Is social security privatization a good idea

Great Debates
121

No, it would not (as far as I have been able to find out).

[hijack]
We really need to do something about the unfunded liabilities represented by medicare, but the only way to do it is to fix the medical care system. Unfortunately all of the talk in this area has to do with increasing rather than decreasing government involvement in our medical system. IMHO we need to look farther down the road on this issue as well and see if some other arrangements might not achieve our goals without requiring tax levels to skyrocket.
[/hijack]

122

If it were me, I’d set up a perpetual annuity, quarterly adjusted for CPI, with a minimum payout level. That way, if I live only to 66, I’m not throwing away tons of money (but the costs of such an annuity means that you will not get 100% what you put in), but if I live to 126 I’m laughing at the insurance company every time they send me a check.

Do we mandate this, too? Of just let people pull out all their money and then let them live on the streets when they mismanage it?

123

“We?” If I wear a necklace of garlic, will it keep your types away from my Social Security?

Anywho, I get the distinct impression that the plan was to totally privatize (except those at 50+). Are you suggesting that the plan is to do a 50/50, 60/40, or whatever thing with Social Security? What’s the point in that? It would seem that the payouts from SS would be nearly useless at that point.

124

And again, to pull off this parlor trick, a trillion dollars or two will need to be borrowed. Are we setting ourselves up for an Argentina-like crash by doing what they did?

125

You know, all one has to do is look at the Federal Employees Retirement plan. This is a three tier plan. One of those tiers is, you guessed it, Social Security. The other two are the Thrift Savings Plan, and small, very tiny sort of pension. The Thrift Savings Plan is probably exactly what the supposed “voluntary” contribution would be like under the Bush’s plan. We are currently able to direct that our funds be invested in a mixture of the following: Treasury bonds, the stock fund, international stock fund, and couple of others. The TSP will of course, if you’ve chosen wisely and invested a decent percentage of your salary, be the biggest part of your retirement.

The problems with the current plan for FERS employees are these:

The funds are administered by a “board”. We don’t get to vote for those board members. They get to jack us with all kinds of administrative fees. We have absolutely no say in which stocks to invest in. “They” decide which are best for us. Congress gets to borrow from our retirement regularly (and supposedly pays it back). Congress does this whenever the debt ceiling needs to be lifted. I will research this further, but I do believe the proposed Bush plan would work just like this. So, where is our choice?

FERS was instituted in 1984, and those of us joining Federal Employment from that time on were immediately forced into this retirement system. Social Security is one of those tiers. To pull SS benefits from those of us in this retirement plan is blatantly wrong.

Under this plan, we have minimum years/retirements ages. In order to collect my retirement, without penalty, I’ll have to work for 37+ years. I currently have over 21 in. At age 56 I can retire, but of course can’t collect SS. I don’t get to collect on that until 7 to 9 years after I retire. I will receive a small supplemental to make up for that until I can (hopefully) collect SS.

I am certainly not the smartest cookie in the world, but I do possess a fair amount of common sense. The way this scheme is being presented currently, will only cause significant problems for future generations.

126

No. But you won’t need the garlic at all. There is no one after “your” social security. Excepting, of course, that the benifits you might otherwise might expect will be lower. But in exchange, they will be paid for.

Look again at the analysis of the CSSS Plan 2 I linked to. It has a summary of that plan. You can look at the Council to Strengthen Social Security web site for the other plans. They all include plans to partially (and in a pretty small way IMHO) privatize social security. None of them even include as a goal to completely privatize it.

Any impression you get that the plan is to totally privatize social security is coming from somewhere else. I am not aware that Bush or anyone else in his administration has ever suggested such a thing.

Yes, this is true. But without any changes at all we will need to borrow quite a bit more than that. The number you quoted is less than 2% of GDP over 10 years. Without changes, Social Security will be underfunded by close to 2% of GDP per year. Which plan will you vote for now?

127

I am not familiar enough with the plans to know exactly how this part would work. I’d be very interested if you can find more details. The choice, however, is in whether or not to put a portion of your SS contrbution into an Individual Account. You won’t be free to take that portion home. You won’t be free to invest it in anything under the sun. But you certainly will have the option to keep it in the non privatized portion of Social Security. If you decide to do so, your benifits (from the non privatized portion) will be larger than someone who chooses to use an IA.

Even if it is only to keep benifits level with current benifits adjusted for inflation? Even if this is done in order that the benifits can be paid for?

But the way the current law reads there will be much bigger problems. Which would you choose?

128

Hmmm, not sure how underfunded it will be. Left alone, the CBO says it is totally solvent until 2052 to which it can pay out 100% of benefits. Afterwards, it can pay out 80%. It would seem to me, a slight tweak will bring that 80% back to 100%. Unless you consciously scour the sidewalk for pennies, I don’t think any tweak should financially hemmorage your income.

I vote to keep it as is.

