I think I see the flaw in this argument. Say that today the system is in balance, with the money taken in exactly matching the money paid out. I think you are saying that this is a 0% rate of return.
But you can’t calculate rate of return in this way. What counts is the return for people getting money relative to what they paid in. That’s the rate of return that matters, and calculating it is difficult, given that like an insurance program or defined benefits pension it depends on how long you live.
One of the political plusses of the system is that anyone alive is on the way to a very good rate of return, while anyone who gets a bad or negative rate of return is dead, and thus can’t vote. (Not counting Chicago.)
If there was no inflation, no change in the tax or the benefits, and no population growth, there would be a zero rate of return for the program as a whole. However individuals would still see a positive rate of return, and maybe a very good one
Nope. I’m not confused as to what the rate of return is. It is around 0%. Of course it depends on how long you live and the number of workers in the system, but the way it works out on average the returns barely match inflation, or worse.
It’s fair to say that as a 30 year old worker, I can expect a 0% rate of return.
Here they show numbers for people born in 1976, like me, and who earn higher incomes, around what I do.
So as a 30 year old who makes a higher income, I’m going to pay in about $902,050 in Social Security taxes over my lifetime and I can only expect to get back $956,959 in bennies. That’s basically a 0% return.
When you add this into the mix, it looks even more grim:
So, unless they dump some more money into the failing program before I retire I can expect to get 30% less than even the meager returns the program is paying now.
I addressed the life expectancy issue a bit, so I agree that groups with low life expectancies will do worse. I didn’t consider the high income issue, but since it is somewhat progressive I agree that the rate of return for people like us who are usually paying the maximum is not as great.
Of course no one has disputed that on average the return from equities is greater. I’m not too worried about massive benefit cuts, since that is almost certain to be politically infeasible - I’m a geezer and I vote!
But the return for those who survive is slightly over zero. All that I was saying.
We HAVE to invade Iraq! Saddam has weapons of mass destruction! AND he was involved with Al Qaeda!
No, American troops aren’t torturing prisoners!
No, we’re not operating a secret prison system!
We would never abuse the Homeland Security Act for partisan political purposes!
We aren’t tortiuring the prisoners in Gitmo!
Putting everything under a single agency under the leadership of President Bush’s highly qualified leaders will make everyone safer in the event of enemy attack OR natural disaster!
Now these same people are saying …
If we privatise Social Security everyone will have more money! Especially ordinary Americans!
Please, people. Consider the source. Just for once, pay some attention. Consider the fucking source.
OK, I understand that the SS funds are comingled with general funds. It doesn’t say that they don’t earn interest and I have posted a link that says they do earn interest. So I am not sure how you get to “the trust fund doesn’t earn interest”
I think I made a valid point. Of course, any argument must ultimately be decided on its own merits, but when a group has been as consistently wrong as conservatives have of late, it’s worth taking note of in considering their arguments. I mean, there’s such a thing as credibility. And conservatives are completely out of that stuff nowadays.
I guess that one of us is wrong about whether or not congress borrows trust fund assets with interest or without interest. If they borrow with interest then its not like they’re stealing money.
Removing the cap will get us part of the way to keeping the trust fund from failing using the assumptions used by this administration. It won’t get us all the way there. So lets say we create private accounts today that cannot be used to pay the benefits of other beneficiaries. Where do we get the money to continue payments for the social security obligations we have already incurred? We are talking about a pretty big peice of the budget
I know that there is an employer contribution, I have paid self employment tax so I am familiar with the actual tax rate. In order to pay out the existing obligations and allow people to create private accounts, we need additional sources of income because the current balance in the trust fund is not enough to pay out the existing obligations. Removing the social security cap (which I agree should be done) will only get us a small part of the way there (it will get us most of the way to keeping the trust fund solvent so we can pay benefits as we go without going negative in the trust fund).
OK, Your point seems to be that the rate of return for YOU is effectively zero. Check out what the rate of return is for a household that earns $30K/year. The social security system is highly progressive and people like you (and me) get crappy returns on a system that is designed to create a minimum income for people after retirement. If your household earns 15K/year your retirement benefits at age 65 in 2041 will be $687/month, if your household earns 30K/year, your monthly payment will be $1,033/month, if your household earns 60K/year, your monthly payments will be $1594/month and if you make 100,000/year, your benefits max out at $2000/month. The system is highly progressive and it is intended to be. The whole point behind the system is to make sure everyone has a minimum income not to force savings.
