Social Security

[jeff]

Social Security- should it be left alone, (partially) privatised, amended, or ended?

Changing SS is a big subject in President Bush's domestic agenda, with Bush discussing partial privatization, making this an important and timely subject.

Some thoughts and opinions to start off with:

- Social Security is not just an investment vehicle: it's also, in fact mainly, an insurance policy. It provides a minimum level of payments that keep low income people from severe poverty in their old age (plus benefits for widows and dependent children). In this regard it is one of the most successful programs ever created by the US Federal government. It has had landmark results in reducing and eliminating abject policy.

- Some people get more money in benefits than they put in (say: if they live a long time after retirement and draw benefits for many years), some less (die before taking out as much as they put in, though see the next bullet) - just like can happen with other insurance or annuity policies (eg: with a term life insurance policy you get nothing if you live past the end of the policy). My point being: it's not an investment plan. Nor does it prevent you from having a private investment plan.

- Widows and orphans are beneficiaries. If a wage earner dies young, his/her spouse and dependant children receive SS benefits. This also has been very successful and has kept many families (besides the aged) out of destitution.

Now to the current situation and Bush's plans:

- I am not convinced that the aging population today demands a drastic change in Social Security. I will provide numbers in a later post. Off the top of my head, the actuarial estimates say that the trust fund empties in 2042 (using current policies and projects of lifespans). At that point, SS still pays out 75% of current benefit levels based on then-current cashflows, so it's not like the whole thing goes bust. I think the severity of the situation has been exaggerated in order to get a desired, predetermined outcome.

- Adjustments have been made before, and could be made again without going to privatization: We could raise the % taken out, the "cap" figure at which SS contributions per year stop, reduce the payouts, or increase the eligible age for receiving benefits. According to the initial plans, such as they are, some of these would happen in Bush's proposed changes anyway. I personally think such tweaking is all that's needed

- Social Security has very low overhead compared to brokerages, and small accounts have higher overheads (per unit) than large accounts. So, I would expect costs to go up for the privatized portions of Social Security.

- Equities (stocks) and mutual funds based on them, have higher historical yields than the government bonds that Social Security funds are currently invested in. If that was the whole reason for change, than SS administration could put the incoming money in stocks right now (like CALPERS employee pension in California), without having to switch to privatization. But: stocks also have higher risks, and you can lose your money.

- I should mention for the last 2 items that I've spent most of my career working on Wall Street in a brokerage, and still work most of my time with them. Which leads me to the next point: not all the advice you get from investment firms is for your benefit. Sometimes, in fact lots of the time, they are dumping stuff on you for comissions or because of the investment banking relationship they have with companies with overpriced stock. There's a lot of risk here.

- Finally, with respect to brokerage: financing the transition to privatization is said to be as much as $10 trillion dollars. One thing I will tell you is that you should never borrow money to pay for investments (eg; buy on margin) unless you are willing to lose it all and then have to cover the loss from your pocket. But, that is exactly what the privatization scheme proposes.

- Right now, SS funds are in government bonds. That doesn't bother me much per se: they're attractive to lots of investors for stability and safety (including lots of foreign investors). What bothers me here is not that they're in debt instruments also in the government - unless the US defaults on its bonds, in which case we're in a lot more trouble than Social Security could cause. What bothers me is that they've been used (bilaterally) to prop up general tax funds to make deficits smaller than they otherwise would be.

Politically:

- Conservatives have been against Social Security ever since FDR brought it out, despite it having saved millions of Americans from terrible poverty. They openly refer to SS today as the "soft underbelly" of social programs in the US. So, their wanting to get rid of it is nothing new. What is new is that there is a president who goes with the program.

- Part of the motivation has been suggested to be a deliberate play by Republicans to get more people to think of them selves as investors/owners ("the ownership society"), as that will cause them to vote more Republican in future. Eliminating SS, according to this theory, is a political move to ensure future generations of Republicans.

Not be be USA-only: I invite the non-USA board members to chime in with their opinions and discussion of the plans in their countries, both for the concepts and the actual implementations, and for notions of how you deal with an aging population.

Your thoughts?

[prototoast]

I think it should be ended. It's a bad pyramid scheme, and it causes nothing but trouble... that, and it's unconstitutional.

