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Old 05-13-2011, 05:55 PM   #21
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I get 0% survivor from SS, since my wife and I have approximately equal SS benefits. If one of us dies, the household just loses that 20k income stream.
Well, the rule is the same for everyone. The survivor of all two earner families loses one of the benefits. The winner is a non-working survivor.
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Old 05-13-2011, 09:55 PM   #22
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I take it that SS is not funded. The Canadian CPP although a much smaller program is fully funded and actuarially sound. Sounds like you need some reform on this big time. Good luck.
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Old 05-14-2011, 09:52 AM   #23
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I take it that SS is not funded. The Canadian CPP although a much smaller program is fully funded and actuarially sound. Sounds like you need some reform on this big time. Good luck.
There are different definitions of "fully funded and actuarially sound".

According to this report from the chief actuary of the CPP http://www.osfi-bsif.gc.ca/app/DocRe...ding_CPP_e.pdf the plan is neither pay-as-you-go nor fully funded.

Unlike the US system, the CPP invests its surplus in real assets. But the total assets aren't adequate to pay the already-accrued benefits.

While looking for information on the CPP, I saw references to the OAS, which appears to be an older paygo program. Maybe Canada is in the middle of a shift from one to the other? or is the expectation that both plans are permanent?

If the US SS old age system were fully funded, it would need assets of about $17 trillion. IIRC, that's in the general neighborhood of the capitalized value of all "US" stocks.
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Old 05-14-2011, 09:58 AM   #24
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The article didn't go into any detail as how the $500K in payments was calculated or the $1,000,000 in expected benefits. My assumption was the $500,000 represents the NPV of stream of payments (FICA and medicare taxes) adjusted for inflation. The million is likewise the NPV of future health care benefits and SS payments also adjusted for medical inflation and wage inflation (both different from CPI).

Since a persons SS and Medicare aren't individually invested but rather used to pay existing benefits of current retirees, I don't see how they benefit from compound interest. Perhaps in the past they did although, the Treasury bills that social security trust fund has invested in the past represent both an asset and liability to the government and should cancel out.
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I'll agree that a paygo system like SS does not benefit from compound interest. But it does benefit from a growing economy, so it's possible to pay each generation of workers more than they paid in. See post #9.
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Old 05-14-2011, 12:43 PM   #25
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I'll agree that a paygo system like SS does not benefit from compound interest.
Suppose that payments into the system were not spent immediately but used to buy government issued securities that do pay interest, and payments out of the system were made by redeeming those securities. To account for the fact that more will be paid out in the future than is being paid in now, the interest rate would have to assumed greater than zero. This system would work just as our SS system does now, so far as amounts paid in and out go, but it would be slightly less efficient, because of the accounting work in buying and selling, possibly even printing, the securities. Since the effect is the same, if it's pleasing to think of the SS being funded through interest bearing securities, why not think of it that way? Thus, SS does, in effect, benefit from compound interest.
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Old 05-14-2011, 01:23 PM   #26
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Suppose that payments into the system were not spent immediately but used to buy government issued securities that do pay interest, and payments out of the system were made by redeeming those securities. To account for the fact that more will be paid out in the future than is being paid in now, the interest rate would have to assumed greater than zero. This system would work just as our SS system does now, so far as amounts paid in and out go, but it would be slightly less efficient, because of the accounting work in buying and selling, possibly even printing, the securities. Since the effect is the same, if it's pleasing to think of the SS being funded through interest bearing securities, why not think of it that way? Thus, SS does, in effect, benefit from compound interest.
To me, the "Suppose that payments ...." scenario is not the same as " just as our SS system does now".

From it's inception, most of the taxes collected by SS were paid as benefits very soon after they were collected. The small difference was kind of like the balance in my checking account - just enough so my checks don't bounce, but not enough to provide any meaningful long term interest.

I guess I don't know how to figure out the dollar amount on those government issued securities in the "Suppose that the payments ..." scenario. Maybe you could clarify that.

