Social Security in Trouble

[Nords]

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Originally Posted by dshibb Nords, I'll admit that I should stop saying things like quotes 1 and 4. 2 and 3 aren't bad. 2 is just factually accurate, blunt, but accurate. In 3 if Obama can't get the votes than I don't care what his thoughts are.

Hey, I thought I'd give it a try.

You have a nice life now.

[Independent]

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Originally Posted by dshibb It was pathetic(the president's commission). There is one particular detail that everybody left out that made all the arguments against it a mute point. And they should have stressed it endlessly. Under the GOP plan, a very small percentage of the money that went into private accounts would go to purchase secondary insurance. That insurance said this, if an individual reaches retirement age and due to crash, losses, etc. the amount in the account wasn't sufficient for paying an income at least equal to what the current system provided, the secondary insurance would make up the difference. So under the Bush plan you were guaranteed to receive at least what the current system paid, and had the opportunity to get much, much more. I don't remember the exact calculations, but it was something like this. If you assumed a 10% rate of return, the income would be like 4 times as much at retirement, and the excess was transferable to your heirs.

I wasn't looking for one detail, I was looking for the entire plan. If you don't want to explain it, can you give me a link to the plan? I'd like something with numbers, not just a concept.

[dshibb]

Thats the whole point the administration never put the numbers forward on the plan. They only put out the numbers on the current system. I ended up hearing the actual numbers in speeches and workshops after the plan burned to the ground. I then ran the numbers myself on a future value of an annuity calculator and the numbers I got were similar to the ones that were put forward in those speeches and workshops. FYI it is actually more like 3 times at 10%

So, what you do is you pull up a future value annuity calc, and then on a seperate calc take 1/12. Put that in as interest rate. Then I used 40 years, so 40 * 12 = 480 for number of payments. Then I just used $100 for simplicity. Run the calc(the number doesn't matter its the ratio to the next piece) You then take the 10/12 for the interest rate. And then you replace the 100 with $33. Run the calc again. Divide this number by the previous one. You now have your ratio.

[W2R]

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Originally Posted by Martha I think SS won't be that hard to fix. I do think raising the retirement age is a mistake. A lot of people take SS early at 62 because they are already so beat up by work and life. Very few are able to hold off past 66.x. Although life expectancy has increased, most of the extra length is due to reductions in very early deaths. A pre 20th Century individual who lived past the teenage years could expect to live to an age close to the life expectancy of today. So raise the tax cap. Medicare is a bigger problem.

Martha, you should run for office! I think you make a lot of sense.

[Independent]

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Originally Posted by dshibb Thats the whole point the administration never put the numbers forward on the plan. They only put out the numbers on the current system. I ended up hearing the actual numbers in speeches and workshops after the plan burned to the ground. I then ran the numbers myself on a future value of an annuity calculator and the numbers I got were similar to the ones that were put forward in those speeches and workshops. FYI it is actually more like 3 times at 10% So, what you do is you pull up a future value annuity calc, and then on a seperate calc take 1/12. Put that in as interest rate. Then I used 40 years, so 40 * 12 = 480 for number of payments. Then I just used $100 for simplicity. Run the calc(the number doesn't matter its the ratio to the next piece) You then take the 10/12 for the interest rate. And then you replace the 100 with $33. Run the calc again. Divide this number by the previous one. You now have your ratio.

I'll take it as a mathematical fact that if you took all your SS taxes and accumulated them at a real return of 10%, you would be able to provide yourself with a retirement income much higher than the SS benefit.

But, a "plan" to replace SS with private accounts needs to include an explanation of where you're going to get the money to put into the accounts. Over the next 15 years, approximately 100% of SS taxes will be needed to cover the checks that will be written in those 15 years. If the money for the accounts comes from reducing benefits, whose benefits are you going to reduce, and by how much? If it doesn't come from reduced benefits, where do we get it?

[dshibb]

All of it doesn't. That is why 2/3 of your ss tax money goes to pay for current workers(the way current system works) and only 1/3 goes to your private account. Mathematically speaking this is better than the status quo. While other reforms are needed(and reforms like these should be passed separately from "harsher" reforms because neither will pass if you put them together), this does considerably help.

Lets assume you were in debt up your a$$ and there was am expenditure that was slated to double in the next few years, and continue to be a worse and worse problem. Would you rather add another 1/3 of that amount to make sure the drain stopped in 20-30 years or would you rather allow the system to get progressivley worse in perpetuity so that you could save that extra expenditure now?

Personally, I think most of the costs would be dealt with by applying offsetting budget cuts in other areas to try to whether the storm. I am okay with taking on a little bit of extra debt if in 20-30 years one of my biggest expenditures starts falling rapidly off of the radar. Because the expenditure saving would be more substantial than the debt taken on in the interim in terms of paying off the interest as well as the principal.

You could then start tinkering with the benefits when that situation comes due.

[Bikerdude]

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Originally Posted by Want2retire Martha, you should run for office! I think you make a lot of sense.

That's exactly why she won't.

[samclem]

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Originally Posted by Martha Although life expectancy has increased, most of the extra length is due to reductions in very early deaths. A pre 20th Century individual who lived past the teenage years could expect to live to an age close to the life expectancy of today.

