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Monday, January 24, 2005

Social Security Reform

Bush keeps talking about social security reform as if he's privatizing it for my generation. I'd like to thank him for not speaking for me in the future. He doesn't have a clue what I want or need and shoudl really stop pretending that he does.

Privatizing social security is the last thing in the world that I want. Social Security is a defined benefit that I'll get paid no matter what happens to the rest of my investments. I already have a lot of government sponsored privatized retirement savings accounts - my IRA, my 401k, and my 403b(s). Within those, I'm already managing the risks associated with those dollars so that I feel comfortable and earn as much as possible. In recent years, none of those accounts have done particularly well. That's the risks, and that's the way it is, but so long as social security doesn't utterly collapse, I'll always have a small amount of money coming from that to supplement my other retirement incomes. That's right - social security is my most secure investment. And I don't want that to change. I don't want to be responsible for managing that money as well as everything else. It's already enough work to keep track of my various accounts from my past years at different jobs. I've got enough $2000 annoying retirement accounts in all varieties (IRA, 401k, 403b) that are hard enough to keep track of. And managing that money costs money. This year I'm in the process of consolidating those accounts so that they don't continue to be such a burden, but darned if that doesn't cost me a heap big load of fees. Still, it's better than losing track of them entirely. No, I want social security to be my safety net. I can make riskier investments with other retirement dollars if I know I have one sure thing.

So, Mr. Bush, stop trying to privatize social security. We've already got 401k and 403b doing that for us. Figure out how to make social security work as a guaranteed benefit program. That's what it was invented for, and that's what it should be. It's supposed to ensure that the elderly don't starve to death in the streets. If it's privatized, there is no guarantee that the stock market won't tank just as I retire and try to draw cash (as happened to so many in 2001). And a generation from now, we'll have to figure out a way to patch that hole, because most people don't actually have the wherewithal pay attention to how their money is invested and will be starving in the streets, and how will we take care of them then? Will we just say, "Oh they invested poorly. Let them die." That's a perversion of the reason that social security was invented. Social security is a difficult problem. It's grown away from it's original intent. Perhaps contracting it to cover only its original intent might help preserve it to continue to provide that benefit. I don't know what the answer is, but I do know that privatization is not something I desire. It just means one more account I have to keep track of, pay investment fees on, and probably will be laden with restrictions that make it difficult to manage. No thank you. Please think again.

11 Comments:

  • The problem with Social Security, and the reason that it needs some sort of reform, is that it's much more than "keeping old people from starving in the street". Some of the opponents of privatizing SS have advocated limiting benefit increases to match the overall price inflation, rather than the overall wage level; this would keep Social Security solvent over the next 40+ years without raising the tax rate from 15% to 40% or increasing the benefit age to 75, which is what it would take to keep SS functioning as it does currently.

    If you want old people to have comfortable retirements, as opposed to not-starving retirements, you either have to commit to taxing the hell out of the next generation, and probably impoverishing the country as a whole or empowering an anti-old-folks reaction a la Logan's Run, or you have to find some way to get most old people to have more than just a pittance.

    Bush's idea to privatize Social Security, and his programs for encouraging home-ownership, are at least an attempt to address the problem. Privatization won't be complete - there will be some portion of the money still going to the government, and there will be some sort of provision for people who lose everything through stock market crashes, scames, or bad divorce lawyers. Bush is at least addressing the issue, unlike the Democrats whose preferred solution is to ignore the looming problems figuring that the next generation can always raise taxes.

    Meanwhile, Social Security is a pretty poor "investment". For people of our generation, an overall ROI of about 1% is about all we can expect; even a cautious investment in treasury bonds would return better than that, and quite likely leave people with far more money to pass on to their children.

    By Blogger Anthony, at 1:29 PM  

  • Ditto.

    By Blogger Eric, at 5:07 PM  

  • The numbers of the current SS system just don't add up. Too many future retirees vs. number of workers. The system pays out more than it takes in in 2018 (give or take). Without instituting some kind of fundamental change, benefits will have to be cut, age limits raised, or fewer workers being taxed even more. And that's assuming the government actually makes good on the SS "Trust Fund", which I have serious doubts about.

    As pointed out by another commentor, if SS were a private account, the current rate of return is 1%, maybe 2% at best right now. So what's wrong with taking a sliver of that SS money and investing it in secure investments to help avoid the above problems? Christ, even a Federally Insured CD will pay me 4+%.

