Privatizing Social Security.

Great Debates
41

Kabbes, that means we got three actuaries regularly posting to these boards (me and december bein’ the other two)… What are the odds of THAT?

Anyway, just to get a bit into the fray:

Chile started a fully privatized social security system in the early 1980s. It has been a very successful experiment, copied by a variety of countries, including Poland and Mexico.

It works roughly as follows: there are a number of registered social security funds (I think around 12 in Chile, if memory serves.) To be a registered social security fund, a company must meet various government requirements; in Chile, the funds are all joint-ventures between banks and insurance companies.

Each employee selects which fund receives his social security contribution, and the funds compete for the business. They advertise, again within some government regulations, and try to show how their investment strategy out-performed their competitor funds. The employee can move his money from fund to fund (there are restrictions, such as once a year.)

Each fund works like a savings plan: the employee’s money accumulates investment earnings each year. It’s not an unlimited investment market, so that the fears expressed in this thread of crummy investment choices, etc, are covered.
In addition, some of the employee’s money is used to buy life insurance and disability insurance, through the insurance branch of his fund.

When the employee gets to retirement age, he has several options, including taking the payments stretched over a period of time.

This is not the system that I’ve heard discussed in the U.S., but I wish we did. The Chilean system seems to combine the best of government-run and competitive market-driven. The government does what it does best: regulate. The funds do what they do best: compete. A very interesting system, IMHO.

42

Kimstu:

I don’t disagree. I would quibble about who we define as “the needy,” but that’s a minor quibble within the scope of the discussion.

Hmmm . . . I don’t know about that. I think the problem lies more in the fact that, in a totally privatized society, other people would fail to meet the goals of altruism that you (the generic you) would prefer that they have. Besides, as my Jewish brethren say, “Whoever saves one life saves the world entire.” :wink:

Well, nobody’s proposing that we ban the consultation of investment professionals or fund managers. When my income and my savings grow to a certain point, I fully intend to consult one. It would take an unwise, even (dare I say it) a stupid person not to consult someone who is more schooled in the ins and outs of financial management.

And God forbid we each undertake a huge amount of work. The effects could be devastating. :smiley:

43

Phil replied to me: “realistically speaking, most of us in a totally privatized society would probably fail to meet our theoretical goals of altruism.” *Hmmm . . . I don’t know about that. I think the problem lies more in the fact that, in a totally privatized society, other people would fail to meet the goals of altruism that you (the generic you) would prefer that they have. *

Well, that would be a problem too: if everybody is thinking “more should be done to alleviate suffering, and other people should do it”, then it sounds as though not enough is being done. At least a universal entitlement supported by tax revenues represents some kind of social consensus as to what our obligations are, albeit a very imperfect one.

44

Socialist Insecurity is nothing but a Ponzi scheme.

45

I have to weigh in on the privatizing side. By the time I’ll be able to collect social security at (68 or 70) I expect there to be a means test or some other catch that will keep me from collecting a nickel of my money back from the SSA.
Really, government has no business running a program like social security anyhow and it points out why government has no business in health care either. They always end up screwing the sorry taxpaying bastards like me that pay the bills. Just remember, congress and the prez don’t pay FICA and they retire pretty well.

I already do, and it takes 22 percent of my paycheck because I fully expect to get screwed by the feds!

Now that’s scary. Gee, that would make it a TAX instead of a contribution, wouldn’t it ? So if I’m a pro basketball player making 40 mill, I contribute 2.8 million a year to SSA so I can get $1,800 a month after age 70 ?? I’m laughing so hard I may bust a gut.

46

How so?
Peace,
mangeorge

47

PunditLisa (in, of all places, a Pit thread about Tupperware parties—and it actually wasn’t a non sequitur!) provided a good summary of the differences between Social Security and a Ponzi scheme.