It seems to me that most proponents of private accounts think social security should be some sort of forced 401K plan. I think the purpose of the social security system is to provide a financial safety net for society in general.
Some people do seem to dispute this. Sure, in any social security debate we have well informed posters such as yourself. But, there’s often a surprising amount of mis-information and just lack of knowledge on this subject.
I remember one GD thread on Social Security where several posters thought that the stock market is a zero sum game, and that for some to make money, others have to lose money. They were genuinely distrustful of the fact that everybody who invests in stocks can make money. They didn’t believe it was possible.
That’s why when I participate in threads like this I find it’s nessesary to point out the obvious. Heck, we’ve got a poster in this very thread insisting that stocks only pay out 1% higher than bonds. That’s just silly. Yet, I’m the only person who’s corrected him on it.
No. You still don’t get it. The returns are low for everyone. Not just one group, but all groups suffer low returns because of the lack of investment of compounding interest.
It doesn’t matter if the contributions are small, and the payouts are progressive. The returns would still be much higher if the money was invested and grew for a lifetime.
Doing some quick math: A person making 30K a year pays $4500 a year in payroll taxes. If they invest that $4500 a year in stocks making 12% (using constant dollars) then the result by age 65 is over eight million dollars.
I think your poor family with a 30K per year income would prefer an eight million dollar nestegg to the measly $1,000 a month social security offers, if they are lucky enough to live long enough to even collect.
You can’t beat the math. Compounding interest beats a ponzi scheme every time.
I explained it a little bit in post 114, but not very well, so I can understand if you’re unconvinced. I’ll try another way.
You’ve agreed that the SS monies have been commingled with the general fund. The government routinely runs at a deficit. So, in actuality there is no pool of money that’s earning interest.
What we have instead is accounting. The government keeps track of how much comes in, and how much it would grow by if it were invested in the hypothetical treasury securities that were designed exclusively for SS. From that they generate a statement that they send you once a year telling you how much your benefit is going to be, and they can perform other calculations based on this hypothetical model.
What they’ve done is simply model what would happen if they did have a trust fund and if it did earn interest, but there is really actually nothing there supporting it but the general inflows and outflows of government funds, the governments’ ability to float debt, and its ability to print money.
Some people will tell you that this is perfectly acceptable ok. The dollar after all is supported by nothing other than the government’s assertion that the dollar is worth something, and the general public’s willingness to believe it. As long as people are willing to beleive, and the government is willing to assert that SS is a real obligation consisting of real funds earning real interest, than this is also true. After all, the government prints the money that makes it true.
So, just as we have fiat money, with SS we have a fiat trust account earning fiat interest.
The problem with this can best be asserted with a very close analogy, that of treasury stock. Our currency is much like stock in corporation in that it is a representation of value measuring our confidence in the underlying nature of the enterprise. As that confidence drops in a corporation so does the price of the underlying stock. The exact same thing happens with the currency of counties. If confidence in the ability of the government to support a currency drops that currency becomes devalued in terms of it’s exchangeability into other currencies and/or its ability to purchase goods and services.
There are of course many differences between currencies and stocks but for purposes of our analogy we will only be considering this respect that I’ve described in which they are very similar.
When a company buys its own stock, it becomes something called treasury stock. This basically means it ceases to exist. It is no longer voted. It no longer counts in the market capitalization of the underlying company, and it can no longer earn dividends. This only changes if it is reissued.
It works this way for a couple of specific reasons. The first is regulatory, and is founded on ethics, and the principles of ownership and control, and while it’s pretty interesting it really doesn’t apply directly to the question at hand.
The second reason is that a company cannot pay itself interest or dividends for very basic accounting reasons. As a transaction, it’s a wash. It’s a completely invalid transaction.
But you protest that there are cases where we pay ourselves interest, such as when we borrow from a 401k plan of which we are the beneficial owner. There are three things that makes these sort of transactions different from what the SS trust funds do.
Usually when you remove qualified money from a plan you must pay taxes and/or a penalty because receiving a present benefit counts as a taxable distribution. When borrowing funds from a 401k you are allowed to argue that you are receiving no present benefit but are actually accruing a liability, and if you do not meet that liability you will have to pay all taxes and penalties as if you did have a present distribution.
