Roger Lowenstein on Social Security

Interesting comment in the article.

The C.B.O. assumes that the typical worker would invest half of his allocation in stocks and the rest in bonds. The C.B.O. projects the average return, after inflation and expenses, at 4.9 percent. This compares with the 6 percent rate (about 3.5 percent after inflation) that the trust fund is earning now.
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William Bernstein's take was that the return would be a lot lower than that - at least for social security's original benificiaries.

http://www.efficientfrontier.com/ef/105/goldrush.htm
Viewed from the other side of the ledger, toss the following four items into the mix: 3% real returns for stocks, 1% for short-term bonds, a 60/40 portfolio, and 2% to 4% overt and covert expenses from your friendly neighborhood brokerage house or fund company. The result is an after-expenses real return that compares unfavorably to the canned goods in your cellar. Even those of us in the low-expense/multifactor crowd shouldn't be too snide - if we can get an overall 1% portfolio boost from small and value and cover our expenses with skilled rebalancing, the only path to a small fortune is to start out with one. (Remember that while we're peddling as fast as we can, real productivity and wages will be increasing by about 2% per year; thus, the best-case scenario is keeping up with the working Joneses, and just barely at that.)

Of course, the country's wealth would not wind up entirely in the hands of the nation's brokerages and fund companies. As publicly traded entities, some would be distributed to shareholders in the form of dividends and capital gains, but even more would be wasted on obscene management perks and corporate acquisitions that would make the Time Warner-AOL deal look like a tip at the Olive Garden.
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This is the best article on the SS "crisis" I have seen to date. Plan to set aside a good half-hour or so, but it's well worth the time.
 
Read the article -- makes me concerned that somebody in Washington with a serious agenda is going to decide the fate of my future SS checks (and marginal financial security in retirement), and that none of the new propositions seem good for early retirees.

Question is: who is behind these changes? Is it the securities industry looking for new fees and commissions that is driving all this? Is it really Bush trying to be 'prudent' and do us all a favor by securing our financial future? I just can't believe it is some sort of presidential altruism -- i wish I knew who is really lobbying for this.
 
Lowenstein's article is, in my opinion, wrong on the trust fund issue. His position allows him to believe in the sanguine view:

He says: "The actuarial view is that the system is probably in need of a small adjustment of the sort that Congress has approved in the past. But there is a strong argument, which the agency acknowledges as a possibility, that the system is solvent as is."

But, I believe those trust fund monies have been spent--those bonds can only used to pay benefits by raising taxes or by more deficit borrowing. (When a government owns its own bonds, those bonds are both an asset and a liability, netting to zero.)

If you 'believe' in the trust fund, then what you are implicitly saying is that government will begin to allocate a larger and larger fraction of its budget to social security--and that can happen, given the demographics, only with higher taxes or even more deficit spending. I personally think both will happen, with a nice dose of inflation to mask the results.

If you want another view of the mess social security is in, I recommend Scott Burns' column from today:

http://www.dallasnews.com/business/scottburns/ (requires free registration, but worth it)

I believe that Burns correctly frames the issue, paraphrased in very inflammatory terms, as rich old people taking resources from much poorer young people. Sadly, it's going to be a rocky debate...
 
One final thought about Social Security. This really shouldn't be much of an issue for dedicated ER folks. I believe ER is all about cutting the links to dependency on 'others,' be it the job, SS checks, or whatever.

Once we have done that, any realistic change to Social Security isn't likely to have much of an impact on our ability to ER or maintain an ER lifestyle.

Why? Because I'll bet any change will be modest, spread over a long time, and with opportunities for advance planning. I'm much more worried about changes that raise taxes dramatically, or increase the inflation rate. Now, those could impact ER plans.

So, I'm going to relax about all this Social Security talk. I'll monitor the situation to avoid as much harm to my situation as possible, but I'm not going to loose sleep over it.
 
. . .But, I believe those trust fund monies have been spent--those bonds can only used to pay benefits by raising taxes or by more deficit borrowing.  . . .
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This is a point that many miss, but helps answer ESRBob's question. Since ss tax is very regressive (it cuts off entirely above $87K earnings) the taxes that have been collected have been disproportionately taken from the poor. But this administration has spent that money (and then some) like a drunken sailor. If they can convince people that social security is bankrupt and cancel the program, then they effectively transfered even more of the tax burden from the rich to the poor.

This administration is of the rich, by the rich, for the rich. Everything they have done has transferred the tax burden from the rich to the poor. Primarily this transfer has been from the rich of today to the poor of tomorrow. They've done that through a combination of deficit spending while reducing taxes on the wealthiest far more than they are reducing taxes on the poor and middle class. But by eliminating social security now (when they have already collected a surplus of social security taxes from the poor) they are able to transfer tax burden from the poor of yesterday to the rich of tomorrow.

