Privatizing Social Security Idea Looks Even Worse Now

[grumpy]

With the markets melting down I'm sure glad that the politicians didn't succeed in the scheme to privatize social security. Shifting the risks to individuals didn't look nearly as stupid then as now.

 

[Alan]

John McCain was (is?) a big proponent of SS privatization, I'm sure he won't mention this over the next few weeks.

Having SS funded the way it is may be an issue in the coming decades but for me it shows the strength of diversification.

 

[haha]

Can you imagine the pressure to bailout all those who might have been totally busted in their private SS accounts- as in they bet it all on oil service and it is now worth 1/4 of what they put in?

ha

 

[Fastfade]

Congress is alreading discussing a bailout for those with 401Ks. They want to let you swap it out for a Guanteed Retirement Account (6% return or 3% above inflation rate , I think?).

More welfare and socialism?

 

[Alan]

Congress is alreading discussing a bailout for those with 401Ks. They want to let you swap it out for a Guanteed Retirement Account (6% return or 3% above inflation rate , I think?).

More welfare and socialism?

Yuk!!

This is exactly what will happen with "personal savings accounts" in the privatization of SS. Profits go to the investor, failure is covered by the taxpayer.

 

[dex]

A couple of points:
It wasn't for the full amount of SS taxes, phased in and began with young workers
http://en.wikipedia.org/wiki/Social_Security_privatization

President George W. Bush called for a transition to a combination of a government funded program and personal accounts ("individual accounts" or "private accounts") through partial privatization of the system. The personal accounts could be invested in various managed investment funds similar to the government employees' Thrift Savings Plan, in which the investor can choose between Treasury Bills, Corporate bonds and a stock market fund. Since the Report of the 1994-1996 Advisory Council on Social Security, the Social Security program has been the subject of widespread debate. After President Bush highlighted the issue in his 2005 State of the Union Address, the debate became especially intense.

++++
Studies have shown that even putting all your and the companies contributions into 30 yr treasury bonds would have given you a much better income than the current system AND you might have had something to leave after your death.
Also, US citizens would be holding the debt instead of China et al.

Even putting a small part of your contributions into treasury bonds + the adjusted SS would have been better.


+++
I wish it was available when I started working at 15.

 

[chinaco]

Can you imagine the pressure to bailout all those who might have been totally busted in their private SS accounts- as in they bet it all on oil service and it is now worth 1/4 of what they put in?

ha

It was worse... they gave it to the government to spend the surplus.

Seriously. There is little question that we need SS. IMO privatization of it was a silly idea because of what is happening right now in addition to the fact that most people do not know how to invest for retirement even in normal times.

We would be better off if we had defined benefit pensions at work. The problem is that people rarely have a lifetime career at a corporation anymore.

 

[ERD50]

It is silly to look at a dip, and then say that privatizing SS would be bad. By that logic, NO ONE should ever invest in stocks - they can go down.

I really LIKE the idea of my own SS account. I do think there would need to be some strategies in place, to keep financially uneducated people from making mistakes. Something along the lines of forcing a 'Target Retirement' mutual fund approach. A 65 YO w/o other savings should NOT have their private SS in 100% stocks.

And if you do have other savings, you could decide to be a bit heavier in equities with that, if the automatic balance of the govt was too conservative for your tastes. Or visa versa.

What is wrong with that?

-ERD50

 

[Alan]

Thanks for the links dex.

My problem with the plan is what happens to those who invest badly and run up big losses? I just don't have the faith that the majority of folks will invest wisely.

 

[chinaco]

It is silly to look at a dip, and then say that privatizing SS would be bad. By that logic, NO ONE should ever invest in stocks - they can go down.

I really LIKE the idea of my own SS account. I do think there would need to be some strategies in place, to keep financially uneducated people from making mistakes. Something along the lines of forcing a 'Target Retirement' mutual fund approach. A 65 YO w/o other savings should NOT have their private SS in 100% stocks.

And if you do have other savings, you could decide to be a bit heavier in equities with that, if the automatic balance of the govt was too conservative for your tastes. Or visa versa.