[jeff]

Why do you feel (a) pyramid scheme (b) causes nothing but trouble (c) unconstitutional?? I don't get the pyramid part at all, for (b) it's known to have tremendously reduced poverty, and (c) would be the legal opinion of the Supreme Court - and they've let this program stand over 60 years. So, why do you feel as you do - could you explain, please.

[prototoast]

Originally Posted by jeff

Why do you feel (a) pyramid scheme (b) causes nothing but trouble (c) unconstitutional?? I don't get the pyramid part at all, for (b) it's known to have tremendously reduced poverty, and (c) would be the legal opinion of the Supreme Court - and they've let this program stand over 60 years. So, why do you feel as you do - could you explain, please.

Well, it's a pyramid scheme because as it has been operated. When you pay, your money is going to the people currently receiving, it's not really storing and tracking your own pay-ins. As you can see from all the worries about retiring baby boomers, this system only works so long as the people paying in exceeds the people receiving.

I think it's nothing but trouble because money doesn't come from nothing. Efficiency is lost in order to support the government bureaucracy, and in general, I should have the freedom to control my own money.

It's unconstitutional because the government isn't given the authority to allow such a program in the constitution and by the tenth ammendment, that power is reserved for the states or the people. As for the courts allowing it, the courts allow countless unconstitutional laws... in fact, all 3 branches of the government allows unconstitutional laws, it is not the court's responsibility to be the sole judge of constitutionality, even though they'd like it to be.

[jeff]

Originally Posted by prototoast

Well, it's a pyramid scheme because as it has been operated. When you pay, your money is going to the people currently receiving, it's not really storing and tracking your own pay-ins. As you can see from all the worries about retiring baby boomers, this system only works so long as the people paying in exceeds the people receiving.

But that's true for ALL insurance plans. Health, life insurance, and so forth. With SS, every generation gets its turn to be on the receiving end - unlike a pyramid. A little tweaking to account for demographics and longer lifetimes would handle the last part.

Originally Posted by prototoast

I think it's nothing but trouble because money doesn't come from nothing. Efficiency is lost in order to support the government bureaucracy, and in general, I should have the freedom to control my own money.

The overhead of SS administration is lower than that of a standard brokerage. Dramatically lower - it's much more efficient.

I take your last point - but by and large you do have control of your money, except for the part deducted for Social Security. Yes, that means there is part you don't control - but the upside is that you, and other members of society, have a guaranteed minimum that _will_ be there.

Originally Posted by prototoast

It's unconstitutional because the government isn't given the authority to allow such a program in the constitution and by the tenth ammendment, that power is reserved for the states or the people. As for the courts allowing it, the courts allow countless unconstitutional laws... in fact, all 3 branches of the government allows unconstitutional laws, it is not the court's responsibility to be the sole judge of constitutionality, even though they'd like it to be.

I'm going to have to disagree here as well: all 3 branches of government have supported SS and no legal challenge to it has gotten anywhere. Even Bush isn't saying (publically at least) that he's trying to eliminate it. The laws that empower Social Security clearly are part of the legal framework of the country.

[Inquartata]

I'm not so sure of the "it's kept millions out of poverty" angle, either. To say that "A received SS" and "A was kept out of poverty" isn't to say that "Without SS A would have been in, and stayed in, poverty".

In any event, "It's helped millions" does not address the accusation that it's a Ponzi scheme. Two separate issues.

Any program which, by dint of simple demographics, will inevitably have a mere two working persons supporting each retiree is on a collision course with disaster. It may be delayed a few generations, but without altering that basic equation it's only postponing the inevitable. And---is it easier to put out a fire early, or to temporize until it turns into a general conflagration?

I'm not sure that private accounts are the answer, or that Bush's assumptions and timelines are correct, but I'm glad to see someone talking about doing something besides adjusting the deck chairs...

[jeff]

Originally Posted by Inquartata

I'm not so sure of the "it's kept millions out of poverty" angle, either. To say that "A received SS" and "A was kept out of poverty" isn't to say that "Without SS A would have been in, and stayed in, poverty".

Before and after comparisons, and studies of poverty and their remediation, make this point rather than a post hoc ergo propter hoc argument. Even Republicans like Bush say how wonderfully SS did this. I consider this self-evident based on 60 years of evidence of its benefits rather than as a theorem that needs to be proved.

