Investing Social Security may be social, but it ain't very secure!

Great Debates
1

I heard on NPR news today that someone is sponsoring a bill or has the idea in his head that giving people a chance to invest their FICA contributions is a good idea.

I say it’s a lousy idea. First of all, Social Security is not a pay-for-yourself deal like a 401k plan. What you put in can go to someone else and what someone else puts in can go to you. That’s the “social” part of it, yes?

And while the economy is rocking like it is now, this seems like a keen idea, but what if we hit a lousy stretch and a slew of people wind up 65 and broke from bad investments? We would as a society need to help them out anyway, which is what Social Security is there for anyway!

As you can tell, I think this is a LOUSY idea, and I do not care that it’s not a very Libertarian position - I’m an issues man!

Yer pal,
Satan

TIME ELAPSED SINCE I QUIT SMOKING:
One month, one week, three days, 23 hours, 9 minutes and 35 seconds.
1638 cigarettes not smoked, saving $204.82.
Life saved: 5 days, 16 hours, 30 minutes.

2

Satan wrote

True. But that’s not how it should be.

I think Social Security should be a forced savings program. If you’re unlucky enough to not save enough, then Welfare should take care of you. Two distict concepts and programs: one to encourage/force people to take care of themselves, and one as a safety net for those that need it.

The safety net should be reasonably invested in low-risk stuff. But the individual savings part should be handled however the participant wants to. Like a forced 401(k).

Or so say I…

3

I am going to chime in here while Satan is watching the Knicks game.

The safety net now is SS. This should be as low risk as possible. I think that a forced 401(k) would be a different issue. A terminology change might be in order for this issue. I would guess that a lot of people wouldn’t like the word “forced”.

4

Okay, let’s get some proper numbers here. In 2 debates on the issue I hear that SS currently returns the equivalent of 1%. Would someone like to posit where that number came from? If it is accurate then we could all get better returns from a passbook savings account.
It looks like Social Security is going to be a big debate issue between Bush and Gore so it’ll be members of this board who can determine who’s playing “cook the books” and save the country.

5

For expected rates of return broken down by state, go to http://www.heritage.org/books/socialsecurity/ and then click “all states” in the state profiles list. A quick perusal shows from a 1-2% expected return. The expected return for minorities is actually about -2%.
This, from http://www.teleport.com/~prf/ss/feb99/cato2-19.html (bolding mine)

The idea behind this last portion is why I think a mix of private investment options would be a good thing. This example only assumes a 5% return. If our econmy goes so far into the tank to get below a 1% return, well, I think retirees (along with everyone else) would be in more trouble than SS checks could cover anyway.

6

Social Security is an inter-generational Ponzi scheme.

If you or I tried to do start a Ponzi scheme, we would soon be hauled off to the pokey.

If you or I tried to get out of the Government-sponsored Ponzi scheme, we would be hauled off to the pokey.

7

First what is a Ponzi scheme ? From the tone of the replies it looks like a chain investment system where you get a payout when you introduce new members, like in a pyramid scheme.

Second. Living in a country that operates social security and possibly is a model for US proponents I think I may have a perspective that many SDMB’ers do not have.I will try not to promote any agenda and reply informatively.

I will give you some idea of the problems and advantages if I can.
I work in a prison and the vast majority of inmates have social security issues. I am also from a family (hollow laugh here) background that is familiar with the practical aspects of how the system works.

I would appreciate someone informing me of what system you have in the US including healthcare, pensions, disability benefits, foodstamps, and welfare to work schemes.

8

casdave asked:
“What is a Ponzi scheme?”

From http://www.m-w.com:

Main Entry: Pon·zi scheme
Pronunciation: 'pän-zE-
Function: noun
Etymology: Charles A. Ponzi died 1949 American (Italian-born) swindler Date: 1973
: an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks

Mjollnir said:
“If you or I tried to do start a Ponzi scheme, we would soon be hauled off to the pokey.”

If I forced you to pay a tax on your income or I tried to raise an army, I’d be “hauled off to the pokey”. There are a lot of things we allow the gummit to do that you or I would be arrested if we tried.

9

Any discussions about reforming SS have to acknowledge that the current SS system is the proverbial 600 pound gorilla. It ain’t gonna be easy to make it turn around, just cause we want it to. Any changes will have to be EXTREMELY gradual, and tweaking will be much more readily accomplished, than major overhaul.

I agree with Satan - what do we do for people who invest badly, or who have to withdraw during a market downturn? For them, will reliance upon whatever welfare their state provides be an improvement?

Also, how do privatizers address transition costs? It is one thing for me to say a 25 year old should be able to privately invest some portion of his SS contribution. But at present, that 25 yr old’s contribution is needed to pay his grandma’s benefits today, and to put into the trust funds to pay his mom and dad’s tomorrow. We might object to this system, but it is the system as it exists. And it can only be changed gradually. If funds are taken out of the present pipeline for individual accounts, how does SS meet present obligations? Borrow?

SS could have been set up as an individual savings program. But it wasn’t. When SS was initiated, there was a desire to cover individuals who were retired at that time or in the near future. Those folks, our grandparents and greatgrandparents, got far more than they contributed. You may agree or disagree with the way it was set up, but that is what we have to deal with.

So, I would like to hear specific privatization recommendations, that address all of the costs that would be involved. We don’t hear much specificity from privatization advocates. George W. certainly provided no details. He has submitted no plan - simply rhetoric. Right now, SS is a pretty cheaply administered program - admin costs are less than 1% of current expenses.

I think a better plan than privatization of SS would be to increase tax benefits of IRAs, or other private savings programs. My understanding is that most investment programs recommend keeping at least some portion of your portfolio in very low risk investments, even tho they may not pay the maximum return available. And you “gamble” with the portion of your money you aren’t going to need to pay the food bills. I think of SS as that really safe portion of my retirement plan. And it doesn’t keep me up nights.

Finally, consistent with my remarks of gradual tweaking being favorable to major overhauls, the sooner we do anything, the better. Right now the trust funds are calculated at being about 2.25% short of payroll during the next 75 years. So, if revenues were increased 2.25%, or benefits reduced by 15%, the system is funded for the next 75 years. BUT, every year that reform is delayed, those numbers increase.

Really finally, my understanding is that countries including Great Britain, Australia, and Chile have recently experimented with increased privatization in their retirement systems. It would be interesting if some folks with knowledge of those countries’ systems would chime in.