There is no such control against default implicit within the hypothetical securities of the SS trust fund.
Secondly, there are actually seperate accounts from which the money is borrowed.
Thirdly, you borrow from a 401k in terms other than yourself. To understand this consider treasury stock again. Treasury stock is without value because it is unissued and the company cannot value its self based on it’s own terms. It’s ownership of itself is a nil transaction.
When the government borrows in terms of itself it creates a null transaction from an accounting standpoint, and from a very real standpoint.
If the government invested the hypothetical balance of the trust fund in euros, and than borrowed those euros back in terms of euros or issued securities against them to generate liquidity to spend than it would not be borrowing in terms of itself generating a null transaction because their would be actual obligations payable in some form.
The government borrowing from itself in its own terms is actually a form of circular logic and is recognized as such within the priciples of financial accounting, and is unallowable as a null transaction or wash under any and all circumstances.
The concept of “trust” and “interest” are specific terms with specific meanings. What the government does is something that one may consider valid, but it does not actually fit those terms.
I guess, as advertised it is supposed to be a little of both. Personally though, I agree with you. I think it is necessary that we have somethin that functions as safety net specifically for the elderly or infirm who are not able to join the workforce to support themselves. I also think it’s necessary that the government administer this part of the program.
As a safety net, SS is a failure for reasons I’ve already discussed. As a net, it’s inadequate. Part of the reason why it’s inadequate is because it catches everybody Bill Gates will not need to be caught in a safety net. Warren Buffett does not need a safety net. They’re receipt of benefits is wasteful. Their benefits will come from people currently paying into the program and will cost future dollars. Their receipt of benefits leaves less available to those who need it. It is also a failure because the person who is most likely to accrue a full benefit is the person who is least likely to need it, whereas somebody who has not been able to work throughout their lives at a decent wage is much more likely to need the larger benefit.
The proposal I outlined on page 2 recognizes these facts and addresses them. Regardless of what you think of SS some people have paid into it for a long time under the beleif that its a retirement plan. The statements they receive from the government have represented and promised as much. Your belief that it is simply a safety net does not alter their payments or the representations and obligations that have already been made. Those people who have paid in are morally entitled to receive their benefit as described.
I simply wish to alter the current structure of the plan to prevent the accrual of more obligations to those who will not need them while paying off the future obligations. At the same token the program must continue to exist so that benefits can continue to accrue and be paid out on a means tested basis, so that the safety net catches those who need catching.
As time goes by and current obligations mature, a larger portion of money will be available to make this safety net sufficient and livable with dignity for those who need it. Since not everybody will need it, the amount of SS tax reserved for the safety net can be available for privatization or investment so that Debaser can seek his 12%.
In this way we end up paying less down the road. We don’t pay benefits to billionaires. We pay meaningful benefits to those who need it, and we allow people to seek a level of return commensurate with their risk tolerance.
I really don’t see what there is to argue about with this kind of idea. Even RTF liked it and we haven’t agreed on anything in like 7 years.
Just for the record, your 12% number is… well, to be polite… bullshit. I’m sure you can seek for a specific period where the equity rate of return was 12% on a noninflationary adjusted basis (like the last fifty years) but that does not make it a real number. We had a severe period of inflation in the late 70s early 80s which devalues that number significantly in real terms.
The number which is generally quoted by Ibbotson and S&P is between 10-11% percent for equities and goes back about 100 years. That number, too is unadjusted.
I’ve never heard anybody use 12 and am unaware of any software that uses that number as an assumption. For most purposes 10 is assumed as the long term equity rate, 6 is the bond rate, and 3 is inflation.
There are also a whole bunch of good reasons why SS should not be wholly invested in equities seeking a 12% rate of return. It is axiomatic that the higher return you seek the higher risk you must take. That risk is measured by standard deviation. The Standard deviation of the S&P 500 is generall considered to be about 14-21% (21% annually,) depending on the period being measured. The Nasdaq is much more likely to produce your 12% and that has a standard deviation of of 28% annually. This means that annual returns can be expected to normally fluctuate between 30% and -16%. That is just a single standard deviation in returns, which is really just kind of like an average.
