Is social security privatization a good idea

Great Debates
61

I think you are correct on both counts. This is the summary from the CBO analysis:

“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;”

So it is not 4% of their SS contribution, it is 4 percentage points of their taxes. But again limited to $1000.

So, Ok, we have a maximum of 33% of the social security contributions going into Individual Accounts. Its not anything like that because of the $1000 cap.

From the analysis:

“Under CSSS Plan 2, Social Security revenues drop from about 5 percent of GDP to 4.2 percent of GDP in 2007 as payroll taxes are diverted into IAs”

This puts the amount of money diverted from Social Security at 0.8% of GDP? Is that the right interpretation? I make that something like 96 billion dollars (assuming GDP of $12 trillion), right?

This is the yearly figure for 2007. It still amounts to less than 1 months trading on the NYSE. And less than a 2 percent of the NYSE capitalization of the top 100 companies.

62

Yes, it is. The money not spent on current benificiaries is used to purchase special treasury bonds. It is not the same as investing the money on behalf of the payroll taxee (because of the oddness of borrowing from oneself), but it does earn interest. It is not accurate to say that the money is simply transfered to the general fund.

63

Nope, it is not. When describing Social Security, an insurance analogy is closer to true than a retirement investment. You pay $x and expect to be able to receive $y, depending on the circumstances. In this case, $y is a perpetual annuity upon your retirement.

Like insurance, there may be circumstances where you never get a ‘return’ on the funds you ‘invested’. I buy fire (homeowners) insurance on my house - I hope never to collect my investment back. I buy life insurance, and I hope to be paying into it for another 35-40 years before anyone collects on it. In the case of SS (retirement insurance), people do hope to collect on it.

Social Security is not an investment. You may want to think of it in terms of return on dollars contributed, but that’s incorrect. It’s an insurance plan promising annuity payments after retirement. How the government manages the contributions and budgets the annuity for future beneficiaries is, of course, open for debate.

IMO, if one is going to privatize SS (and I’m not sold on the idea), acceptable investment vehicles should work similarly. You contribute to a fund which pays a perpetual annuity, with a guaranteed minimum, upon retirement. This annuity needs to be easily transfered so that you don’t lose the annuity value should you wish to change investment firms. And payments into the retirement plan still need to be mandatory.

64

Social Security is not designed to make you rich. It is designed to make you not poor when you reach retirement age. There’s a huge difference.

65

What makes you think that the stock market is a zero-sum game? As total productivity is increased by technological advances, discoveries of new resources, etc, the total value of the world’s capital increases correspondingly.

66

One of the things that makes me suspicious of this privatization thing is that, if the stock market is this magic 12% money making machine, why, so far as I know, aren’t the US gov’t or other gov’ts already heavily invested in it? After all, I doubt any institution can borrow as much $$ as the US gov’t, and it only has to pay that T-bill interest of 3-4% on its borrowing. So why haven’t we just borrowed a crapload of cash and thrown it in the stock market and then used the interest to gild the capitol dome in gold and buy every citizen a turkey on thanksgiving.

And in 1983 when it was decided to allow the SS system to collect surpluses, why weren’t these surpluses invested in the stock market, instead of putting it into T-bonds where it both collects less interest and has to be paid back by the federal gov’t later.

67

I don’t think that you’re correct. I’ve always understood that the funds go into the general fund to be spent like any other government revenue.

I’m searching for a cite that can tell us one way or another and not having much luck. I have found some interesting things:

The Cato institute has a calculator to calculate your SS bennefits based on your age and income.

Just to balance things out, here is the AARP page on SS.

68

I’m not sure what part you are disputing. That the stock market exists? That the values of stocks publicly traded goes up over time? That the average rate at which they go up is 12%?

These things are all facts.

I, and many others, would object if the government started taking our regular tax dollars and investing the money in the stock market. That’s not why the government collects taxes. They are collecting taxes to pay for the expenditures that keep the government functioning. Whenever they are collecting more than they need, they should pay off deficits or give us a tax cut.