What is wrong with that?

-ERD50

I view SS as both pension and safety net... keep in mind the variety of insurance components of SS if you become disabled, etc.

 

[donheff]

I view SS as both pension and safety net... keep in mind the variety of insurance components of SS if you become disabled, etc.

+1 Comparing SS to private individual investments is comparing apples to oranges. I doubt that a minimum wage employee would do as well with Treasuries as with SS. If the current bear market lasts for years as some predict a whole lot of Boomers are going to be thanking their lucky stars that SS is there for them. I believe there is a basic floor that we as a society should place under our kids and our senior citizens. Public schools is a part of that, SS is part of that (beefed up a bit if I had my druthers), and some sort of universal health insurance is a part of that as well.

 

[youbet]

+1 Comparing SS to private individual investments is comparing apples to oranges. I doubt that a minimum wage employee would do as well with Treasuries as with SS.

Yep. Most forget that an important function of our current SS system is to transfer wealth from higher wage earners to lower wage earners in order for the lower wage earners to avoid poverty in old age. If you're unfortunate enough to work a lifetime at low wages, SS, because of the formula used to calculate benefits, is a truly sweet deal. If you spend a lifetime contributing the max, according to the formula, it isn't such a sweet deal.

I personally don't have a problem with this. Few people take this important aspect of SS into account.

 

[dex]

Thanks for the links dex.

My problem with the plan is what happens to those who invest badly and run up big losses? I just don't have the faith that the majority of folks will invest wisely.

That's an easy fix. Only have one investment option - 30 year US treasury bonds. It would be like laddering CDs - people would still be better off than with SS either under a partial or all plan of privatization.

 

[Culture]

It is my opinion that the issue of public/private SS was never the real issue. The real problem is that SS is an income redistribution program that takes primarily from middle income wage earners to fund the retirement of low income wage earners.

The real solution to SS is "private accounts," where your SS contributions are credited to your name, invested in government bonds in your name, interest applied to your account, and the amount that is accumulated is annuitized when you retire and used to fund your retirement. Some portion (say up to 25-50%) could be used to invest in a government run TSP-like broad index fund at the individuals disgression. The amount allowed in the index would decrease with age.

A small portion of your contributions could be used to fund a "disability plan/life insurance" in case you do not make it to retirement.

Of course, this will never happened because politicians only gain advantage when subsidizing the public or industry.

 

[dex]

Social Security

"Even an absolutely safe U.S. Treasury Bond or Note rate of return of 5% would significantly beat the current rate of return on Social Security benefits which is only about 1½%. "

"An additional extreme negative associated with the Social Security pension is that the benefits die with the retiree whereas with self-funded private retirement plans there will be a death benefit equal to the remaining account balance in the private plan. "

Imagine if a mother and father were able to leave their privatized portion of SS to their children or favorite charity.

"Another extraordinary fact pertaining to this issue, and one that is relatively unknown by most Americans, is the fact that many federal and state employees already have fully-privatized retirement benefits. In other words, many federal and state employees have the equivalent of their entire Social Security tax go into an individual account plan that can earn a real market rate of return like in a Section 401(k) and the other private retirement plans discussed below."

 

[donheff]

It is my opinion that the issue of public/private SS was never the real issue. The real problem is that SS is an income redistribution program that takes primarily from middle income wage earners to fund the retirement of low income wage earners.

The real solution to SS is "private accounts," where your SS contributions are credited to your name,
A small portion of your contributions could be used to fund a "disability plan/life insurance" in case you do not make it to retirement.

I fundamentally disagree, but I am a pinko. I hope you are consistent in your views and would stop public funding of education. We could switch to users fees for those who utilize it. Why should we tax singles and gay couples to fund straight couples' kids' education? The answer, of course, is the good of society as a whole. Just the way I see a SS safety net for the poor.