Originally Posted by Inquartata

In any event, "It's helped millions" does not address the accusation that it's a Ponzi scheme. Two separate issues.

Indeed they are two issues. However, the worst once could say is that it hasn't been a Ponzi scheme up till now, since each generation's needs for Social Security outflow have been met. If the question is "how to prevent it from becoming one", then there are a number of suggested possibilities: the one Bush proposes, and others, some of which I've mentioned. In neither case is it a Ponzi scheme, which is deliberate fraud, where payouts are impossible due to geometric increases in the sums that have to be paid. This is certainly not the case with SS.

Originally Posted by Inquartata

Any program which, by dint of simple demographics, will inevitably have a mere two working persons supporting each retiree is on a collision course with disaster. It may be delayed a few generations, but without altering that basic equation it's only postponing the inevitable. And---is it easier to put out a fire early, or to temporize until it turns into a general conflagration?

I'm not sure that private accounts are the answer, or that Bush's assumptions and timelines are correct, but I'm glad to see someone talking about doing something besides adjusting the deck chairs...

Everyone agrees that something has to be done. The questions are "what" and "how much". Personally, I don't see how diverting funds from SS keeps it solvent. If the only point was that the equity market provides higher yields with equivalent safety, then the SS administration could solve the problem simply by changing their investments from buying government debt to buying listed equities.

[prototoast]

Originally Posted by jeff

But that's true for ALL insurance plans. Health, life insurance, and so forth. With SS, every generation gets its turn to be on the receiving end - unlike a pyramid. A little tweaking to account for demographics and longer lifetimes would handle the last part.



The overhead of SS administration is lower than that of a standard brokerage. Dramatically lower - it's much more efficient.

Well, they keep talking about how SS won't be able to pay out once the population paying starts to decline... that sure sounds like a pyramid scheme to me (they were just fortunate that for the past 60 years, the population growth effectively matched the necessary conditions of a pyramid scheme).

Originally Posted by jeff

I take your last point - but by and large you do have control of your money, except for the part deducted for Social Security. Yes, that means there is part you don't control - but the upside is that you, and other members of society, have a guaranteed minimum that _will_ be there.

But what if I don't want to pay in. What if I plan on dying at age 50, before I get any benefits? Maybe I want to leave the country when I get older... either way, I should have as much control as possible.

Originally Posted by jeff

I'm going to have to disagree here as well: all 3 branches of government have supported SS and no legal challenge to it has gotten anywhere. Even Bush isn't saying (publically at least) that he's trying to eliminate it. The laws that empower Social Security clearly are part of the legal framework of the country.

All 3 branches of government are in the business of big government. They allow countless unconstitutional laws to exist. Simply because they allow it doesn't mean it's legal.

[mrbiggs]

Originally Posted by prototoast

I think it should be ended. It's a bad pyramid scheme, and it causes nothing but trouble... that, and it's unconstitutional.

W00t on all points, except the constitutionality of it. Many federal programs are unconstitutional by your definition. The federal bank, for example. Yet we keep them because they are necessary.

Social security makes no sense because it is spending more every year. It cannot, and will not, continue on forever. It needs to be reformed so that the money taken in and the money given out are equal.

Privitization is not that reform. It's risky. What if the individual invests their own money...and loses it? We can't let them starve, so we'll end up paying MORE money for them. Bad idea.

[prototoast]

Originally Posted by mrbiggs

W00t on all points, except the constitutionality of it. Many federal programs are unconstitutional by your definition. The federal bank, for example. Yet we keep them because they are necessary.

If they are necessary, why not make them legal?

[mrbiggs]

Originally Posted by prototoast

If they are necessary, why not make them legal?

You got me! But I was pointing out that the whole "not delegated to Congress are delegated to the states" ( or whatever) thing is not always followed in the modern interpretation of the constitution.

[Epee_Pox]

I, and most of my peers with whom I've discussed it, have long believed that Social Security will not be around when we all retire. (To give context, I graduated college in 1992. This is one of those things attributed in general to Generation X that actually seems to be true.)

Bush's plan sounds intriguing. The strongest and most lethal opposition would have come from AARP types, but he cut the marrow out of that opposition by guaranteeing that what they got ain't changing.

If it gives me something to actually save for me, I say fine. But I'd rather just have the money and invest it myself. I'm much better at it than any bureaucrats you hire to do it for me. Much.