Great question. They should have decided to invest SS taxes from the very beginning when SS was first set up. They should have decided to invest the surpluses in 1983. They should let us invest our money now.

69

Dude, we did this back in the first page. I gave you a cite. Here it is again cite redux

Again the basic jist is that the SS fund buys treasury bonds, and the money used to pay for those bonds go to the general fund.

70

That cite doesn’t work for me. Maybe that’s why I missed it the first time around?

Even if true, this factoid actually just strenghens my case. If some leftover portion of SS is already being invested, we haven’t seen any disastrous consequences because of this! Why not invest more? Why not invest in vehicles with a higher return? Why not re-invest earnings to take advantage of compounding interest?

If it’s true, then this is a step in the right direction. But, only a baby step, and one that needs following up on.

71

Not really disputing any of these things (though I’m suspicious that the 12% number might factor in the late 90’s tech bubble, which probably is an outlier), what I’m saying is that all these things have been known for a long time, and the fact that much more knowledgable people then I haven’t taken advantage of them makes me think that they saw other factors I don’t see. I’m asking if anyone knows what those factors might be.

In 1983 they had collected extra monies but a group headed by Alan Greenspan (who apparently has been running our economy since WWI) specifically decided not to invest it in the stockmarket (I’m using stockmarket as a shorthand for non-gov securities). One possible reason was that the market had been flat for sometime, which raised the question, is this likely to happen again and if it does what would be the effects.

So…your against privitization now??

Yeah, I can’t imagine why they wouldn’t have trusted their cash in the stockmarket in 1935 :slight_smile:

72

Well, this is correct and not correct.

According to the Social Security web sit question and answer section (www.ssa.gov)

“QHow are the Social Security trust funds invested?
AThe Social Security Act specifies that the trust funds can be invested only in securities backed by the full faith and credit of the Federal government. These securities may include regular Treasury bills, notes, and bonds that anyone could buy (called “public issues”), or ones that are issued only to the trust funds (called “special issues”). Since 1981 the Treasury has invested trust fund assets only in special issues. Currently, less than one hundredth of one percent of the assets are invested in public issues.”

"QDo the Social Security Trust Funds earn interest?
A*Yes they do. By law, the assets of the Social Security program must be invested in interest-bearing government securities or in securities guaranteed by the government as to both principal and interest. The Trust Funds hold a mix of short-term and long-term government securities. The Trust Funds can hold both regular Treasury securities and “special obligation” securities issued only to federal trust funds. Almost all the securities in the Social Security Trust Funds are special obligations.

The interest rate on special obligations is set monthly as the average market yield on long-term Treasury securities. Interest from investments in 2003 amounted to $84.9 billion. This represented an effective annual interest rate of 6.0%. *"

Now, since these “Special T-bills” are sold by the government, you are also correct to say that the money goes into the general fund. That is, the Government issues a special treasury note to the trust fund and then takes the money in exchange. The only thing I’m saying is that it is not true to characterize this as simply moving the money into the general fund. There is a promise to pay it back with interest. And FTR, I think that if we renege on even one of these notes all bets are off. Imagine what would happen in the world economy if the United States Government announced they were not going to honor a federal treasury note.

All I’m saying is that the situation is more complicated than to claim that the government is stealing the trust fund. Just as it is more complicated to claim that the money is gone entirely.

On review, Malodorous gave a better site.

According to this site there was some discussion about investing a trust fund originally.

73

Not a “lot.” I am still in the negative after three years. While I can be happy to know Bush won’t be around much longer, destroying the economy, the legacy he’s leaving will make it that more more difficult to realize the “riches” many think they will have with privatization.

Curious tho, have you considered the additional costs that that would incur?

• management fees
• paying insurance premiums to private insurance companies for the same level of protection that Social Security offers (I promise you, the government will not offer any help in this area)
• bearing a burden to pay for the transition from one system to the other

What of the exposure to labor market risks that is greater for women and minorities than for others?

That link between the labor market and individual accounts essentially punishes women and minorities twice. One: they have lower lifetime earnings than men and whites and thus proportionately lower savings. Second: they accumulate fewer savings for each dollar they put away because of greater fluctuations in employment and wages.

