This is topic Is Social Security reform Good or Bad? Somebody tell me what to think! in forum Books, Films, Food and Culture at Hatrack River Forum.


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Posted by IdemosthenesI (Member # 862) on :
 
Okay, this issue is obviously huge. I'm trying to come at it from two different angles. On the obvious side, I don't trust the current administration to make the case for ANYTHING after the "facts" in most of what else they do turn out to be rather heavily massaged. Nonetheless, the idea of all those billions (trillions?) of dollars sitting in a trust fund doing absolutely nothing, as useless as a wad of bills under a matress makes me ill. If the money isn't growing except at the rate of inflation, possibly, how will benefits keep up with the rising cost of living? If benefits can be increased by investing some of the money, should it?

On the other hand, can Social Security meet its current obligations if the money being pumped into the general fund is decreased by the amount proposed for private investment?

This is an issue I honestly know little about, but I don't know of any reliable sources. I'm not gonna go to GWBush's website, and I'm not gonna trust the AARP's brief either. What sources should I read to learn about what is being proposed, its strengths, and its weaknesses?

[ February 01, 2005, 10:55 PM: Message edited by: IdemosthenesI ]
 

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Posted by Paul Goldner (Member # 1910) on :
 
The COngressional Budget Office is one of the best non-partisan analyst groups out there for congressional spending.

Here is the link for pdf file of their latest long term projections of social security.

http://www.cbo.gov/ftpdoc.cfm?index=6064&type=1

Here's a link that will get you digging through many of their social security analyses.

http://www.cbo.gov/SocialSecurity.cfm
 

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Posted by Dagonee (Member # 5818) on :
 
Social security is not really the huge problem - Medicare is. With rising health costs and rising numbers of seniors, there is a huge projected shortfall. I doubt it can be fixed without something more systemic aimed at overall health care reform. My initial idea (which I think fugu has articulated here as well) is something like statewide insurance pools with guaranteed eligibility.

Assistance for affording such pools could be given on the same basis as things like food stamps. We separate the care delivery mechanisms from the assistance mechanisms that way.

Dagonee
 

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Posted by Synesthesia (Member # 4774) on :
 
I read that it will cost several trillion dollars to switch.
It seems somewhat unnessasary as well as expensive.
 

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Posted by IdemosthenesI (Member # 862) on :
 
Is it unnecesary?

According to Democrats, yes, Republicans, no. The most oft quoted statistic by those who favor privatization seems to be that when social security first started there were 16 workers paying in for each beneficiary. Now it's something like three and a half, with that number projected to shrink to two in the next few decades.

The figures quoted by Bush and Co. are pretty much the same sort of misleading tripe they shoveled out about Kerry during the election. They imply (though they are careful not to come out and actually say this) that the money will basically be gone in eleven years. Or that the system will be bankrupt. Or that there is going to be a deficit of 11 trillion dollars.

However, even Democrats who are against reform cite as their evidence that payments into the system will cease being more than benefits payments around the same time. All this means is that the enormous social security trust fund will begin shrinking instead of growing. The money won't actually run out until sometime in the 2040s. Even then, benefits will still be covered at the 80 percent rate, which is basically backed up by the pdfs linked above.

The reason this sounds unconvincing to me is that even with crisis not hitting until 2040, it still seems a ticking time bomb, and "we'll deal with it later" seems like a pretty silly answer.

Is it expensive?

This is where the above pdfs don't help very much. The basic concept here is that Bush's plan allows workers to redirect about three percent of their payroll taxes from social security to a private investment account. Instead of paying for the existing system, it would pay for their personal retirement investments, which would hopefully be invested wisely. Like any investment, there are risks involved, but as long as people invest wisely in widely diversified mutual funds, there is a high likelihood of recieving a higher rate of return than they could expect from social security (at least from what I know.)

There seem to be two major attacks on this proposition. First, whereas social security is guaranteed by the government, money put into the stock market can be lost with no recourse whatsoever. Ask the Enron employees who invested primarily in their own company's stock. They now have no retirement savings.

Second, and in my opinion the stronger argument, the social security system is not a savings account. Today's workers are paying for today's retirees, not putting that money away for their own retirement. Currently, about twelve percent of workers' payroll taxes go into social security. Reduce that to nine percent, and you reduce the money that is being pumped into the trust fund. Rather than the current system going insolvent in 1940s, it could go insolvent much sooner, leaving workers with only what they had put into personal retirement account (or as little as three percent of their payroll taxes.) I haven't seen any estimates of how soon that would happen assuming a reasonable number of people take advantage of the personalized accounts.

In other words, in exchange for allowing future retirees to get a better return on their investment, we could be screwing over the people who are unlucky enough to be retiring when the current system collapses.
 

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Posted by Troubadour (Member # 83) on :
 
In Australia we have a slightly different system.

Everyone contributes from their wages to Superannuation. Usually a salary package will be listed as 50K + super - and your super will be a fixed percentage in addition to your wage.

