Which is exactly how Pensions work. Assuming you life to a ripe old age, you’ll bearly always get more out of a pension than you put in, as:
Dudes die and don’t collect much if anything
The $$ has earnings.
Now, if SS was a real pension plan then you’d be able to get far mor eout than you put in- assuming you lived long enough. But note that dudes who die before 67 (YMMV) don’t get anything back.
What Congress has to make up it’s mind is whether or not SS is a forced pension, or welfare for the elderly. It can’t be both.
In either case, there should be no cap on contributions. Even normal pensions often have a cap on benefits without any cap on contributions.
I agree, it is difficult to apply historical market data to any individual case, because you have no way of knowing when you are going to be drawing upon SS. I do not believe the “guaranteed security” of SS benefits is negligible. They will be there when you need them, no matter whether the market was up or down when you invested or withdrew.
Another wrinkle IMO is that folks who argue what a “bad investment” SS is, tend to be the folks who have the least “need” for SS, and tend to ignore the financial sophistication of those who are most dependent on it. (I acknowledge that if you view SS as a retirement investment fund and consider your contributions as “your investments” - ignoring or resenting any redistribution of wealth that occurs - you will disagree with this interpretation.) In 2004, SS bens were 50% or more of income for 66% of receipients over 65; 90% or more of income for 34% of aged recipients. To my socialist-tending mind, these are the people most in need of SS. And I do not believe it is too much of a stretch to assume that these folks are the least likely to have the sophistication to take advantage of market investment alternatives.
I believe that a valid measure of a society is the “safety net” it afford to its least advantaged members. So, as someone who has positioned himself such that he will have a pension, 401k investments and private savings, AND social security, I am not over-troubled by the fact that other of my investments may outperform my SS contributions.
No they don’t. I buy Geico because I want my car to get paid for if I wreck it. I’m paying my own premiums. It’s not like I’m paying more to make up for the original batch of Geico customers who got in for free and I’ll never be dependant on some new crop of victims to come in behind me to pay for my benefits.
I’m not asserting that at all. I have been addressing the “retirement” part of SS, and haven’t been talking about the “disability” part of it, true. But that doesn’t mean I’m asserting that part doesn’t exist. If you want to bring it up, simply do so. I’ll just tell you that disability is something that can be done without a mandatory government ponzi scheme. Most employers already offer disability insurance just like health insurance anyway.
It’s funny because in the next few sentances you go ahead and argue with that:
Look, I’m all for letting anyone invest in whatever they want no matter how foolish it is. But, let’s meet halfway. If instead of running SS as a ponzi scheme like it is now without investing any of the money, we invest in a diversified portfolio we’d get a huge return on the money. We could simply use index funds and not allow people to buy only one stock.
I don’t think you understand how risk in the market works. If you’re 24 years old and you invest in stocks that you aren’t going to sell until you’re 65 years old you wouldn’t ever have lost money. You could have bought at the absolutely worst time and sold at the absolute worst time and it’s impossible to have lost money on the stock market during that long of a time period any time in the history of the stock market.
(I’m assuming a total stock market index fund, of course, not a single stock like the dreaded Enron.)
Also regarding risk: At this point I consider some cash that I put into the stock market a hell of a lot less risky than the cash that’s been taken from me by Social Security. As a thirty year old, it’s likely that I won’t see all of that money back. My stocks I am certain I will see my money back times ten.
I don’t know what you mean here. Do you have an example?
The return isn’t just low. It’s lower than inflation. That’s not low, it’s pathetic.
How about bonds? We could invest in bonds and the return would still be ten times as much as Social Security.
I think you would be troubled if you fully understood how badly your SS is underperforming and how much this is hurting you (and everyone) financially.
Let’s run some numbers.
Let’s say you make around the average household income of $50,000 a year. You contribute a hearty 15% to your 401(k). That’s $7,500 a year.
Starting at age 24 (I’m just using the age of the poster in my other examples above) you invest your 15% ($625 a month) into your 401(k) which is invested in stocks making the average of 12% a year.
When you retire this nestegg is worth $8,293,452!
Not bad, huh? This is a simple example. I’m assuming you never get a raise, work for exactly $50,000 you’re whole life, and inflation isn’t taken into account. But, you get the idea. It’s a lot of money thanks to the stock market and compounding interest.
But, wait. Let’s look at Social Security. It’s also taking about 15% of your income away from you. (Some direct and some indirect.) That means if not for SS you would be able to double your investment into your 401(k).
You’d have twice as much money on retiring. $16,586,903! Not too shabby. You would even have plenty of money to dump some of it off to buy a nice disability insurance plan and still have plenty left to retire rich.
The real sad part is that most people aren’t looking at the option of 15% or 30% to save for retiring. They can only afford 15%. But, since payroll taxes are mandatory they don’t have a choice. They’re forced to take the bad investment and don’t have the money left over to save the smart way.