Do you remember in 2000 when the Nasdaq was around 5000, and then it dropped for the next couple of years losing nearly 80% of it’s value? That’s the kind of fluctuation that can occur with an asset with that kind of standard deviation.
That kind of risk may be acceptable to long term assets where the money will be touched for decades, but consider that not everybody in SS is retiring in 30 years, and benefits must be paid out now. If you are pulling cash flow from an asset and that asset drops 80% and you still withdraw money you can completely complete that asset. Monte Carlo simulations show the effects of standard deviation of returns on assets over time, by modelling fluctuating returns and the results are unquestionable.
Look at it this way. You have $100,000. You invest it in growth stocks so that it returns 12% and withdraw 10% a year, or $10,000. Your money grows at 2% and you get a nice dividend, right? Wrong.
With a standard deviation you might have a year where your $100,000 drops to $84,000. You remove another $10,000 and you’re left with $74,000. Your chances of maintaining your cash flow have just plummetted. If you have two bad years in a row you’re doomed.
What are the chances of that happening? Extremely high. Extremely high.
If you don’t beleive me, try this. Play blackjack for $2 a hand. If you win spend the two dollars. If you lose double your bet until you win and recover your principle.
While on average you will only lose maybe 51% of the time, you will find that “average” doesn’t protect you from the statistical certainty that very quickly you will lose enough times in a row to deplete all your savings no matter how large it is.
If you think I’m lying than try it. The casinos will love you.
This is all ignoring the effect of an ss investment in the market and on market dynamics which would be a whole other discussion.
Unless I’ve misunderstood your proposal (which is certainly possble), the number isn’t moot. It’s just that you think that your proposal results in a enough cost savings take care of those who do fail.
While I agree that the study you cite isn’t all doom and gloom, I don’t think it makes your case for widespread investor competence. Aside from some of the more troubling assertions it makes, (50% of all 401(k) portfolios aren’t diversified at all) it just doesn’t account for a large enough population to support your case.
An analysis of Census Bureau (Current Population Survey) data by the Employee Benefit Research Institute found that only 48% of workers ages 21-64 participated in a workplace retirement plan in 2004, down from 52% in 2000.
Individuals that participate in employer sponsored plans typically can avail themselves of multiple sources of investment advice, including investment professionals. According to your study, fully half of them don’t have diversified portfolios. You can asset say that this inequity could be offset by holdings outside the qualified plan, but that’s your speculation. This headline doesn’t support that idea.
Even if we were to accept the notion that the overwhelming majority of 401(k) investors are competent to plan their own retirement, what about the other 50+% of Americans that aren’t covered by those plans? Surely their performance will be worse. Possibly much worse.
I’d like to pose another question. If the U.S. were institute a privatized social security system, what affect would that have on the market? We’d be dumping a monstrous amount of cash into the market. If we did that, could we really expect historical rates of return to continue? I really am not qualified to answer that and would like to hear some informed opinions.
I’m not sure how you see that. If right now the number of elderly in poverty requiring assistance is something like 10%, but you are of the belief that that number will grow to some higher percentage, my point still holds. Right now, 100% of contributors will become eligible to receive SS benefits. Means testing will lower that percentage. The number in poverty will almost surely (I hope) be something under 100% resulting in a savings from the current status quo.
Actually, it’s more like your case that it’s supporting. You’ve made the supposition that the next generation will be less competant in planning for their retirement than the current generation and therefore the poverty rate of the elderly is lkely to grow in the future.
I disagree. The babyboomer generation was one of the most feckless, carefree and irresponsible generations in its youth but as they got older they settled down, and one of the biggest forces in the investment industry is the wealth of the baby boomers. Every generation is irresponsible in its youth. That’s part of what youth is. Every generation grows up and acts more responsibly. You seem to be suggesting that this generation isn’t going to. That’s really the supposition that needs proving.
Why is this group different from all of the others?
Well, if you check page one of your second study it will tell you that participation is up to 48% in 2003 versus 44% in 1998. And, if you look at the first chart on page 3 you’ll find that since 1979 the participation rate has hovered between about 42-48% which is a pretty steady trend.
Your first cite also points out that participation has remained stagnant. Based on this, the statistic that you’ve cited to illustrate the idea that participation is dropping is both misleading and innacurate. Both of your cites contradict that this data is a trend.
