’d need to see less murky details to seriously examine it.

Overall, I don’t think it makes any sense to cut the tie between peoples payroll taxes and thier own benefits, either via social security as it currently is or some kind of private accounts. Furthermore, I don’t think people would stand for it.

I thought you said they were 0%.

You’re confusing two concepts. If I take $100 from you today and pay you back $100 (in inflation adjusted dollars) ten years from now than the rate of return on that investment, after inflation, is 0. But, as I said, it’s better than nothing. Meaning it would be worse if I took $100 from you today and never paid you back at all. Get it?

[Debaser]

@RTFirefly

If you’ve got over 100 million investors, all of whom are free to invest their retirement portfolio however they want, tens of millions of them won’t have a clue, and they’ll be bombarded with pitches from all sorts of places.

I’m not saying everyone is free to invest their retirement portfolio however they want. In fact I’ve specifically stated that’s not what I want to do.

We only invest the private accounts into well diversified index funds. When investing for the long term these make money. Thats it.

Hell, we could only invest in bonds, or even government bonds for that matter if you’re worried about risk. The returns would be lower, but still way higher than anything you’d get with the current system.

Don’t get me wrong: In a perfect world, I’d drop my pragmatic position and argue what Scylla seems to be saying: Everyone should be responsible to fail or succeed on their own without the government forcibly taking away their money to provide for their retirement. However, I’m willing to meet you guys halfway. Besides, that just wouldn’t ever happen.

[RTFirefly]

@Debaser

Don’t say according to me!

@Debaser @48

The short version is: We end the cap, and enact a means test on bennies. That would raise a ton of money. If it’s not enough, you could tax the earnings (not the contributions) of the private accounts to make up the difference.

This is your plan. I’ve offered some suggestions, but I still don’t fully understand where you think the money is coming from. It seems odd to me to have “private accounts” that are paid for by money other than ones Social Security contributions.

One last time: you would like a system of private accounts, funded by the Social Security tax, and you say that it would be easy to do this and still fund the benefits of those who’d prefer staying with Social Security as it is.

I’m saying: “That’s great, then - but if it’s all the same, let’s swap the funding for the two systems. During the long transition period where we have Social Security and private accounts side by side, let’s have the existing tax fund Social Security rather than the private accounts, and have your new source of funding for the remaining lifetime of Social Security fund your private accounts.”

If you’ve got enough money to fund both systems, then it’s a wash. If your source of funding falls short, it’s your problem, not mine.

I’m perfectly happy with no new system of private accounts, because I contend that the transition costs from one system to the other are genuinely prohibitive, without someone getting screwed over. You say that’s not true. I’m saying, OK, if you believe that, let your system bear the risk of your being wrong.

That’s all.

Goddamn it, how hard can that possibly be to understand?

How do you tell how much each person gets?

If they opt for Social Security benefits, same way as now. If they opt for private accounts, an amount equivalent to their Social Security tax each paycheck (or less, if your funding source is insufficient) is deposited in their private account.

Overall, I don’t think it makes any sense to cut the tie between peoples payroll taxes and thier own benefits, either via social security as it currently is or some kind of private accounts. Furthermore, I don’t think people would stand for it.

What “people won’t stand for” is to risk the existing Social Security program. I thought we settled that once more in 2005.

You’re saying you want to swipe the funding for the existing Social Security program and use it to fund your private accounts. To replace that, you’ll find some other money somewhere else. I’m saying that if you claim your other source of money is sufficient to plug the hole, you should be the one to depend on it, not me.

This will have to be my last post on this. I’m getting tired of saying the same thing over and over again, in different ways. If there were a bunch of posters saying they couldn’t understand, or even one I respected saying that, I’d be inclined to say I’m not explaining it well. But it’s just you.

[Debaser]

That’s some impressive selective quoting there. You almost make it look like I’m saying the words you’re trying to put in my mouth.

Let’s try it again, this time with context:

@Debaser

I think I’m understanding you. Explain where the payroll taxes would go for workers who opt into private accounts and I’ll respond more to the end of your post.

The short version is: We end the cap, and enact a means test on bennies. That would raise a ton of money. If it’s not enough, you could tax the earnings (not the contributions) of the private accounts to make up the difference.