Super is privatised, but mandatory. So every full-time, part-time or permanent employee has contributions made their entire working life.

Up to a certain point, any voluntary contributions you make will be matched dollar-for-dollar by the government and you can also salary-package additional super contributions out of your pre-tax salary - which the goverment will match as well.

Unfortunately, these super funds are run by private investment firms who chose how to attempt to grow your super. Some just stick it in the bank and let the general interest rate take care of it - even at 6%, with compound interest, it's not too bad. However during the dot-com crash of '01, many super funds went backwards. To the point where my dad, who had just retired, purchased a very large twin-engine cruiser. By the time he'd sold it, it had held onto enough value that he was better off than if he'd left his money with that particular super fund.

Another issue is that super once wasn't taxed. Now the interest is taxed and even worse, if you try to take it as a lump-sum on retirement (you can't access super until you're 55 or 60) you get taxed horrifically.

If the government had left the system alone, it would've been sufficient for people to live out their retirement on. As it is, Dad tries to get additional work to make up for the low super.

Our national health system is also quite good, although again, not as good as it was.

We have both private health insurance (which I've never heard of being covered by an employer) in addition to a different kind of Medicare system.

Doctors can choose to be part of the Medicare system or not. While it used to be the case that almost every doctor was, it's become less common - now only about 50-60% of doctors use this system - but it's vital for low-income families. Essentially Medicare doctors "bulk-bill" - every man, woman and child in Australia has a Medicare card. If you go to a doctor who bulk-bills, you simply swipe your Medicare card and pay nothing for the consultation or most GP-based treatments (except for any medications you need to purchase). The doctor then bulk-bills the government - effectively giving the government a discount for charging a bunch of patients at once.

Odd system, I know, but hey, I've never paid for a consult in my life from a GP.

Health insurance is expensive, but not too bad.

I pay about $68AUD a month for my health insurance. I get around 6 months of contact lenses free a year, huge discounts off my physio and hospital & amublance cover.

Since I've never been to hospital for an emergency, I don't know exactly how it works, but public hospitals are free. Unless you're going in for voluntary procedures. Some stuff costs - like MRI's and Chemo - but much of it is heavily subsidised. If your health cover is good enough, you also get some private hospital coverage as well.
 

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Posted by IdemosthenesI (Member # 862) on :
 
I recognize that something must be done eventually. As with any problem, the sooner it's addressed the better. I'm ashamed that my party's position is "We'll cross that bridge when we come to it." However, I don't know if what Bush is proposing would work, or if it would result in Social Security being dismantled entirely far sooner than it otherwise would have. I like the idea of this money being put into the economy in order to finance innovation and entrepeneurship, not to mention gain a better return for the people who will rely on it in the future, but I don't know if that will hurt the people who have paid into the system their entire lives only to find that the system doesn't have enough in the general fund to pay their benefits when they go to retire.

I find myself conflicted on this issue. The cynical part of me wants to dismiss the entire thing as a scheme to get a lot more money into the market so those who already hold a lot of stock (Republicans) will have their portfolios leap in value. But even if that's the case, a rising tide lifts all boats. If it means fewer people have to live at the poverty level after they quit working, I don't think I mind if a few fat cats make a fortune in the meantime. If it means an entire generation of seniors is going to be left out to dry... I don't like that idea.

It does seem a bit suspicious that Bush would propose pumping vast amounts of money formerly earmarked for social security into the markets only a few years after slashing the capital gains tax, though....
 

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Posted by IdemosthenesI (Member # 862) on :
 
So Troubador,

Is your individual contribution to the super what you get out? In other words, are they personal accounts, or is payout based on a percentage of pre-retirement earnings, or what?
 

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Posted by Synesthesia (Member # 4774) on :
 
Someone said it would have a negative effect on disability.
 

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Posted by aspectre (Member # 2222) on :
 
There is no money in the SocialSecurity trustfund account, just IOUs.

Now, unless you are intending for the US government to defraud those folks who are owed the services that were supposed to be taken care of, there ain't no SocialSecurity money available to be diverted into individual retirement accounts.
 

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Posted by IdemosthenesI (Member # 862) on :
 
Yes, aspectre. That is my question. But if I just wanted assurances, I would go to dailykos.

I am accustomed to mistrusting anything the current administration says, but in this case, I have misgivings as to the responses by my party. Do you know of a fairly unbiased source for what the effects the Bush proposal would have on the trustfund? How would it affect the insolvency horizon for current benefits payout?

Anybody?

[ February 02, 2005, 02:05 AM: Message edited by: IdemosthenesI ]
 

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Posted by Troubadour (Member # 83) on :
 
Yeah, you get out what you put in, plus interest. But it's *not* voluntary. Your employer puts in roughly an additional 9% on top of your wage every month into a super fund. You can't touch this money until retirement and it earns a varying degree of interest depending on the management company. You can choose which company manages your super.

But you can make voluntary contributions in addition, which the government will match dollar for dollar, if you're earning below about $45K a year.
 

