SS helped pay for college when my father died before I entered. Of course, the caveat is you cannot make XX amount of yearly income.
You’re telling me that social security is voluntary? I must have completely missed the “Pay FICA” checkbox on my W-2.
The plan is strictly damned if you do, damned if you don’t. Even a non-profit-oriented* entity like Vanguard charges at least $10 a year in fund maintenance per fund: initially the fund managers will have to add at least an additional %1 to normal mutual fund fees to pay for the overhead in managing millions of tiny $1000 accounts (help desk centers, mailings, etc.)
So unless the plan is planning on investing more than that $1 or $2 trillion, again, don’t count on big returns.
Believe me, I would be all for a privatization if it could be done in an efficient way without jeopardizing the debt, but it can’t now, with the deficits we are running. We could have started the process before Bush and friends started to mess up the budget, but we need to wait for the next good time to start it. Hint: this probably will not occur until most current Republicans are out of office.
*not sure if I can write “non-profit” here, since it is a mutually-owned company, owned by the investors, and thus is not beholden to outside investors.
This is especially impressive when you consider that according to the COB plan linked to by pervert back in the first page, the return on the privatized accounts is supposed to be 5.2%, with .3% skimmed off for administrative costs for a total net gain of 4.9%. The report goes on to say that this is a higher then expected return then that on Treasury Bonds, but it estimates the return on Treasury Bonds as 3.3%, apparently using the rate for the bonds available to Joe Shmoes like me and not the super 6% bonds the gov’t somewhat bizarrely sells to itself.
The section I’m talking about is under the heading Analyzing Alternative Investments if anyone wants to check it out.
Yeah, like I said, it’s only good for dependents and spouses, which you wouldn’t be if you were earning your own living. So it’s not as good as a private investment account as far as leaving your money behind, but it does at least partially fulfill this function.
It does indeed. Many years ago, I even knew a guy who was on the receiving end of that benefit: his father had died when he was young, and he got Social Security benefits while growing up.
You’re right, I should’ve mentioned this.
That’s more debatable. Obviously, what ‘they’ want depends on which ‘they’ you talk to, but the pro-privatization folks I hear from seem to be entranced with the idea that everybody might be able to leave the principal of their private Social Security account to their heirs - IOW, we’re talking about inherited capital, not mere insurance.
And this is a situation where insurance works, and accumulation of capital doesn’t. Because fathers dying while their children are young generally haven’t had time to pay that much into Social Security to begin with, and not enough years have passed for compounding to be much help. So the income from a Social Security survivor benefit is more likely to be useful to the beneficiary than the inherited corpus of a private account would be.
According to the link, the 5.2% overall pre-admin costs rate of return is based on a 6.8% return on equities. My question: is this a reasonable expectation over the long haul? For instance, what sort of long-term relation is there between the rate of GDP growth and the return on equities? (I’m assuming there’d have to be a fairly strong connection; I just don’t know what it would be.)
The way I see it, after looking at several pro-privitazation websites, is that it is basically
a) The investing won’t help the poor. Whatever pittance the 12.5% may buy them, their returns will not be great, and neither will they be assured. While the social security fund is already in debt and realistically isn’t assured either, it is backed by the government. Investing in a private fund would be risky for most poor people, who don’t understand the complexities of the market, and many would probably be taken advantage of. What little gain they did have at one point would probably be a trivial amount - you don’t make money off the market unless you get really lucky or invest substantial sums of money. It also opens the possibility to LOSING all of your money. It is gambling with your retirement fund.
b) In fact, not only does this not help the poor, it is a poorly hidden move to help the rich (because they suffer so much only owning one summer condo). They certainly don’t need their 12.5% of their paycheck going to social security; they would rather invest it, which is a more substantial amount, on their own. In essence, getting rid of that pesky social security tax that FDR introduced. It is a tax break for the rich people.
c) Social security is not entirely a retirement fund. Social security money goes to many other sources. It goes to disabled persons. It goes to widows/widowers. It goes to situations like death or birth in the family. In general, it goes to that evil of evils, welfare. This concept of investing the money privately instead of pooling it is absolutely horrendous to anyone relying on social security money for any other way. A young or middle-aged person who is or becomes disabled will run out of their privately invested “nest egg” very quickly, and what then?