As you can see from the first paragraph here, I was simply giving you feedback on your plan and how it might work. That’s all.

Somehow you interpret this to make up this statement and attibute it to me: “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.”

Don’t make it sound like it’s my idea. It’s yours, and it’s not a very good one.

One last time: you would like a system of private accounts, funded by the Social Security tax, and you say that it would be easy to do this and still fund the benefits of those who’d prefer staying with Social Security as it is.

I’d prefer that to the current system, yes. There are a dozen other ways to do it that would also be better. If private accounts are unaccaptable than we could keep the money pooled, for instance. I’m open to options.

I’m saying: “That’s great, then - but if it’s all the same, let’s swap the funding for the two systems. During the long transition period where we have Social Security and private accounts side by side, let’s have the existing tax fund Social Security rather than the private accounts, and have your new source of funding for the remaining lifetime of Social Security fund your private accounts.”

To which I’m saying that’s a silly idea. If I’m a worker and I see that $100 a week goes out of my paycheck and a corresponding $100 a week goes into my private account, it’s me who’s contributing it for all intents and purposes. The fact that some government bean counter in a building in Washington is considering that $100 completely different and actually from another tax source while meanwhile my $100 is going to social security payments is just silly. Nobody cares. It’s academic.

If you’ve got enough money to fund both systems, then it’s a wash. If your source of funding falls short, it’s your problem, not mine.

How could it fall short? It’s not like I’m saying specifically something like “well add a new tax of 2% to short term capital gains” or something else that might not raise enough. I’m saying we’ll raise taxes in numerous ways until we have enough. If we don’t have enough we’ll raise more.

Goddamn it, how hard can that possibly be to understand?

It’s genuinely amusing to me when people can’t tell the diffence between not understanding something and not agreeing with it. Your idea isn’t a good one. After reading your explanations, it’s clear to me that the parts of it which I “don’t get” aren’t because I don’t understand, it’s because they just don’t make sense. I was giving you the benefit of the doubt and assuming that there was something missing in the explanation, but it’s just a bad idea.

[RTFirefly]

@Debaser

To which I’m saying that’s a silly idea. If I’m a worker and I see that $100 a week goes out of my paycheck and a corresponding $100 a week goes into my private account, it’s me who’s contributing it for all intents and purposes. The fact that some government bean counter in a building in Washington is considering that $100 completely different and actually from another tax source while meanwhile my $100 is going to social security payments is just silly. Nobody cares. It’s academic.

If it’s strictly academic, then you can’t possibly object, right?

How could it fall short? It’s not like I’m saying specifically something like “well add a new tax of 2% to short term capital gains” or something else that might not raise enough. I’m saying we’ll raise taxes in numerous ways until we have enough. If we don’t have enough we’ll raise more.

Yeah, you’ll just wave your “raising more” wand.

I’ve noticed - maybe you have too - that in the real world, large increases in taxes are politically challenging. Has this changed lately?

It’s genuinely amusing to me when people can’t tell the diffence between not understanding something and not agreeing with it.

OK, I take it back. All those times you said you didn’t understand my idea, you were really disagreeing with it. And anytime you said anything else, I assume similar permutations of meaning apply.

I’m good with that.

[Debaser]

@RTFirefly

If it’s strictly academic, then you can’t possibly object, right?

Sure, if that’s the only way I could have it. If the choice is your plan or continuing the current Ponzi scheme then I’d take your plan.

It’s still a bad plan, though, compared with other things we could do.

I’ve noticed - maybe you have too - that in the real world, large increases in taxes are politically challenging. Has this changed lately?

Of course it is. That’s why I suggested taking away the cap and not giving those hit by that additional tax any extra benefits. That only hits people making more than 90K per year, which is a small part of the population. Further, I’ve suggested we tax the earnings from the private accounts, which would be new money people would otherwise not even have had.

I’m aware that taxes are tricky, and I’m suggesting approaches that handle them less painfully than just adding another tax on income. But if need be, I would be willing to use general tax revenue to help offset the temporary cost of moving to private accounts. I think it is that important but hopefully we wouldn’t even have to. Saving us all from the ponzi scheme would certainly not be the worst way we could spend our tax revenue, IMO.