129

You repeat this arguement a lot. But of course the only two choices are not between the privatzation scheme and letting the current laws stay as they are, no one is arguing that no reform or changes are needed. Several other non-privatization plans exist that also proport to be able to make the system solvent.

This is a good question. If we allow everyone to manage thier own funds, the media will be swamped with stories of poor and eldarly people who were tricked into investing in snake-oil farms and the like. If we have it managed from the top, then we open it up to the same abuses Tiers mentions exist in the Federal Employee plan. I wonder what would happen if we just took the 2 trillion, had Greenspan invest the whole thing, and then just used it and its interest to cover the deficit in another 30 years.

Here’s what happend to Chilie when they privatized thier system.

130

This is a 401(k) that is used by many private corporations. The funds are actually managed by Wells Fargo, which charges a nominal fee, similar to those by managers of any other mutual fund. It decides which stocks to invest in as any mutual fund does. It has experts who consider what is best and it certainly can do a better job at it than you could. You can retire at age 56, but this is the same or very similar to any 401(k) by any corporation.

What you did not mention is that the government will match you up to 6% for any amount you do invest, and you can invest up to 10% of your salary. This is very comparable to any other 401(k) by any corporation. This is a good deal, and you are lucky you are starting it so young. By the time you are 56, you won’t need Social Security, which would be a mere fraction of what you will get unless there is a real stock market crash – but you can protect against this by investing in one of the non-stock funds, such as bonds, money markets, etc. You probably do not want to put all your eggs in one basket.

So, what’s your beef?

131

Oh, yes. In addition the new FERS (which replaced CSRS) allows a federal employee to participate in Social Security. Under the old system, a federal employee was excluded from Social Security and the employee’s pension was only slightly lower than the pension under FERS, which pension is independent of the TPS (thrift planning system). So, under FERS you get the pension, the TSP (matched up to 6%), and SS benefits. Under the old system, you got only the pension. In addition - if more need be said - if you had paid FICA taxes by working at a private corporation and would be potentially eligible for SS benefits, under CSRS, the SS benefits would be offset by your federal pension, unless you had 30 years of private employment. Under FERS there is no offset against your federal pension.

And you’re complaining you got screwed by FERS? It’s a much better deal than CSRS was.

132

By the way, just to note, I’ve been investing in the 401K at work since I arrived 8 years ago…always up to the maximum IRS-allowed amount in a year and as of the end of last year, the account was worth 97% of what I (and the company match) had put into it over the years (and that’s not taking into account the issues of cost of living…i.e., I didn’t try to convert all of that to “real dollars”). In other words, I would have done better putting it under my bed.

Okay, I’ll admit that I am not the world’s greatest investor but I wasn’t careless either…I was quite diversified and such. Perhaps over the next 15 - 25 years before I hit retirement (being that I’m 40 now), it will do much better. But, it will take quite a good run for me to hit the sort of returns that people who got in at the beginning of the bull market in the '90s are going to end up with.

I’m still glad I have the 401K but I am also glad that I have something less volatile like social security too.

133

Really? Did you look more closely at the level of taxes the would be necessary for such a “tweak”? Look again at the percentage of GDP that the shortfall represents. It amounts to increasing taxes by 10% or more. And this is on top of the increased taxes needed to make up for the Social Security Surplus we’ve been borrowing from. It is also in addition to the addittional taxes needed to pay all of that back. Quite a “tweak” if you ask me.

Wouldn’t it be nice to make a comfortable position such as this available to more people? :wink:

134

Actually, the govt will match FERS contributions dollar for dollar up to three percent, and 50 cents on the dollar up to five percent; not six percent.

The so-called pension under FERS is next to nothing. Your contributions can never increase.

Yes, I can increase my contributions to the TSP. Actually, as a fully vested TSP member I can contribute up to 14% percent. I currently invest half of that. However, with all my other deductions for health insurance, etc. 14% would not be feasible. I’ve still got kids to raise.

Look, I’m not saying that something shouldn’t be done about Social Security. I just don’t think the plan being advanced by this administration is the answer. If I had the answers, I don’t think I’d be working where I work now. I also wonder if perhaps there is a lot of “sky is falling” going on.

Unless you’ve actually been a civil servant paying into the FERS system, you can’t begin to understand some of the mismanagement that has occurred. For instance, the so-called computer system that was going to make things easier for all concerned. Guess what, contractor couldn’t come up with a system that worked properly in the time allotted, board decided (as per contract) not to pay for what wasn’t done, contractor sues and wins, and we the TSP/FERS participants had to pay for work/services that weren’t received. Then a new contractor was brought in and he had to be paid too. There are other abuses too; what makes one think this couldn’t happen with the plan being advanced by this administration?

My gripe is that my SS benefits could possibly disappear. This is supposed to be part of my retirement as outlined to me by my employer, the US govt. Now they’re talking about decreasing or not giving me my benefits when I’m not of age? That really my total gripe. I was told I had a package deal and now there’s a possibility of the government reneging (what surprise) on this.