48

>1. I am sorry, but someone can be quite bright and intelligent, and still not be able to properly understsnd the in & outs of annuities, IRA/s, and other retirement plans, and still not be “wilfully stupid”. Especially when a fast-talking fiancial “expert” is giving you “advice”. So I guess what we will have to do is put the pldennisons on a board, and when some 70 year-old couples retirement plan goes bust, this board makes a decision on whether or not the old folks were 'wilfully stupid", whereupon they get stamped “stupid”, and are sent out to starve to death. :rolleyes:

>2. OH, I do donate, and serve on boards & commisions & such. But as far as “aid” goes, I want all of us to be required to give, so I know WE ALL are giving to help.

>3. I know of NO-ONE who counts on social security for a “prosperous” retirement.

>4. personal attacks & name-calling. Right.

49

The question we should be looking at is not the scholasticist argument as to whether someone who makes a bad investment in their youth deserves to starve in the street or not.

The question ought to be whether a society in which elderly people regularly starve is or is not preferable to one in which they do not.

After deciding which is the case, we may then decide how we are going to go about securing that end.

50

If they don’t understand them, they should consult a licensed financial planner.

Gee, that accurately represents my position.

I never thought you’d actually own up to the fact that you intend to take everyone’s money at gunpoint to satisfy your own need to feel altruistic. At least you’re honest.

Hey, you’re the one who insinuated that I don’t understand the difference between the mentally retarded and the willfully stupid. Are you standing by that statement?

51

Note that in your 1st mention of letting “the stupid” starve to death, you do not differentiate as “wilfully” stupid. Forrest Gump was “stupid”. I have no idea what “wilfully stupid” means, but it seems that your are taking it to mean those who are NOT stupid, but are actually bright, but still deliberately perform foolish actions. Well, I would not let them starve, either. However, I do not feel being stuck living on just minimun SS, ie about $600 a mo, is exactly a picnic. That would a a humane “consequence” of their own decisions.

Also note, folks, that Social security is mostly tax free, entirely so for those ONLY on SS. Under a privatized plan, that would stop. And it takes quite a bit extra “return on investment” to make up for not paying some 38% in taxes (FED & St).

52

Why not let people decide for themselves if they want to opt for a private plan in lieu of Social Security?

Two reasons I can think of off hand are: (1) Social Security does not hold for you an account, per se, but pays you your entitlement from a general fund (like multi-level marketing) or (2) the majority of people don’t have sense enough to make decisions like that. Of either would I be afraid were I a staunch defender of majoritarianism.

53

Another reason. Social Security is progressive. The upper classes pay more than they get, but the lower classes get more than they pay. If SS was optional the upper classes would opt out, and this would leave the poor without enough money to support even a minimal level of necessities.

People often use an example of a person making 50,000$ a year, and say “look you are only getting a 1.5% return.” Well a poor janitor or maid gets a 10-12% return. In a private system they would never make enough to save an adequate amount.

54

labdude: Another reason. Social Security is progressive. […] People often use an example of a person making 50,000$ a year, and say “look you are only getting a 1.5% return.” Well a poor janitor or maid gets a 10-12% return. In a private system they would never make enough to save an adequate amount.

Good point, and let me note, for the benefit of those who figure that that ought to be the janitor’s or maid’s problem, that it would be much harder for employers to make enough to retire on comfortably if they had to pay their unskilled workers enough to retire on comfortably too. In fact, it’s probably far cheaper for employers to pay janitors and maids modest wages and help support their modest retirement than it would be to pay them $50,000 per annum and let them pay for retirement themselves.

Of course, there’s always Libertarian’s alternative:

*I know that your concern for starving old people is genuine. Perhaps there is a tactic you have not considered. What if you played the game of capitalism, made yourself wealthy, and actually built shelters and care-centers for starving old people? *

But I have an even better tactic! You go down to the bazaar, see, and you buy this old lamp at a junk dealer’s, and you take it home and start to clean it and then this genie pops out and gives you three wishes, and so you can have your private wealth plus shelters and care-centers! Much quicker and more economical, and about as practical.