OK, I take it back. All those times you said you didn’t understand my idea, you were really disagreeing with it. And anytime you said anything else, I assume similar permutations of meaning apply.

I’ll just quote myself where I’ve specifically addressed this already:

After reading your explanations, it’s clear to me that the parts of it which I “don’t get” aren’t because I don’t understand, it’s because they just don’t make sense. I was giving you the benefit of the doubt and assuming that there was something missing in the explanation, but it’s just a bad idea.

Maybe this time you’ll get it.

[RTFirefly]

@Debaser

Sure, if that’s the only way I could have it. If the choice is your plan or continuing the current Ponzi scheme then I’d take your plan.

Ah, you mean that people entering the system later, pay for the benefits of people who entered the system earlier and live long enough to draw benefits.

(Bolding mine.)

I’ll just quote myself where I’ve specifically addressed this already:

Ah. You’re saying that all the pieces are there (which they are), but because you couldn’t perceive this, it was a bad plan in your opinion.

I can live with that too.

[Saint_Cad]

@RTFirefly

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.

But what if someone has paid into BOTH?

[RTFirefly]

@SaintCad

But what if someone has paid into BOTH?

Then I can’t see why they shouldn’t get both.

[Damuri_Ajashi]

@Dangerosa

I’m not saying it is, and I have no idea where you are getting that idea from.

Privatizing SS on the other hand appears to be turning it into a 401k.

I am basically agreeing with you. Too many people think that Social Security should be like a forced 401K, it kinda defeats the purpose of having a social security system.

[Damuri_Ajashi]

@Debaser

You’re just flat out incorrect, here. If there were only a 2% difference between the equity market and guaranteed government securities then no one would ever buy stock.

Not a lot of people with a ton of money puts very much of it in stock unless its in the company that they own. When a billionaire goes to his financial adviser, do you think he sks for stock picks? They all have laddered treasuries and some small portion of their money is investd in risk capital.

Just based on simple google search:

http://www.minneapolisfed.org/research/SR/SR313.pdf

accounting for taxes regulation and costs, the difference between average debt and equity returns during peacetime in the last century is less than 1%

Of course the last decade has seen returns on equity at 15% but we have also seen an inflation of P/E multiples and more focus on projected earnings. Maybe the rules have changed but the last time I heard that line, my Lucent stock went from 60 to 5 shortly thereafter.

Sure, I am using the most conservtive estimates of returns on equity and the fund probably would do better if it could get equity returns but I don’t know if we should be trying to skim the equity “risk premium” for a program that is designed to support the financial stability of the country.

@Debaser

Sure, if we remove the cap we’d flood the system with money and it would be able to continue to limp along providing basically no returns for a few more generations before it once again started to run out of steam. But it would be a much better route to use that money to move to private accounts that take advantage of compounding interest. The returns would be exponentially higher.

I believe the entire amount that is owed by the government to the trust fund is held in the form of government securities. It earns interest.

Social Security Trust Fund

[Damuri_Ajashi]

@Debaser

The social security fund that is invested in government bonds is only what’s leftover after paying out all the existing retirees. It’s just scraps that are leftover. You seem to think that all of it’s being invested. It’s not.

Social Security Trust Fund

The main benefit of privatization isn’t that the return is higher, although it is much higher than just one or two percent. It’s more like 6-8% higher. The goal of privatization is investing all of the money, not just the leftovers.

We already do that. If it turns out that we do in fact earn no interest on the portion of the social security trust fund that is spent by the government then I would say that we should limit the investment by the social security fund to general obligation government securities. One of us is about to be doped.

[quote]
Oh, and I give up: Why does ones income have anything to do with the rate of return on the bond market? (Hint: It doesn’t.)

[quote]

Well I guess I was referring to the extremely progressive nature of the payout on social security. If you had been earning 15K a year for your entire life and paid $1000/year in social security taxes for your entire life, you might be getting $1000/month in benefits after you retire. If you earned 30K/year for your entire life and paid $2000/year in social security taxes for your entire life, you will not be getting $2000/month in benefits after you retire, you probably won’t be getting $1500/month. The social security tax is flat on the front end but very progressive on the back end. That is why your income level affects your expected return on your social security taxes. Capping the social security tax basically puts everyone who makes more than the social security cap in the same bucket.