Believe me, I am very familiar with SS’s performance. (You might even say they have signed my paycheck these past 2 decades. ;))
And I am very comfortable with my understanding that SS is far more than a personal retirement investment system. You say you are not mentioning disability. Why? That is a significant portion of SS. And how about survivor’s or child’s bens? Or SSI? Am I correct in assuming you consider these to reflect “Ponzi schemes” because recipients receive far more than they may have paid in. I, instead, view them favorably as safety nets for society’s most needy/least fortunate (tho I admit I am not a fan of kid’s SSI).
Since I have no expectation of getting anything approaching market results from my personal SS contributions, I am in no way troubled by any “missed investment opportunities.” In fact, as I live in my comfortable middle class suburban home with my well-provided-for family, I have a hard time resenting the government for taking too much from me in terms of taxes. The amount I am taxed bothers me nowhere near what the government is spending money on - most significantly at present this war.
I also am comfortable with the multiple predictions I have seen telling me that within a matter of a relatively small number of years after I retire, I can expect to earn back more than my total contributions adjusted for inflation. (I do not have a cite, but did presentations on this in the past based on what were at the time the most current and accurate official stats and predictions.)
If my luck doesn’t hold, and I die the day after I retire - well, I’ll be dead so I won’t be too shaken up about my missed investment earnings. (This gets to the reason why it is in most people’s interest to start drawing as soon as possible, rather than waiting to draw a higher monthly benefit. Statistically, too many people die too soon after the later date to make the increased benefits worthwhile.)
If I live 5-10 years past retirement, I can expect to get back all I contributed, and anything after that is gravy - or earnings/interest. I’m fine with that. You apparently are not.
IMO, one of the biggest problems with SS is that they do not do enough to dispel the misconception that is is a personal retirement investment system.
Even at a young age it makes sense to diversify - the mix is different, as is the mix between differernt types of equities. I do know this stuff - which is why I’m not worried about retiring in 7 - 10 years. When we worked this out, I was pleasantly surprised at how much money I’d be getting from Social Security, which I had discounted as trivial.
I think social security is quite safe - politically there is no option but to protect it, as Bush recently discovered. It is in far better shap than it was 25 years ago when Reagan and the committee did the right thing.
Roughly, the pension laws require a certain amount of money and contributions into the fund. When the market was up so high, companies cut back contributions, improving the bottom line. When the market tanked, there was a deficit, which they should have made up by increased contributions, but often could not afford to. The federal pension insurance program is in serious trouble. This is not a case of bad investments per se, or of anyone doing anything illegal - just over confidence in the continued success of the market.
Social security is invested in bonds - government bonds.
There is another problem with Social Security being invested in equities. That is the immense political problem of where to put the money. Don’t you think the lobbyists would have a field day trying to get the government to dump some money on their stocks? Even if invested in the S&P 500, say, there would be an even greater incentive to get in there. I’m actually not opposed to the Social Security trust fund investing somewhat more aggressively, but these problems would have to be solved first.
I don’t know how you think insurance works, but Geico is entirely dependent on having many customers to pay for your car wreck. Unless you are getting severely ripped off, your premiums on any one car will never amount to the replacement value of the car. The idea that “your premiums” are labeled for your use only is just incorrect. Your premiums pay for your car accident, the car accident of the guy who had a perfect driving record for 50 years, and the car accident of the guy who had Geico for only 30 seconds before getting into a wreck. So yes, your premiums do go to some “freeloaders.”
Surely you’re not holding up American’s health insurance system as a successful model on which to base other social insurance programs… Are you?
Is it possible for you to make a well-reasoned argument against Social Security without referring to it as a Ponzi scheme? Because no matter how many times you say it, it is simply not true. A Ponzi scheme is designed to make some rich and screw others. Nobody is getting rich on Social Security
I’m addressing the retirement portion simply because that’s what most people think of when they think of Social Security. Also, it’s the part that is most in need of fixing. Finally, it’s the largest part, right? I don’t have number on that, but the amount paid out to retirees is the lion’s share IIRC.
I’d like to clean up all of it, but if we could at least get the retirement portion working in a way that wasn’t so wasteful it would be a good start.
No. Not at all. That’s more like insurance. Since most people don’t become disabled, they won’t collect more than they paid in. That’s not a ponzi scheme. That’s just how insurance works.
But it is a personal retirement investment system. It’s other things also. But, that’s a large part of what it is. People contribute to it. It’s a system. It’s an investment. It pays you out upon retirement. It does other things too, but it’s not incorrect to talk about SS as a personal retirement investment system.
I like the rest of your post BTW. It’s nice that you are doing well financially and otherwise. However, to steal an old liberal argument: What about those not so well off? What about the ones who need that 15% to be able to invest for retirement?
Not really, IMO. There’s nothing wrong with a 30 year old having some bonds. Say 10% or so, but there’s nothing wrong with going 100% stocks also if you’re level of acceptable risk allows it.