:slight_smile: Seriously though, I’m surprised that nobody’s yet picked up on CKDextHavn’s proposal of the Chilean-style combination of privatized investment and government regulation for a universal retirement plan. This sounds very exciting, and I don’t understand why we haven’t heard more about it. kabbes, any actuarial comments on this one?

55

Being naturally psychic. You will notice I commented on CKDextHavn’s proposal before he even mentioned it. :slight_smile:

56

Oh! blush So you did, oldscratch. Hmmm, interesting points. How about it then, CKDH? Any comments on the FAIR report on the Chilean system from oldscratch’s post (a few earlier than yours)?

57

Everyone’s for “private” systems, and the Chilean syatem does not look TOO bad, but this is during “boom” tims. When times ain’t so good, SS will look a lot better. Everyone is counting on a 7>10% return thru stocks. Well, if the market goes REALLY bear, then you might have a minus return of some 20%.

58

Some thoughts:

Practicalities of Privatisation

In Britain there are two state pensions; the basic state pension (a fixed amount for everybody providing they have either paid their social security or been exempt from it all their lives) and the state second pension which is based on your career earnings.

There would certainly be a problem with suddenly privatising the whole state second pension system. This is because it is an unfunded, or ‘pay-as-you-go’ scheme. In other words, the Government never put aside and earmarked money for individuals. Instead, successive generations must pay for the generation before them. This means two things:
[ul]
[li]If the system became privatised there would be a whole generation for whom there is no money set aside to pay their benefits.[/li][li]As the population becomes ever more aged the system is costing more and more to each successive generation.[/li][/ul]
The British government are seeking to combat this problem in two main mays:
[ul]
[li]contributions to social security (“National Insurance” contributions) are not explicitly divided into pension contributions and other welfare. If you do opt for a private state second pension you receive a rebate on your NI, but this is by no means all of your NI. In addition, since you are paying for the previous generation and not yourself the rationale behind even this rebate is questionable.[/li][li]State second benefits are gradually being eroded. I fully expect that by the time I reach retirement age that[/li][ol]
[li]Retirement age will be more like 70 or 75 rather than the current 65.[/li][li]the state second pension will be a negligible amount anyway.[/li][/ul]
[/ol]
Now, Libertarian said

“Social Security does not hold for you an account, per se, but pays you your entitlement from a general fund (like multi-level marketing)”.

Unfortunately, I don’t know the American social security system very well, but this sounds suspiciously like pay-as-you-go. Anyone want to refute this?

Private Finance
I’ve seen a few references to the idea that an individual can always consult a financial expert. However[ol]
[li]Personally directed financial advice doesn’t come cheap. Often the kind of advice being discussed here would be thousands of dollars - a significant proportion of a small fund (I reiterate - there are lots of factors to consider when deciding on the best strategy for the fall-back part of your pension).[/li][li]It is far more efficient for the safety net to be managed en masse since the optimum strategy for this part of the fund will be pretty much common across individuals.[/li][li]Funds in excess of this safety net may of course be invested in Sri Lankan Internet Solutions if that is what you wish. This is exactly what existing arrangements (e.g. your 301k pensions) already allow for.[/li][/ol]
Kimstu asked for my take on the Chilean system. It seems that the above is essentially what happens there. I agree with my colleague :wink: CKDextHavn that the system there combines the attractive elements of market efficiency and government regulation. However I’d also like to second Kimstu’s note from labdude’s excellent point about the lowly paid effectively earning a higher rate of return on SS vs private investment. If employers were forced to pay a totally private pension to all of their employees, they would be forced to pay them much more. From this point of view the Chilean system appears to fall down.

Regards,

pan

*ps to CKDextHavn:

Actuary 1: “What’s the square root of 9?”
Actuary 2: “Hmm. Let’s call it 4 to be on the safe side”.

Actuary: Someone who likes you to be dead on time.

I think I’ll stop now.
*