If I'm for SS Privatization..

Great Debates
101

[QUOTE=col_10022]
cite please

[/quote]

Please refer to my earlier cite of the SS FAQ page. This addresses my point about how most money is paid out and not invested.

It always amazes me how very well informed posters often don’t understand the most basic concepts of how social security works.

Yes. I know this sucks. But, if it’s what we have to do to get ourselves out of the ponzi scheme than it’s worth it. It also should be possible to do this since even a lot of people who are in favor of the current system want to means test it anyways, so this should be palatable to voters.

What’s your point here? Are you worried about the government losing revenue from the wealthier people that aren’t going to get paid out due to a means test? I guess it’s worth considering but it’s hardly a dealbreaker.

102

[QUOTE=Debaser]
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.
[/QUOTE]

What happens if we get a stock market crash when Junior is 9 and it erases 80% of your account value? How do you recover? What happens if the market reacts the same way in 2029 as it did in 1929 (after all, a lot of people think that the stock market is severely overvalued).

Listen don’t get me wrong, I am fully invested in equity and real estate right now but I am not 100% sure that my lifetime returns in stocks are going to outperform treasuries, its because I am still young enough to earn back any lost investments over the next 30 years AND I have defined benefits in the form of social security and a pension. If I didn’t have those things providing a safety net, I would have some portion of my money invested in treasuries.

103

[QUOTE=Debaser]
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.
[/quote]

There is nowhere I can find that will tell you where these people invest. Just anecdotal evidence. If you are extremely wealthy, you can live very luxuriously on the interst earned by your money, you are investing money that you don’t ever intend to spend, you don’t get much longer term than that. The extremely wealthy are more concerned with wealth preservation than hitting home runs. No doubt they put money into the stock market but you seem to think the “smart money” puts most of it in index funds, they don’t they put the largest chunk in government securities. These people don’t need to take on additional risk because they don’t need the higher returns.

As far as individual tax shelters are concerned, Section 469 pretty much got rid of almost all tax shelters available to individuals. Now the largest legitimate tax shelters for individuals are life insurance and annuities.

And I provided you a cite that says otherwise. Between an academic study and motley fool (a company trying to sell you advice on stockpicking) who do you think will be more objective about the difference between investing in stock versus investing in debt or government debt. Maybe I am the victim of the shorthand that floats around investment banks on wall street but the concensus seems to be that debt (non-government) returns about 7% over the long term, equity conservatively returns about 8%. Inflation adjusted, equity offers a 20% higher return on your money than debt.

I’m gonna guess you are familiar with some economic principles. If Equity offered significantly higher returns over debt (3%, 5% or 7% deopending on the time period you choose) companies would have a much higher apetite for issuing debt over equity, but they don’t. The only advantrage that equity offers over debt is that you are being paid a risk premium for taking on more variability in your investment performance than debtholders, that risk premium is about 1%, it MAY be 2%.

Government securities offer even lower returns than corporate debt but the spread there is also only about 1% but the inflation adjusted returns on corporate debt are 25% higher than the returns on government securities.

[/quote]

OK, now I understand what you are saying. You gave me the iompression that you thought the money that congress borrowed from the trust didn’t earn interest. There are two reasons for the problem. First, social security is very very progressive so that if you don’t pay a lot into the fund, you still get a moderate amount out of the fund. None of the original recipients paid a whole lot into the fund because they were so close to retirement but they still got a moderate amount out. We basically floated at least some portion of a generation’s worth of beneficiaries. The second reason is that actuarial assumptions have changed dramatically since the inception of the fund, people live a lot longer.

I have linked to a wiki article Social Security debate in the United States - Wikipedia
Social Security - News, Tools, and Resources

Removing the cap on social security and gradually increasing retirement age would get rid of most of the projected shortfall. You still wouldn’t be able to fund private accounts (assuming that private accounts are a good idea). How do you propose we raise enough money that all earned benefits are fully funded so that we can set aside all the incoming social security taxes in private accounts?

104

[QUOTE=Debaser]
Please refer to my earlier cite of the SS FAQ page. This addresses my point about how most money is paid out and not invested.

It always amazes me how very well informed posters often don’t understand the most basic concepts of how social security works.
[/quote]

I thought you were saying that the money that congress was borrowing from the fund did not earn a rate of return.

If I am rich, why the heck would I spend any effort on managing my social security account? If you want to turn social security into a welfare program than fine by me but I always thought of social security as a progressive national pension plan.