If my above mentioned (mutual funds) situation was different and I was ready to retire, my annuities would be dratically reduced. Presently, Social Security benefits isn’t dependent on the stock market.

74

I haven’t yet seen anyone ask the basic question, what is the purpose of Social Security? What are we expecting it to do?

Only when we agree on that can we answer the question of how to better achieve that purpose.

At present, Social Security isn’t an investment plan, as has been noted. It’s not a vehicle for wealth accumulation or for creating inheritances to be passed down to succeeding generations. It’s simply a government program to ensure that elderly citizens have some sort of base income in their declining years, regardless of the path they’ve taken through life up to that point.

There’s nothing that says that has to eternally be the purpose of Social Security, of course. But if we expect it to do more than it’s doing now - to give elderly citizens a base income in their old age, and enable their children to inherit something from them - then there’s going to be an extra cost, right there. Right now, Social Security saves a fair chunk of money by only paying out to actual retirees, rather than to retirees, the descendants of deceased retirees, and to the descendants of people who didn’t live to retirement.

In this sense, Social Security is exceedingly efficient. It’s got a limited and clear goal, it’s able to achieve it, and it’s cheaper on account of its limits. In my private savings, I have to make sure there’s enough money to last me until I’m 105, because I just might live that long. Social Security doesn’t have to tax at a high enough rate to provide for the possibility of everybody living to 105; it can save money due to the fact that some will die sooner, and others won’t. But in a privatized system, we have to put away enough money to cover the possibility of everybody living that long.

That’s going to be a pretty hefty extra cost. I think it’s kind of bizarre to try to ‘reform’ an allegedly financially troubled system by asking it to do more than it’s already doing. You’ve got to ask, is the added benefit (a) affordable at all, and if so, (b) is it worth it? Is it important enough to us to pay for it?

I’m definitely in the ‘no’ camp on this. Sure, there’ll be ‘winners’ (those who live to 105) and ‘losers’ (those who die the day before they retire), [Mellencamp]what do they know, no, no no?[/Mellencamp] But when we’re 25, most all of us think we’ll live forever, and we don’t know who the winners and losers will be. All I want is to know that if I make it to my declining years, I’ve got that income coming in; otherwise, let it go to someone who needs it, because I won’t.

And being in that camp puts me in the ‘no’ camp with respect to privatization, for each dollar in individual accounts - even aside from all the other problems of privatization - reduce the pooling-the-risk aspect of Social Security, and increase the extent to which we all have to self-insure the possibility that we might live to 105, driving up everyone’s ultimate cost.

And if you feel the benefit of potentially leaving money to your heirs through Social Security is worth the price, then you get to wrangle with funding the $2T transition cost, and all the other prospective problems.

75

But “some”? Something is better than nothing, no?

I don’t know what this means. You’ve only been investing for three years? You’ve been in the negative for three years? I need a lot more information for this to have a meaningful context. How long have you been in the market?

It would be nice if we could have a discussion about anything on the boards without the mindless Bush bashing.

Management fees are very small on index funds. Usually they are about .05%. That’s what I pay on my funds. These funds are very widely diversified and end up beating most mutual funds anyways.

Why would you need to pay insurance premiums to private insurance companies? Some of the anti-privatization arguments seem to require big assumptions like this to be made that are sort of from left field, IMO. Why not simply leave the insurance aspects of SS alone for the time being? Why assume that this has to drastically change?

There wouldn’t be too much of a burden to transition from one system to the other. 401K’s and IRA’s do this sort of thing all the time without any problems.

This is silly. Anybody who makes less will get less out of the existing SS system when they retire already. It’s not exactly fair to put a burden on those of us who want to fix social security to have to create some sort of utopia of equality for all citizens while we’re at it. :smiley:

You’re social security benefits presently aren’t growing at all. Some growth, even if it flucuates and is less than expected, is still better than no growth.

76

As pointed out by others, the surplus money is in fact invested and note that the underlying effective annual yield last year (from pervert’s cite] was 6.0%, which is higher than your claimed ~3% for TBills, and not so bad in a time of low interest rates where banks are offering only on the order of 1% or so on their accounts (and not all that much more on CDs).

