Saul Friedman: On Social Security–Just the Facts Please
Posted at 1:18 pm, October 2nd, 2007
Reporters and editors who are about to cover the 2008 presidential and congressional campaigns will almost certainly have to deal with the issue of Social Security, which won’t go away. But they’ll do it badly, unless they get a few facts straight.
Here is an example of what I mean. On Bloomberg.com, which is supposed to be a reputable financial service, Kevin Carmichael wrote on Sept. 24, “The Social Security program pays benefits to 49 million people and will cost the federal treasury $576 billion in 2007, the equivalent of 20 percent of the federal budget.”
The fact is that Social Security, which pays benefits to more than 50 million men, women and children, takes not a penny from the federal budget. Most of Social Security’s pension benefits are self-financed by pay-as-you-go payroll taxes and the rest goes into a trust fund, which continues to grow, and from which the federal treasury borrows. Which means Social Security helps pay for the federal budget, not the other way around. I pointed this out to Mr. Carmichael via e-mail but received no reply.
Then there is the junk about the Trust Fund as IOUs. The Social Security trustees (mostly good Republicans) report this year that the trust fund now amounts to more than $2 trillion and is growing at about 4 percent. Yet here comes Jeff Poor of the Business & Media Institute approvingly quoting the right wing Heritage Foundation: “There is no cash in the Social Security trust fund and there never has been any. The Social Security trust fund is merely an accounting device filled with IOUs that future taxpayers must pay.”
As President Bush was surprised to learn during his failed effort to privatize Social Security in 2005, those IOUs in the vaults are stacks of Treasury Bonds, which the rest of the world buys when they don’t trust stocks. For that matter, a corporate bond, or even a personal check or a dollar bill are IOUs. And the United States (unlike many a corporation that has gone belly up) has never defaulted on one of its bonds. (It is true that higher return on these bonds could earn Social Security even more money, but Congress decided that would compete with other Treasury bond issues).
Then there is this old saw that came from Treasury Secretary Henry M. Paulson’s latest paper on Social Security, which was repeated in dozens of papers and editorials without much analysis: Social Security’s unfunded liabilities for the “indefinite future” amount to $13.6 trillion. But that simply means that if nothing were to change in the next 75 years that would be the amount needed to fund Social Security. But as economist Dean Baker pointed out to me that projection does not take into account changes in the economy, productivity and taxes over the next 75 years.
But isn’t Social Security facing a crisis when the trust fund runs out? That’s what the Treasury Department says will happen in 2041. And too many newspapers echo this news uncritically, worrying about whether Social Security will be there for the boomers. Never mind that no one really knows what the world or the American economy or American politics will be like in 2041. We don’t know for sure that General Motors will be around in 2041. What we do know is that in 2041, if Social Security is not abandoned, most of the boomers will be dead, having had their Social Security pensions. That is not only a fact; it’s arithmetic.
But the conventional wisdom of Social Security in crisis has so seeped into the consciousness that it came as a complete surprise when Tim Russert, on “Meet the Press,” asked former Federal Reserve Chairman Alan Greenspan on Sept. 23 how big the Social Security crisis will be. Greenspan replied, “Social Security is not a big crisis. We are approximately two percentage points of payroll short over the very long run…but it’s doable…in any number of ways.” That would mean a one percent raise in each of the employer’s and employee’s share of the payroll taxes would fix the problem, although as he said, there are other solutions.
Greenspan ought to know, for his commission, appointed by conservative Ronald Reagan in 1983, saved Social Security for the nation and the boomers by raising the retirement age gradually, including all federal employees and members of Congress in Social Security and raising payroll taxes to build the huge surplus in the Social Security trust fund.
October 2nd, 2007 at 2:05 pm |
A couple points: 1)those bonds are “special-issue” treasury securities and unlike regular treasury securities they cannot be traded on secondary markets so these are not securities the world would or even could buy when they don’t trust stocks; 2) the social security trust fund starts to have negative cash flows in 2017 which is a more important date than 2041; 3) you are right, the U.S. Government will not default on these IOUs, but, where are the funds going to come from to pay them: a) higher taxes and/or 2) reduced social security benefits, and/or 3) cuts in domestic programs and/or 4) issuing more debt (like those treasury securities that the world buys when they don’t like stock – not the kind the social security trust fund holds. There are no assets in the social security trust fund other than promises that the U.S. Government will raise taxes, cut benefits or cost or borrow more money to pay those IOUs. The U.S. Government spends the social security surplus each year (or borrows less) and replaces it with a promise. It’s the nature of these promises that we need to start discussing.
October 2nd, 2007 at 4:01 pm |
Hmm… Just the facts, huh? Seems Mr. Friedman is repeating the same bombastic screed that Paul Krugman and Dean Baker get paid to espouse. All sides have been guilty of bending the truth a little to suit their purposes but, as Ken Bauer rightly proposes, it’s the promises implied by the program that need to be discussed. And, to Treas. Sec. Paulson’s credit, his department is trying to emphasize points on which all sides can agree if they’ll take their partisan blinders off long enough to read the studies. It’s time to get serious about our children’s future, Mr. Friedman. Or do you really hate your children and grandchildren? It’s a pretty easy question to answer, sir.
October 2nd, 2007 at 4:41 pm |
If the trust fund really had any value, then the government should be able to turn around and turn it in to cash. Unfortunately, the government can’t do that. Thus, the trust fund really only represents a promise to pay. Yes, it’s true that the government has never defaulted on a bond and I highly doubt it will do so over Social Security. But where do you think it’s going to get the money to pay back the trust fund? Most of it will probably come from increased taxes. But some of it will probably be borrowed, which means higher taxes later on.
October 3rd, 2007 at 12:35 am |
When Social Security begins cashing in its bonds the government will have to pay them. It is in no way the fault of Social Security (or its participants) that the US government is spending wildly. When the cash starts flowing out of the trust fund either the government will have to correspondingly reduce other expenditures, borrow (at a higher than 4% rate) to cover the needed amounts, or raise taxes. That’s just how things are and again, it is not the fault of Social Security that the Congress is not spending wisely. Quite possibly a solution could be to increase the tax rate for higher income people. That the government has to repay what it has borrowed from the SSA is not a flaw in social Security.
October 3rd, 2007 at 12:39 am |
Don’t ask Mr. Friedman if he hates his children and grandchildren, ask the Congress and the President. They’re the ones spending unwisely, they’re the ones who are the architects of the problem. If Treas. Sec. Paulson actually addresses the overspending issue, which is the vital issue, then he will earn and deserve much credit. If, though, he just parrots Bush propaganda intended to discredit Social Security so it can be destroyed then he will earn scorn.
October 3rd, 2007 at 10:23 am |
Friedman emailed me overnight re my posting. People who disagree don’t have to ignore one another. I respect the fact that he contacted me.
This doesn’t mitigate the misleading comments in his blog, however.
One factual error is to say “that projection does not take into account changes in the economy, productivity and taxes over the next 75 years.” Those things ARE accounted for in the Trustees’ projections. In fact, the Trustees’ projections are actually that real wage growth over the next 75 years will exceed the historic average over the last 40. See
http://www.ssa.gov/OACT/TR/TR07/V_economic.html#wp133682. The whole idea that the Trustees’ projections are ignoring likely economic growth is a myth.
Friedman also misleads when he implies that the $13.6 T shortfall is some speculative, maybe-it-won’t-happen future event. The structural shortfall in Social Security is on the books NOW. People already in the system have been promised $14.4 T more in benefits than they will have paid for with their taxes. See
http://www.ssa.gov/OACT/TR/TR07/IV_LRest.html#wp267012. To portray this as some type of distant imaginary figment is misleading. The shortfall is already there.
