Social Security's security

Great Debates
21

I’ll agree with december: any politician who seriously uses the term “lockbox” is a frigging lying scumbag counting on manipulating the ignorance of the masses for cheap political points.
Al Gore was the worst abuser of the “lockbox” lie last year. That’s not to say there aren’t lying scumbags in both parties. But Gore was the most egregious of them in 2000.

Nice to have some real-life actuaries aboard. Nothing livens up a party like a pension fund actuary and a game of penochle, I say. <g>

Thanks for your reply, kabbes.

Now, onto the issues of liquidity:

It’s been argued that that amount of money going directly into securities would have an unpredictable effect on the stock market. I agree it would have a supporting effect on equity prices, but I don’t neccessarily regard that as an evil thing. There’s a lot of 401k money flowing into the market now, and the world hasn’t come to an end yet. I think the steady buying pressure probably took some of the edge off this last collapse. Provided a bit of a safety net, if you will.

I spoke with Gus Sauter, who runs the indexing bench at the Vanguard Group, and manages the Vanguard S&P 500 and Total Stock Market Index Fund last year about this very subject, actually. I asked him “Hey, if the government did enact some privatization of Social Security, is there enough liquidity in the market to handle it?”

Essentially, his response was that between the total U.S. stock and bond markets, there was more than enough liquidity to do it, but he wasn’t sure he wanted the headaches or hassle of dealing with a government agency.

Spoke to Jack Bogle about that matter, too–and he also believes there’s plenty of liquidity. I’d look for him to participate heavily in any SS commission.

More later.

22

Liquidity is going to be the crucial problem for the Baby Boomers. Whether stocks, real estate, bonds, whatever, we’re going to have to sell them to someone in order to get money back to live. Since retired people, and therefore sellers, will make up a greater percentage of the population after 2010 and especially after 2020, it should be logical to expect some pressure on prices. That’s going to be a tough nut to tackle. Even markets as big and liquid as the U.S. markets could expect to have some trouble at that time, it seems to me.

23

<<<Liquidity is going to be the crucial problem for the Baby Boomers. Whether stocks, real estate, bonds, whatever, we’re going to have to sell them to someone in order to get money back to live. Since retired people, and therefore sellers, will make up a greater percentage of the population after 2010 and especially after 2020, it should be logical to expect some pressure on prices. That’s going to be a tough nut to tackle. Even markets as big and liquid as the U.S. markets could expect to have some trouble at that time, it seems to me.>>

Well, see…we’re in luck. Yes, the United States is going to have a ‘geezer boom’ and they’d have to sell to someone in order to retire, anyway.

But that’s where a billion screamin’ Chinamen and a billion more tabla-thumpin Indians come in. Particularly the latter. Those folks have an expanding population a free-market economy, and most importantly, a blossoming middle-class coming down the pike. They’ll have a voracious appetite for U.S. appliances and U.S. equities alike. So as U.S. population growth slows, they will be providing a good deal of demand, very likely more than offsetting the geezer boom in the U.S. and Europe.

At any rate, even if that were not the case–or Pakistan and India mutually decide it would be in their best interests to incinerate one another, we’d STILL have the same problem whether we privatize Social Security or not: Someone is going to have to cough up the money to redeem all those treasuries, and at present, we don’t know where that money’s going to come from.

So not privatizing Social Security doesn’t avoid or mitigate the liquidity problem in the slightest: it just ensures the American Taxpayer shoulders the entire burden, without any assistance from our friends, the curry-swilling nehru-jacket-wearing Tandoori tasters and the Wu Tang Clan across the Pacific.

24

Yeah, but if they’re still living in India and China, we have to sell them something. Given our large and chronically growing trade deficit, this is a lot harder than it looks.
Alternatively, we could just open up the floodgates and let them immigrate so that they could support us in our old age. Personally, I would have no problem with that. Large sections of the U.S. population disagree, though.

25

Actually Gore pretty much spelled out how SS actually works in one of the debates (in a rebuttal against Bush–I believe it was the second Presidential debate… No link and am curious as to whether transcripts are still around) but still persisted in his bogus ‘lockbox’ terminology.