You said that one way to get over the transition issue was to tax social security. My point is that it is already taxed.

It seems to me that you are not against the progressive nature of social security (you favor means testing), you are not even against putting all the money in government securities. You just want the social seucrity fund to be fully funded and you think privitization will provide a mechanism to ensure that social secuirty is fully funded. Why not just advocate for fully funding the social security fund. Then you won’t be pissing off all the retirees who justifiably feel threatened by talk of privitization (which invariably ends up screwing beneficiaries (current or future). Why not just advocate for higher taxes. If we repealed the Bush tax cuts and earmarked all that money for social security, we would be fully funded in a few decades and we wouldn’t have to change any of the benefits.

105

[QUOTE=col_10022]

[/quote]
OK, but we’re talking apples and oranges here - or, more to the point, cherry tomatoes and watermelons. Because your cite refers to the supposed 25% shortfall nearly 40 years away, and we’re talking about a 50-year, 100% gap starting right now.

Or maybe it just isn’t going bankrupt at all. Yes, people are living longer than they were 70 years ago, but worker productivity has also grown quite a bit since then.

106

[QUOTE=Debaser]
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
[/QUOTE]
This may be true, but your cite doesn’t show it, at least not the part you bolded: “However, Social Security is still basically a “pay-as-you-go” system as the $1.9 trillion is a small percent of benefit obligations.”

“Benefit obligations” in their view is the present value of what they’re obligated to pay out from now until the end of time.

107

[QUOTE=RTFirefly]
OK, but we’re talking apples and oranges here - or, more to the point, cherry tomatoes and watermelons. Because your cite refers to the supposed 25% shortfall nearly 40 years away, and we’re talking about a 50-year, 100% gap starting right now.

Or maybe it just isn’t going bankrupt at all. Yes, people are living longer than they were 70 years ago, but worker productivity has also grown quite a bit since then.
[/QUOTE]

I think we may be talking past one another. My point is that if there is a crisis with the current social security system, we can plug the hole forever by removing the cap and indexing eligible retirement age to increased life expectancy.

108

[QUOTE=col_10022]
I think we may be talking past one another. My point is that if there is a crisis with the current social security system, we can plug the hole forever by removing the cap and indexing eligible retirement age to increased life expectancy.
[/QUOTE]
That may be, but I’m opposed to raising the retirement age due to increased life expectancy. While it’s clear that for most of us who work at desks and cubes, we’re going to live longer and be able to work longer. There’s still a lot of people working physical jobs whose bodies are wearing out at the same rate as 50 years ago. Until you figure out a way to deal with that disparity, I’m totally opposed to raising the retirement age.

I think the ‘crisis’ with the current system is overblown. Medicare has a looming crisis. Social Security may need some tweaks, or may not.

109

But as far as this thread is concerned, that’s a side issue to me. The only point I came into this thread to make is the extreme difficulty of transitioning from the current Social Security system (in which most revenues get immediately paid out as benefits) to a system of private accounts (in which the revenues would be saved and paid out at a far later time, on average) without leaving a lot of people high and dry in their ‘golden years’.

110

[QUOTE=RTFirefly]
But as far as this thread is concerned, that’s a side issue to me. The only point I came into this thread to make is the extreme difficulty of transitioning from the current Social Security system (in which most revenues get immediately paid out as benefits) to a system of private accounts (in which the revenues would be saved and paid out at a far later time, on average) without leaving a lot of people high and dry in their ‘golden years’.
[/QUOTE]

Transition doesn;t work without screwing retirees or taxpayers. I suspect most of the people who want private accounts these days figure we should screw the baby boomers.

111

[QUOTE=Ass For A Hat]
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.
[/QUOTE]

As has been pointed out, the number is moot. You do however, raise an exceedingly good point, one that has troubled many and been studied by many.

Let’s quantify your issue a little bit more.

Last year there was a study examining the performance of self-directed plans versus defined benefit plans. This study raised many of the issues and sought to answer many of the questions you asked, and its conclusions strongly support your concerns.

You can read the report here:

http://www.bc.edu/centers/crr/issues/ib_52.pdf

So, you’ve made a point that has been echoed by many at the highest levels of academia.

My beleif though is that this report overstates the problem, or creates a potential problem where there may not be any.

First off, the 1% difference in returns of self-directed assets versus pooled pension plans is not a huge one and does not support the charge of incompetance, IMO.