    Is the Bush idea the best answer? I don't know, but the Social Security solutions should be explored, not just rejected outright in a knee-jerk fashion by the sore loser party and the Main Stream Media. Do you see the Dems saying things like "Yeah, Social Security is going to be a problem, maybe we should try ....."? Nope! All they can do is scream that Bush is going to destroy Social Security and give all the money to the Wall Street fat cats.

    By Blogger Kevin, at 4:33 PM  

  • I think your post really expresses my feelings about Social Security as well. I want it to continue to be a defined benefit program for the same reasons.
    As a defined benefit program, retirees on SS never have dilemma of "living too long" and exhausted their benefits. This can happen with a defined contribution plan like a 401k or IRA.

    By Blogger Chris S, at 11:43 PM  

  • Yeah, but you're going to have to come up with that money somewhere. Would it change your opinion if the solution was to keep benefits at their current level but the eligible age were pushed back to life expectancy + 1 like it used to be?

    By Blogger Eric, at 11:56 PM  

  • Currently any income above about $80,000 a year isn't taxed by Social Security at all. Bill Gates and George Bush pay the same SS tax as someone making $40/hr. One solution is to make Social Security tax applies to all income, just like regular income tax and have the people most able do to so, perform something patriotic, like, for instance, helping out their fellow man.
    This by itself might solve the problem of Social Security without any need for further fixes.

    This won't, as someone melodramatically put it, "tax the hell" out of anyone.

    Comparing rates of return is very misleading.
    http://www.cbpp.org/3-11-99socsec.htm#N_3_

    Further on the same point. Social Security is not a private investment and should not be thought as such. It provides a fixed benefit and insurance benefits. The benefit depends of the person involved. If you live until retirement and are okay, the benefit may not be very large (the actual rate depends on how much you made and contributed, with low income workers getting a somewhat higher rate of return,). It is intended to replace 40% of your salary income. If you become disabled at an earlier age, or are the spouse or child of someone who died, than those people are getting a greater benefit(sometimes much greater but I honestly don't envy them).
    Similarly, if you never get into an accident, your auto insurance premiums are "wasted", if your house never burns down, all the money you paid in fire insurance was "money down the drain".

    As far as CD rates go, that's apples and oranges. Any money you invest in a CD is POST TAX dollars, and the interest you earn is subject to tax as well. It also fails to account for inflation. So the real return is significantly lower (close to 0%). All the studies I have googled for SS rates of return (which range from 1.3% to a speculative 6%) include inflation in their calculations and most SS benefits are not taxed at all.
    The Social Security Trust fund invests exclusively in Treasury Bonds. If there was a way to increase the return, by investing in them, that return would already be happening in the present day Trust Fund right now. So any gain to be had by investing in Treasury bonds instead of SS is illusory.

    As far as individual accounts go, any provision you make to cover stock market losses etc, put the govt right back where they started in covers the benefits themselves with decreasing revenues.

    More links on the dangers on individual accounts that express the risks of the markets much better than I could.

    http://www.bankrate.com/brm/news/sav/20041222a1.asp
    http://www.bankrate.com/brm/news/advice/19990712c.asp

    By Blogger Chris S, at 2:54 AM  

  • Chris, there are 3 issues I have to disagree with you on. First, you are correct, SS is a defined benefit plan. But like any other defined benefit pension plan, the money has to come from somewhere. In the private sector, the money is invested so it can grow. SS is a Ponzi scheme, where around 2018 there will be too many people receiving and not enough paying in.

    Secondly, CDs being taxable is a smoke screen. If gov't changes the SS system to allow a sliver to be privately invested, they can easily make that portion non-taxable. My point was that the return on that privately invested portion can be greater than the theoretical rate of return we currently enjoy from SS, and still be 100% safe. Plus we enjoy the benefit of having that portion actually belong to us and our family. Because only a small portion is privately invested, the rest is available to pay survivor benefits and disability insurance as we do now.

    Lastly, maybe I'm just being too pessimistic, but you place way too much trust in the SS Trust Fund. The gov't has borrowed and spent that trust fund instead of investing it. When it comes time to start paying itself back to fund SS, there's going to be trouble. I don't think the gov't will be able to without drastically raising taxes on somebody, whether through income taxes or payroll taxes. Or maybe they will cut benefits. I personally feel they will be cutting benefits, and I am investing in my private retirement plans based on the idea that SS will only be paying 75% as much as now, adjusting for inflation of course. By doing something now, maybe the above scenario can be avoided.