Personally I don’t care about SS beyond the fact that I think that it should just go away ASAP. I am not going to see any of it personally (or I will see it but only after paying much more of my money into it than I will ever get out of it and after it has some harsh consequences on the economy) so I would rather see it go away right now. Shrug. I will support my Mom/Dad if it comes to that:)

Ander

26

On Risk:

Kimtsu hit on an interesting point: the need to assign a maximum risk tolerance. And yes, you can back test a portfolio of holdings and quantify, based on historical precedent, the percentage chance that it will lose y or more value in x amount of time.

And that’s important, but it only measures investment risk, and it only looks backward. That kind of risk analysis ignores the fact that while Treasuries pose little investment risk, Social Security faces several other very real risks that are not so easily quantified.

The chief risk is legislative risk. Based on current censuses, the risk that we are going to have to either raise SS taxes or cut benefits very soon, in some form, is now running close to 100%.

Well if you’re paying in, and hoping to get a certain return for your trouble, either solution, or any combination thereto, represents the equivalent of a loss of capital, as far as you’re concerned. You put money into a program and it’s not there when you get it out. Hence, loss of capital.

Well, I don’t know about you, but putting money into any investment that offers a near 100% risk of capital loss strikes me as a pretty stupid idea, when I can invest in an FDIC insured CD where the risk of capital loss is zero, and get an equivalent or greater return. The 3% on SSA Treasuries is simply pathetic.

You can also quantify the risk that you’ll eventually die at close to 100%. Shoot, call it an even 100%. Therefore, you’ll want to be able to pass on the unused portion of your wealth to your hears.
The risk that you will be able to pass none of your accumulated SS money to your heirs is also 100%. Again, SS sounds like a pretty lousy deal.

Then there’s the risk that Social Security benefits will, in real terms, remain flat or even lose value when inflation is taken into account. This risk is significant, since inflation averages 3%. The rate of return on Social Security’s Treasury portfolio averages 3%. Meanwhile, the risk that the taxpayer himself (in other words, in the aggregate, the Social Security beneficiary) is going to have to be the one to cough up that 3% rate of interest on Social Security–in effect writing a check from his right pocket to his left, is in fact 100%. That’s because interest payments HAVE to come from the taxpayer. There’s simply no other place for government to obtain that money.

So, assuming inflation remains positive, the risk of loss of capital due to inflation is 100%. Again, SS seems like a stupid investment.

So, while Modern Portfolio Theory suggests that the SS portfolio undergoes very little investment risk, the MPT and other usual actuarial models are inadequate to this particular task.

27

pman - you are still persisting in thinking about SS as an investment. One more time: it is not an investment. It doesn’t seek to be an investment. It doesn’t want to be an investment.

You’d be better off thinking of it as a tax. Then the benefits paid under the SS umbrella are those the government sees fit as being necessary for its social and economic policy. These include minimum pension benefits and unemployment benefit, amongst other things.

In summary: the SS money you invest is no longer yours. It belongs to the government. There is no investment. There is no fund. It is a tax that happens to be well delineated as to what it is for.

pan

28

pman, your analysis of social security is riddled with miscomprehensions. Let’s try to clear up a few.

First, as kabbes points out, SS is not an investment. The money you pay in is, for the most part, being used to pay out beneficiaries today. Thus, claims about its rate of return being 2 or 3% are nonsense. On this point, see the middle section of this article http://www.prospect.org/print/V12/8/mcintyre-r.html in The American Prospect. It says, in part,

Now, you may not like the fact that your money is being used to pay current beneficiaries. But, if you want to change the system to an investment one, it is incumbent on you to either explain whose benefits will be cut or whose taxes will be raised because it can’t just be done for free.

Your second point, about SS not likely to be around for you, is based on buying into the end-of-the-world scenarios propagated by those who want to get rid of SS. The “crisis” in social security can actually be averted with little pain. See, for example, http://www.tompaine.com/features/2000/05/30/9.html for a lead-in to the discussion on this.