I know what all those words mean. But, put together like that? It just doesn’t make any sense.

I guess I was referring to how most people calculate returns on the stock market. They look at the companies that are still around and look at the aerage returns for those companies, people often ignore the effect of the companies that just went bankrupt. Maybe I am making a mountain out of a molehill but if you are talking about long term equity returns over 10%/year then you are probably looking at the return on surviving companies.

Anti-stock people love talking about the Dow. The reason is that it’s the only example you have. That’s because it’s only 30 stocks. If you look at any large group of stocks in an index they do much better. The more stocks you have the less risk of an individual stock hurting your overall performance. This concept, called diversification, is why any financial advisor would insist that their clients never only hold a fund of 30 stocks. You should own hundreds, thousands, or better yet: All of them.

Ask your broker how many different stocks you need before you are adequately diversified. there comes a point where adding additional companies does little or nothing to hedge your risk. You get 80% of the way there with just 10 stocks, you get 90% of the way there with 20. Look at the Dow and you see a pretty diverse groups of industries. The reason people like diversification is that there is an implicit risk premium inherent in the return the market demands of equity stocks. Portfolio theory tries to capture that risk premium without actually taking the risk.

The reason we use the DJIA is because its the only one thats been around a long time. The S&P 500 has been around less than 50 years and it held less than 100 companies when it first started.

No one is suggesting that we invest social security account money into single stocks or small groups of stocks like the Dow. Big index funds are the way to go.

The equity market as a whole, has more risk than th debt market as a whole and the debt market has more risk than government securities.

You may have hedged the risk of one or two underperforming stocks with diversification but you are still subject to overall market risk with equities.

[Damuri_Ajashi]

@RTFirefly

So, let’s see some estimates of how much new revenue we’d need, and how much lifting the cap would raise. My understanding is that lifting the cap wouldn’t raise anything like the right order of magnitude of income.

Social Security debate in the United States

The commission stated:

Making all earnings covered by Social Security subject to the payroll tax beginning in 2002, but retaining the current law limit for benefit computations (in effect removing the link between earnings and benefits at higher earnings levels), would eliminate the deficit. If benefits were to be paid on the additional earnings, 88 percent of the deficit would be eliminated. (Social Security Advisory Board report[31] July 2001 (rev. ed.), p. 23)

We should probably also index the retirement age to life expectancy. The fund is not going bankrupt because it isn’t in jeopardy because it isn’t being managed well, its running out of gas because people are living a lot longer than when the original actuarial models were created.

[Damuri_Ajashi]

@Debaser

It’s not a dead horse. It’s the heart of the entire argument. The fact that social security mostly isn’t invested and doesn’t provide any returns is the problem that many of us have with social security.

cite please

The short version is: We end the cap, and enact a means test on bennies. That would raise a ton of money. If it’s not enough, you could tax the earnings (not the contributions) of the private accounts to make up the difference.

means testing benefits? So if you accumulate a lot of money in your private account and you already have a lot of money when you retire, then you don’t get any benefits? I believe social security payments are taxable income, the whole payment not just the portion that represents earnings.

[Damuri_Ajashi]

@Voyager

There were plenty of articles about seniors having to do with the cheapest stuff they can find. I’m a bit dubious about the cat food story, my dog’s food isn’t cheap! But how many more would go hungry without Social Security? Food may be fairly cheap, but if you’re paying for essential medicines there may not be much left over to buy it.

There were definitely people eating cat food. The reason wasn’t necessarily because cat food was cheaper than chicken. People ate cat food (at least in part) for the same reason that Gerbers used to sell so much baby food in Florida retirement communities. It was soft and easy to eat. It was also cheap (baby food isn’t).

[Damuri_Ajashi]

@Scylla

When founded in 1935, there were relatively few retirees and lots and lots of workers. Life expectancies being what they were only a fraction of the populace was expected to live to recieve benefits and those that did were unlikely to live long enough to receive them for long. This would leave a very large surplus that the goverment could spend as it wishes…
The current “trust fund” is not a seperate account and contains no assets it is a hypothetical that contains imaginary securities that have been created special for SS. They cannot be purchased by anybody else and the SS trust fund cannot purchase anything but these imaginary securities (since they only have imaginary money this works out ok.) This also works out ok because nobody else would want these imaginary securities even if they were real because they suck.