Well no, not really. I point out the possibility simply to contradict the study’s conclusion that the lack of diversification in pension plans alone can be used to demonstrate a lack of diversification in general. The one does not suggest the other. Frankly, I don’t know how diversified the general populace is, and I’d be surprised is the majority had a sophisticated holistic approach to asset allocation.
I’m simply saying that a lack of diversification in a pension plan does not demonstrate a lack of diversification in the total portfolio holdings of the beneficial owner of said pension plan.
That statement of mine is incontrovertibly true.
It does nothing to contradict it either. We can argue it all you like, but I can tell you authoritatively that the savings rate in 2005 has zero bearing on the asset allocation or portfolio size of the general public. I’m not dodging the issue, and in fact I’ve gone into lengthy explanations in other places here, but that statistic simply is not measuring what you think it’s measuring. It’s a reflection of intererest rates being low, consumer confidence being high, and real estate booming. As such a reflection of transient economic environmental factors it cannot be reasonably used to make assertions about the long term retirement planning acumen of the general public.
Who are you to decide whether the public is capable of taking care of itself, Big Brother?
I am all in favor of a safety net for those who fail. A compassionate society as well as enlightened self-interest demands as much. People do have the right to self-determination though, and this is still a free country. I place a given person’s ability to take care of themselves a lot higher than the government’s institutionalized incompetance. Do you want to entrust your retirement to the competance of the average government worker? Are you suggesting the average american is worse than that? Have you visited a department of motor vehicles recently?
Anyway, to answer your question, 50% of people currently not participating in a retirement plan is not a troubling statistic from the standpoint of the general health of retirement planning among the nation’s populace. In fact, I consider that a very good statistic from that standpoint. Your second cite also considers that news positive in this context. I’d respectfully suggest that you just don’t understand what it means and are therefore drawing the wrong conclusion. I’ll explain, making up some statistics off the top of my head to illustrate your misconception.
Starting with 52% or so are not participating in a retirement plan:
15% of that group are under age 21.
15% are 21-30 and are using their available income to start a household (They are in the acquisition phase of life, buying a house, etc.)
5% are putting a child or children through college
30% are working a supplemental career/hobby career and have a spouse who is the significant breadwinner who participating
5% have decided that their spouses plan is superior to the one they have available to them and are diverting the larger share of income to that other plan.
15% are seeking to accrue their retirement savings through non-tax defferred methods (real estate, building value in a family business or farm, etc.)
15% are either two poor or incompetant to plan for retirement though they should be doing so.
So, from that only 7% of the general working public would have a problem.
Once again, I’ve made those numbers up and use them as an example. The example illustrates that your statistic in and of itself is meaningful. To make it meaningful you need more data to determine what portion of the 50% plus of the population who are not investing in a retirement plan are actually creating a future crisis for themselves.
The 50% by itself is meaningless without that context and does not tell us anything useful statistically about the future result of current retirement planning practices.
It would depend on exactly what is proposed.
I dunno. It would depend on what is proposed. My plan would not. If you are wondering what would happen if we suddenly invested an amount equal to the value of the hypothetical SS trust fund into the stock market in general, than yes, I imagine that that would have some interesting not particularly great long term consequences.
Actually, you are as qualified as anybody to guess whether or not historical rates will continue. Nobody really knows and there is a huge disparity of opinion among the experts.
From a historical standpoint, extrapolating past trends forward into infinity is generally a recipe for disaster. There are lots of good reasons to beleive why the historical rate of economic growth is unrealistic, and some very good ones to beleive why it is.
The reasons for the former are pretty straightforward: Saturation point, etc. For the latter they’re pretty fascinating rationales. The American economy has historically been an adaptation economy which has fueled itself by transition. Put simply, we continue to grow by evolving our economy into something new. We’ve gone from resource-based, to agricultural, to industrial, and seem to be transitioning to information-based. We’ve gone through many modes and evolutions within each of those categories. The collapse of American Buggywhip was not a disaster but rather heralded the evolution into the next phase. We’ve gone through many of these transitions. Proponents of sustainable growth will generally argue that historical growth figures are inadequate as they do not reflect the geometric technological growth which is the driver of our economy, and suggest that returns are destined to be much higher in the future.
Your guess is as good as mine, but I’m a professional optimist in this category.