Secondly, the study makes much of the asset allocation differential, the fact that defined contribution plans, tended, as a whole to hold a higher percentage of equities. From this the author concludes that the participants are taking on high levels of risk inconsistent with prudent investment behavior. This is not necessarily true. A proper asset allocation model when implemented by an individual is likely to have the highest concentration of stocks in the retirement assets since those are the longest term assets, and the least likely to be tapped for current financial needs.

For example, based on a given time horizon till retirement and a given risk tolerance, a prudent investor might decide that his overall asset allocation should be 50% stocks, 40% bonds and 10% cash. If that investor has a million dollars in investable assets, of which $600,000 are in a 401k, than that investor might prudently decide to invest $500,000 of his 401k money in stocks for long-term tax deferred growth, and the remaining $100,000 in the 401k in long term corporate bonds. Outside of the IRA he may invest in municipal bonds for tax-defferal and money markets funds for cash. The lesser volatility and the tax advantage of the municipal bonds equates to higher liquidity against need or opportunity.

That would be a prudent portfolio consistent with Modern Portfolio Theory. In the study I’ve cited, they are only looking at the retirement assets and so they conclude based on that limited portion that the portfolio is not prudent.

The defined benefit plan must maintain a prudent portfolio in and of itself, but if a person’s interest in that portfolio is not efficient for purposes of risk and taxes, than that portfolio is less effective.

Thirdly, people will sometimes invest stupidly when they have control of their own assets. Usually this happens when they don’t have experience. In the early years of contributing to a 401k a new investor is likely to take on higher risk or make more mistakes. Fortunately, at this time he is not making decisions for a large amount of capitol.

In the money management industry we have an inside joke:

“How do you avoid making bad decisions?” asks the junior manager to the seasoned veteran.

“Experience.” Replies the veteran.

“How do you gain experience?”

“By making bad decisions.”

112

[QUOTE=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.
[/QUOTE]

I’m really uncomfortable with generalizations like this as I feel that they are often unintentionally misleading.

I think I could make the very strong argument right now that the bond market as a whole currently has a lot more risk in it than the equity market.

With a 3 month cd paying about 90% the return of a 30 year corporate band both of which are trading with a real negative return after inflation and taxes at the highest margins, if we discount a steepening of the yield curve at the long end by just 1% we could be looking at a 15-20% downside in a hypothetical single A rated 30 year bond.

That’s an equity downside with a CD return, hardly a good risk to return proposition.

Contrast that with BAC right now, which has roughly the same after tax yield as our bond. That bond will never pay more than its current yield to today’s buyer, but if he buys BAC he gets a dividend that is equivalent and may increase, and his investment may also increase in value where the bond never will (significantly.) Yes, he has a 15-20% downside, but for that risk he also get a significant upside possibility. From a risk to return standpoint, the stock is the much more conservative investment.

We are in an odd sort of market right now, but under any given environment, I think one is making a mistake to define risk outside of the current market pricing structure.

113

[QUOTE=col_10022]
Don’t most of those people get social security (I think that the average payout on social security puts you over the poverty level).
[/QUOTE]

The average payment is about $900, and the poverty level for an individual is about ten times that, so yes, SS average payments put you over the poverty level.

I guess it would be safe to say that 10% who are below the poverty line are recieving less than the average benefit (as about half must,) and/or are supporting more than one person in the houselhold to set them below the poverty line.

114

[QUOTE=col_10022]
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.
[/QUOTE]

My point is that none of the money earns interest. Their is no seperate account, and there is no SS trust fund. The fund was commingled with the general account to pay for Vietnam.

What the current setup is, is nothing more than a device to make it seem as if there is some kind of actual trust fund or a seperate account that earns interest. Nothing of the kind actually takes place according to any kind of reasonalbe principles and definitions of “trust account” or “interest.”

Part of the reason for this IMO is nothing more than blatant deception, the other part is because what is actually going on within SS and the “trust account” is incredibly complex and arcane from a macroeconomic/accounting standpoint.

I’m trying to think of a good example to model for you what goes on, but it kind of fails me. Try this:

You have a bank account. It has X number of dollars in it. In your head, you have divided that bank account into many subaccounts to serve different purposes (boat, groceries, mortgage payment, SDMB posting fees, etc) but only in your head. Now, let’s say somebody gives you money to help pay down the mortgage but instead you buy go out to bar (or invade Iraq, your choice), so, in your head (and in your head only) you increase the amount of money you have in the account specifically in the subaccount for mortgages by $100 but since it’s not available there now, you categorize it as invested and decide that when you do get some extra money to put something in there, say a year from now you will actually put in $105 and pronounce it good and fair. In this way, you rationalize spending the mortage payment on beer (or invading Iraq.)