 

[OAG]

One idea that I have never seen floated for SS is to allow people to "buy in" to it. For instance if you felt your benefit was going to be too low (or just wanted to increase it) when you get your first forecast of benefits (around age 45) they (SSA) would allow for a annual lump sum you would pay for some "add on increase in benefits". That portion of the account would be "buy name/ssn" and the unused portion (if any) would be "part of one's estate" at death (or otherwise "passed down"). Seems that would be one way to extend the survivability of the plan. It would provide another way to insure one's "old age" and may (or may not; not sure) even financially assist society.

 

[Rustward]

One idea that I have never seen floated for SS is to allow people to "buy in" to it.

Interesting idea that I have never heard either. Seems like buying a guaranteed annuity from the government.
Have heard many ideas to the contrary -- "It's my money, let me determine where it gets invested..." but now we are seeing some of the pitfalls with that idea.

 

[donheff]

One idea that I have never seen floated for SS is to allow people to "buy in" to it.

You can do this to a degree by taking SS at 62 and then reapplying at 70 (or 66, or whenever). Basically, you get to rethink your longevity when you hit 70. Unless they change things you don't even have to pay interest -- it seems like a no-brainer.

 

[73ss454]

I think it was REW who brought up a good point about giving back the SS money.
You would have already paid tax on it, so maybe not as good a deal as you may think.

 

[FIRE'd@51]

I am against privatizing SS, but I am not against investing a portion of the trust fund in equities to increase the long-term rate of return above that which can be earned on Treasury securities. I would like to see a system that kept the benefit formulas the way they are now, but have the SS trust fund run like a pension plan. IMO, the main problem with privatizing SS is that it becomes impossible to "diversify across time", and folks who retire during a market downturn would lose benefits relative to those who retire when the market is performing well. Since most corporations have moved away from defined-benefit plans into defined-contribution plans (e.g., 401k's), the current SS model has become even more important as a portfolio diversifier.

 

[OAG]

I think it was REW who brought up a good point about giving back the SS money.
You would have already paid tax on it, so maybe not as good a deal as you may think.

Not true. You either take a Schedule A Deduction for the repaid amount or Credit on Line 70 of 1040 in year of repayment for the difference in what your taxes paid were less any additional amount paid because of SS benefits repaid. (page 81 IRS Publication 17 for details as per IRC Ruling 1341). I will be doing it for this tax year and will receive a refund of every dollar I have paid on previous SS benefits received and repaid this year.

 

[Khan]

Social Security

"Even an absolutely safe U.S. Treasury Bond or Note rate of return of 5% would significantly beat the current rate of return on Social Security benefits which is only about 1½%. "

"An additional extreme negative associated with the Social Security pension is that the benefits die with the retiree whereas with self-funded private retirement plans there will be a death benefit equal to the remaining account balance in the private plan. "

Imagine if a mother and father were able to leave their privatized portion of SS to their children or favorite charity.

"Another extraordinary fact pertaining to this issue, and one that is relatively unknown by most Americans, is the fact that many federal and state employees already have fully-privatized retirement benefits. In other words, many federal and state employees have the equivalent of their entire Social Security tax go into an individual account plan that can earn a real market rate of return like in a Section 401(k) and the other private retirement plans discussed below."

When did that happen?

 

[73ss454]

Not true. You either take a Schedule A Deduction for the repaid amount or Credit on Line 70 of 1040 in year of repayment for the difference in what your taxes paid were less any additional amount paid because of SS benefits repaid. (page 81 IRS Publication 17 for details as per IRC Ruling 1341). I will be doing it for this tax year and will receive a refund of every dollar I have paid on previous SS benefits received and repaid this year.

Cool, that's the 1st good news I've heard in a while. Then Dex is right if the health is good it's a no brainer.

 

[REWahoo]

Not true. You either take a Schedule A Deduction for the repaid amount or Credit on Line 70 of 1040 in year of repayment for the difference in what your taxes paid were less any additional amount paid because of SS benefits repaid. (page 81 IRS Publication 17 for details as per IRC Ruling 1341). I will be doing it for this tax year and will receive a refund of every dollar I have paid on previous SS benefits received and repaid this year.

This is good information OAG. Thanks.