Also, the Greenspan Commission didn’t know it was building a huge surplus in the Soc Sec Trust Fund – it never intended to do that. That’s a myth that developed after the fact. Any number of documentary evidences show this to be the case (eg, read the online interview with Robert Myers, the Commission’s executive director. See http://www.ssa.gov/history/myersorl.html). No one in 1983 thought that building a big Trust Fund surplus would really pre-fund future benefits and it misreads history to pretend they did.
By 1992, the 75-year Social Security deficit was again bigger than the 75-year gap they filled with the 1983 reforms – a space of only nine year. The Commission was a nice example of bipartisan compromise, but no one should pretend that it saved Soc Sec indefinitely.
October 3rd, 2007 at 10:24 am |
Actually, yes, I can blame Social Security for the government’s wild spending. Social Security is the 2nd largest line item in the federal budget, weighing in at an astounding $586 billion. Of course, you’ll argue that Social Security pays for itself. But that’s nonsense. >I
October 3rd, 2007 at 12:00 pm |
Social Security is running a surplus at the moment. Even with that surplus the federal government has to make huge additional borrowings each year. It is the spending that requires those additional borrowings to which I refer. That spending is in no way the fault of Social Security.
That spending is a problem. Paying for that and repaying Social Security when benefits rise to a higher level than FICA taxes will be a problem. That problem needs to be addressed but the problem is not the fault of Social Security. Stiffing Social Security participants in order to get out of the crushing debt load that the federal government has created for itself is not the solution to the overspending problem.
October 3rd, 2007 at 2:27 pm |
I see my comment was cut short. Shouldn’t have used anything resembling HTML tags.
You praise Social Security for running a surplus as if Social Security CREATED the surplus. The Social Security was created by raising the Social Security tax rate to a crushing 6.2 times what it originally was. As things currently stand, a single taxpayer making less than $59K pays more in payroll taxes than income taxes. In other words, I pay for that surplus, along with millions of other Americans paying in to the Ponzi scheme.
The problem with Social Security isn’t whether it runs surplus or how that surplus is spent. The issue is that it is a Ponzi scheme and, as such, it is governed by a single factor: the ratio of new “investors” to old “investors” (i.e. the ratio of workers to retirees). You simply cannot escape the simple equation:
replacement rate = ratio of workers to retirees * tax rate
Since its inception, the replacement rate has stayed relatively constant but the ratio of workers to retirees has been plummeting. That’s why the tax rate has been increased 520% since inception. Things were so bad that Greenspan et al decided to artifically raise the ratio of workers to retirees by raising the retirement age. But even that didn’t save the precious Golden Calf.
The next target, obviously, will be the replacement rate (i.e. cutting benefits). And, just like every tax hike and even the increase in the retirement age, it will be hailed as a victory because it saved Social Security. Unfortunately, what people don’t realize is that Social Security is a GUARANTEED losing proposition for all involved. The Ponzi scheme currently gives “investors” a negative rate of return on their money. Cutting benefits will make it even worse.
The only winner in Social Security is the Democrats, who use it as a wholesale method to purchase votes. But eventually, people will wake up and realize what an awful program it is.
October 3rd, 2007 at 5:24 pm |
Don’t alter my words and meaning to make your point (which is a tiresome one.) I expressed no praise, I merely stated that Social Security currently has a surplus. This was to counter your deceptive spin that it is Social Security that represents the huge spending by the federal government that is a problem. The spending by the federal government on other programs exceeds the revenues from ordinary taxes and is not compensated by the SS surplus. That spending is excessive.
“Ponzi scheme” is likewise tired and shopworn. 70 years.
Good that you show and have faith in the “simple equation.” Exactly the same consideration applies whether all, some, or none of the retiree benefits come from Social Security. Financial markets don’t create any wealth: work by workers creates wealth. If the retirees are receiving benefits then the workers are providing the benefits. With Social Security the benefits derive from the FICA tax (and, in the future, from other taxes used to pay off what has been borrowed from Social Security.) With a “personal account” scheme the benefit amounts are skimmed off the value created by the workers in a different fashion, but it is still the workers who are supporting the retirees.
The Social Security system is subjected to an annual analysis to project its future performance and condition. So far the personal account scheme has not even been described, let alone analyzed. There’s lots of conflicting and often deceptive claims thrown out but no actual plan has been described, no legislation introduced. It’s all a big propaganda campaign.
Bush did let one cat out of the bag: retirees will not be allowed any access to their principal (nor to accumulated capital gains) during their lifetimes. Did you know that? It’s on the White House web site: check what Bush said in Arizona, Colorado, and New Mexico.
You will find large numbers of Americans who consider themselves winners because of their Social Security benefits.
October 3rd, 2007 at 11:50 pm |
Your first responder is right in that the IOUs in the SS Trust fund do not get sold to others. They just sit there. Of course, interest is due on them every year, but my understanding is that that is just covered by adding more IOUs…that cannot be sold to anyone.
I think that the federal government has already defaulted on the SS Trust Fund. The $2 trillion is supposed to be there, but it has been spent. By 2017, there is supposed to be more than $4 trillion. If nothing is there by 2017, then it would be like a bank that took deposits but did not have the money to return when due. “Raising” the money by increasing taxes or reducing benefits just begins to cover over the fact that the government has defaulted on the funds.
And increasing income to the Trust Fund only raises the debt, if the surplus is spent on other things. And when the annual budget is a deficit, of course the surplus is spent on other things.
Finally, the benefit paid out by SS is based on what is paid in. If the maximum cap were increased, the maximum payout would have to be increased as well. It would be then possible that rich folks could be receiving tens of thousands of dollars per month in benefits when due. That is not a sensible solution. It fixes nothing!
George Fulmore. Concord, CA.
October 4th, 2007 at 11:53 am |
“Ponzi scheme” is likewise tired and shopworn. 70 years.
Doesn’t the fact that people have been calling Social Security a Ponzi scheme for 70 years suggest that there’s something to it?
Financial markets don’t create any wealth: work by workers creates wealth.
I don’t agree with this assertion. However, for the time being, let’s go with it. What you’re asserting is that the amount of wealth that can be generated is bounded by workers and their productivity. Fine. Then Social Security forces low-wage earners in to a lousy investment scheme where the most they can hope for is a 1% or 2% real return on their investment. The low-wage earners can’t possibly afford to invest in anything else because Social Security takes 12.4% of their total compensation. Meanwhile, higher wage earners, who have some money to put toward retirement, invest in things like stocks and bonds which earn them a decent 4%-7% real return. Talk about class warfare!
Bush did let one cat out of the bag
I never said I supported the President’s approach. I think it’s just as absurd as the current system. I take the much more radical approach of letting everyone keep their money. That way, everyone can tune their investments and insurance to their individual risk tolerance. More importantly, the country won’t be plunged in to unending debt.
You will find large numbers of Americans who consider themselves winners because of their Social Security benefits.
In October 2002, there were also large numbers of Americans who considered the Iraq War a good idea. Nice to see that worked out so well for them.
October 4th, 2007 at 8:36 pm |
“Doesn’t the fact that people have been calling Social Security a Ponzi scheme for 70 years suggest that there’s something to it?”
A 70-year old lie is still a lie.
How many Ponzi schemes last 70 years?
“I take the much more radical approach of letting everyone keep their money.”
That’s the system in effect before Social Security. Large numbers of retirees were destitute. Widows were destitute. Orphaned children were destitute.
“More importantly, the country won’t be plunged in to unending debt.”
SS has a surplus. It’s the rest that has the debt.
“In October 2002, there were also large numbers of Americans who considered the Iraq War a good idea. Nice to see that worked out so well for them.”
The ones who consider themselves winners through Social Security have something concrete to show for it. The point is that there are millions of retirees who are winners and consider themselves to be. The Democrats are not the only winners, as claimed.
October 5th, 2007 at 8:11 am |
A 70-year old lie is still a lie.
Just like the lie that Social Security is good for America?