Finally, as regards inflation, I believe (although someone can correct me if I am wrong) that SS benefits are pegged to the cost-of-living index and so they rise with inflation.

29

Other good links on SS at TomPaine.com are http://www.tompaine.com/features/2000/05/24/1.html and http://www.tompaine.com/features/2000/05/26/ and http://www.tompaine.com/features/2000/05/26/2.html

30

Kabbes - I very much appreciate your contributions to this thread. Let me respond to a few of your points, as an American general insurance actuary.

“Purpose” is a slippery concept. Government programs tend to never end, claiming whatever new purposes may be useful in oder to justify their survival.

The avowed purpose of the initial American SS (circa 1936) was “floor of protection,” i.e., it wasn’t enough to live on. Today’s SS is far more generous in real terms (as a guess, 5 to 10 times as generous.) If one lost 20% of benefits because of bad investments, the remaining 80% would far exceed the original “floor of protection.” And, SS is indeed indexed for inflation.

There’s no longer any single stated “purpose” to American SS. IMHO the purpose is to win votes. Those who collect are better organized and more aware than those who pay in. My spouse worries that if investments truned sour, then the govrenment would make up the loss.

American SS is indeed a pay as you go system. At the moment, it’s running a surplus, and this surplus is loaned to other parts of the government. SS solvency has benefited from rising wage rates and from women entering the workforce. (Especially wives, since a working wife gets only a bit more benefits than a non-working wife, but she contributes a full share.) As the demographics turn, SS wil have to become less generous.

Kabbes – I don’t like calling SS a “tax,” even though it sort-of is one. One reason is that the program has always been promoted as “insurance.” (E.g., a foreign worker who retired back to his native country can collect SS, because “he paid into it.”)

Another problem with the “tax” interpretation is that it smacks of the concept that all my income really belongs to the government, except whatever pittance they kindly allow me to keep.

I endorse Kabbes’s comment, ‘Passing on a notional “fund” back to a member involves double payment and someone is going to have to pay for that.’ If W’s plan passes, there will be a long period when amounts going into the SS Fund would be reduced, but its outgo would be unchanged. Income and outgo would equalize after some decades Until that happens, the government would have to make do with less contribution from SS (or more of a transfer to SS.)

The US government books (deficit, national debt, etc.) ignore SS’s unfunded liability. W’s plan would reduce that unfunded liability by the amount that employees would recover from their own invesments. However, that difference wouldn’t show up in the government figures.

31

Thankyou december. Incidentally in about a month I’m making the switch to general insurance too. Recurving - isn’t it a wonderful thing?

I too don’t like calling it a tax - but I suspect that is because I’ve been trained to have a rather precise way of thinking about the problem. In truth, the General Public ™ might well be better off bearing in mind this point of view, even if it isn’t quite actually presented in this way. At the very least it would stop the endless and meaningless comparisons to investment funds.

Anyway, on to the reason for this post.

To those suggesting that SS is halted completely: do you realise that since SS is PAYG (thanks for clearing this up for me), then even if it is ceased you will still have to contribute to it! You are paying for the last generation, not your own retirement. The only thing that you will achieve is to guarantee that you won’t see a dime.

If you want a social justification, then you may like to bear this in mind: PAYG SS is sometimes referred to as a “contract between generations”. That is, the old geezers made the country what it is today, put in the spadework and built infrastructure that we now use. We pay for it by paying them back. Less "me me me and mine " and more “thanks and here’s your reward”.

If you want an practical justification for SS being PAYG, consider this: you are looking at enormous capital flows. Where do you invest them to keep them secure? At this point you have to consider my previous post on the nature of the liabilities and realise that the most appropriate place for a minimum target is in government bonds. But how does the government invest in its own bonds? Is this self-investment?

And a historical argument: when SS was introduced, PAYG meant that worthwhile benefits could be provided straight away, rather than waiting 40 years until the first people started being full beneficiaries.

Actually the arguments for PAYG vs funded SS are quite active in the actuarial community and have no easy resolution. But one thing you have to realise is that if you start from a PAYG position, as you do in the US and as we do in the UK, it isn’t that straightforward to change the situation.

pan