As to plan managers investing my funds; I agree up to a point. I’m certainly not a Wall Street expert. I may even concede a little on this issue to previous posters.

And finally, as so many have asked here, where is the govt supposed to get these funds to get the ball rolling? Will the government fully fund this; or, like they have with their performance based pay systems for certain government agencies, will they mandate it, and then not fund it? Consequences of those new pay systems are nobody receives raises; period. Yet, cost of living goes up, cost of health benefits goes up, and what these folks see is a net DECREASE in pay. I see the almost the same thing happening with the plan advanced by this administration. Where’s the safety net?

135

It is available to all people now (401K’s, IRA’s, and the like). Admittedly, those with lower incomes tend not to put much away in their 401K’s since they are pretty much spending all of their income.

But, as we have seen, even including the individual accounts, almost noone born in the years 1940-2009 (which is what they considered) is predicted by the CBO to come out ahead in the long run, in terms of present value of lifetime benefits, under the plan they analyzed. (See Table 4.) This is even true under the assumption that under the current plan the benefits are paid at the reduced rate from what is taken in each year once the trust fund is exhausted in ~2052.

So, really the question if we are to adopt that plan is whether we want to trade off the reduced benefits that will occur for the fiscal advantages of that plan. It is not a question of giving people more, at least as far as their total (not privatized + privatized) benefits are concerned. (Of course, this is all modulo the issue of how good the CBO estimates are.)

136

Yes, quite. The most money saved under the proposed plan is through benifit reductions compared to the current law.

According to that table, the expected lifetime benifits show less of a decrease, compared to current law, than the yearly benifits listed in table 2. They must be counting on a substantial increase in longevity. Hmmm.

The point of the Individual Accounts, however is not to guarantee an increase in benifits compared to current law. It is to allow some people to take advantage of the wealth being created in the economy as part of their retirement.

I’m afraid I’m going to have to remember this thread the next time you suggest that poor people do not have the same sorts of investment vehicles available to them. :wink:

Yes, exactly. That is the essential question. Are we willing to make the decision to take some small reductions in benifits in exchange for fiscal responsibility. Even if those reductions are accompanied with the option to increase said benifits.

I suppose essential to answering the question is whether or not the resulting benifits accomplish the purpose of Social Security. Assuming the sorts of lifetime benifits listed in table 4, what do you think? It that level of benifit sufficient to keep the elderly off of the poverty roles? Is there some other purpose of Social Security that this plan does not address?

137

But where do you get this idea? Its not part of any of the plans I am aware of.

I agree with you that “sky is falling” rhetoric is going around. It is going around on both sides, however.

138

Well, I am not really sure what you mean by that. As the benefits are currently indexed to wages, it is effectively taking advantage of the wealth being created in the economy. (There is an issue with median wages not having kept up with the wealth being created recently but I believe that isn’t really true of mean wages, which is how I would assume they are indexed…although this is an interesting question now that I think about.)

What the proposed system is doing is basically decoupling this into two parts - most of your money goes to the traditional system but with benefits now indexed only to prices which means it is not rising with the overall wealth of the economy and some goes into the private accounts which will presumably rise with the wealth of the economy but with more volatility plus the possibility of not doing so if you don’t invest wisely.

Well, my phrasing was careful here. I.e., I recognized that in actual practice it is difficult for the poor to find the money to put into the 401K’s.

No, I am not really sold on it, although perhaps not quite as unhappy with it as before I knew the details. I would also like to see more analysis of it by people with similar views on issues of poverty, inequality and so forth.

139

Taking advantage of, yes. But not in the same sort of participatory way. Current law links benifits to the economy, the proposal allows individuals to participate in a different way.

Well, price indexing should reflect the growth of the economy in an idirect way. Just as wages do. Its just that the indirection is different.

Yea, I know. Just teasing. I remember a discussio about welfare in which you or another poster suggested that just because a person is free to do something does not meant that they can, and that helping them is akin to actually making them free.

I rather like the plan. I am somewhat skeptical of some of the claims. I’m going to wait to see actual legislation (or more likely an analysis of it) before I am sold completely. I’m especially not sure that reducing benifits compared to current law in the way they are proposing will really fulfill the implied promise we have to our just about to be retired people.

140

You’ll have to justify this statement because I don’t think it is true. The whole point of the consumer price index is to factor out that component of rises in wages and prices that aren’t any sort of increase in wealth but are simply due to a change of scale…that is a change in the purchasing power of a dollar. There have been some arguments made that this factoring out might be incomplete in that they don’t completely account for quality improvements in products, but in principle that is what they try to do. (I was just reading a book on statistics that talked about the CPI and gave a specific example of a year-to-year increase in the price of cars in some specific year from the early 80s I believe, saying what part of the price increase they decided to attribute to increases in quality and what part they attributed just to inflation.)