But, how is one supposed to invest the money that is to be paid out to today’s retirees? The point is that social security is not a vehicle for you to invest your money. It is a social insurance system.

And, how much you get back is determined not be what sort of money is earned on investments, but rather by how the law mandates the money gets paid out. And, right now the formula is quite complex, with the payouts overall indexed to overall wages. Under the proposed Plan 2 from the commission that we have been talking about here, the indexing on the part outside of the proposed individual accounts would change to being indexed to prices, which would (if you really insist on looking at it from the point of view of an investment) mean a reduction in the rate of return on that portion over what you would get otherwise, assuming that wages continue to rise faster than prices. (Of course, in return, it is argued that we extend the solvency of the system from the estimated ~2050 date when it would first be unable to pay full benefits into perpituity.)

77

Three years ago, I took a huge hit on my funds. I lost all my gains and some of my own money. Based on what I had in my funds at the time (actual money I put in and gains from the market) I am in the hole. I am still waiting to get back to the initial money I put in.

You can call it mindless Bush bashing, but investing isn’t just going to happen. There are a lot of variables that play into the market. You are failing to admit how an administration affects the market. To deny that lessens the credibility of the argument.

Actually, Social Security pays proportionately higher benefits to low lifetime earners than to high lifetime ones.

But that’s my point…I presently have negative growth. Of course, I could simply put all the money in the bank and earn a simple low guaranteed interest.

Also touching back on labor market risks: workers’ earnings are below average in a recession, when it would be most opportune to purchase stocks because of a concurrent stock market decline. Which leads me to my next point. I thought the Social Security system was more less created the way it is so it would be unaffected by the volatility of the stock market. It was never meant as means of lone income.

78

Chuckle. You believe what they say, I don’t. I think they’re evil bastards lying through they’re teeth, and they’ll say anything to get at my money. Why else would they create an artificial crisis about social security? Sure, they’ll say it’s voluntary, just like they said they wouldn’t do any nation building and they would maintain a balanced budget and they said there WMD’s in Iraq. The difference between me and you is that I know lying bastards can’t be trusted and you drank the kool aid.

There you have it a nutshell. Lying corrupt officials who have been exposed still have your implicit trust. Say, wanna buy some WMD’s in Iraq?

There’s a difference between not UNDERSTANDING something and not BELIEVING something. I believe they are trying to get their hands on my money, and anything they start off with is just to set us up to take more, and without me volunteering.

Were’ not talking about last night’s basketball scores, we’re talking about tonight’s basketball scores, i.e., we’re projecting, not proving. The fact that many people, including US Senators, well-established political organizations, etc., share my opinion are either worth citing because they prove it’s not that unsual an opinion or they aren’t worth citing because they are still just opinions. It’s dumb to even ask for a cite about opinions on what is likely to happen in the future.

What’s “left” about not trusting lying bastards with my money? That’s kind of an apolitical stance. A small-government solution would be to abandoned social security all together. To take it anyway and give it to someone else is still big government, it’s just corrupt big government.

79

Not sure if you’re being sarcastic, but it is voluntary. I know several people, who coicindentally are government workers, who do not contribute.

80

RTFirefly I agree with your basic point that we need to examine what we want from SS before we decide how we want to fix it. I also agree with you that personally I don’t want it to serve as an investment vhiecle, I have other money set aside for that sort of thing, I want it to be a guaranteed payout when I can’t work.

A nitpick though, I think your wrong in this:

emphasis mine.

I’m fairly certain that SS does make some payouts to your spouse and dependent children in the event that you precede them in making the big exit. The AARP website says: “If you’re still working, you probably don’t realize Social Security is protecting you right now. Thanks to Social Security, you have disability and survivor insurance for you and your family.” which I take to mean that if I bite the big one, at least some of my cash goes to my wife and any dependents I might have. Of course it’s not as flexable as a real trustfund or the like would be, but it already fulfills some of the inheritence functions that the pro-privitization folks would like.