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Posted by IdemosthenesI (Member # 862) on :
 
Wow... That sounds like a really good system. The problem with the american system right now is twofold.The most seemingly insurmountable is how do we get there from here. We have a system in place that must meet obligations to workers who have already been paying into it. The second problem is, of course, what you mentioned happened in your case, that the markets are not 100% reliable. However, over a long term, one can do much to make sure that the money is, if not safe, at least fairly safe. The vastly increased potential rate of return is a very good argument for assuming th risk. If the money were all just placed into a broad based index fund, similar to the Wilshire 5000, I would be a lot more comfortable.

But at the moment, the only serious opposition I see is the transition period, which I still don't know where to find reliable figures on.
 

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Posted by Troubadour (Member # 83) on :
 
I think the best system would be one similar to our own, where employers are obliged to factor Super into their pay scales, and add it in on top of the salary at a fixed percentage mandated by the government.

You should not be able to access this money until you're retired after age 55.

The money should be managed by private firms that make a small amount from each account through fees - they make huge dollars simply by the sheer number of people who are members. $50 a year is a bucketload if you have a million members.

The funds should be put into a spread of safe investments ranging from normal banks savings through to relatively safe shares - and you should be able to choose your own management firm based on whether you want a company that is safer or riskier than others.

There needs to be accountability for how those shares are managed and how they perform.

Once the worker has retired they should be given incentives for keeping their money in super - such as higher interest rates - while they recieve a monthly stipend. They shouldn't take a hit if they want to remove their entire fund.

Bear in mind also that we do have government funded social security. You're on the poverty line, but if you can't work for whatever reason - you will be supported.

We do have a fairly comprehensive welfare system for younger people who are out of work or are unemployable. They have to prove that they are actively seeking work, make fortnightly check-ins, with quotas for job applications. You can't refuse any work offered to you or you lose your benefits.

If you're off work for an extended period of time, there are other programs as well - there's "Work for the Dole" which you can be forced into; the government basically puts you to work for your dole money. There's also the NEIS (New Enterprise Incentive Scheme) that gives people a 3-month training course in business management and marketing. At the end of this they must produce a workable business plan, which is then reviewed by a number of parties. If it's approved you get a year to make your idea work - they'll support you to the tune of around $10k for the first year. It's not means-tested either, so you can make a bucket-load on your business that year and they'll still give you the cash. You can't earn more than $600 a month outside of the business tho, or they take the support away.

I know I got a little off-track, but I just wanted to highlight how we have a reasonably good system here - except for our ridiculously high level of taxation. The mix of private management with government oversight, along with government support for the truly needy works quite well.

(By the way - until 2000 we never had a goods & sales tax. We had a fairly simple income tax and that's it. It had a sliding scale based on how much you earn. It's actually fairly rough now - Once you're about $56K a year, you're getting slugged 48c in the dollar in Tax, in addition to a 10% GST. It's gotten quite tough. When my parents were my age, there was a flat income tax of around 9%)
 

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Posted by IdemosthenesI (Member # 862) on :
 
I agree with you except on one point. I don't see any reason you should be able to withdraw the entire amount as a lump sum without some sort of penalty, simply as a way to discourage people from doing so. If you retire at 55 and live until 80, that money has to last a very long time. The government has a compelling interest in encouraging citizens to remain self-sufficient, as otherwise, they would have to lean on the state for survival. There is no faster way to complete financial ruin than liquidating all of your assets and withdrawing them for whatever reason.

I'm certainly happy to be convinced otherwise, though.

[ February 02, 2005, 04:25 AM: Message edited by: IdemosthenesI ]
 

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Posted by Troubadour (Member # 83) on :
 
Sure, I'm not quite certain of that one myself yet.

I feel it's unfair to penalise someone for accessing funds they have rightfully earned, but I agree that it's not right to take that money, spend up big, then rely on the state.

I guess the incentive not to is that what the state provides is extremely little - around $380 a fortnight, and you'd only get that much if you had no property and no appreciable assetts. It's difficult to live on that kind of money.

However some people would be able to do great things with that lump sum - my father for instance. He took the hit and invested it wisely (it's weird to think of a boat as an investment, but there you go) and came out better than people who'd left their cash in super.

But it was still a HUGE whack of his funds nevertheless.

not sure where the line should be drawn.
 

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Posted by IdemosthenesI (Member # 862) on :
 
You say he bought the boat as an investment, sold it, and then put the money back in the market? If the hit for pulling the lump sum was really that big, I would think holding onto his shares and riding out the slump would have still left him in pretty good shape, no?

If he took it out and bought his boat and then waited for the market to rally before re-investing, that's trying to time the market. Generally, timing the market can't overcome transaction costs and fees, especially if there was a large fee for getting the money out in the first place. It sounds to me like he ended up being pretty lucky.

Of course, I'm fairly new to investing, but I certainly wouldn't want to encourage people to speculate in unsafe investments with the government mandated retirement funds.
 