I don’t share your optimism. Also, even if nobody ever gets the political courage that Bush had and tries to change it, it will most likely not be able to pay me back at a rate that even keeps up with inflation (according to the cites above). That’s unsafe! If you give me a dollar now and I give you back .75 in fourty years, I'd call that an unsafe investment even if I thought my .75 was guaranteed.
Thanks for the info about pensions. I’ve always thought they were bad idea. Skip the pension and just put the money into my 401(k) says I.
No. It’s not. The tiny amount that’s left over after paying existing retirees is invested in government bonds. That’s not good enough. All of it should be invested and then paid back to those who contributed it.
You could just buy a total stock market index. Simple. Easy. .2% fees. Done.
Of course they are. Can you go back and read what I posted? I don’t know how I can say it any differently. There was no “first batch” of Geico customers who got insurance for free (or very little) that I’m paying to make up for now. There’s no generational gap with one paying for the next. That’s the difference. See?
No. I wasn’t. I am saying that disability insurance isn’t a big deal. It’s relatively inexpensive and is a small portion of SS payments, IIRC. It would also have a lot less fraud I bet if it were privately run. I’ve known a few people who get disability checks from just scamming the system.
True, Social Security isn’t designed to be a scam as deliberately as a typical Ponzi scheme. However, it’s basic concept of needing an ever growing number of contributors to pay out the existing members is the same. That basic similarity is enough that it’s fair to call SS a Ponzi scheme. Where it’s different is really just a matter of scope since it’s required of everyone.
Not aware of specific figures, but my WAG is that those who are least well off are also likely to be those least likely to save. And I don’t mean this entirely critically. Folks of low income may legitimately wish to purchase items or spend money on things that higher income folk take for granted, and may consider those expenditures more important than saving or investment.
I wonder what the stats would be for people at different income levels: if they instantly had the cash that is currently withheld for SS (either their portion or also their employer’s contribution) - I wonder how many people would save how much of it, as opposed to just spending it. Given what I understand to be our nation’s extremely low savings habits, I suspect the percentage of folk who would set it aside to be pretty low. But that’s just my guess.
SS has consistently been amended - and consistently expanded - in the past. I’m not going to crunch the numbers, but I would suspect that if SSI were ended, as well as disability, survivors and spouses benefits, it would go a long way towards “curing” the system - at least in terms of its original intent of providing a return to workers only.
Well, given that education level tends to correlate highly with income level, I think they probably would be the least savvy investors (though I know plenty of highly educated folks who are really crappy investors). I might be repeating what you’re saying here, but I think that those who are least well off are not only least likely to save, but probably least able to save. I say this given past statistics I’ve seen (but I don’t know where now) that the majority of spending among lower income groups is used on neccessities.
Sorry for the double post, but I had another thought (a true rarity for me).
I would tend to agree with Debaser in saying that the people that received benefits when SS was nascent probably shouldn’t have gotten that much out of the system. However, that train left the station a long time ago. So my question would be, how do you decide which group of people to punish in order to fix the system? Right now, it seems to be politically unfeasible to cut Boomer SS benefits because they’re such a large voting bloc. My generation (Nixon Babies) is small, so I could see where we would tend to get ignored by the politicos.
In other words, isn’t the most likely thing to happen with SS is to push it further down toward future generations when the current politicians aren’t in office anymore? Inertia is a strong force.
Anyway, I take back the statement that I had another thought; upon preview, it’s just more incoherent babblings from the voices in my head.
Which brings us back to the OP. Getting rid of the cap is one way to cover the transition costs of fixing SS. If we instead just get rid of the cap to milk a few more decades out of the broken system as it is, we’ve wasted one easy safety valve.
I also think you touch on many important points in your second post. For example, I tend to support some minimal means test for receiving bens. Wealthy retirees would scream “Murder, those are our benefits that we paid in!” I respond “Tough. You are fortunate you are well-off enough that you can afford to give it up.” But that is just me.
IMO, the best solution would be a number of small adjustments. Maybe increase the withholding percentage a small amount, AND increase the max income subject to withholding, AND increase the retirement age, AND increase the setoff of retirement income against SS bens. But there are groups who will scream bloody murder against each of these changes. And opponents who would contest any proposed change for the mere purpose of obtaining political advantage.
And it is far easier for today’s short-sighted politicians to put it off for someone else to deal with - the inertia you mention. Why stick your neck out for something that won’t be a crisis until 2040? Remember how Clinton said he was going to initiate a national conversation on SS? Well, the economy picked up, and predicted insolvency was pushed back a couple of years, and the conversation went nowhere.
As I’ve said before - I always think of this like an incoming asteroid in StarTrek. If we take action now, we only need to budge the rock infinitesimally to give us plenty of room for safety. But if we wait until the damn thing is blotting out the sun, well, that will require more drastic measures.