How many Ponzi schemes last 70 years?
One where the entire country is forced to participate at gunpoint. As long as the ratio of new “investors” to old “investors” stays high, the Ponzi scheme can survive. But as that ratio dwindles, things start to fall apart. It’s obvious to anyone with even the slightest bit of mathematical acumen.
That’s the system in effect before Social Security.
I never said I didn’t want an anti-poverty program. But Social Security isn’t an anti-poverty program. It’s a wholesale vote-purchasing program. If Social Security were an anti-poverty program, it would be the most expensive miserable failure of all time. On the other hand, as a vote-purchasing program, Social Security is very successful.
In 2005, based on market income, there were 55 million Americans living in poverty. We spent $530 billion on Social Security (and another $1 trillion on other social programs). Despite the mammoth spending, 30 million Americans remained in poverty. That’s a success rate of 45%. This is totally unacceptable, especially considering that it would only cost about $450 billion to completely eliminate poverty in the United States.
SS has a surplus. It’s the rest that has the debt.
As of 2004, Social Security’s unfunded liability was estimated at $10.4 trillion. Medicare is far worse off at $61.6 trillion. And that includes the “value” in the trust funds. Social Security may run a surplus, now, but it’s headed in to massive debt. This has absolutely nothing to do with spending its current surpluses. It’s simple demographics.
The ones who consider themselves winners through Social Security have something concrete to show for it.
Social Security is a booby prize compared to what they could have earned by actually investing their FICA dollars. But I guess it’s better than nothing.
October 5th, 2007 at 10:56 am |
“As long as the ratio of new “investors” to old “investors” stays high, the Ponzi scheme can survive. But as that ratio dwindles, things start to fall apart. It’s obvious to anyone with even the slightest bit of mathematical acumen.”
WELL SAID. That’s why the Bush scheme and YOUR’S are certain to be failures.
Let’s look at the future, when there are 3 workers per retiree (and the number going down steadily.) Let’s take 3 workers and one retiree to represent them all.
The workers earn an average of $A per year and contribute X% of that to their personal accounts. The retirees receive a fraction Y% of A per year as benefits. They’re retirees, they can line on less.
If Y is bigger than 3X then the retirees are taking more money out of the personal accounts than the workers are putting in. Y will be bigger than 3X.
Let’s say X is 5% and Y is 60%. Then what the workers put in is only 1/4 of what the retirees take out. That’s sustainable? That’s not a sure formula for a decline in prices on the financial markets?
Show me how your scheme isn’t simply a bubble, sure to collapse once the number of retirees supported by it gets large. Show me that the bubble that collapses isn’t the entire financial market.
I can be sympathetic to an attitude that it sucks to support retirees via taxes. But that’s better than having a general financial crash, and that crash would be certain your way.
I think there’s a problem looming with regard to the ratio of workers to retirees but the problem isn’t solved by any type of investment scheme to provide retiree support. There is an urgent meed for the country to get sensible financially, meaning Congress must get sensible. Hyping investment schemes goes away from sensible. A crash is a certainty if that’s done and then the cure, if any, has to be accomplished when there’s only 3 (or whatever) workers per retiree – and the workers will still pay for it all.
October 5th, 2007 at 11:44 am |
Typo. This line above:
They’re retirees, they can line on less.
Should say:
They’re retirees, they can live on less.
October 5th, 2007 at 12:00 pm |
Your entire argument is based on the premise that only workers generate wealth. As I said before, I don’t accept that premise. Therefore, I won’t debate your argument because it’s pointless. However, I will reiterate my point that, if your assertion is true, then Social Security is truly the cruelist form of class warfare.
What you’ve described is exactly how Social Security works. The workers pay in the money and the retirees take it out. In fact, it demonstrates EXACTLY the simple equation you ridiculed before:
replacement rate = ratio of workers to retirees * tax rate
Show me how your scheme isn’t simply a bubble, sure to collapse once the number of retirees supported by it gets large.
How about some historical evidence? The popularity of 401k’s and IRAs have turned huge numbers of Americans in to investors. Americans now invest in record numbers and record amounts. But the stock market is still going strong. Unless you believe the stock market, too, is a bubble waiting to burst. In that case, I hope you can assure me that you don’t invest anything, yourself. I wouldn’t want to be debating with a hypocrite.
How about you show me why Social Security isn’t simply a Ponzi scheme, sure to collapse once ratio of new “investors” to old “investors” gets too small? Actually, you demonstrated it quite well in your previous post. So if you’re going to try to convince me that Social Security in’t goign to collapse, you’ll have to take back most of your previous post.
I can be sympathetic to an attitude that it sucks to support retirees via taxes.
It doesn’t just suck; it’s amoral. There’s no reason that people like Warren Buffett should be collecting a Social Security check. I have no problem with supporting the NEEDY with taxes. But I don’t think we need to take a shotgun approach to do so.
Hyping investment schemes goes away from sensible.
Again, I hope you’re not an investor then. Practice what you preach.
October 5th, 2007 at 12:14 pm |
“Americans now invest in record numbers and record amounts. But the stock market is still going strong.”
It’s a market. Both of your sentences say the same thing. The market is strong because “Americans now invest in record numbers and record amounts.” That’s what “strong” means.
When you use the stock market to provide retirement support then the retirees will sell and their sales will depress prices. It’s a market, it’s a market, it’s a market. That’s market behavior.
The stock market is not a magic money machine, it’s just a market. It doesn’t matter what is traded. It can be tulip bulbs, it can be Beanie Babies, it can be stocks. When buyers outweigh sellers prices go up (and prices go up because of the buyers, not because of anything done by the companies which issued the stock nor because of anything inherent in the stock.) When sellers outweigh buyers prices go down. No matter how you paint Social Security markets are still markets and that’s the flaw in what you advocate.
I showed you how the investments by workers would be less than the amounts taken out by retirees. Taking more out than is going in will depress prices. Why? Because it’s a market. There is nothing other than the investments in a market that cause market prices to go up. Whatever the inherent value of what is traded on a market the price of what is traded is determined by purchases. There is nothing other than sales on a market that causes prices to go down. Those numbers on the bottom of the screen on financial channels are reporting those effects, transaction by transaction. That’s what is behind the cat that Bush let out of the bag: by forbidding retirees access to their principal the bubble can be prolonged.
October 5th, 2007 at 12:17 pm |
“Hyping investment schemes goes away from sensible.”
“Again, I hope you’re not an investor then. Practice what you preach.”
There’s a difference between “investment schemes” and investing. Nor is what I do pertinent to the discussion nor is what I do any of your business. I’m not likely to ever listen to investment-related advice from anyone who demonstrates he doesn’t even know what a market is, who thinks it’s a magic money machine.
October 5th, 2007 at 1:51 pm |
Nor is what I do pertinent to the discussion nor is what I do any of your business.
Of course it’s pertinent. Why is investing in equities good enough for you but not good enough for the millions of Americans who are stuck with Social Security? Do you invest in equities or don’t you? If you do, you’re obviously highly irrational, since you’re simultaneously arguing that the financial market can’t make money and isn’t a “magic money machine”. If it can’t make money, why on Earth would you invest in it?
Whatever your reasoning, hard-working, middle-class Americans deserve better than Social Security. They deserve the opportunity to earn the same kind of returns that you and I enjoy. But Social Security denies them that opportunity. It takes an enormous amount of their money and promises them a pittance in return. Yes, it’s been spun as the crown jewel of the New Deal. However, if you take off your partisan blinders and look closely, you’ll see it’s now a raw deal that condemns those it was intended to serve.