A move to a sales tax (another regressive tax) instead of income tax is yet another attempt to transfer tax payments from the rich to the poor. Elimination of estate taxes favors the ultra wealthy far more than the middle class and has no effect on the poor. Elimination of capital gains taxes is also far more favorable to the rich.

Why bankrupt the government and the poor? ? ? In the absence of a strong central government, the wealthy, elite rule the country. Without a credible safety net or government advocate, the poor are desparate to work till they die for whatever wages they can get. This administration is in favor of cheap, desparate labor to be exploited by the rich. It is the unifying principle that makes all of their policy decisions rational.
 
Why bankrupt the government and the poor? ? ?  In the absence of a strong central government, the wealthy, elite rule the country.  Without a credible safety net or government advocate, the poor are desparate to work till they die for whatever wages they can get.  This administration is in favor of cheap, desparate labor to be exploited by the rich.  It is the unifying principle that makes all of their policy decisions rational.
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Very dark, but probably true. Bush is Caligula for today.

Mikey
 
I believe that Burns correctly frames the issue, paraphrased in very inflammatory terms, as rich old people taking resources from much poorer young people.  Sadly, it's going to be a rocky debate...
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Sure Burns plan works on paper but what he's missing is that the Social Security Issue is 95% Politics and 5% numbers.

The folks messing with it are going to learn why they called SS the third rail of politics.
 
I thought Burns' column was excessively inflammatory. He's got an agenda - he wants to sell a national sales tax. Does anyone here really think that's a neat idea? Once we get a national sales tax we'll never get rid of it, and we'll still have the income tax.

My dad has got a better deal from Social Security than I will. I don't feel victimized by that. I have paid Alan Greenspan's increased payroll tax for the last 20 years on the promise that it would secure my retirement. But it may not be enough. Ok, so now some tweaks are in order. Changing from wage indexing back to cost indexing (which was the standard until the Ford administration) seems reasonable to me.
 
Question is:  who is behind these changes?  Is it the securities industry looking for new fees and commissions that is driving all this?  
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As always, follow the money. Who stands to profit/ Maybe this is just to soften us up for the big blow that comes when they try to 'fix' Medicare. There's a scary one.

Judy
 
But, I believe those trust fund monies have been spent--those bonds can only used to pay benefits by raising taxes or by more deficit borrowing.  (When a government owns its own bonds, those bonds are both an asset and a liability, netting to zero.)
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Hmmm, if a citizen of the US owns US government bonds are those "both an asset and a liability, netting to zero"?

However, if you have objections with the surplus being held in government bonds then why not pool the funds and invest in the markets in aggregate?  This is one suggestion given in the article and is in fact what some other countries do with their social security-like programs' surpluses.  For example, Canada does this with the surpluses on their Canada Pension Plan system.

From the article:
In any case, Social Security could capture the return on stocks, without putting individuals at risk, by investing in equities directly. This would also achieve another frequently stated objective: keeping the government's hands off the Social Security trust fund. That option would be far more efficient, in economic terms, than separating the money into 150 million disparate accounts. Costs are much lower for one big investor. And more important, in a system of individual accounts, benefits will vary with individual choices, and some people will make poor ones. In Sweden, where the retirement system has included private accounts since 2000, the majority of Swedes made excessively risky investment choices by putting money into stocks at the market top, according to Richard Thaler, a University of Chicago behavioral economist. Finally, pooling the investment pools the risk, and thus reduces the danger of retiring at the wrong time. In a system of personal accounts, someone who retired after a market crash would be out of luck.
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Re: Roger Lowenstein on Social Security This is a

This is a point that many miss, but helps answer ESRBob's question. Since ss tax is very regressive (it cuts off entirely above $87K earnings) the taxes that have been collected have been disproportionately taken from the poor.
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As a point of balance: Social security is tremendously progressive in terms of what it pays out.

This has always been so. It is regressive when paid. But this is more than offset when it comes to payments.

Have fun.

John R.
 
Re: Roger Lowenstein on Social Security This is a

As a point of balance: Social security is tremendously progressive in terms of what it pays out.

This has always been so. It is regressive when paid. But this is more than offset when it comes to payments.

Have fun.

John R.
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That's exactly the point, John. A surplus has been collected (the regressive part). If we stop the system and apply those funds to the debt instead of to the benefits (the progressive part), then we have transferred taxes from the rich to the poor. :)
 
Holy Moly! Does SalaryGuru have a political slant or what? Wow! Darth Vader is going to stop the SS system, rule the world, put us in chains. We do still have an elected government. A congress, right? Chill out.
 