The reasons we get interest on corporate bonds is that we're willing to consume less than we earn. The consumer goods we don't buy are instead being consumed by people who produce capital goods for the corporation that borrows my money. The return of my principal plus interest comes from the productivity created by those capital goods. I see that as a fundamentally different economic process than the IRR in a paygo pension system, so I look for different words to describe them.
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Old 05-14-2011, 01:50 PM   #27
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@Independent. Thanks for the link interesting read. Yes I think the term "fully funded" is open to interpretation and I stand somewhat corrected. The study says the current steady state funding methodology will result in an optimal funding plan and will ensure assets are in place to fund expected future payouts. I think it is fair to say it is " actuarially sound". It is not a pay as you go system as SS is.
OAS(Old Age Security)is a supplementary additional payment that pays additional funds to people earning less than about $65k/ annum & max payout is around $6k/ annum. This is a pay as you go scheme like SS. This is paid from general revenues not participant contributions.
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Old 05-14-2011, 01:57 PM   #28
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I recall watching The Millionaire as a kid and the larceny in that TV-watching-kid always wondered why Michael Anthony didn't just keep one of those $1,000,000 cashiers checks for himself and vanish, after all that was when a million bucks was worth a million.

I think that I later theorized that Mike probably was paid a million bucks by Mr. Tipton so that kept him home and employed. Your theory?
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Old 05-14-2011, 02:02 PM   #29
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I recall watching The Millionaire as a kid and the larceny in that TV-watching-kid always wondered why Michael Anthony didn't just keep one of those $1,000,000 cashiers checks for himself and vanish, after all that was when a million bucks was worth a million.

I think that I later theorized that Mike probably was paid a million bucks by Mr. Tipton so that kept him home and employed. Your theory?
This was one of my favourite shows as a kid. I always assumed Anthony was a lawyer whose firm was hired by Tipton. Obviously Tipton being the smart guy that he was would design control systems to prevent your senario.
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Old 05-14-2011, 02:08 PM   #30
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This was one of my favourite shows as a kid. I always assumed Anthony was a lawyer whose firm was hired by Tipton. Obviously Tipton being the smart guy that he was would design control systems to prevent your senario.
You really had a much more sophisticated insight into their business relationship that did I. I was thinking that all the Mike did was deliver the checks on a weekly basis and waited around until the next check was typed up and ready for the next delivery.
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Old 05-14-2011, 02:45 PM   #31
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The return of my principal plus interest comes from the productivity created by those capital goods.
So if as an investor you were offered a bond backed by the US government which offered a high rate of interest, you would refuse it if the principal and interest could not be associated with any capital goods. Right? You're not looking just for a return on your money and safety of the principal, but something else -- returns must come from productivity.
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Old 05-14-2011, 03:16 PM   #32
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@Independent. Thanks for the link interesting read. Yes I think the term "fully funded" is open to interpretation and I stand somewhat corrected. The study says the current steady state funding methodology will result in an optimal funding plan and will ensure assets are in place to fund expected future payouts. I think it is fair to say it is " actuarially sound". It is not a pay as you go system as SS is.
Is Canada's population rising from birthrate and immigration, slowing, or declining?

I think the U.S. concern is that the population is aging from longevity while no longer rapidly growing from birthrate or (legal) immigration.
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Old 05-14-2011, 05:08 PM   #33
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So if as an investor you were offered a bond backed by the US government which offered a high rate of interest, you would refuse it if the principal and interest could not be associated with any capital goods. Right? You're not looking just for a return on your money and safety of the principal, but something else -- returns must come from productivity.
As an individual investor, the first step is that I have to have some savings. I need to consume less than I earn in order to buy the gov't bond. In your example, I didn't see how that was happening, but I figured that could easily mean I didn't understand the example. I'm still stuck on this question "I guess I don't know how to figure out the dollar amount on those government issued securities ...". Clarifying that could help.

As you're pointing out, sometimes private lending isn't tied to real capital accumulation. I could lend my neighbor money for a new car, and he could repay me later with some interest so I can buy a slightly nicer car than he bought. I earned interest, but he paid an equal amount. That nets to zero in the entire economy.