As I’ve written it, this scenario is actually understating the issue. In my example, you have to make the mortgage payment, and you have to do it with real money that you’ve earned and if you don’t your house can be foreclosed on. In this sense these things actually fit the definitions of obligations in ways that the SS obligation.

If under any circumstances the goverment does not pay a t-bill, that is a default. Legislatively SS benefits are subject to legislative whimsy. We can’t really call them obligations in the same breath.

115

[QUOTE=col_10022]
I thought you were saying that the money that congress was borrowing from the fund did not earn a rate of return.

[/quote]

OK. Fair enough.

Why would you not? If anything I’d wager that people making over 90K a year would be more willing and able to manage their accounts actively. Since they make more money, they probably already have experience investing on their own.

I see. However, since the payments out of social security private accounts would be much higher than the payments out of the current system, the taxes would be much higher as well. There would be at least ten times as much tax revenue if you are taxing the returns from a private account vs just taxing the current bennies.

Nope. You’re still not getting the main point. As Scylla said it’s the lack of interest. That’s what’s wrong with the current system. You can fund the existing system all you want and it doesn’t begin to address this problem of how it’s designed.

Instead of my $1 being taxed from me today and paid out to retirees, I want that $1 invested so when I retire it’s sitting in my account now worth $65 because of the compounding interest. (I’m using my age of 30, with a retirement age of 65 and 12% interest to get that number.)

That way you wont have to tax some 30 year old in order to pay me my $1 back (without interest). I won’t need it.

116

[QUOTE=Scylla]

You have a bank account. It has X number of dollars in it. In your head, you have divided that bank account into many subaccounts to serve different purposes (boat, groceries, mortgage payment, SDMB posting fees, etc) but only in your head. Now, let’s say somebody gives you money to help pay down the mortgage but instead you buy go out to bar (or invade Iraq, your choice), so, in your head (and in your head only) you increase the amount of money you have in the account specifically in the subaccount for mortgages by $100 but since it’s not available there now, you categorize it as invested and decide that when you do get some extra money to put something in there, say a year from now you will actually put in $105 and pronounce it good and fair. In this way, you rationalize spending the mortage payment on beer (or invading Iraq.)

[/QUOTE]

I think this is more like borrowing from a 401K, without some of the restrictions that actually entails. You are commingling savings with spending, and paying yourself interest. Now, you can get the interest and perhaps pay a higher rate by going outside, but it doesn’t necessarily make financial sense. Or, you could forego borrowing, but we’re trying to be real here.

While it is true that Congress can change anything, it is unlikely that a Congress who did so would be in office long. That’s a political law as powerful as gravity.

117

[QUOTE=Scylla]
My point is that none of the money earns interest. Their is no seperate account, and there is no SS trust fund. The fund was commingled with the general account to pay for Vietnam.
[/QUOTE]

Do you have a cite for that because I have a posted a few cites saying that the money that congress borrowed from the fund is earning interest, the money that you paid in taxes that was necessary to pay current beneficiaries does not earn interest.

118

[QUOTE=Debaser]
Nope. You’re still not getting the main point. As Scylla said it’s the lack of interest. That’s what’s wrong with the current system. You can fund the existing system all you want and it doesn’t begin to address this problem of how it’s designed.

Instead of my $1 being taxed from me today and paid out to retirees, I want that $1 invested so when I retire it’s sitting in my account now worth $65 because of the compounding interest. (I’m using my age of 30, with a retirement age of 65 and 12% interest to get that number.)

That way you wont have to tax some 30 year old in order to pay me my $1 back (without interest). I won’t need it.
[/QUOTE]

OK, so if we put in enough money so that we are fully funded actuarially and that money earns interest at the risk free rate of say 6% you would still want private accounts? Is it basically your desire to have a shot at getting 12% returns instead of the risk free rate of return?

Lets assume that the social security account could earn 12% (which is a ridiculous rate of return to assume over the long term but lets go with it) so we could increase social security payments to everyone but it would still be highly progressive. Would you have a problem then or do you have a problem with the idea that there is redistribution going on within the social security sytem?

Now pretend you are 65 and you have paid social security taxes for 30 years and now they want to privatize social security. Where would you suggest they get the money to pay your benefits?