    By Blogger Kevin, at 8:36 AM  

  • The idea of taxing all income isn't likely to help, as benefits are tied to the payments. So while Bill Gates pays the same SS tax as a manager making $85k, he's going to get the same SS check as that manager once they're 65. Taxing higher levels of income without increasing benefits for those paying more tax will make the SS system less fair than it is now, and will make it nakedly a welfare program, which will cause it to lose a lot of political support.

    By Blogger Anthony, at 11:09 PM  

  • Kevin,

    #1)
    A Ponzi Scheme is an intentional fraud with nothing behind it to start with. Social Security simply faces the prospect of it's expense being great than it's income and I offered a fix to that in my post. Remove the $80,000 cap on SS tax.

    #2) I understood your point just fine. Your figures and assumptions are still flawed. You can't get a better return that is as safe as Social Security. The 4% CD is before inflation (which has been between 2-3% for the last few years), since the 1% on SS is a rough figure, this puts the two pretty much on par. Except that if inflation rises to 4-6% (or 10% like in '79-'81), then you have, in effect, lost money on your CD, whereas SS pays a fixed amount with increases based on wages, and that doesn't include a collapse like the '80s S&L crisis.
    You mention that only a sliver will be available to invest. Compound interest works both ways. A little money can become a lot, but a little taken way can significantly reduce benefits in the future. Pension funds/insurance pools like SS depend on large pools of money to function efficiently. Saying it's just a sliver is a wedge tactic. Chip away a little so it's easier to take it all done later.

    #3)
    "The gov't has borrowed and spent that trust fund instead of investing it. When it comes time to start paying itself back to fund SS, there's going to be trouble." My response is "no and yes"
    Let me address what might come across as a misunderstanding of how the Trust fund works. After SS taxes are paid to beneficiaries, the surplus is put in the Trust Fund. The Trust Fund buys US Treasuries bonds with that money. A Treasury bond (any Treasury bond, bought by SS, China or you and me) is a loan to the Federal government. It borrows and spends that money and pays you back with interest out of tax revenues. That's what it's supposed to do, that's the deal, it's expected, legal and legit.

    So to say they borrowed and spend it instead of investing it, is misleading because it implies they mismanaged something, they didn't. They do what governments do, spend it on governmental programs and pay it back with interest. The government is not in the business of investing in the stock market. It's risky and it has enough money to seriously influence markets which would cause people to cry out about govt interference in the free market.
    Treasury bonds pay interest every 6 months,and returns principal at the end of the bond's term. So the Government has been paying the Trust Fund, is paying it now and will continue in the future.

    Having said all that, if nothing changes,there will be an end to the surplus around 2018, which means that the Govt will have to pay back Trust Fund without recieving funds from new bond sales. All interest and premium payments will have to come from other sources. This will be a problem if left unchanged, what the solution is hasn't been decided.

    By Blogger Chris S, at 2:41 AM  

  • Anthony,

    David Lazarus has written a good column on SS today.
    http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/01/28/BUG46B1PK21.DTL

    I'm pretty much with him.
    I have no problem having Bill Gates pay SS tax on all his wages and yet capping his benefits at $80,000.
    Why ?
    Because Social Security was meant to help insure a decent retirement and Bill Gates doesn't need that help.

    As Roosevelt said, Social Security is about providing "at least some protection" to ordinary citizens "through old-age pensions and through increased services for the protection of children and the prevention of ill health." (from Lazarus's column)
    Bill Gates has all the protection he needs.
    He can collect his check, and benefits from ordinary retirees having stable enough incomes to afford MS products (kind of a 'trickle down effect') and MS doesn't have to boost it's retirement plans to make up for SS shortfalls.

    By Blogger Chris S, at 2:59 AM  

  • Keep in mind there is a major difference between Social Security (as it was intended) and private investment accounts. Social Security is an insurance policy against poverty, and the FICA is not a tax, but rather a premium paid toward the policy.

    Perhaps we should be allowed to set up private investment accounts to take care of replacing our homes and automobiles in case of loss! Oh wait, but what happens if we haven't contribute that much to our account and the house burns down? Sort of like, what happens if we move our money into private investment accounts and then we become disabled a year later? Or we die and leave behind dependents?

    I don't think the younger folk out there in favor of "reforming" Social Security truly understand how it works, and why it was set up the way it was.

    The Social Security Trust Fund (in the form of Treasury Bonds) truly does exist, in spite of what Bush and his people are telling us. It's just that, he really needs to get his hands on it to pay for all of his nation-building and other Republican priorities. Don't let them pull the wool over your eyes.

    By Blogger Robin S., at 10:55 AM  

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