Social Security Privatization, # Whatever: what's the downside

Great Debates
21

It’s simply not possible to lose your entire investment due to bad luck or bad decissions, as long as we regulate it properly. Have people invest in index funds. They have small fees and are diversified. Nobody is arguing that investors should be able to put thier entire nestegg into one company that might be the next Enron.

Why do we have to increase social services spending? Why not just leave that part of Social Security alone and just deal with the retirement part?

We would gain a huge amount on a net basis? Do you know what the difference between saving 15% of your money at 12% interest is and saving 15% of your money at 0% interest is? It’s huge. Millions and millions of dollars, even for a low income worker.

What? How would investment expenses eat up all of the proceeds? I think you’ve been listening to the anti-stock market people for too long on this one. Plenty of funds have high fees of about 2% or so. They still make plenty of money. Index funds have fees of .2% or so and thats what we should be investing in anyways.

It’s just crazy to think that some wall street tycoon is going to be getting all the proceeds while the funds have negative returns. That’s just not how it works.

22

Sure it is. While there hasn’t been an existing case of losing one’s entire investment, %70 is just as good as %100 when it comes to quality of life for those on the margins, as rent has to be paid.

Do you seriously think that government regulations, supposedly so inefficient when it comes to administering SS in the first place, would magically be able to efficiently regulate privatization so that fees and risk and return are all acceptable.

I for one do not have faith that the end products one can select from would have the low cost and diversity one would see simply in Vanguard’s index funds.

I’m all for breaking them up, as it would lead to better accounting.

Just don’t claim that by breaking them up we are seeing a savings, where what we are really seeing is one program that is a net gain and the other that is a net loss.

There’s no such thing as saving at 12% interest. Unless there is 9% inflation.

We aren’t really returning 0% on our money anyway after you break out the social services portion. It is true that it is held in government securities, but if we were to invest it in the equities market instead we’d have to borrow that money again on the open market.

All this of course assumes that there is unlimited potential for expansion in world capital markets. I am not one to disagree too strongly with that premise but I remain unconvinced that it is necessarily so that investment returns would match the astronomical gains they experienced in the 20th century when there is a flood of new investment money. The law of supply and demand invites scepticism with regard to continued good equity returns.

If we direct trillions into index funds it will merely invite mediocre returns in the stock market in general since companies will not have to work so hard to differentiate themselves from others.

And besides that, markets can and do have medium-term dips, as a retiree I’d expect, on a conservative (from my safety perspective) basis to experience a 33% or higher drop for a span of 10 years at least once during my retirement. If this happens at the wrong time it can make a difference between getting by with food on the table and a vacation now and again and not being able to pay the rent.

23

I guess this is where I’m not getting you.

On the one hand you’re saying that Vanguard index funds have low cost and diversity. I agree. I own vanguard index funds for my own retirement right now.

On the other hand you’re saying that the government cound never regulate privatization so that fees and risk will be acceptable.

Why doesn’t the government just buy Vanguard index funds? Wouldn’t that have the fees and risk that are acceptable? Why do you think it has to be more complicated than that? The government need not reinvent the wheel. Just buy index funds with a large portion of our money so it will grow rather than pissing it away without ever benefitting from compounding interest.

(I grant you that you have a point with there possibly being unintented consequences of dumping trillions into the market like this, but I’m not talking about that.)

24

Why would the money in your retirement account going up or down have anything to do with your ability to put food on the table or take a vacation? It goes up and down in the short term, but you ignore these trends. In the long term it will be up. It always has been in the history of the market as long as you’re looking at a 20 year or longer timeline, which we are in this case.

25

sorry, I have an excellent chance of seeing more back than I paid in. Considering that social security has relatively little overhead, if it was such a ripoff for everyone it should be in surplus for as far as the eye can see. Since some people admittedly don’t make money (like Sampiro’s parents, there should be even more.

You can’t say SS is going bankrupt and no one makes money off of it in the same breath!

And too bad it is mandatory - but would you let people who didn’t invest in it starve in the gutters when they figured out that was a bad move? Even the private accounts are mandatory, after all.