October 5th, 2007 at 3:54 pm |
I have been amused and gratified at the debate my little piece engendered. I have written more extensively on the subject at http://www.newsday.com/saulfriedman. May I make a couple of points. 401k)s are nice; I had one when I worked full time, but in their 25 years they have failed as a retirement vehicle. Check the median worth of such plans, They are not ebough to finance six months. And most Americans have no such plans ands not one share of stock. My IRA has grown, but i’ve also watched it go way down. Fortunately, I could always depend on those Social Security checks. Indeed, my own broker (and yours too, if he/she is hones) would tell you it’s foolish to give up the guaranteed income of a defined benefit pension, like SS, for dependence on the market alone. I know SS will be arounf in 2041 and beyond. I can’t say the same for GM or any of the companies on the Dow or the Nasdaq. Can anybody guarantee me a return in time to pay for my retirement. If you do, you violate SEC regulations.
October 5th, 2007 at 4:01 pm |
Stick to the issues. Whether I have divested of equities or not is none of your business and is not pertinent to the discussion. The issue is, as I demonstrated using your own argument, that if the country relies on investment in financial markets for general retirement security that will lead to deflation of the investment markets. That’s the future, not today. The financial markets are not magic money machines.
October 5th, 2007 at 7:29 pm |
“Can anybody guarantee me a return in time to pay for my retirement. If you do, you violate SEC regulations.”
Right. A broker can’t do it, a mutual fund salesman can’t do it.
A president can – but a clever one lets the propaganda machine make the promises so that they can’t later be blamed on him. But, as is known, political promises are worthless.
October 5th, 2007 at 11:33 pm |
Realistic stuff – except “Ronald Reagan in 1983, saved Social Sec…” In my opinion, we would have been much better off if we had stayed with “pay as you go” rather than build up the surplus. The surplus was used to reduce income taxes, in effect a loan to those who would have paid higher income taxes. Now that that loan is about to come due – these folks do not like the idea of paying it off. This is part of the motivation for the scare tactics.
Another problem with the surplus is that it has fed the mentality that Social Security is like a personal pension fund – in which we put in – then take out. In fact it has much of the nature of insurance – in that those of us who are fortunate enough to have a prosperous life overpay – those who experience misfortune (or their heirs) collect more than they contribute.
Keep up the good work!
October 5th, 2007 at 11:51 pm |
Allan F:
Good comments. If we had gone with pay-as-you-go all along my impression is that the FICA tax would now have to be hiked even higher than it is because of the baby boomers.
There is a lot of irony (or something) in the fact that making provision for the surge in Social Security benefits (that will happen soon because of the baby boomers) is used by the opponents of Social Security to attack the program. As you indicate, they don’t want to pay off the loans. They already got a break: since the bonds pay a lower ate of interest the debt isn’t as high as it would be if all the borrowing was on the open market. They are explicitly the ones who would default on the obligations and cheat retirees. They are warning today’s workers about themselves when they speak the scare talk.
October 6th, 2007 at 12:51 am |
“If we had gone with pay-as-you-go all along my impression is that the FICA tax would now have to be hiked even higher than it is because of the baby boomers. ”
As you point out – SSI is still running at a surplus – so current benefits could be funded with lower taxes.
If there is a problem – it is demographic – not financial. If we oldies want to not work and be supported by working society – it is not a matter of how many paper assets we have – we need enough willing and productive workers. This means either increase productivity (invest in physical capital and intellectual capital) or bring in immigrants.
The advantage of “pay as you go” is each generation of workers sees that their taxes are going directly to fund the old and otherwise infirm.
Of course if a younger generation losses faith in the social contract to the extent they do not expect to be taken care of, they will likely not want to help others.
October 6th, 2007 at 11:12 am |
“We oldies” is correct: I retired in 2001.
If the younger generation loses faith in the social contract it will largely be because of the propagandizing by those who want to eliminate the social contract. They scream “Social Security won’t be there for you younger workers” but they don’t mention that they are themselves the ones who want to make that happen. SS is in structure an insurance program. To keep it solvent there has to be a balance between income and benefit payments. (The current surplus is the result of legislation to keep that balance by collecting more money from the baby boomers before they retire in order to be able to pay them benefits when they do retire.) The anti-SS group scream “no real assets” but the assets are just as real as corporate bonds. Corporations don’t (in general) retain the money they get from a bond issue: they spend it.
It is true that the ratio of workers to retirees is going down but that’s not the fault of Social Security nor of the workers: we live at a time when life expectancy is being extended and we live at a time when the birth rate is declining. Both of these tend to make the population be older.
The retirement age has been adjusted upward once already. It may happen again, or benefit amounts may need to be reduced or FICA taxes may need to be increased (or all three.) That’s just the reality of insurance programs and is not evil.
The real action needed is not action directed at Social Security but is action directed at changing the way the government spends so that it can get by with lower revenue when the number of retirees soars. Action is needed to get long-term infrastructure in place now, while so many are working, so that it will be there when they have retired.
What you say about paper assets is also true. Also what you say about the demographic problem. That’s the reality, and that’s where attention needs to be directed.
October 12th, 2007 at 9:53 pm |
Indeed, my own broker (and yours too, if he/she is hones) would tell you it’s foolish to give up the guaranteed income of a defined benefit pension, like SS, for dependence on the market alone.
This is an incomplete statement. Of course no one would trade a guaranteed benefit for an expected benefit of equal amount. But that’s not what we’re talking about here. We’re talking about a factor of two difference or more. Furthermore, you have to examine the variance in the expected benefit. I’m the first person to admit that the stock market is volatile. But if practice disciplined dollar cost averaging over the course of 40+ years, the volatility is smoothed out.
Here’s the real analysis of Social Security vs. stock market. Suppose a median income couple, working from October 1955-October 2002, had been allowed to invest their FICA dollars in the S&P 500. Despite the fact that they retired at the very bottom of the tech bubble, they would have retired with $619K. In comparison, their Social Security benefit amounts to a paltry $1128 per month.
What’s worse is that this analysis is based on historical FICA rates and a retirement age of 65. The median income couple paid an average of 11.54% in FICA taxes. A couple starting out today pays 15.3% in FICA taxes and doesn’t get full benefits until age 67. Is that fair?
Stick to the issues. Whether I have divested of equities or not is none of your business and is not pertinent to the discussion.
Of course it’s pertinent. Your whole argument is based on the premise that financial markets don’t generate wealth. I don’t accept this premise so I’m attacking it. If you’re a rational person and you truly believe that financial markets don’t generate wealth, there’s no reason you would invest in one. Therefore, I can only conlude that either A) you’re not a rational person or B) you don’t truly believe that financial markets can generate wealth. Call it an ad hominem attack if you like.
October 14th, 2007 at 10:05 am |
We aren’t talking about one median income couple, we’re talking about all median income couples. There is no way that everyone can win following a particular investment strategy. The issue is “everyone.” That’s why contrarian strategies work, that’s the basis of contrarian strategies.
Financial markets don’t generate wealth, they redistribute it. It is work that generates wealth. Look at the absurd extreme: everyone invests in the market, gets rich, and then stops working and lives on the income. That cannot work, will not work. Somebody has to be the supplier for all goods, for all services.
When Social Security is analyzed each year a forward-looking analysis is done. That analysis takes into account all the reasonable projections for the future that will have an effect: the number of workers, the number of retirees, the supply and demand for goods and services. You (and all the rest of the personal account backers) do no such thing. Instead you make a false and inapplicable backwards-looking analysis that claims to show how the markets would perform had everyone invested in them for their retirement security. Such backward-looking analyses never pay attention to the fact that everyone had not done that: the data are for a periond during which the financial markets were not the basis of the general retirement security plan. Had the markets been the basis of the general retirement security plan the retirees would have sold substantial assets. Those sales would hugely change the financial market performance.
What you want to do is take a single (small) investor strategy and make it a universal investment strategy while ignoring the fact that if everyone follows any strategy that in itself is a major influence on market performance.
Financial markets are not magic money machines, they are simply markets. They do not generate any wealth. It is the trades on the markets that have the controlling influence.
