I assumed there would be tons of posts on this but when I checked the search function I didn’t see any. If there have been other threads on this feel free to link to them.
I do not know if SS is at any legitimate risk of going insolvent if it is not privatized, I don’t know if I can trust this quote since the author is obviously biased
“But it’s a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of GDP. That’s less than 3 percent of federal spending – less than we’re currently spending in Iraq. And it’s only about one-quarter of the revenue lost each year because of President Bush’s tax cuts – roughly equal to the fraction of those cuts that goes to people with incomes of more than $500,000 a year.”
But maybe there is some truth to it. I do know that we already have several thousands of dollars worth of investment schemes like Roth IRAs, 401ks, other plans i’m sure and whatever you invest of your own free will that are considered private retirement investment so I don’t think that adding another $1000 a year in SS privatization is going to make a difference when people have 8-10k a year in private investment opportunities open to them already.
That piece you link to is by Paul Krugman, who is a very smart economist turned op-ed writer for the N.Y. Times. Admittedly he has a point-of-view but I think his figures are generally reliable…certainly a lot moreso than his opponent’s tend to be. And, this is particularly true on this issue where there is a lot of blue smoke and mirrors going around.
As for discussions elsewhere, this current thread is dealing with a lot of these issues.
IMO, taking a service that is design to aid the people, and putting into the hands of a corporation who exists to make it’s shareholders richer, never a good idea.
Social security is a ponzi scheme. It’s ripping me off and I want out.
If the $5-7 thousand dollars a year or so that I pay into SS at least went into a fund of government T Bills I would at least get a 3-4% return, which is better than what I’m getting now: ZERO.
Privatizing social security is taking the money and giving control of it to the people who earned it, and away from the government who isn’t even investing it. This is a very good thing.
The part of the money that you pay the gov’t that isn’t immedietly paid out to people currently in the SS system is put into a fund of gov’t T Bills.
You probably don’t see much of a return though, except to cover inflation. The idea is that it’s money your guraranteed to get back, not $$ that will be invested. It’s closer to an insurance plan, not an investment plan.
It would be much better if Social Security were completely private, for lots of reason:
[ul]
[li]As it stands, you can contribute all your life, die before you collect, and that money is just eaten up by the state. In a private system, you could leave your retirement nest-egg to your family. Given poor and low middle class people a way to transfer wealth to new generations would be one of the greatest things for income mobility and ending cycles of poverty.[/li][li]The nature of Social Security is that the government collects money decades before it has to pay it out. This gives far too much of an incentive to borrow from the fund, leading to potential catastrophes. Every single nation that has enacted a state retirement plan has borrowed the money in it, leading to huge unfunded liabilities that are going to bite us in the ass.[/li][li]Social Security, when it’s disconnected from personal ownership of the retirement assets, becomes a tax. And it’s a particularly regressive tax. Again, not good for poor and lower middle class people.[/li][li]The system is unstable. Because it relies on one generation to pay for the retirement of the next, it’s always going to be susceptible to demographic problems. If birthrates fall more than expected, the system becomes under-funded. Better to have private ownership, which disconnects personal retirement from societal trends.[/li][li]Social Security has become so politicized that it’s extremely hard to govern. The wealth and power of the older generations compared to the younger means that the system just becomes a way for older people to get benefits without consideration of the cost on younger generations.[/li]
For example, the retirement age should really be closer to 70 now, given increased lifespans and increased quality of life. But any politician who proposes increasing the retirement age gets destroyed by the AARP and retired people in general. You can always tell when a politician is considering running for higher office - the leading indicator is when he or she starts recanting anything ever said about decreasing SS benefits or increasing retirement ages.
[/ul]
Of course, there are problems with privatization as well:
[ul]
[li]Retirees become vulnerable to the state of the economy at retirement time. No one wants to retire just after their nest-egg was cut in half by a market crash.[/li][li]There will be a large temporary shortfall. However, that shortfall is already there as an unfunded liability. So too much is made out of this issue by the likes of Krugman. If Bush borrowed 100 billion dollars to pay for the SS shortfall, basically he’d just be moving a liabiity from one set of books to another. [/li][li]The biggest risk, from my standpoint: The government will wind up covering shortfalls for retirees during market busts. This will increase the overall size of the SS system. In other words, the system won’t be totally private, because the government will still find it polliticially expedient to protect people from the downside risk of investment.[/li][/ul]
Given all this, I think it makes sense to adopt a gradualist viewpoint, which is what Bush is doing. He doesn’t want to ‘privatize Social Security’ - he wants to tkae a very small part of it and partially privatize that. Maybe 1%, 5%, maybe 10%. With lots of regulations determining where the money can be invested, when it can be withdrawn, etc. Sounds good to me. Let’s do it with 10% of our funds, and see how it works out. If it works well, we can increase it to 20% in five or ten years.