Holy Moly! Does SalaryGuru have a political slant or what? Wow! Darth Vader is going to stop the SS system, rule the world, put us in chains. We do still have an elected government. A congress, right? Chill out.
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I don't recall mentioning Darth Vader or chains.  Do you object to the facts related to the transferral of tax burden from the rich to the poor or to the rationale I've assigned to those moves?  Why do you think this administration is systematically widening the gap between the rich and the poor?  
 
However, if you have objections with the surplus being held in government bonds then why not pool the funds and invest in the markets in aggregate?
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That misses the point of the program, which is to foster individual responsibility. Under private accounts, your future is in your own hands. If you work diligently, you will store up the maximum in your private account each year. If you are slothful, you will only partially fund your account, and you will suffer for it.

Similarly on the investment side, if you study and invest wisely, your account will support you in your old age. If you are slothful and pay no attention to how your account is invested, you will suffer. The new program is an ownership society, where your rewards are directly related to your efforts.

The current system gives more benefits to the working poor than they have earned, which is what the new system wants to eliminate. Under private accounts, you either study hard to learn a trade, then work diligently at it, or you starve. I am not saying that I agree or disagree with this philosopy, but that is my understanding of what they are trying to do.
 
Similarly on the investment side, if you study and invest wisely, your account will support you in your old age. If you are slothful and pay no attention to how your account is invested, you will suffer. The new program is an ownership society, where your rewards are directly related to your efforts.
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Why doesn't the government just invest the money in the stock market for the masses. Why Bush could appoint the smartest folks on Wall Street to manage the portfolio - Or they might decide that Index funds make the most money. :D

What you don't understand Michael is that the Government is going to have to take care of the Stupid, the Poor, The criminals etc. if they don't have any money- It will cost more to do it with Prisons, Capital Punishment and Crime Sprees than handing out piddly Social Security Checks!

There is a simple solution to every complicated problem that won't work!
 
Hey Salaryguru, the Darth Vader comment was posted
by somebody else ....... not me.

Cheers,

Charlie
 
Why doesn't the government just invest the money in the stock market for the masses. Why Bush could appoint the smartest folks on Wall Street to manage the portfolio - Or they might decide that Index funds make the most money. :D

What you don't understand Michael is that the Government is going to have to take care of the Stupid, the Poor, The criminals etc. if they don't have any money- It will cost more to do it with Prisons, Capital Punishment and Crime Sprees than handing out piddly Social Security Checks!

There is a simple solution to every complicated problem that won't work!
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I agree with CT-we already have "private retirement accounts" They are called IRAs.

I'm in favor of the government investing a chunk of the SS cash flows in some broad based index funds and AAA corporate bonds. Let's have a little diversity here :)

And yes, there is a cost to everything. We as a society will always fund "social programs" Be they SS or prisons.

I'd rather spend it on SS than prisons...
 
Hey CT,

How about coming out of retirement and running for President. I like your common sense logic.

Of course, the red state voters may prefer to vote for someone who would build prisons to house all those (who probably were for privatization) who began robbing others to survive because they became destitute losing their money in the stock market and had no decent SS check to fall back on.

MJ :D
 
Under private accounts, you either study hard to learn a trade, then work diligently at it, or you starve.  I am not saying that I agree or disagree with this philosopy, but that is my understanding of what they are trying to do.
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Well Michael, I think you have a rather unique understanding. It may also be Emperor Bush's intention, but I doubt it would play well with most voters. Though I have no doubt that you think that you would like it.

One thing I would like to point out to you and anyone else who is not only short on empathy but also on common sense is that there are many ways to become poor other than by being lazy. Having a child with leukemia might be one. Study hard, become a carpenter, then fall and break your back might be another. Even a motorcycle accident could do the trick.

Or one could be the stay at home wife and mother married to a man to whom any of these things happen- or just to a man who decides to take off on you. Do you know any single mothers? Many of them are very hard working, probably harder than you will ever be. What is that like? You get up well before dawn to get your kids ready for day-care or school, work all day, then run around like a madwoman to pick up the kids, get them some dinner, talk to them and give them a little much needed love, then see if you can get 5 hours of sleep for yourself before starting all over again. Tough life when it is working, and very vulnerable to shocks.

Then there is always the birth lottery. Do you know that most skilled trades require at least an average IQ? An average IQ is 100. Do you know that by definition, half are above that, and half below it? For every 130, there is a 70? So a good number of people are running the race with their feet tied together. How do you feel about letting them starve?

Last week I was walking in a hip downtown residential area where condos cost $600,000 and up to well over $1million. People with their bedding were all over the place. Piles of human waste were here and there. Under your do well or starve theory, I suppose one would add to this collection people in various stages of dying, including the recently dead.

I suspect that the following might be a bit out of your ken, but the English Christian poet John Donne dealt well with this topic in his 1623 poem, For Whom The Bell Tolls:

"If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend's or of thine own were: any man's death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee."

Mikey
 
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