Malordorous, the link I cited from the Social Security Administration claimed a 6% return in 2003. The CBO assumed a 3% return over the long run. I think the CBO number is a better estimate for the long run. I have no idea what the historical performance is of these special T-Bills. But also from that cite, it does fluctuate with the market.
I found a more detailed discussion of these special T-bills. It suggests:
“The formula is designed to give an interest rate equal to what private investors would get if they purchased new, long-term Treasury bonds. The rate, therefore, does not give the trust funds any advantage, or disadvantage, compared to the rate the Treasury would need to give to private investors if it had to raise money through the sale of bonds to the public.”
The paragraphs around the chart in the middle of that page give a possible solution to the difference between the CBO number and the SSA number I cited. The rate of return on the bonds that the Social Security Trust Fund now owns is calcualted not with current values of treasury bills. IT is calcualted with the interest rates that are attached to the special T-Bills at the time they were issued. This means that SS still has a lot of bills from the 80 and nineties when interest rates were higher. The CBO analysis was attempting to use a figure for expected returns from treasury bills over the next century.
I hope this helps.
RTFireflyMy understanding is the 6.8% expected return is pretty conservative. I’m not sure I can prove it, but the last time I remember looking the average return on an investment in the stock market was something like 8%.
Ottenok did you read the COB report I linked to? There is a lot more to this plan than simply putting some of the FICA money in the stock market. It also includes, for instance an increase in the miminum benifit. This means that poor people who do not contribute as much to the fund will get a larger benifit from the non privatized portion of SS.
It lumps in everything from the specified time period, including the outliers at both extremes (the 1990s bubble, the 1930s Great Depression).
I would like to emphasize this. The biggest change by far in the proposed Plan 2 wold be this reduction in expected benifit payouts. Almost everyon participating in Social Security would expec less money than the current law mandates except the very lowest economic rungs. In exchange for this lower benifit, we allow those participants to keep some of the money they put into the system.
This seems like a reasonable exchange to me.
I know everyone is nervous about changing Social Security to a privitized system but the more important change is to control benifits over the next century. We have a chance to modify the benifit structure to save the system without reducing benifits to current or near term retirees. We are going to have to move funds from the general tax base into the social security system pretty soon anyway. The current law does not provide for this. If you look at the CBO analysis (Table 1B) you will notice a line called “Automatic Benifit Reduction”. The current law simply has no plan for what to do when the money from the payroll tax and the trust fund runs out. And if we wait until then, we will have to adjust taxes or benifits to a tune of 2% of GDP. And that will be after decades of adjusting to increased taxes or reduced government programs in other areas to make up the funding shortfall as a result in the social security surplus evaporating around 2019 or so.
Most of this is made up in the Plan 2 by changing the benifit payout structure. Some of it, however is made up by assuming that participation in the Individual Accounts will reduce the benifit liability as well.
Your statement about the minimum benefit is true as far as it goes, but I don’t think your last statement really is. Here is what the CBO says:
(Bolding mine.) I.e., the point is that the change in the indexing would be the dominant effect, especially in the long-term. And, while the “low-earner enhanced benefit” might partially offset this, there is no indication that those folks come out ahead compared to current law.
And then there is this unwieldy paragraph in the CBO report:
After parsing the first sentence several times, here is what I think it means: Annual benefits, including the portion from individual accounts (IAs) would remain stable in inflation-adjusted dollars. However, because wages tend to increase faster than the level of inflation of time (i.e., they increase even in real terms), these annual benefits will look smaller and smaller measured as a percentage of one’s annual salary before retirement. This is in contrast to the current system where the indexing is to wages so that the annual benefits over time remain stable measured as a percentage of one’s annual salary. [When I say “one’s salary” here, I am of course talking about averages, as the payout to a particular individual depends on lots of factors including their work history and so forth.]