I’ve always understood this concept of a “social security trust fund” as many call it, to be a myth. SS taxes that I pay are immediately handed out to the retirees who are collecting (without any savings or interest). Any extra funds left over go into the general budget to be spent by the federal government like any other revenue.
But, insurance plans are investments. And this is a bad investment. Very bad. If a private corporation was selling this plan, no one would be buying it. I want out.
OK, you want out. Your ancestors already have you on the hook for it, though. They borrowed the money and you have to pay it.
Veterans get pensions. I pay them, and I don’t get jack. I want out.
Sam’s post is more reasonable (literally). It recognizes that we have current obligations. Call them a tax, and get over it.
I could support something where, if you want out, you only pay the amount they need from you to keep the current system afloat. You’d pay a little bit less than everyone else, but you never get to make a social security claim, ever, for anything.
BTW, Debaser, your grandchildren called. They want out of paying back the huge deficits the Republicans are running up right now.
Well, I presume if a spouse dies, the widow can still collect SS. Your right about cases where both sposes kick it early (which I imagine in todays world isn’t a very large precentage of the population, hence the problem) but that’s sort of the nature of an insurance scheme, you might not get your money back in the end.
But the liabilities aren’t underfunded, they have bonds from the government to pay thier way (with interest even). It’s the gov’t that’s underfunded in paying those bonds, but then gov’ts sell bonds and run deficits regardless of who is buying them, I don’t think that gov’ts need SS trust funds to encourage them to run deficits.
Well that’s certainly the problem, but as the OP said it’s not particularaly intractable. And as you mentioned, market fluctuations make the privatization scheme succeptable to its own sort of instability.
Surpluses aren’t directly “handed over” to the federal gov’t, they’re used to buy T-bonds (like you said you wanted), and the federal gov’t uses the revenues from those bonds to buy tanks and WWII memorials and the like. As the bonds mature, the federal gov’t pays the money back into the system with interest. So the fund isn’t a complete myth. Here’s more info curtsey of a link Frankenstien’s Monster provided in another thread.
I think all insurance plans are by deffinition a bad investment, aren’t they. You plan to pay in more then you plan to collect, or at least more then you could make with the money in a similar time period , otherwise they wouldn’t be profitable for the insurance provider.
These fears are preyed upon by those against the idea of privatizing social security, but they are really unfounded.
First of all, we are talking about very long investment timelines. If you are looking at a 20 year timeline of the stock market or longer it is historically impossible to lose money on your investment. (I’m talking about index funds that are holding stocks of the entire market.)
So, for a younger worker like me (I’m 28) who is 30-40 years away from retirement, I’m virtually guaranteed to have gains and large gains at that. The odds that I will lose money in the market over that long a timeframe are about the same that the federal government will collapse by then and not be paying back it’s T-Bills. In the financial world, this is about as far fetched a scenario as it gets.
So, even if I lose half my investment because of some market crash the day before I retire, I would still be well in the black and well ahead of the SS system which doesn’t provide any interest at all.
Secondly, this entire argument is moot because simply steps could prevent such a crash from affecting those about to retire. Set common sense limits similar to those on mutual funds.
[ul]
[li]A portfolio cannot be to heavily into a single stock.[/li][li]A portfolio must gradually move away from stocks as the retiree comes closer to retirement age.[/li][li]Stop loss orders on accounts of workers near retirement could simply prevent anyone from losing beyond a certain percentage of their accounts once they are near retirement age.[/li][/ul]
The notion of people losing all thier money, or even half their in a privatized plan is simply not realistic and can be prevented.
This is the most powerful argument against privitization. If younger workers are let out of the SS plan, then who will pay the older workers?
It’s a good question: But the answer is simply that just because several generations have already been fleeced by this program doesn’t mean we have to continue it forever. Even if breaking the cycle is painful, it must be done.
I don’t know why you assume this. Once people are investing on their own, they will never need the government to do anything for them regarding SS payments. They’ll be making so much more money because of compounding interest that the SS payments will be puny by comparison. There are much better ways to insulate people from the downswings of the market than the government simply bailing them out.
Then why are people buying them? Is everyone that buys insurance making a bad financial decision? Of course not.
The trick with insurance and understanding how it’s a good investment is knowing about the concept of porfolios. As a part of a portfolio, insurance can be a good investment.
Example 1: Homeowners insurance on it’s own = bad investment. You pay in more than you expect to collect.