Social Security is a ponzi scheme. It generates no assets or returns but instead depends on a constant flow of new investors to pay the previous ones. A ponzi scheme can fail when its obligations overtake its inflows which usually occurs because of a lack of new investors. SS is dependant upon a constantly growing base as are all ponzi schemes.

Maybe I am misunderstanding everyone’s point here. If the point is that the money that the government "borrows from the fund doesn’t earn interest then I call BS. If the point is that my social security taxes are paying for the benefits of current retirees and noone is paying me interest on the money that was used to pay current retirees then I agree. But this is largely the result of changes in actuarial assumptions, if everyone croaked after 5 or 10 years of retirement like they used to, we wouldn’t be having this conversation.

[Damuri_Ajashi]

@Scylla

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%

http://www.census.gov/hhes/www/poverty/poverty05/pov05hi.html

Unless you have better numbers, I think you’ll be happy to concede that things are better than you had guessed.

Don’t most of those people get social security (I think that the average payout on social security puts you over the poverty level).

[Debaser]

@col_10022

Not a lot of people with a ton of money puts very much of it in stock unless its in the company that they own.

Do you have a cite for this? I know that the very wealthy have to look at tax implications much more than the rest of us, and for that reason they invest in a lot of tax shelters. But if you have money that you would like to invest for the long term stocks is where you should put it. It doesn’t matter if it’s 100K or a billion. If you don’t need it for twenty years or more you are wasting money if you don’t buy stocks.

Sure, I am using the most conservtive estimates of returns on equity and the fund probably would do better if it could get equity returns but I don’t know if we should be trying to skim the equity “risk premium” for a program that is designed to support the financial stability of the country.

Yes, you aren’t just being conservative about the returns of stocks, you’re just flat out mistaken.

Here’s a link for the Motley Fool:

Average Annual Returns

1802-1995
T-bills -
Bonds 4.97%
Stocks 7.79%

1900-1995
T-bills 4.19%
Bonds 4.05%
Stocks 9.78%
1950-1995
T-bills 5.35%
Bonds 4.15%
Stocks 12.42%

Data from Global Financial Data

As you can see, stocks perform much better than bonds.

Again, I ask you: If stocks only returned 1% higher than bonds, why would anybody invest in stocks? Bonds are guaranteed to pay out, unless the company goes bankrupt. They are much less risky than stocks. Why would people take so much more risk for 1%?

I believe the entire amount that is owed by the government to the trust fund is held in the form of government securities. It earns interest.

You’re not getting what I’m saying on this. I know that the government earns interest on the “trust fund” for social security. (The entire idea of if the “trust fund” even exists or is a meaningless term is a whole debate in itself, but let’s just ignore that for now.)

What I’m saying is that most of the money pulled into the Social Security system is paid right out immediately to current beneficiaries. It’s not ever invested and doesn’t earn any interest. It’s only the small amount left over that is invested.

SS FAQ page

Is there really a Social Security trust fund?

Yes. Presently, Social Security collects more in taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. These bonds totaled $1.9 trillion at the beginning of 2006. Social Security received $94 billion in interest from bonds in 2005. **However, Social Security is still basically a “pay-as-you-go” system as the $1.9 trillion is a small percent of benefit obligations. **

[Debaser]

@col_10022

The equity market as a whole, has more risk than th debt market as a whole and the debt market has more risk than government securities.

Agreed. To which I’d ad that the equity market as a whole has higher returns than the debt market as a whole and the debt market has higher returns than government securities.

The risk comes with the reward of higher returns.

You may have hedged the risk of one or two underperforming stocks with diversification but you are still subject to overall market risk with equities.

Yes, and the way you deal with this is time. Stocks are risky in the short term, but less so in the long term.

It’s a bad move to buy stocks with junior’s college fund if junior is sixteen years old. It’s a better move to buy stocks with junior’s college fund if junior is one. That’s because when you hold well diversified stocks for a long time they have always been up historically. As you come nearer to needing the money you move it into safer investments.