26

This is assuming the same thing that is assumed with the pie in the sky 12% returns as far as the eye can see scenario: namely that dividends and company re-investment will continue despite the economic performance. After all it is only 70 years since the Great Depression, where there wasn’t any performance to be had at all, let alone capital appreciation.

In the long run, we’re all dead.

Have you ever heard the phrase “past results are not indicative of future performance?” :rolleyes: That’s without considering the unprecedented distortion the market would undergo in such a scheme. At the very least I wouldn’t bet on future 12% returns.

27

You will note that I left out one option in my list of preferred alternatives, since no one seems to be seriously discussing it:

#4)Abandon the retirement portion of SS altogether. This would at least have the advantage that the money would have even less overhead and regulation than the index-funds scenario.

I’d prefer abandonment whereby I’d receive at least a majority of the money I already paid in back to me immediately to any sort of privatization.

We can keep the small amount of the program that goes to the disabled.

Frankly, considering that I’m 33 and do not count on getting any SS money back at all from the government, I’m torn between keeping it as-is with financial reforms to keep it solvent and just abandoning the retirement portion altogether.

28

I think you’re assuming you can time the market. Clearly you move high return, higher risk investments into lower return, lower risk ones before retirement, but what if the market starts going down just before you want to do this, and it keeps going down up until past the point of retirement. Behavioral economists have shown that people are very bad about dumping losing investments. With enough investment smarts, or a good investment advisor, you can do well in any situation, but how many people are the first (though they may think so) or can afford the second.

What Social Security is is a decision to, as a baseline, give everyone the lowest risk investment portfolio for retirement. Those who have the money (which is almost everyone) are welcome to invest in higher risk instruments. Social Security didn’t start with the founders, but when a laissez faire policy caused problems.

I might be in favor of a limited set of index funds, but I don’t know how to get around the market distortion you mention, and no doubt there will be people complaining about the low yields. There seems to often be an implicit assumption that a low risk high yield investment strategy is possible. You fell into this also when you mentioned investing 15% of your money at 12% interest. You might get lucky, but you also have a good chance of winding up with not much left.

29

I’ve said all I care to say in the numerous previous threads of why I believe privatization is undesireable, and why I consider it extremely ignorant for someone to say they don’t expect to get anything back from SS.

But I wondered exactly how you propose that what parts be split off from SS and handled differently? What is the “retirement part” and how is it isolated?

(I’m sure you folks know better than I how this can be done. After all, I’ve only worked here for 20 years. :smack: )

30

Thanks for all responses. It’s just not an easy issue.

Perhaps a hybrid would be best: allow you the option to at least invest 5% of your own money in private sources with the other 10% going into public pool. This would still give you a guaranteed income but also would allow greater death benefits to your heirs if you died before eligibility (or, as in my case, if your preferred heirs are not legally eligible to inherit even if there’s a will).

My four grandparents were born between 1891 and 1901. One died (weeks) before his eligibility for Soc.Sec., one drew SS on her (living) husband’s account for 10 years, the other two both worked 50 years in middle-class jobs, lived to be very old (late 80s/early 90s) and drew SS on their own accounts. My grandmother had Alzheimers and required a nursing home for the final decade of her life and certainly would NEVER have been able to afford such a place without SS and her state pension and other insurance. So I suppose my parents, who drew much less than they put in, atoned for their parents, who drew far more than they put in and it balances in the same family.

One thing that majorly bothers me, though, is having been a social worker for a mental health agency. I was on first name basis with dozens of former mental patients, most of whom could have worked- there are certainly some MI people whose illnesses prevent them from working, but for most that is not the case- but instead they drew SS and SSI checks. Sometimes it was on their parents accounts, sometimes it was on their own, but seeing people who’d worked less than a decade draw several hundreds per month for more than a decade (and with probably decades more to live) without replenishing anything always made me very leary of the system. How many people have to die in order for the system to work? (I’m sure there’s a number.) And what if they don’t?