Example 2: A portfolio consisting of homeowners insurance and a house = possibly good investment. The negative expected return of the insurance is offset by the advantage it gives to the investment of the home.
Your other basic argument about paying back the previous generations I already began to address in my post to Sam. It’s defininitely the best argument to keep us in the system that exists (the only argument that’s worth a damn, IMO.)
But, like I said before: Just because my grandfather and father got fleeced by this scam doesn’t mean I have to as well. It’s going to run out of money with or without me. Letting me out might hasten the collapse of the system, but the system will collapse at some point no matter what.
Yes, but the defense dollars that the government is spending is not a retirement plan. It does make sense for me to hold the retirement plan of the government up to the retirement plan that I could buy for the private sector.
A better analogy would be: Could you do a better job protecting yourself from foreign invaders and protecting US interests around the world as the government has done with your defense spending dollars?
What good is investing it in T-Bills going to do since the government is still paying you back your own money? I don’t think the US government needs $500 billion a year invested in T-Bills, besides wouldn’t the government just need to raise taxes to pay for that 4% interest rate they are paying you, which is just a more advanced form of social security (take money from one group and give it to another, in this case raising taxes to pay off bonds).
Insurance is by definition a bad investment if the definition of a bad investment is (expected return < 1.0).
But rational people are willing to do it, even in the absence of a portfolio, because they are risk-averse, and utility is not linear with respect to money.
Car insurance, for instance: you lose $ on average with it. Cars have negative expected returns, too - there’s no capital gain that offsets the insurance.
You fork over $600 each half-year, when the average claim is maybe $500 (most people’s claims are zero, while a few have huge claims).
Let’s say you have a 99% chance of no claim, and a 1% chance of a $50,000 claim.
The utility you give up in giving up that $100 (it’s $600 minus the average claim $500), is less than 1/100th of the negative utility you’d experience if you needed $50,000.
So utility-wise, you come out ahead, even though money-wise you come out behind.
I think perhaps that is the report he is refering to and the he is specifically refering to this bit:
“CBO projects Social Security’s summarized outlays over 100 years at 5.8 percent of GDP and summarized revenues at 5.2 percent, resulting in a summarized deficit of 0.5 percent of GDP (see Table 1-2). CBO’s analysis can also calculate the range of uncertainty around those projections. The probability is more than 95 percent that, under current law, total outlays over 100 years will exceed total revenues (that is, the summarized balance will be less than zero), CBO projects. In addition, the 100-year summarized deficit could be much greater than 0.5 percent of GDP; there is a 10 percent chance that it will exceed 1.1 percent of GDP.”
Does his paragraph (from the OP) not seem a little disengenuous from this? It seemed to me that he was suggesting that all we had to do was raise taxes .5% of GDP to cover the SSD. But the CBO report suggests that this number is talking about summarized outlays, not yearly outlays. In the following paragraph, the report itself suggests:
"As noted earlier, however, positive trust fund balances indicate the legal authority to pay benefits but not the budgetary resources to do so. Thus, they do not give as full a picture of the financial situation as annual outlays and revenues do. A limitation of simply targeting the summarized balance is that such an approach would not necessarily provide solvency to the Social Security system over the long term. Because outlays are projected to rise over time, a policy that increased revenues by 0.5 percent of GDP every year would still result in annual Social Security deficits beginning in 2024 and would only modestly reduce them in the long run. For example, the annual deficit under current law is projected to equal 1.3 percent of GDP in 2050 and 2.0 percent of GDP in 2100, so boosting revenues by 0.5 percent of GDP would still leave large deficits in those years."
I’d like to address a couple other points here.
It seems dishonest of you and Krugman to suggest that the projected trust fund shortfall is “A problem of the rest of government, not social security”. You guys are the ones who complained that Bush’s figures regarding who got his income tax cuts did not include enough information about other forms of taxes. Now your saying that an expense which is such a large percentage of the federal budget does not count as to government funding problems. No one is blaming social security, BTW, we are just interested in the one program which accounts for so much of the outlays. This seems like a prudent thing when discussing the federal government’s future.
2)The economic projections are not nearly as shaky as you like to claim in these threads. We are not talking about projecting the exact amount of GDP each year for 100 years. We are talking about measuring percentages of GDP which are not nearly as volitile.
From the report linked to :
"*CBO has developed the capability to project various measures of Social Security’s finances far into the future, both under current law and under a variety of possible legislative changes to the program. CBO’s current-law projections of those measures for the next 100 years are described below. Projections of benefit levels and tax payments for different income and age groups are detailed in Chapter 2. An important feature for policymakers and program participants is the uncertainty inherent in those projections. By examining the history of the demographic and economic factors on which the analysis is based, CBO is able to quantify that uncertainty, as explained in Chapter 3.