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Posted by Troubadour (Member # 83) on :
 
Dad used to be a futures writer for The Bulletin and was widely regarded as one of the canniest analysts in Australia in his day. He correctly predicted the '87 stock market crash and got out.

Ironically, The Bulletin cut back its analytical writers and Dad got the chop - despite being the only one in his peergroup of freelancers who got it right; down to the month.

He got out entirely and has only just returned to analysis recently using a bunch of new charting programs. Bores me senseless, but he certainly seems to know what he's doing.

He's got this system going where basically he wins/loses 50/50 - but his winning shares are always worth around 4 times as much as his losing ones, so he always comes out on top.

Don't ask me how he does it. He's been refining his systems for quite a number of years. Previously they were entirely mathematical in nature. He was quite excited this year to discover that people aren't rational beings and that he needed to account for the "human factor". He's estimated that all of his calculations need to include a 25% human factor.

Not that he's human himself, when it comes to numbers.
 

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Posted by IdemosthenesI (Member # 862) on :
 
I guess that would explain his ability to time the market, then. Say, he doesn't want to gie me a bunch of free money, does he??
 

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Posted by Paul Goldner (Member # 1910) on :
 
" I'm ashamed that my party's position is "We'll cross that bridge when we come to it.""

This isn't exactly true. There are several democratic proposals out there, most notably the Diamond-ORzag plan.

In my opinion, the best way to fix social security is to remove the cap on payroll taxes. Currently, all money earned over, I believe, 93,000 dollars in a year, is not taxed for social security purposes. If income over 93k were taxed as income under 93k were taxed for purposes of social security, a rather large amount of money would be added to the revenues every year.

Combined with modest (less then the CBO assumes will occur under the Bush plan) reductions in benefits, this would keep social security healthy past the 2055 crises that the CBO currently projects.

In 2055, the trust fund will be exhausted and revenue less then payouts, under current law, so benefits would be cut to about 80% of current benefits, and social security at that level would remain solvent until 2105 at least.
 

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Posted by IdemosthenesI (Member # 862) on :
 
Interesting. Any idea how much that would increase the taxes on somebody making, say, 200,000?

BTW, Paul. Have you heard any reliable figures on when the current system would go insolvent under the proposed Bush plan, given the reduction of funds being paid in to the trust?
 

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Posted by Dagonee (Member # 5818) on :
 
It would increase it somewhere on the order of $7,000 from the employee, and the same from the employer.
 

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Posted by Belle (Member # 2314) on :
 
It's real easy to say "Oh just increase the taxes on the people making over $93,000"

But since it increases it for the employer as well - and since self-employed people have to pay the full contribution, you'd be talking about a significant increase on the part of people who own their own businesses.

What percentage of our work force works for small businesses? Isn't it around 80%?

So increase taxes significantly for small business owners....and see what kind of effect it has on the job market.

[ February 02, 2005, 12:18 PM: Message edited by: Belle ]
 

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Posted by fugu13 (Member # 2859) on :
 
The problem is, of course, that the social security tax is currently extremely regressive.

The tax is (effectively, in terms of employment determent) 12.4%. So your typical person making $40k/year in taxable income will be paying a rate of around 29% in federal taxes (not counting medicare, which is the same percentage across brackets)

A person making $150k/year in taxable income, however, is only paying about 3% more than that after SS is accounted for -- 32%. Adding in that wealthier people tend to have more tax breaks available to them, and its quite likely that someone making 150k a year is paying a lower overall percentage tax than someone making just 40k a year.
 

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Posted by Bokonon (Member # 480) on :
 
I'd raise the age cap too. Age 65 ca. 1930 is the equivalent to what in 2005? Phase in the age increase over time. So many people in my generation say they aren't planning on counting on social security, let's see if it's true.

-Bok
 

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Posted by Jay (Member # 5786) on :
 
There is a crisis, there isn’t a crisis. Seems like it depends on who is suggesting the reform on weather there is a crisis or not.
I think it would be good if they didn’t give it out to so many people under retirement age who claim disability. It’s interesting to see these same people out and about doing things all the time and what not. If they can do this why can’t they work?
 

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Posted by Paul Goldner (Member # 1910) on :
 
"BTW, Paul. Have you heard any reliable figures on when the current system would go insolvent under the proposed Bush plan, given the reduction of funds being paid in to the trust?"

The plan wouldn't go insolvent, because benefits would be dramatically reduced, according to the CBO. Something like a 30% reduction in benefits, starting much sooner then we'd have to reduce benefits under current law. If we left benefits as they are now, until 2055 when we'd have to reduce them under current plan, the Bush Plan would make socsec insolvent in about 20 years.
 

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Posted by fugu13 (Member # 2859) on :
 
Because I'm sure you've evaluated the cases of all the millions of people in that situation, and verified that at least a large percentage of them are "out and about". Not to mention there are certainly things which prevent one from holding gainful employment that do not prevent one from walking.

Way to go on the dismissing Americans with disabilities wholesale, Jay, your compassionate conservatism is really showing.
 