October 14th, 2007 at 12:26 pm |
We aren’t talking about one median income couple, we’re talking about all median income couples.
Well I’m talking about 1 couple. But let’s start talking about more. I assume you’ll agree that 1 couple could have invested their FICA dollars in the stock market without diminishing returns. Would you agree that 2 couples could? How about 3 or 4? But, according to you, not every couple could. So where do you draw the line? I certainly don’t know where to draw it, but obviously you do. Moreover, you’re content to stick with the status quo which effectively bans lower wage earners from investing in the stock market. Aren’t liberals supposed to be all about equal opportunity?
There is no way that everyone can win following a particular investment strategy.
That depends on how you define “win”. If you define “win” as being as rich as Bill Gates then I will agree. However if you define “win” as beating Social Security, I strongly disagree. Social Security guarantees me a negative rate of return. I would be better off taking my FICA dollars and sticking them in a savings account; forget about the stock market.
Financial markets don’t generate wealth, they redistribute it.
Again, I have to ask: If you truly believe that, why do you invest in them? Are you trying to steal other people’s money?
What you want to do is take a single (small) investor strategy and make it a universal investment strategy while ignoring the fact that if everyone follows any strategy that in itself is a major influence on market performance.
No, what I want to do is give people a choice and the opportunity to earn a positive rate of return on their investment. Obviously not everyone wants to plow their money in to the stock market. I’m young and highly risk tolerant so it works for me. What does not work for me is the guaranteed negative return I will get from Social Security. That may work for you, but count me out.
October 14th, 2007 at 11:16 pm |
You saw where I drew the line: at “everybody.” Everybody can’t beat Social Security by investing in financial markets. It isn’t possible.
When you buy a stock most often you are buying it form someone who owns that stock. That someone, if selling at a profit, gets more money from you than that someone first paid. You supply the wealth, not the market.
If everybody buys stocks yes, by gum, the prices go up. That’s because everybody is buying: that is how a market functions. Looks good on paper.
If everybody sells then there’s a crash. Looks bad on paper, and is bad.
Prices on a market are a response to the interaction of buyers and sellers. The market does not create any wealth, the buyers do that. The increase in price due to the buyers creates a paper illusion of greater value for the holders of the stocks but that stays stable only while they hold. If small numbers sell then the price is slightly affected but that’s usually about it. If many sell the price drops.
If retirees are counting on selling their stock to provide the money they need to live on then lots of them will be selling. When the ratio of workers to retirees drops, as it will, then the amounts invested by the workers each month will be less than the amounts being taken out by the retirees each month. That will cause prices to go down, and prices will go down as long as the retirees are taking out more than the workers are putting in. When other investors see the decline in prices they can either hold on to the stock and watch the value drop or they can sell it. If they sell prices will drop further.
Basing your retirement security on the financial markets is hugely risky. You don’t see that many investment professionals backing personal accounts. They know better.
At least you ought to ask a few investment professionals if what I say here is valid. When you take a risk with your retirement money you take a major risk.
October 17th, 2007 at 10:53 am |
You saw where I drew the line: at “everybody.” Everybody can’t beat Social Security by investing in financial markets. It isn’t possible.
Then why not make Social Security voluntary? There are plenty of people out there who, like yourself, think that Social Security is GREAT and would like nothing more than to continue participating. The rest of us will take our money elsewhere.
I could beat Social Security by stuffing my FICA dollars in my mattress. What part of negative rate of return do you not understand? Forget about the stock market, I would be better off putting my FICA dollars in treasury bonds, a savings account or a money market fund. Furthermore, people should have the right to make that decision for themselves. It should not be forced upon them.
Basing your retirement security on the financial markets is hugely risky.
No, it’s not. In fact, it’s done all the time. Where do you think defined benefit plans get the money to pay out benefits? Pension fund managers don’t just sit around all day counting the money in the fund. They invest it. Furthermore, investing in stocks over a 40+ year horizon is not hugely risky. Anyone who claims otherwise is clearly lacking the mathematical acumen to make that claim.
At least you ought to ask a few investment professionals if what I say here is valid.
I’ve interacted with plenty of investment professionals, both academic and not. In fact, my thesis was on algorithms for financial planning. So, you see, I have more than a passing understanding of the issues.
When you take a risk with your retirement money you take a major risk.
Yes, but Social Security isn’t a risk; it’s a guaranteed losing proposition. On the other hand, if I had control over my FICA dollars, I could calculate the risk, take steps to minimize the risk and tailor the risk to my personal tolerance. This is what happens when you employ knowledge instead of blind faith.
October 17th, 2007 at 12:04 pm |
“I’ve interacted with plenty of investment professionals, both academic and not. In fact, my thesis was on algorithms for financial planning. So, you see, I have more than a passing understanding of the issues.”
Super keen. Then you ought to look at the work of the economists at Yale who warn of a downward pressure on stock prices because of sales of stock by retired baby boomers, soon to occur. I can look up the references or you can find them.
It also still appears that you are taking a single-investor view of the markets. You can’t validly use single-investor reasoning for a general retirement program: once it’s a general system it loses single investor character. Investment pools that grow large lose flexibility. That’s why many successful mutual funds stop accepting new investors: it’s already hard enough to manage the fund without new investments making it harder.
I’ve seen no personal account plan proposal that lets the participants make all decisions. They will be subject to restrictions and no plan has been fully described. It’s dishonest to claim that participants will be able to do what in fact they will not be able to do. According to Bush retirees would not even have access to their principal during their lifetimes. With your background why don’t you ponder that and figure out why the people feeding Bush with plan details would choose to forbid access to principal.
You over-rate your knowledge and you make it clear that you have a single-investor outlook. That is the wrong outlook for a general program.
Show me the prospectus, show me how having everyone investing their FICA money in financial markets will affect those markets. Then show me how having everyone supporting retirement using those investments will affect the markets. You might plan to sell stocks and buy less risky vehicles when nearing retirement. Peachy. If 1,000,000 investors are doing the same what happens to stock prices? Not all can time that.
October 17th, 2007 at 12:08 pm |
P.S.
You appear to have a lot of “blind faith” in your “knowledge.” Even if your knowledge is indeed supreme the issue that you avoid is that not all investors can succeed, even if they all have supreme knowledge.
October 17th, 2007 at 2:09 pm |
I’ve seen no personal account plan proposal that lets the participants make all decisions.
And that’s too bad because no one is more qualified to make a decision about your future than you are. Only you know if it makes more sense to put money toward retirement or debt reduction. Only you know how much risk you’re willing to tolerate. Only you know what your current needs are and only you are in the best position to estimate your future needs. Unfortunately, our nanny state government disagrees and loves to micromanage our lives. That micromanagement has led to the insanity that is our tax code. It’s a shame, but it’s what we’ve come to.
You over-rate your knowledge and you make it clear that you have a single-investor outlook.
You’ve crossed the line by attacking my credentials. I spent 4 years in grad school, developed a whole family of algorithms for financial planning, wrote a thesis, have been published in several journals and am considered an expert in my field. I won’t stoop to your level and ask for your credentials.
As for my supposed “single-investor outlook”, I could care less. Forget about the stock market. The fact remains that I am guaranteed a negative rate of return from Social Security. It’s not just me; it’s everyone who joined the Ponzi scheme after the tax was raised to 12.4% and retirement age was raised to 67. If every single person is guaranteed a negative rate of return, what value is the program? Why not just keep your money? You don’t need a 10% return to beat Social Security. You don’t need any positive return. You just need a non-negative return.
Show me the prospectus, show me how having everyone investing their FICA money in financial markets will affect those markets.
My analysis is based on historical and current data. I won’t pretend to be able to predict the future. I leave that to people who, like yourself, make themselves look foolish by doing so. Maybe you should try lotto
October 17th, 2007 at 2:48 pm |
“My analysis is based on historical and current data. I won’t pretend to be able to predict the future. I leave that to people who, like yourself, make themselves look foolish by doing so. Maybe you should try lotto”
I guess I struck first, so OK.