Even under a wide range of assumptions, CBO’s projections point to a financial imbalance in the Social Security system over the long run. Changes in economic growth can affect the system’s finances. But because the initial benefits paid to new recipients are indexed to the overall growth of earnings, the effect of such changes is muted. For the most part, the future financial status of Social Security will be driven not by economic conditions but by long-term demographic shifts–most notably, the aging of the population. That trend is generally predictable, because anyone who will receive retirement benefits during the next 62 years has already been born.*"
The privitization portion of the scheme consists of 3 points :
"*Allowing workers to divert 4 percentage points of their payroll taxes, up to $1,000, to a personal account, which would belong to covered workers;
Disbursing the principal and interest in those accounts–in the form of annuities that would supplement Social Security benefits–to workers at retirement or to their heirs if they died before retirement; and
Reducing the traditional benefit by the annuitized value of a notional (or theoretical) account, equivalent to the diverted payroll taxes accrued at the Treasury interest rate minus 1 percentage point.*"
So, there is only a small amount of income diversion being discussed. Also, even that amount is not exactly “taken away from the social security system”. Any money in such an account would reduce the benifits recieved by that participant. If he died, or his account went bankrupt, then some money would have been diverted. But again, we are talking about a small percentage of a small percentage.
It also says this about SS funding under this plan.
"CBO projects that under current law, the government will be unable to pay scheduled benefits starting in 2053 and Social Security outlays will exceed revenues from payroll taxes and taxation of benefits beginning in 2019. CSSS Plan 2 would enable the government to pay the benefits scheduled under that law without transferring additional money from the general fund until 2036. From 2036 through 2050, transfers from the general fund would be required. After 2050, scheduled benefits would fall sufficiently that dedicated revenues would be large enough to pay them in full. "
An just so I can say I said it, the issues with medicare are indeed much worse. It suffers from all of the same demographics pressure and is additionally burdened with ever increasing medical care cost projections.
Debaser, you’re using a much more abstract version of the term “good investment” then I’m used to, but I’ll run with it. If homeowners insurance is a good investment because it protects you from the risk of loosing your investment in a home, then social security is a good investment because it insures that you’ll get at least some of the money you put away for retirement back if your disabled or your 401k or other investments flunk out (in fact, its better, 'cause you get the money back, indexed for inflation, even if your other investments do well, yeah!). Sure, if your investments do well then in retrospect you would’ve been better off not getting SS and putting all your money in your 401k, but then if your house doesn’t burn down you would’ve been better off keeping the money you paid into homeowners insurance and putting it into buying another house.
DeBaser
A market doesn’t have to crash. You can simply have the ill fortune of retiring during a downturn. The 20+ year example is nice, and it is true. Over a 20 year period, markets trend upwards. But it is not linear. If you are in a 2-3 year down market towards the time of your retirement, you are seeing the the bulk of your investment and planned annuity eroded. If you lose 5% of your $10,000 investment 2 years into your working life, you’ve only lost $500 and have time on your side. That same person loses 5% on his diversified portfolio at age 64 on his $500,000 fund, s/he just took a $25,000 hit with serious, immediate implications to whatever retirement annuity s/he was planning.
You are also assuming that everyone, even within your restrictions, will always choose a portfolio that will perform over time. Even that is a bad assumption. There are far too many people incapable of making sound investment decisions who, for whatever reasons, refuse to avail themselves of the knowledge. Does the nation just say, “Screw them, they coulda learned”?
One more minor point: a stop-loss will not necessarily protect you against large losses. If a stock is spiraling out of control, Enron-style, it could hit your stop-loss, trigger your sale order, but not be filled until it has lost far more money. Anyone with a stop-loss at least one tick ahead of yours is in line to have their shares sold first, and the brokers need to find a buyer at that price. [This is more specific to a stock in free-fall, rather than normal trading conditions]
On the other hand, you are absolutely correct about the investment value of insurance plans, and I agree with you wholeheartedly.
For the record, and to clarify my position: I am against privatization of SS. Yes, I would like greater control of my FICA withholdings, and I believe I could soundly and reasonably invest them in a blue chip/AAA portfolio. I don’t believe, however, that even the majority of the working population is responsible enough to do so. I have a very low opinion of the general public’s (and the SDMB is not the general public) decision-making process (sue me, I’m a cynic). I would like the federal and state and local governments to stop using the voodoo accounting they use to support their own poor fiscal management, so reasonably educated men and women interested in government financial affairs don’t need PhDs in accounting to undertand them.