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Posted by Belle (Member # 2314) on :
 
The age to retire with maximum benefits has already been raised, to 67.

Am I right on that? I seem to think it's 67 now.
 

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Posted by Jay (Member # 5786) on :
 
Oh because I think that someone who can go out and do construction work with a buddy shouldn’t get a government disability check, I’m bad?
Guess that means you think everyone should get one. Sounds like communism to me.
I don’t have a problem with helping out someone who truly needs it. But bums who take advantage should have to pay back ten fold.
 

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Posted by fugu13 (Member # 2859) on :
 
The problem is that you suggested cutting it off for disabilities because you know of someone screwing the system, not because the system is a bad system.

There is no perfectly efficient system out there; every system will be exploited in at least a few cases for personal gain. That this happens is bad, but not a reason to scrap any system, because otherwise there would be no such thing as public policy and we would have anarchy.
 

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Posted by IdemosthenesI (Member # 862) on :
 
An NPR story about SSDI (Social Security Disability Insurance).
http://www.npr.org/templates/story/story.php?storyId=1675516

I really am conflicted on this one. I know that a lot of people really need this, but at the same time, the definition of disability has expanded to the point where it includes a lot of conditions that aren't chronic. Even so, people who get on SSDI generally don't get off. It seems like the system is a bit more susceptible to abuse than it could be. I'm not ready to write the whole thing off, though.
 

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Posted by Bokonon (Member # 480) on :
 
I think it's still 67... And when I'm saying raise the age cap, I'm talking 70, 75. My idea is to put it at around the life expectency of the generation retiring.

-Bok
 

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Posted by Jay (Member # 5786) on :
 
Interesting. I get accused all the time of not reading stuff or messing up what I say. I clearly said “if they didn’t give it out to so many people” that doesn’t look anything like “you suggested cutting it off”
Big difference. Again, talking about a place to help reduce cost and instead of looking at the idea let’s attack the conservative. I seem to sense a theme.
Sort of like when you go out to the store and see people pulling up in one of the handicap spots but of course they walk right out into the store. They seem to give these out like candy anymore. Don’t want to get sued for not giving it out right?
 

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Posted by Olivetta (Member # 6456) on :
 
Privitization will not solve the problem, though. It will earn the private sector some nice brokerage fees, and some may come out ahead. What of the people who have to retire when the market is down, or who unexpectedly become disabled?

I worked for the Social Security Administration for nine years, and this really scares me. I've SEEN situations where privitization would lead to people getting nothing. No system is perfect, at least not in the U. S. but this will not end well, IMO.
 

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Posted by IdemosthenesI (Member # 862) on :
 
At the same time, to play the devil's advocate, people who retire when the market is down will also, once the system is in place, have been paying into the market for their entire working lives. Over the long term, the stock market can be pretty reliable. How would you feel, Olivet, if it were a mandatory investment into your choice of broad based index funds? Or even just a blanket universal fund like the Wilshire 5000, which is basically like putting money into the ENTIRE stock market. Even if it's on a down year when I retire, the market can usually be counted on to rally, and if I've been paying into it my whole life, I've still probably got more than I would have putting it under the mattress, right?
 

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Posted by Brian J. Hill (Member # 5346) on :
 
I agree with ldemo's "devil's advocate" position. To it, I would add that the idea is that it is a totally voluntary program. Those who choose to participate in privitization are aware of the risks of the market being down when they retire, and accept that as a possibility. Those who are unwilling to accept the risk will continue getting their checks.
 

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Posted by Olivetta (Member # 6456) on :
 
It depends on how bad it happens to get. If you were in the position of having to retire during, say, black October (which lasted quite awhile, if memory serves) your 30 year investment of of $100,000.00 (or whatever) could be worth a third of that, or less. In which case, a mattress-stuffer would come out ahead.

If there are safeguards in place to prevent that from happening, then how would it really be less expensive to do it that way? Because you can't always control when you'll need to retire.
 

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Posted by Olivetta (Member # 6456) on :
 
Brian, I have dealt with these supposedly informed people you speak of, and 95% of them will do whatever somebody tells them to do, whether they understand it or not. Some areas may have a bit more well-informed populace than others, but I served in both very rural and very urban areas, and most people don't get it if it can't be summed up in a sound bite.
 

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Posted by Brian J. Hill (Member # 5346) on :
 

quote:

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people don't get it if it can't be summed up in a sound bite

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quote:

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both very rural and very urban areas

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I especially liked that you didn't place the blame for cluelessness only on rural America. As someone who grew up in a rural school system, I'm pretty offended at unfair stereotypes, and condescending worldviews held by the "more sophisticated" urbanites.
 

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Posted by IdemosthenesI (Member # 862) on :
 
Okay, obviously the stock market crash that started the great depression would be a bad time to retire if Bush's plan had been in place then. However, that was a completely different market than today's. The corruption in that market would make Ken Lay look like Saint Nicholas! That was before we had the SEC, the FTC... Basically, while there is still risk in the market, isn't it at least a kinder, gentler market than it was then? The chances of somebody paying in over an extremely long term (decades) with a buy and hold strategy into a broadly diversified portfolio and coming out with less than their cumulative investment... A nuke would have to hit the NYSE!
 