So, when the gov't borrows from its citizens, where is the interest coming from? and are we better off as a country?

Maybe the borrowing goes to pay for roads or basic research or education that will make us more productive in the future. There really is a productivity gain that funds that interest.

OTOH, it may be simply this generation of taxpayers wanting get more gov't services than they are willing to pay taxes for, and promising some other citizens that if they are willing to forgo some private goods, future taxpayers will repay them with interest. That looks a lot like private consumer-to-consumer lending to me. It may make sense for me as an individual saver to lend my money to the gov't on that basis, but any interest I earn is a loss to somebody else. I see a zero net, but that may be okay if I understood your idea better.
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Old 05-14-2011, 05:21 PM   #34
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Is Canada's population rising from birthrate and immigration, slowing, or declining?

I think the U.S. concern is that the population is aging from longevity while no longer rapidly growing from birthrate or (legal) immigration.
I believe Canada's population is growing-mostly via immigration. Bottom line is the amounts collected are fairly high in relation to the payouts. Max payout is only about $11k /year. I think the amounts collected are about $3-4 k per year including employer portion.
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Old 05-14-2011, 06:21 PM   #35
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I'm still stuck on this question "I guess I don't know how to figure out the dollar amount on those government issued securities ...". Clarifying that could help.
I don't think I understand your question. The amount issued in any year would equal the SS tax collected in that year, and the amount redeemed at maturity with have to equal the SS pay outs to beneficiaries, whenever maturity is and however much those payouts are. I haven't worked out dollar amounts, and I don't see the point of doing that. It's a thought experiment, meant only to show that the claim that SS monies are not invested and so do not earn interest is not really meaningful. One can consider that they are invested in phantom bonds and do earn phantom interest.
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Old 05-14-2011, 06:50 PM   #36
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Independent: I guess I don't know how to figure out the dollar amount on those government issued securities in the "Suppose that the payments ..." scenario. Maybe you could clarify that.
I'm not sure what you are looking for since this discussion has supposes and the Canadian system but there is almost nothing you can't find about the finances of the SS system in the yearly report. For example the bonds issued to the trust fund can be found at:
2011 Trustees Report: Appendix A

Other tables are listed at:
2011 OASDI Trustees Report: X1_trLOT.html
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Old 05-14-2011, 10:07 PM   #37
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I believe Canada's population is growing-mostly via immigration. Bottom line is the amounts collected are fairly high in relation to the payouts. Max payout is only about $11k /year. I think the amounts collected are about $3-4 k per year including employer portion.
OK, thanks. I'm always befuddled by the relative population ratios & demographics between our two countries.
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Old 05-14-2011, 11:50 PM   #38
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Political editorial!

Funny how the author couched the burdened.... "on the poor deprive Chilllllllllllllllllllldrrrrreeeeeeeeeeeeeeeeennnn nnnnnnnn!

Hey we were children too. And we paid into the system.

The sooner our leaders begin to move toward the middle, the sooner an acceptable plan can be crafted.

The fix will involve some adjustments to the program and an increase in taxes.... probably higher FICA and High Estate Taxes to pay back those SS BONDS!
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Old 05-15-2011, 12:35 AM   #39
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My understanding of the Canadian system is that it is a hybrid system - 75% of SS (If I may call it that - actually called CPP) is intended to be eventually funded as a PAYGO system - at present inflows are sufficient to fund outflows and there is no need to tap into investment income and reserves.

Eventually due to demographics, inflows will no longer cover outflows and the projection is that inflows will cover about 75% of outflows and the rest will be covered by accumulated reserves and investment income. They have completely moved away from using inflows to provide cheap financing to the state and provinces.

GIS and OAS (means tested) and to prevent retirees living in penury is covered by revenues.
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Old 05-15-2011, 06:43 AM   #40
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OK, thanks. I'm always befuddled by the relative population ratios & demographics between our two countries.
Canada's population is 34 million yours is 308million. I was under the impression that the US is growing faster than Canada but I could be wrong on that. Actually I just looked it up and the US is growing slightly faster (.97% vs .9%) period 2005-2009.
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