The second sentence just points out that because life expectancy will presumably continue to increase, the total payouts per person will increase in real dollars even though the annual payouts remain the same in real dollars.
The third sentence tells us that the benefits of this new plan will be less than those of the old plan under the assumption that money was somehow transferred from the rest of the budget to continue to pay full scheduled benefits once the trust fund was exhausted in roughly 2050 (by best estimate). However, if we assume that the old plan would only pay the amount that it could within its own budget once the trust fund is exhausted, then the benefits at that point under the old plan would actually be less than under the new plan. (I assume that this strictly refers to the years immediately following the budget exhaustion.)
Hope that is all clear to everybody now! 
Just to be clear, this is all meant “over time” not relative to the current system.
Also, I used the term “old plan” to mean “current system” in what followed.
I’m not sure this is the case. Look at Table 1B. At the bottom is shows balances for the current law and Plan 2 for various economic quintiles. Notice the 90th percentile. Their balance increases drastically under Plan 2.
If we look at Table 2, which shows expected benifits for the lowest quintile, we see that for the 1950s, and 1960s, cohorts the benifits are increased when compared to the Trust Fund Financed Benifits for that group. After that the benifits decrease compared to the same measure. However, I think they do not increase as quickly as those same benifits do for the other economic groups.
Specifically the 2000 cohorts in the lowest quintile get $8900 instead of a funded $9800 or a $13,000 scheduled benifit. Meanwhile the 2000 cohorts in the highest quintile get $20,800 benifit instead of the funded $28,400 or $37,600 scheduled benifit. That looks like a 10% or 32% change for the lowest quintile but a 27% or 45% change for the highest quintile. (I hope I did that math right).
The idea is to lower benifits for everyone, lower them least for the lowest economic quintile, and lower them least for those who will retire very soon. As a general principle, privatization or not, we have to do this or gird our loins for some very large tax burdens.
I agree with your assessment of that paragraph. I think this is one reason they broke out the “Trust Fund Financed Benifits” from the “Current Law Scheduled Benifits”.
Not getting overly optimistic are we?
Because, chuckle, the Republicans don’t lie. Not about money, anyway. Nothing to worry about. La la la la.
Dude, do you have a single salient point to add to this discussion? An alternative plan, perhaps. A single cite worth posting even?
Kerry’s answer of basically leaving it alone was right on the money.
In other words, the answer to the question is NO.
The answer to the question in the OP, that is.
The Washington Monthly blog has had a few posts discussing this issue, here’s one. The basic gist is that if the market does well enough to give a ~7% return, then the economy will probably be doing well enough so that SS will stay solvent without changes.
From a blog associated with a progressive magazine, so obviously not a great cite, but it’s the only thing I’ve read on this part of the issue. And even if the numbers aren’t reliable, the idea that assumptions of stock profits are made with out taking into account the same effects that are predicted to sink the SS system is worth watching out for.
Well, I don’t think I will disagree with that. But, it is not in contradiction with my previous statement that the minimum benefit does not increase benefits over current law but merely partially offsets the decrease that would otherwise result.
(On looking at Table 2 again, I do agree that there are a few of the lowest income people who are close to retirement now who are projected to see a small increase in benefits. I had missed them. But, the majority of people will see a drop…And, that drop will tend to increase over time.)
Well, I would argue that the best way to have done this was to never have enacted the Bush tax cuts, or at least the large part of it that goes to upper incomes. That worsened the fiscal situation in the part of the budget where it was already bad. Perhaps, we should fix that first and then worry about fixing the fiscal situation of the part of the budget currently running a healthy surplus that might be running into trouble 40 years down the road?
In other words, before people sell me on social security reform, I want them to show me that they are serious about having the payroll taxes go to paying for social security rather than being skimmed off almost indefinitely to pay for budget problems caused in large part by tax cuts for the wealthy.