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Posted by holden (Member # 7351) on :
 
It is important to note that private accounts would also have non stock market options such as government and investment grade corporate bond funds. As a person approaches retirement, it would be prudent for that person to move more and more money away from growth investments (the stock market) and toward safer income producing investments (the bond market). Investing is not rocket science. Most people have some exposure to the markets in 401k or other employer sponsored accounts. In order to provide for people who are unable or unwilling to learn basic principles of investing (asset allocation, diversification etc.) the govt. could provide mutual funds that target a specific retirement year and the fund management would make asset allocation changes for you. As you get closer to retirement the fund would automatically add more bond exposure and limit stock esposure.

The important thing is that over time we are changing from a system that is basically a ponzi scheme, (paying one group of people with money from another group) to a wealth building system that will help everyone, the poor in particular.
 

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Posted by Olivetta (Member # 6456) on :
 
Exactly, Brian! I think a lot of people will think it's a good idea without really knowing the implications, and that is why it scares me. Not because I think it won't work out for the best for the people who do know what they are getting into.

I don't think there is an easy solution. Things are dire. Maybe if a plague kills off half of the Baby Boomers in the next five years, the system we have would suffice. Okay, not the best place for black humor.

I do believe that whatever we end up with be half-assed and cumbersome, because I have never witnessed an elegant and efficient solution to anything emerge from Washington D.C. The system complicates things quite a bit.
 

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Posted by holden (Member # 7351) on :
 
None of the proposals that don't include personal retirement accounts actually fix the system. They simply delay the day when the system goes in the red. We must make a structural change in how we look at retirement. Changing demographics simply won't allow us to continue to have current workers fund the retirment of current retired people.
 

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Posted by Paul Goldner (Member # 1910) on :
 
"None of the proposals that don't include personal retirement accounts actually fix the system."

Maybe true, although I tend to disagree with that assessment... however, personal retirement accounts by definition break the system. We already HAVE personal retirement accounts. Social security is supposed to be a safety net for retirees... a publicly garunteed minimum income to retire on. Personal retirement accounts replacing social security eliminate that contract with retirees.
 

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Posted by holden (Member # 7351) on :
 
"personal retirement accounts by definition break the system. We already HAVE personal retirement accounts. Social security is supposed to be a safety net for retirees... a publicly garunteed minimum income to retire on. Personal retirement accounts replacing social security eliminate that contract with retirees."

No one is talking about eliminating the contract with retirees. The only idea on the table is giving the people the OPTION of taking some of their FICA taxes and investing them in personal accounts in exchange for lowing their future benefits. I don't think there is any question that the end goal is to replace the current system with 100% private accounts in the future but that simply can't be done in one step. The obligation to people that are at or close to retirement must be kept.

I think the primary difference between the personal retirement accounts we already have (IRAs etc.) and the personal retirement accounts proposed as part of a social security overhaul is that contributions would be mandatory. Not only that but they would be invested in a select group of approved and diversified investments. Even people that decided to play it safe and invest only in govt bonds would end up with a larger income stream than social security currently provides. It is possible that some people may not invest prudently and have too much exposure to stocks right before retirement. It is my opinion that the percentage of people that would do that is small. Again the investment choices could provide safeguards against that by providing automatic asset allocation shifts towards bonds as people age.

It is really a question of personal responsibility and freedom or dependence on govt. If given a choice between an income stream guaranteed only by a govt promise to pay (if they have the money) and an account that I own as part of my personal wealth, I'll take the account any day. How about you Paul?
 

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Posted by Belle (Member # 2314) on :
 
holden are you new to hatrack? If so - welcome!


 

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Posted by ClaudiaTherese (Member # 923) on :
 
Hi, holden. Welcome to Hatrack.

An honest question, not trying to trap you -- what do you foresee happening if we have another stock market crash, and it turns out that some have invested unwisely? How would (should) the options look like to someone who is retired, but now has no savings to live on?

*interested
 

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Posted by holden (Member # 7351) on :
 
Thanks Belle.

I actually have been a lurker for a couple of years now. I registered holden a long time ago with a member number in the 5000s but for some reason it wasn't in the system when I tried for the first time today.
 

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Posted by holden (Member # 7351) on :
 
It would be virtually impossible for someone to lose "all" of their savings in a stock market crash. Even if we take the extremely unwise example of a person who chose to be 100% exposed to the stock market right up to the day they retired. They would not be invested in individual stocks so they would not be exposed to an Enron like disaster. They would be invested in broadly diversified funds that have exposure to hundreds or even thousands of companies. If the stock market as a whole were to decline to zero, we would have more important things to worry about than our savings accounts.

One possible solution I have thought about is having the mix of investment choices available determined by age. For example younger workers could choose between a broad range of stock and bond combinations while older workers would be limited to less stock exposure. I'm not sure I'm in favor of this idea as it would limit people's freedom to choose for themselves. However if that is the compromise that would be required to convince those that oppose private accounts it would be worth it.
 