When you invest you can’t avoid the need to project into the future: you are pretending. If your grad school experience was proper then all of your work should have made clear what the assumptions were upon which you were operating. You appear to assume that the market would still act as it does today (with millions pouring in for 401(k) and other plans) when retirees start drawing out huge sums of money. Even if you don’t make that assumption your projections are worthless if you do not take into account the predictable factors. If you didn’t learn that in graduate school then either you were bad student or you had a bad major professor.
Yes, you are basing what you say on historical and current data. Go read a prospectus and see what it says about historic performance and its predictive value. I would be elated for future retirees to find themselves better off than they would be with Social Security. There are at least two flaws in what you say. (1) You are glossing over that it is a “chance” that retirees will do better than with Social Security. “Chance” means there is a risk. (2) You ignore and do not evaluate the risk. Were you touting one of your algorithms as a mutual fund you’d have to provide a prospectus and that prospectus wold have to identify the risk.
If you have all the professional qualifications you claim (I assume you do)then it ought to be easy for you to go to one of your files and pull out the documents that you already have that evaluate the risks for what you advocate and report the risks. I can understand Bush not providing details. A professional not only should provide the details, he should pride himself on doing so.
October 17th, 2007 at 6:37 pm |
Bill:
It’s probably naive of me to ask, but you’re cobstant use of yourself as the example for how well everone would do, if they did as you, I am moved to wonder if you believe in the common good, the concept of one generation helping another, of the well helping the sick (if only because the well person may someday be sick), of the safe driver being forced to buy insurance to protect against accidents in which an unsafe driver may be involved, of New York paying taxes to help keep the Houston Ship Channel open, of Houston paying taxes to finance a New York kid’s college education…That’s the idea behind social insurance. Ronald Reagan proposed in 1976 that Social Securitry be voluntary. When it was explained to him that the program’s risk pool would collapse, he changed his mind and later helped save Social Security through 2040.
Bill, I have and IRA on top of my Social Security. But most people don;t and never will. Many people would not buy auto or homeowners insurance unless they were forced to by the law or their mortgage companies. but nothing stops you from investing in an IRA, or buying stock even with your SS check. Does SS and Medicare support the common good? Should we not concern ourselves with the common good? Are you not concerned about it?
saul
October 17th, 2007 at 9:51 pm |
The attitude toward the common good doesn’t matter. The problem is that you cannot base a general retirement system for a population like that of the US on investments in financial markets. It cannot work.
It matters a great deal that proponents of such schemes base their arguments on single-investor strategies. Single-investor strategies (for investors who do not have huge portfolios) affect the markets only slightly (all sales and all purchases affect the market where they occur, if only slightly for smaller transactions.) If a single investor senses or anticipates, for instance, that the market is going to soon drop substantially the investor can sell without a major repercussion. That works for that investor. If there’s 100,000 investors who sense or anticipate a substantial drop those 100,000 investors cannot sell so simply: their sales will have a large enough effect to cause a drop, or to intensify the anticipated drop.
It wouldn’t be a surprise that in schools they teach mostly single-investor-focused strategies. You simply cannot use such strategies when planning a system for a substantial number of participants. It has to be noted that very few investment professionals strongly favor any personal account scheme. They know the risks. More than that they know the certainty of what would happen once large numbers of participants began to sell assets to get money to pay for what they use and consume.
There probably is a problem looming for when the ratio of workers to retirees is 2 to 1. That problem is there no matter how the money to the retirees flows. If the retirees live well there’s a problem. Worse than any future problem is the absolutely wasteful spending now by the administration and the Congress. That bill will come due in the future, too.
October 18th, 2007 at 11:22 am |
You appear to assume that the market would still act as it does today
I made no such assumption, nor is that my thesis. I agree that, if more people invest in equities, it stands to reason that returns will go down. However, there is historical evidence to contradict this. The 401k and IRA craze has turned 50% of American households in to investors, pumping a lot of money in to the stock market. Yet returns have not diminished. This suggests that the response is not nearly as simple as you believe. I won’t go so far as to label it chaotic, but certainly nonlinear.
Go read a prospectus and see what it says about historic performance and its predictive value.
A standard prospectus says next to nothing about the predictive power of past performance. All it says is that past performance is no guarantee, which is not especially enlightening. Given the choice between gazing in to a crystal ball or using actual data to predict the future, I’ll pick the actual data every time.
I would be elated for future retirees to find themselves better off than they would be with Social Security.
Well, it’s not that hard. Just stop forcing people to “invest” in Social Security. Even if their alternative investment yields a 0% return, they would still do better than on Social Security. That’s really all I’m saying.
(1) You are glossing over that it is a “chance” that retirees will do better than with Social Security. “Chance” means there is a risk. (2) You ignore and do not evaluate the risk.
There is nothing left to chance. The probability that future retirees can do better than Social Security is 1. This is evident if you accept the premise that Social Security guarantees a negative rate of return. Perhaps you don’t accept that, in which case I’m making the wrong argument. Regardless, you don’t have to take risks and invest in equities. You don’t have to do anything but sit on your money and you’ll come out ahead.
October 18th, 2007 at 1:04 pm |
I am moved to wonder if you believe in the common good,
the concept of one generation helping another
I absolutely believe in the common good. Unfortunately, Social Security is no longer in the interest of the common good. It is a losing proposition for everyone who entered the workforce after 1990 (and probably earlier). There are many political reasons to preserve Social Security, but to argue that it’s for the common good is simply fallacy.
I do not support wealth redistribution simply for the sake of wealth redistribution. I’m all in favor of helping those who need it, but wholesale wealth redistribution like Social Security is a shotgun approach, which is wholly unnecessary. There is no reason Warren Buffett should be collecting a Social Security check.
On the flip side of that equation, the money going to the Warren Buffets has to come from somewhere. And, as we all know, the government takes that money from working-class Americans (“for their own good”). In turn, those working class Americans are unable to save for their own retirement because their taxes are so high. As a result, they’re stuck on the government dole. Repeat ad nauseum.
That is not to say that everyone will be able to prepare for their retirement. In fact, not everyone will be able to provide for their family while they’re working. As a devout Catholic, I take the words of Jesus very seriously: “For ye have the poor always with you”. Well, it’s 2000 years later and we still have the poor with us. I firmly believe we should help them but that does not include the wholesale transfer of wealth from one generation to the previous. We can be more precise than that.
I won’t repeat the computation on how much it would cost to lift everyone out of poverty. But I will say that it’s less than we spend on Social Security and about 1/3 of our total Social Spending. It makes me wonder where the money is going and mad that it’s not going to the right people.
October 19th, 2007 at 12:16 am |
that >returns haven’t diminished. What I see is that P/E ratios have gone up, which is the same as saying returns have diminished.
TINSTAAFL (There is no such thing as a free lunch.) Financial markets are not magic money machines.
It’s real nice to think that investing in financial markets will provide high returns to everyone but there’s no facts to back that belief. Bush told his hand-picked audiences that retirees would not be able to access their principal. That is extremely important. He was telling them that the scheme had a major flaw – but the hand-picked audiences were so enamored of the notion that they didn’t think. As are too many.
October 19th, 2007 at 10:29 am |
TINSTAAFL (There is no such thing as a free lunch.) Financial markets are not magic money machines.
You sound like a broken record. You’ve said this more times than I care to count. Moreover, it’s completely irrelevent. Social Security -> negative rate of return. Keep your money and do nothing with it -> 0 rate of return. Given the choice, a rational person will choose the 0 rate of return over the negative rate of return every single time.