Coming from a family that was economically devastated by the loss of its principal wage earner (my father- AND, I must add in fairness, his own failure to plan for his death) and having known many others who were equally devastated, I honestly think that at least a portion of SS should be payable in death benefits as well. We were lucky in that both of my parents did have burial insurance, otherwise my mother’s embalming/casket/funeral/etc. alone would have been over $10,000 out-of-pocket, then there’s the final illness expenses; most families simply don’t have that kind of disposable cash and death benefits would help CONSIDERABLY. Has there ever been a move for mandatory national life insurance policies?

31

Personally I’m not a big fan of kids’ SSI. Don’t know why a “disabled” kid should translate into a cash payment to their parent. But for the aged, blind and disabled poor, doesn’t really upset me all that much. In many ways I believe a society can be judged on the basis of the safety net it provides for its least fortunate members. And that is the vast majority of who is receiving SSI.

I guess you could have a legitimate gripe against the extension of SS to cover SSI, but I have not heard anyone so much as hint at reeling that back in.

And the numbers don’t really suggest that the savings from cutting/eliminating SSI would solve SS’s problems. In 2006, 7.1 million folks got some kind of SSI payments. Compared to over 48 million + drawing OASDI.

Oh - and in response to your question “How many people have to die in order for the system to work?” All of them - eventually. “And what if they don’t” We’ll be in BIG trouble! :smiley:

32

Maybe you need to do a “ask the Social Security expert” thread.

33

Hell, that sounds WAY too much like work - and if I wanted to do anything resembling work, I wouldn’t be hanging around these boards all the time! :smiley:

There are a couple of reasons I don’t do what you suggest. First and foremost, working for SSA has given me some idea of how tremendously vast this program is. Tho I’m pretty much of an expert in my one area, there are aspects of SS that I know NOTHING about, even 20+ years in.

The other reason is that the information people most often want - inquiries concerning their personal accounts - is generally available to them other places. These days everyone gets their statements concerning recorded income and projected benefits. And if you have any specific questions, it is a relatively easy thing to call the toll-free number, or stop into your local district office. The Agency has allocated tons of resources over the past decade-plus to improve telephone service, and everything I have seen has shown that it has improved. And there is a TON of general, legal, and historical info readily available at ssa.gov.

I think the 2 points I mention here are relevant to what I believe is a lot of people’s distress concerning SS. They have difficulty reconciling their personal interest with the general goals of this program. You don’t need to go any further than the name - Social Security - to figure it is something other than simply an individual investment program. So it shouldn’t be surprising that you get should expect than maximum market “profit” from your “investment.”

IME a lot of people’s criticism of the existing system is based on their very narrow perception of their personal finances - which I believe may not be the best lens through which to judge a system intended to serve the entire population. Another point which you may consider as you wish - it seems as tho the folks who complain the loudest about what a bad deal SS is are those who are doing okay for themselves - with some personal savings and a decent middle-class or higher lifestyle. Whereas the folks who are the most dependant on SS are less vocal - and far less sophisticated in their ability to pursue other investment opportunities. Final statistic I’ll offer - 34% of all SS recipients 65 and older depend on SS as 90% or more of their income. Rather than worrying that some of those folks might be drawing more than they paid in, I prefer being glad that I will be able to avoid a similar fate.

Another factor of the size of the SS system is - like an aircraft carrier - you can’t spin it on a dime. IMO a program this large responds better to “tweaks” and gradual changes, than to radical overhauls. Take a look for a moment at the truly mind-boggling transition costs that would be involved in implementing the various privitization proposals, and consider whether that affects your opinion.

One final point I don’t quite understand about privatization - exactly how do you determine when you are going to withdraw your funds? If you are in your 30s you may not plan on retiring for another 35 years. But if you become disabled tomorrow, should your benefits be limited by how well you invested your contributions? Or if you die, should your survivors be similarly limited? And should the amount you and your survivors draw be determined by whether the market is up or down at the moment you die or become disabled?