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Posted by ClaudiaTherese (Member # 923) on :
 

quote:

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They would be invested in broadly diversified funds that have exposure to hundreds or even thousands of companies.

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So, I'm guessing that this would be a requirement under your ideal plan? (that is, diversification) It seems logical to me to diversify, but there are always people willing to do otherwise.

(I can't tell whether you would want required diversification of such investments, or not. The first paragraph suggests so, but the second indicates it would be at best a necessary evil to you. Just a little slow, here. )
 

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Posted by holden (Member # 7351) on :
 
"I can't tell whether you would want required diversification of such investments, or not. The first paragraph suggests so, but the second indicates it would be at best a necessary evil to you. Just a little slow, here."

Not slow at all CT, I'm just not being clear. It is my understanding that the personal retirement accounts currently on the table would be similar to most 401k plans in that individual stocks are not an option. All stock exposure must be through mutual funds that are broadly diversified. In other words I don't think owning individual stocks is even on the table. Thus the concern of having a complete disaster and losing all of your money is only possible in an armegedon like scenario. It is however possible that even in a broadly diversified stock mutual fund you could experience very significant losses based on the market as a whole declining as it has done at various times in the past. That is why it may make sense to limit people's exposure to stocks as they age so that if we did experience a large crash like 1987 or 1929 people close to retirement would either not have stock or at least not much.
 

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Posted by holden (Member # 7351) on :
 
The question of whether or not the govt should force people to limit their stock exposure is similar to whether the govt should pass motorcylce helmet laws. It is obvious that if you are going to ride a mortorcylce you should protect yourself with a helmet. The question is should the govt force you to be smart? I don't think so.

I know, there is one difference. People who chose not to wear helmets either don't crash and are fine or do crash and remove themselves from society. Either way they are not a problem for the rest of us. People who are not prudent in their investment choices have the potential of being a burden that the rest of society has to bear. It is my belief that the fraction of people who would do this would be small enough that the govt could provide some kind of minimal benefit to them through the current system(i.e. maintaining a very small portion of current payroll taxes). I would prefer that this happened through private charities but that might not be politically feasable.
 

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Posted by ClaudiaTherese (Member # 923) on :
 
Thanks for the clarification, holden. I understand much better now.
 

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Posted by Brian J. Hill (Member # 5346) on :
 
I'm right now listening to a financial planning radio talk-show, and they're debating this issue right now. If you have streaming audio capacity on your computer and want to know more about how privitization works, you can listen live right here.
 

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Posted by TheHumanTarget (Member # 7129) on :
 
Sorry to double post, but this was under the state of the union topic, and it really applies here...

Someone needs to take the President, Vice-President, and all of Congress to a nice quiet place, and explain that you can't fund new projects and cut taxes at the same time. Raising the national debt limit doesn't help either, it just pushes the responsibility for repaying the debt onto the next president.

Folks, if any of us ran our households like this, we'd be homeless and destitute on the streets. Whether you disklike Bush or adore him, are a Republican or Democrat, you have to see that he is not creating policies that make fiscal sense. Frankly, these policies don't even make it past a common sense test.

I become very worried about our country when I hear some of the hare-brained plans that are being considered for our country and how they will affect us fiscally.

The plan for Social Security is laughable in its deliberately deceptive double-speak. I can't even begin to cover it here in the forums...but read the Washington Post article http://www.msnbc.msn.com/id/6903404/

What's worse is that it doesn't even mention MediCare, which is tied so closely to Social Security that any attempt to change one program will impact the other. Not to mention the fact that it's widely believed that MediCare will go bust years before SS.

What's so frustrating about this, is that we're just along for the ride. Our representatives don't live by the same rules as us, and aren't affected by their actions or in-actions until they run for election. Policy-making has stopped being about policy, and has just become another gimmick to sustain the career of self-serving politicians...

BAH!!!
 

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Posted by mothertree (Member # 4999) on :
 
Privatizing up to 4% of an individual's payroll tax. Is it me or is that not very much? I guess it will need to start out as not very much, since the contribution/payout ratio is going to be so critical for the next 20 years or so.

[ February 03, 2005, 02:29 PM: Message edited by: mothertree ]
 

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Posted by holden (Member # 7351) on :
 
Comparing the government's fiscal policy and a household budget is not a valid comparison in my opinion. When the govt makes the decision to lower taxes (decrease govt revenue in the short term) in many cases they actually end up with more revenue in the long term due to classic supply side economics. People have more money so they spend more which causes people to make more money and owe more taxes. Of course this only works to a point or the ideal tax rate would be .000001%. A household on the other hand that makes the decision to make less money, simply ends up with less money. Not the same.

I would be very interested in hearing a plan to fix social security that does not include private accounts. Fix, not delay the problem. To me even if the program is OK until 2105 it is still a problem that we are pushing onto the next generation.
 