It seems to me that you’re repeating this line over and over because you can’t counter the argument that Social Security now guarantees a negative rate of return. Perhaps you don’t believe that Social Security guarantees younger workers a negative rate of return. Since you retired in 2001, this is somewhat understandable. You’ll probably get a decent rate of return from Social Security. But it doesn’t take a genius to figure out why:
1) Your full retirement age is 65 instead of 67.
2) The tax rate was 4% back in 1954 vs. 12.4% now.
Younger workers aren’t as fortunate as you were. I pay 3 times more for Social Security than you did. Adding insult to injury, my benefits have been cut a la increasing the full retirement age. Explain to me how that’s fair. Explain to me why Social Security is good when it guarantees a negative rate of return.
Also, you liberal types should be ecstatic if returns from the stock market go down. That means the evil rich will have a harder time getting richer. It levels the playing field. I would think that the true liberals would consider that a good thing.
October 19th, 2007 at 12:04 pm |
Well, good. If you have the meme “the financial markets aren’t magic money machines” drilled into your head then perhaps others do, too. I would hope that you learned that during your 4 years in graduate school – but if you had I’d not need to repeat it.
“Also, you liberal types should be ecstatic if returns from the stock market go down.”
That’s a tired old ploy. I also would help if you’d explain what you mean by “returns … go down.” Do you mean a higher P/E ratio or do you mean a drop in the DJIA? The rich, of course, will react as Mr. Potter did in “It’s a Wonderful Life.”
P/E ratios have gone up. But surely that, too, is something you learned during those 4 years.
The key word with respect to Social Security is the one you used: “guarantees.”
October 19th, 2007 at 12:18 pm |
Again, you have dodged the central issue. Clever, but it does not work on me. Social Security guarantees a negative rate of return. Doing nothing with my money guarantees a 0 rate of return. Explain how Social Security is better than doing nothing with my money.
Furthermore, Social Security the guarantee offered by Social Security is one I do not want. It’s a guarantee to pay exorbitantly high taxes over my working life and get a modicum of them returned to me when I retire. Again, explain to me how that’s better than just keeping my money.
You can lecture on the stock market and P/E ratios all you want. But realize that you’re dodging the central issue. Like I said, it’s clever, but it doesn’t work on me.
October 19th, 2007 at 10:14 pm |
What “works” on you is not the issue. The issue is what works for American workers and American retirees. Saying it doesn’t “work” on you is just a backwards way of saying you aren’t going to pay attention to good sense considerations.
You claim a negative rate of return for Social Security but you don’t show it. What’s even more glaring is that you don’t and can’t show a guaranteed return for any financial market investment program. You (as do many others) make broad claims based on some selected measure of market performance over some past time period but such data does not and can not guarantee future performance. As I’ve said before, you also ignore the implications (actually, certainties) of having all Americans using investments in the financial markets as the basis for their retirement security.
So, show me. Show me the monthly dollar total Social Security would be paying (if left unchanged) in 2035 and then show me the effect on the financial markets if instead that much money was taken out of them each month. I don’t dispute that those monthly payments would be a burden to workers if it they were all from Social Security but I do not see how they are not an exactly equal burden if taken out of the financial markets. Worse, the downward pressure on stock prices (for instance, if a major portion of the personal accounts had significant investments in the stock market) would drive prices down. None of the historical data show that effect because, historically, general retirement security has not been funded through investment in the financial markets. The historical data is for a time period during which investment behavior has been different from how it would be if general retirement security were based on investments in financial markets.
No amount of hand-waving or trash-talking Social Security undoes the flaws in what you advocate. Attacking SS does not make your scheme valid.
October 20th, 2007 at 5:10 pm |
You claim a negative rate of return for Social Security but you don’t show it.
So you’ve finally decided to address the core issue. I guess I gave you no choice. Still, it’s big of you to do so. Begin with this report from the Congressional Budget Office:
http://www.cbo.gov/ftpdoc.cfm?index=4866&type=0
If you don’t care to read it, the only important number is the replacement rate. In 2035, the median replacement rate will be reduced to 36%. The tax rate is 12.4%. The life expectancy of an 18-year-old is 65 years. Full retirement age is 67.
So in order to receive full benefits, an 18-year-old can look forward to 49 years of paying the 12.4% tax. After that, he can expect to collect benefits for 16 years. To show that the rate of return is negative, it’s sufficient to show that:
tax rate * working years > replacement rate * benefit years
For these specific numbers, that works out to:
12.4 * 49 > 36 * 16
607.6 > 576
It’s more complicated to actually compute the rate of return because you have to use a root finding algorithm. I won’t go in to the details but I will claim, without proof, that it’s -0.17%, continuously compounded. If you don’t believe me, I can show you that computation, too.
What’s even more glaring is that you don’t and can’t show a guaranteed return for any financial market investment program.
You’re absolutely correct, but it’s also completely irrelevent. The guaranteed rate of return from Social Security is negative. The guaranteed rate of return from doing nothing is 0. Given the choice, which will you pick?
It has nothing to do with the stock market. My argument is completely independent of the stock market. People don’t need to invest in the stock market (or anything else, for that matter) to beat Social Security. You’re arguing that apples are great because oranges suck. In logic, we call that ignoratio elenchi. It’s a clever ploy, but your repeated use of it just makes you dumb.
October 20th, 2007 at 6:30 pm |
The FICA tax also contains premiums for survivors insurance. Factor that in, please. In addition there is inflation, which you have ignored and there is also an increase in compensation rate (for many people) which also seems to have been ignored.
You are the one comparing apples (FICA taxes paid at the beginning of a work career) to oranges (SS benefits paid at the end.) It should be quite simple to use a spreadsheet to do a more honest and thorough calculation. Pray, do.
If you’re showing me that more money will flow into Social Security than out it looks like the solvency problem is a myth. Is that your claim?
Before there was Social Security “retirees” was hardly a word, but many of the aged, who, as you prescribe, paid nothing into Social Security (as it didn’t exist) had nothing on which to retire. The issue seems to be that of actually having retirement security for American workers. Without Social Security there was no such security for the vast majority of Americans. I’d suggest you tread lightly with respect to hurling charges of “ignoratio elenchi.” Almost getting it all back looks pretty good to me, and as Social Security benefits continue for a lifetime the fortunate retiree who outlives his expectancy still has money coming in, unlike the one who saved just enough to support him for his expected lifetime.
I don’t bother with “root finding algorithms.” I used to just log on to a computer that had BASIC and computer X^(1/Y) or whatever. That computer died so now I just put the formula in a cell in a spread sheet.
The only way you can do even an over-simple calculation for investing in financial markets that’s at all like the one you did for Social Security is to assume a rate of return. Unfortunately, the rate of return is the issue, as you appear to want to point out. You can’t prove a rate of return by assuming it, can you?
October 20th, 2007 at 10:59 pm |
The FICA tax also contains premiums for survivors insurance. Factor that in, please.
Solve for the tax rate such that Social Security breaks even:
tax rate = replacement rate * benefit years / work years
Going with the numbers above, we get a tax rate of 11.7%. Since the acutal tax rate is 12.4%, that leaves 0.7% to spend on life insurnace. That doesn’t buy a lot of life insurance, but the Social Security survivor benefit isn’t a lot of insurance, either. Besides which, the survivor benefit doesn’t benefit everyone. But I will concede that, with the insurance, Social Security is a break-even proposition.
In addition there is inflation, which you have ignored
Surely you can come up with some extraordinarily safe investment to protect against inflation. Treasury bonds or a high-yield savings account. Both of which will offer a positive return, even after inflation.
there is also an increase in compensation rate (for many people) which also seems to have been ignored
It’s not a factor. People make less earlier in life and more later in life. So using the median is a perfectly acceptable approach. Actually, it’s precisely what Social Security does. Your benefit is based on the average of 35 years.
Almost getting it all back looks pretty good to me
You would choose getting most of your money back versus keeping all your money? To me, this suggests that you’re simply not rational.