I guess we could increase social security taxes to 12% or so and then you could fund social security private accounts while still paying current benefits and after about 30 years, we could lower the rate back to where it is today and you will be able to retire with about 4 times the money (assuming you get a 12% return on the moey that actually hits your private account) you paid in taxes (remember you aren’t getting 35 years of accretion on every dollar, you are only getting that on the moeny you pay in year 1, the money you pay in year 34 only gets one year of accretion; then you have to factor in the fact that you don’t get accretion on every dollar you pay because you are funding the actuarial deficit in the trust fund; I am not even counting the fact that you have to account for the “social security” aspect of the program which effectively subsidizes the eturns of those who were low income earners during their lifetime, it would be silly to have a social security program that still leaves poor retirees destitute).

Or did you mean we should just screw the baby boom generation because they are a bunch of greedy bastards anyways.

119

[QUOTE=col_10022]
Do you have a cite for that because I have a posted a few cites saying that the money that congress borrowed from the fund is earning interest, the money that you paid in taxes that was necessary to pay current beneficiaries does not earn interest.
[/QUOTE]

Sure:

“Beginning in fiscal year 1969, Social Security and other Federal programs that operate through trust funds were counted officially in the budget. This was done administratively by President Johnson. At the time Congress did not have a budget-making process. In 1974 Congress adopted procedures for setting budget goals through passage of annual budget resolutions. Like the budgets prepared by the President, these resolutions were to reflect a “unified” budget that included trust fund programs such as Social Security in the budget totals.”

And here:

http://www.ssa.gov/history/BudgetTreatment.html

“In early 1968 President Lyndon Johnson made a change in the budget presentation by including Social Security and all other trust funds in a"unified budget.” This is likewise sometimes described by saying that Social Security was placed “on-budget.”

::snip::

“One way to estimate the immediate impact of this accounting change is to look at the government’s actual expenditures for FY 1969. Under the current unified budget rules, the government reported a surplus of $3.2 billion for FY 1969. Removing the “off-budget” items from the calculation would result in a net deficit of $507 million.”

Read on, and if you like we discuss the 1983 ammendment and Gramm-Rudman-Hollings and their effect on SS within the budget, but I think that should satisfy you that the SS funds are indeed commingled within the General Fund.

120

[QUOTE=col_10022]
OK, so if we put in enough money so that we are fully funded actuarially and that money earns interest at the risk free rate of say 6% you would still want private accounts? Is it basically your desire to have a shot at getting 12% returns instead of the risk free rate of return?

[/quote]

I think we’re using a different definition of “fully funded”. When most people refer to the term “fully funded” they mean that the system will be able to continue to pay out the obligations that it has without running out of money. Those obligations being basically a 0% return on your money. That’s mediocre at best. It’s better than collapsing under the strain, but it’s hardly the best we should be hoping for.

Having the money in private accounts is completely different than simply giving the existing program adequate funding. It means not spending the money a person contributes until that person who contributed it is ready to retire. That way the money can earn compounding interest over a very long period of time and the result is huge returns.

It’s a completely different premise than the way that SS runs now. It’s not just a matter of funding.

First of all, 12% is not rediculous at all. I’ve already given a cite that shows that stocks on average have returned 12% over the past 50 years. There’s no reason to think that they won’t continue to do so. But, it doesn’t matter. We could say 6% and the returns would still be much higher than anything social security is returning now.

But, to answer your question: I don’t care about investing the “social security account”. First of all, if even such an account exists is up for debate, as Scylla points out. Secondly, even if the account was seperated from the general fund and invested in stocks earning 12% interest, that’s not going to do much. It’s only a small amount of money that’s left over after paying out existing retirees that’s in the account. This is completely different than privatizing the whole thing.

Yes. This is a problem. It’s called “transition costs” and we’ve been discussing it at length in this thread. There’s many ways you could deal with it.

I’ve been suggesting a removal of the cap, without any additional bennies to those who face that removal. This would flood the system with money. In addition to this we can tax the earnings of the private accounts. Finally, if that’s not enough we can take general revenue funds. It’s only fair, since social security has been raided over history so often that it returns the favor!

In addition to my ideas, others in this thread have suggested ways to pay for the transition such as Scylla.

Social Security taxes are already higher than 12%, they are over 14% in fact, once you consider the company match which is something that employees basically are paying. The rest of your paragraph here is on the right track, though.

?

Are you joking, or are you seriously trying to pin this silly strawman on me?

The current system is screwing every generation over now. I want the screwing over to stop. That’s why I like privatization.