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Posted by holden (Member # 7351) on :
 
Mothertree just to be clear it is 4 percentage points of the current 12.6% payroll tax. That equates to about 31.7% of the total payroll tax. So it is a significant amount.
 

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Posted by mothertree (Member # 4999) on :
 
Uh... how does 4% become over 30%? (I am a tax preparer, lay it on me.)
 

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Posted by holden (Member # 7351) on :
 
Mothertree, the 4% is the amount of our income(subject to limits) that we will be allowed to put into personal accounts. So what percentage of the total social security tax does that make up? Social security tax is currently 6.2% paid by employee and 6.2% paid by employer for a total of 12.4%. Of those 12.4 percentage points the plan would allow us to put 4 of them into private accounts. 4 is 32.25% of 12.4. (i accidently used 12.6 in the last calculation sorry) If you use the entire payroll tax (15.3% including medicare etc.) the percentage is slightly smaller at 26.14%. Some people make the mistake that the 4% figure means only 4% of the numerical amount we pay into social security. I thought that is what you ment and was trying to clarify.
 

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Posted by mothertree (Member # 4999) on :
 
See I thought it might mean 4% of income, but the way it was phrased seemed to mean 4% of the 12.4, which didn't seem like enough to make a difference. So I'm actually relieved at that explanation.
 

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Posted by TheHumanTarget (Member # 7129) on :
 
Holden,
My comparison was not meant to be literal, just comparitive in that, supply-side economics aside, there is nothing indicating that our economy is prospering by lowering taxes. Especially if our spending so far overruns the prospective returns of lowering taxes as to negate the supposed effects.

I agree that some level of privatization is necessary, I just don't believe that this plan is the way to go. The funds still disappear before the majority of us have an oppurtunity to use them.
 

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Posted by holden (Member # 7351) on :
 

quote:

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there is nothing indicating that our economy is prospering by lowering taxes

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quote:

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I agree that some level of privatization is necessary, I just don't believe that this plan is the way to go. The funds still disappear before the majority of us have an oppurtunity to use them

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quote:

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As every economist I know is of the strong position that tariffs are bad, yet people in congress and the executive continually put tariffs in place, I am confident that whatever they know about economics the people in the US government are more than happy to ignore it for political reasons.

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Not that I actually agree with tariffs or know why politicians put them in, but I'd like to point out that being bad for the economy doesn't mean it's the wrong thing to do.

Hobbes
 

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Posted by fugu13 (Member # 2859) on :
 
Name five well-respected supply side economists .

Note, this is not merely people which advocate strong supply side support, but people who are adherents to the "supply side" theory that ignores the demand side.

Here's an article by Krugman you may find interesting: http://www.huppi.com/kangaroo/23More.htm

Krugman has some significant problems of his own, but his criticisms of supply-side economics are generally appropriate. Plus, its worth pointing out that Bush's second round of tax cuts got soundly criticized by conservative think tanks (including a supply side one or two, iirc) for using intentionally deceptive accounting and not being accompanied by spending cut proposals.

[ February 03, 2005, 05:53 PM: Message edited by: fugu13 ]
 

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Posted by fugu13 (Member # 2859) on :
 
Hobbes: while economists don't like subsidies either, economists are (generally) of the opinion that a subsidy program is better than a tariff program, resulting in basically the same benefits with fewer negatives.
 

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Posted by Dagonee (Member # 5818) on :
 

quote:

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Everyone knows that inflating the budget with stupid add-ons on random bills is stupid, but they do it anyway. They know it's stupid - they do it. Not so with supply-side economics. They actually have reasons to believe that it will work, whether they are accurate or not.

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quote:

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Hobbes: while economists don't like subsidies either, economists are (generally) of the opinion that a subsidy program is better than a tariff program, resulting in basically the same benefits with fewer negatives.

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I wasn't advocating anything Fugu, just pointing out that there are non-economic or political related reasons to do things [even strongly economicly based things such as tariffs] too. It was an aside, not an attack.

Hobbes

[ February 03, 2005, 05:58 PM: Message edited by: Hobbes ]
 

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Posted by fugu13 (Member # 2859) on :
 
Yes, and I was clarifying why that wasn't likely true in this case .
 

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Posted by fugu13 (Member # 2859) on :
 
Dags, yes, but the politicans are the ones making the specific decisions, and so can be brought to task for those, while it is much harder to sway a large mass of voters to stop voting for someone who sends inefficient pork products their way.
 

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Posted by Hobbes (Member # 433) on :
 
Well now we're clarifying clarifications, perhaps it's time to stop.

Hobbes
 

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Posted by fugu13 (Member # 2859) on :
 
In politics, government, and economics, it is extremely important to be clear, particularly as there's a lot of misinformation out there .
 

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Posted by Dagonee (Member # 5818) on :
 

quote:

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Dags, yes, but the politicans are the ones making the specific decisions, and so can be brought to task for those, while it is much harder to sway a large mass of voters to stop voting for someone who sends inefficient pork products their way.

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