But I don't think it's going to pass. Congressmen would be committing political suicide on an individual level, though passing it would have been a good thing. So even the progressive conservatives are likely to join the liberals in insisting that things remain just as they are.

So I'm still convinced that Social Security will be long gone before I need it. I'm not counting on it, and I think it would be foolish to plan for the future thinking it's going to be there for you.

[prototoast]

Originally Posted by mrbiggs

You got me! But I was pointing out that the whole "not delegated to Congress are delegated to the states" ( or whatever) thing is not always followed in the modern interpretation of the constitution.

Well, yeah... that's how they're doing it these days... that's the problem.

[darius]

I'm pretty solidly middle-class. I make a pretty average tech salary -- about $45K (which goes quite far in Rochester, NY). My Soc Security tax is ... wait for it ... about $2500, or 5%.

That's not a large amount when you consider those funds are earmarked for guaranteeing a safety net.

Look, if I want a "personal savings account", or whatever the GOP buzzword-approved word is, I can always create one on my own, without the government's interference. A 401K or SIMPLE plan allows you to invest several thousand dollars, tax-free, and most corporations match that up to a certain percentage. Let's say I can invest $8K and I max it out ... my work will match up to 3% of my salary, so I've put in $8k, gotten $1350 in company matching funds, and then avoided the taxes on $8k. So before spending a single dime, I've gone from $6400 in after-tax dollars to $9350. That's a decent ROI. Now, I can invest those dollars in mutual funds -- I'm not sure about 401ks, but my SIMPLE plan allows me to control which funds I buy shares of.

If I'm willing to take on more risk with after-tax dollars, then I can invest in stocks. There are plenty of tools which make that possible at a low-cost, as long as I'm willing to get an education in how to make that work (working on that now).

That's all the privatization I need. The one thing missing from this model is....a safety net! Maybe I make a series of bad investments, or my portfolio crashes because of a [rec|depr]esssion right when I'm retiring. Or whatever.

Social security provides that. FDR was a clever, clever guy.

darius

[jeff]

I take the same position as Darius. There is both risk and reward in the stock market. If you cashed out in 1999 you probably did a lot better than if you cashed out in 2000. The marketplace has both winners and losers, and social security provides a safety net that softens the blow. There are plenty of programs for private-sector investment that let you accumulate capital. Also remember that it provides benefits for survivor of a worker who dies early, and therefore may not have accumulated a big nest egg.

[scrapinpeg]

Social Security as safety net is a wonderful thing.

But why should I, a young person at the early stages of a career, subsidize the retirements of old folks who have had their whole lives to earn and save money? Not people who are genuinely in dire straits, but all the rest, the majority of retirees who don't or shouldn't really need the Social Security check.

I say scr=w them. They don't need my money, or if they do it's their own stupid fault for not saving. I don't mind shelling out tax dollars to support people who genuinely need it -- in fact, I don't think we give truly needy retirees nearly enough -- but stop giving my money to the comfortably-off.

[jeff]

I was going to respond with "because the next generation will do the same for you", or "the same generation will do the same for your family if you croak young", or "because your 401K might be in the 21st century equivalent of Enron and you'll need the safety net", but it also sounds like you're recommending a means-test. Is that right?

In other words, are you saying that only the poor should receive SS benefits, and not the "well off" (whatever that equates to). That would be a controversial move, since it would open up the program for accusations of "soak the rich" or "Ponzi scheme". I'm not saying I totally disagree (I have no problem with helping poor old people have comfortable retirements), but want to make sure I understand your intention.

Europeans, British, Australians, NZ - how do you like/dislike your retirement plans?

[Peach]

Social Security is also a safety net for younger people, and not in the way you might expect. It keeps you from having to support any relatives (such as parents) who for one reason or another (the leading cause of personal bankruptcy in the US, I recently read, is medical bills) are poor. I personally thank whatever powers there may be that my father gets Social Security, because otherwise I might have to take care of him as well as my disabled mother, his long-divorced wife. My mom through no plan of her own has money. My dad does not. But he can afford to live with his sister in a low-rent part of the country because he has Social Security--and she can afford to take him in.

Social Security is also freedom for the relatives of the recipients--and I certainly never expected to be a caregiver for my parents.