My approach may be twisted. But I kinda figure that if I make enough money that I have to pay a ton into SS, if I am not poor enough to need to try for SSI, if I am healthy enough that I don’t need to draw disability, and if I live long enough to worry about whether I’m making back “market rates” on my SS contributions - well, I’d prefer to dwell on how damn lucky I am and how good my life is, instead of worrying whether someone else might have gotten “more than they deserved.” Just a mindfuck that works for me.

Now - I really should get something done…

34

Here’s a likely side effect that seems to occur to few people: if part of these individual retirement plans is invested in common stock, this likely would mean someone in the SSA bureaucracy would control (and exercise) the voting rights of said stock. And if the fund held a “controlling interest” in some company (which eventually would happen if all Social Security money were so invested), that means some government flunky would be in a position to control a private corporation! (And you thought Socialism was bad.)

If this possibility ever occurs to the corporate world, they’ll drop the idea of privitizing Social Security quite quickly.

35

Well, I’m not saying that exactly. My point isn’t so much that it’s going bankrupt but that it’s an inefficient ripoff.

In any case, why couldn’t someone say both those things? They aren’t mutually exlusive.

36

I’m not excluding the great depression. If you bought stocks on the day before the crash, you still would have made money if you were investing for the long term.

Why not? What should we bet on? That’s what the market has historically done, so that’s what I’m using. So what if it returns a different amount. Let’s say it returns 6% instead of 12%. That’s still a lot better than the 0% or so that we’re getting now. Anything is better than nothing.

37

Good for you. If somebody comes into the thread and says they won’t get anything back from SS I’ll join you in mocking them.

I’m saying that I don’t expect to get any kind of a good return for my investment in SS. I’ll probably get something back, but I doubt it will even be as much as I paid in. It certainly won’t be anywhere close to what I would have if I were allowed to invest the same amount of money, even conservatively. I do expect I’ll get something, though.

There are a hundred ways to do it.

Scrap the whole program and privatize it. Then implement a new payroll tax which is only few percent to cover the non-retirement things social security does now.

Figure out exactly how much of payroll taxes are going towards retirees vs how much are going towards the other parts of social security. Let people invest that amound in private accounts, since it’s not likely to change.

Let people opt out of the program entirely, even from the disability bennies. If you must we can require that they prove they have privately bought disability insurance to make sure they won’t end up on the street.

Why would it be hard to do?

38

I’ll explain why it’s twisted: Those of us who want privatization aren’t just greedy. I’m genuinely outraged at how badly this system is screwing everyone over, not just me.

You’re right about one thing. I’ve got enough money that even after SS takes its 15%, I’ve got enough left that I can still save another 15% for myself. Great for me. But what about the poorer people who don’t have any disposable income left after being hit for the first 15%? They are left with nothing to save. The money that is taken from them is “invested” only a small amount and most is wasted by paying out existing retirees. It’s a ripoff and I’m pissed about it for them even if they aren’t financially savvy enough to be.

39

It’s occurred to me. You’re missing something, though: It’s private accounts, not government accounts that we want. Using that logic you could argue that the finance companies like Fidelity or Vanguard own everything in America. They don’t. People put their money into Fidelity, and then use it to buy ownership of companies. That means the people have ownership, not Fidelity.

It would be the same with Social Security private accounts. Mrs. Jones gets 15% taken out of her paycheck and some of it is invested in an index fund. She now owns a piece of all the public companies in America. The government is just holding it for her. They don’t actually own it.

40

Oh? Do you get to vote the shares your mutual fund holds? I vote share for stocks I own directly, but not the ones in the funds. The state pension systems, for example, definitely vote their shares, and don’t ask state employees for advice. I suspect fund managers do also, since I can’t believe that they sit on their hands during a takeover bid, which is when it counts.

There are so many funds, and so many managers, that it is not a big issue in the present system. With one ginormous fund, it’s a different story.

About overhead - do you know the relative overheads of social security vs managed funds? I believe Krugman said Social Security is much less, which makes sense since there is so much less to manage. I’m not saying that the funds management costs are too high. You may disagree with the investment direction, but I’d like some evidence that Social Security is inefficient.