You can’t prove a rate of return by assuming it, can you?
Of course not. And I’ve done no such thing. Computing the rate of return involves solving the transcendal equation:
12.4(e^(49r)-1) = 36(e^(16r)-1)
This is why you need a root-finding algorith. In lieu of solving the equation, though, you can just compare how much you’ve paid in to how much you’re paid out. That doesn’t tell you the rate of return, but it will tell you if it’s positive or negative.
Leave the math to the mathematician.
October 21st, 2007 at 6:05 pm |
In addition there is inflation, which you have ignored
Surely you can come up with some extraordinarily safe investment to protect against inflation. Treasury bonds or a high-yield savings account. Both of which will offer a positive return, even after inflation.
I meant that you had ignored inflation over the lifetime of the worker. I wasn’t referring to any investment to protect against inflation.
there is also an increase in compensation rate (for many people) which also seems to have been ignored
It’s not a factor. People make less earlier in life and more later in life. So using the median is a perfectly acceptable approach. Actually, it’s precisely what Social Security does. Your benefit is based on the average of 35 years.
“Median” and “average” are not the same measure. how Social Security computes the benefit isn’t the issue You also ignore inflation (and the increase in benefits) after retirement.
But all your hand-waving math is unnecessary. Social Security is designed to be self-supporting and is run that way. That means the FICA income (plus the earnings from the surplus) pretty much equals the benefits. That’s the design goal. You go to a lot of trouble to show that SS works as is designed to work.
The rate of return to which I refer is the rate of return personal account backers assume.
Almost getting it all back looks pretty good to me
You would choose getting most of your money back versus keeping all your money? To me, this suggests that you’re simply not rational.
Given that different people live different lengths of time having a program that provides an inflation-adjusted lifetime benefit looks pretty good to me – along with the two other main benefits.
We’ve already done the no-Social-Security experiment in the United States. How did that work out for the elderly/retired? Wasn’t that precisely the reason SS was created?
October 21st, 2007 at 9:14 pm |
You go to a lot of trouble to show that SS works as is designed to work.
Social Security can ALWAYS be self-supporting. It’s just a matter of increasing taxes and reducing benefits. It can continue to work ad infinitum by employing those measures. That’s not my point. My point is that, as you raise taxes and cut benefits, it becomes a worse and worse deal. Right now, it’s just about at the break even point. If taxes are increased or benefits are decreased (as is inevitable), the program will become an even greater burden on the middle class it was intended to serve.
We’ve already done the no-Social-Security experiment in the United States. How did that work out for the elderly/retired? Wasn’t that precisely the reason SS was created?
This is a false dilemma. Your implication is that it’s Social Security or nothing. What if Social Security were replaced by another program that works as follows. If your income puts you below the poverty line, the government will cut you a check to bump you up to the poverty line. That would guarantee that no seniors (or anyone else, for that matter) are left below the poverty line. Would that be a sufficient replacement for Social Security?
Another problem with Social Security is that it’s simply not fair. Why does your generation, which paid relatively little in Social Security taxes, receive more benefits than my generation, which pays through the nose? We pay so much because you didn’t have enough children to sustain your precious Ponzi scheme. On top of that, you’ve left us with tens of trillions of dollars in debt and unfunded liabilities. Thanks.
Social Security was, beyond a doubt, a great boon to your generation. Unfortunately, it’s a great burden to my generation; a burden which I don’t think you can fully fathom. At the very least, you should offer people a choice. I don’t understand what’s so wrong with that. This is, after all, the land of the free, isn’t it?
October 22nd, 2007 at 10:36 am |
“Social Security can ALWAYS be self-supporting. It’s just a matter of increasing taxes and reducing benefits.”
Yep. Until (if it ever happens) the demographics stabilize. Both sides of the debate could (if they would) agree on that.
“My point is that, as you raise taxes and cut benefits, it becomes a worse and worse deal.”
That’s phrased in a very prejudicial way but the underlying point is valid and can (and should) be considered by the Congress.
SS benefits can be taxed and are taxed, if other income is high enough. That can be modified (to a higher tax rate) in the future and could help balance the budget without explicitly designating “poverty level” as the goal for those with lower earnings.
“We pay so much because you didn’t have enough children to sustain your precious Ponzi scheme.”
Again, phrased in a very prejudicial way but accurate enough (if the inaccurate “Ponzi scheme” crap is thrown out.) In addition the life expectancy has gone up, due to medical advances made by my generation. Should we throw those out?
There are forces (economic ones included) that lead to a reduction in the birth rate. There are some beneficial aspects to that lower birth rate. One effect is a raising of the FICA rate.
“What if Social Security were replaced by another program that works as follows. (etc.)”
That can be proposed in Congress and we’ll see how well it flies.
“Unfortunately, it’s a great burden to my generation; a burden which I don’t think you can fully fathom.”
You pay a tax. How is that “hard to fathom”? What is it you need but cannot afford?
You live in a country that values the common welfare enough to explicitly mention it in the Constitution. You are part of the society. Maybe it’s too bad that you no longer can sling an ax over your shoulder and go out into the wilderness and live for yourself but that’s how it is (although maybe if you searched you could find such a wilderness.)
October 22nd, 2007 at 10:38 am |
Choice? When will I be offered the chance to not have to pay for Bush’s war (although it is your generation that’s receiving the biggest part of that bill)?
October 22nd, 2007 at 12:10 pm |
That’s phrased in a very prejudicial way but the underlying point is valid and can (and should) be considered by the Congress.
It’s not prejudicial, it’s simply the facts. What if the tax rate was raised to 15% and the replacement rate was lowered to 30%? At that point, I think even you would agree that the system sucks. Unfortunately, we’re headed to that point. You may not live to see it, but I probably will. As the ratio of workers to retirees dwindles to 2, the ratio of replacement rate to tax rate must also approach 2. It’s simple math.
At what point do we say that it’s just not worth beating this dead horse? Social Security already represents trillions in unfunded liabilities. Do we really have to get to the point I described above before we call it quits? Or could we possibly exercise a modicum of foresight and stop the train wreck before it happens?
Choice? When will I be offered the chance to not have to pay for Bush’s war (although it is your generation that’s receiving the biggest part of that bill)?
You’re preaching to the choir. I have always held that invading Iraq was absolute folly. But I wouldn’t be so quick to label it “Bush’s war”. Recall that the Democrats held the majority in the Senate when the vote was taken. They easily could have stopped this mammoth mistake. Too bad not enough of them had the spine to stand up to the polling data.
October 22nd, 2007 at 1:29 pm |
I said (October 5) “I can be sympathetic to an attitude that it sucks to support retirees via taxes.”
“At what point do we say that it’s just not worth beating this dead horse?”
That’s up to the people, working through their representatives in Congress. (Again, you use prejudicial language.)
“Recall that the Democrats held the majority in the Senate when the vote was taken. They easily could have stopped this mammoth mistake. Too bad not enough of them had the spine to stand up to the polling data.”
Still in the same choir. Heck, if you read the Constitution you discover that Congress and only Congress has the power to declare war.
Of course we’re both ignoring the massive right-wing propaganda machine that would (actually, did anyway) paint the Democrats as being unpatriotic. Seeing as how they were so painted anyway they might as well have voted intelligently.
Last time he ran Senator Feingold had a campaign T-shirt you could buy. It featured a spine. Very cool and apropos.
http://www.russfeingold.org/feingear.php
June 21st, 2010 at 1:05 am |
It seems like there is finally some good news with the spill. The Houston Chronicle reports, U.S. ships were being outfitted earlier this month with four pairs of skimming booms airlifted from the Netherlands and should be deployed within days.” Could this be the turning point? For all those feeling pretty gloomy about this situation, I recommend a good laugh… Here’s a funny joke, http://www.youtube.com/watch?v=Dd0svVWfFbo