Some numbers (link to chart):

For white males:
1890 life expectancy at birth : 42.5 years
1890 life expectancy at age 20: 60.66 years
1939-41 life expectancy at birth: 62.81
1939-41 life expectancy at age 20: 67.76
2004 life expectancy at birth: 75.5 years
2004 life expectancy at age 20 77.7 years

So, it looks like mortality for the very young was reduced significantly between 1890 and 1939 (probably due largely to the advent of immunization and improved public sanitation measures).

Since SS was started, the average life expectancy at birth has increased about 12 years, while the life expectancy for those who have reached young adulthood has increased only slightly less, about 10 years. It looks like the major decreases in mortality for the last 6 decades have been concentrated among the old.

[Independent]

Quote:

Originally Posted by dshibb All of it doesn't. That is why 2/3 of your ss tax money goes to pay for current workers(the way current system works) and only 1/3 goes to your private account. Mathematically speaking this is better than the status quo. While other reforms are needed(and reforms like these should be passed separately from "harsher" reforms because neither will pass if you put them together), this does considerably help. Personally, I think most of the costs would be dealt with by applying offsetting budget cuts in other areas to try to whether the storm. I am okay with taking on a little bit of extra debt if in 20-30 years one of my biggest expenditures starts falling rapidly off of the radar. Because the expenditure saving would be more substantial than the debt taken on in the interim in terms of paying off the interest as well as the principal. You could then start tinkering with the benefits when that situation comes due.

I'm not sure where you are getting your 1/3. The Trustees' Report is the "official" source of SS numbers. Table IV.A1 here 2009 Trustees Report: Section IV.A, Short-range estimates gives year-by-year income and expenses. For 2009, the projected OASI payroll tax is $579 million, and the benefits are $555 million. There are additional columns which you may or may not want to include, most people would say "cash income" is $601 million and "cash outgo" is $561 million (because interest on the trust fund isn't "cash"). Cash-out will exceed cash-in in 2017. That's why I estimated that over the next 15 years, total income will equal total outgo.

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Personally, I think most of the costs would be dealt with by applying offsetting budget cuts in other areas to try to whether the storm. I am okay with taking on a little bit of extra debt if in 20-30 years one of my biggest expenditures starts falling rapidly off of the radar. Because the expenditure saving would be more substantial than the debt taken on in the interim in terms of paying off the interest as well as the principal.

I assume "other areas" means the General Fund. Some people think that any budget cuts there should be used to cut taxes. I'd prefer they be used to reduce the General Fund deficit (which has averaged about 35% of revenue over the last 30 years). Because of these deficits, assigning any spending cuts to SS is exactly the same as having SS borrow that amount directly from the public.

If "a little bit of extra debt" would actually make big progress on dealing with SS, I'd probably be for it. But I think the fact is that we would incur a huge amount of debt, and it wouldn't do much good. I'm not asking you to take my word for it. The Trustees Report gives you enough numbers to make rough estimates of whatever plan you want. One easy to use source inside the Report is Table IV.B1 here: 2009 Trustees Report: Section IV.B, Long-range estimates

[freebird5825]

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Originally Posted by mikex ...What are the solutions? Don't you think means testing is part of the solution? Also, they better start making some decisions for very young workers quick, because if they pay into it for 30 years and don't get anything out of it, there's going to be hell to pay when they get to be in their 60s. I'd decide on a cutoff date (if taxes are'nt going to be raised to fund it) and tell the young workers to start funding their retirement by other means. At least they'll have been warned.

I have never considered SS to be a viable part of my retirement portfolio. Born in 1958, for age reference. I acknowledged early on that some of my payroll SS deductions were funding payments for my mom and her generation.

Two things led me to take a pessimsitic view of SS for myself:
1. All the years of listening to the program's predicted troubles "down the road", and it kept getting swept under the carpet.
2. The fact of the record numbers of boomers retiring just ahead of me.

Very little (or none, worst case) SS was a huge factor in my retirement planning. I sincerely hope I'm wrong.

I agree, younger workers need to face up NOW to the reality that SS may not be what they are expecting. SS may end up being the gravy on the meat and potatoes of a independent personal portfolio.
This generation definitely has to get on the ball sooner.
The Question du jour is...will they?

[dshibb]

1/3 is the change in the system under private accounts. Currently 12% of payroll goes to SS. Under private accounts 4% would go to your private account. The other 8% goes to continue paying current retirees. 1/3 is the drop of revenues that the current system will get if people elect to opt out. But they eventually get a 100 percent in drop in cost, so the 1/3 drop is worth it. Would you pay 1/3 current cost to wipe out 100 percent of future liabilities? I would. What you are talking is about the track of ss that it is heading in. I'm referring to the change is systems.

Borrowing from the public is a stretch, I find very little of what the federal govenment does as actually benefiting the public. YOU NEED TO CUT A BUNCH OF $HIT OUT of the budget. Even stuff that people "want" or that "has always been there". Just completely gut most of the agency budgets. There should be nothing left of most of the government programs, and a few of the big ones like welfare, food stamps, HUD, etc. should be small pieces of what they used to be. Because nobody realizes that you lose practically all the programs if you let the situation go where it is going. The fact is that if you add up all the future liabilities(in the business world they would be called liabilities because they are promising to pay), and you discover the federal government is bankrupt. Completely bankrupt. Bankrupt means that you practically lose everything.

"If "a little bit of extra debt" would actually make big progress on dealing with SS, I'd probably be for it."
Do you get what I'm trying to say to you, that the best way to get this cleared up is to have a replacement system on the back end(where future retirees opt out of the current one). If you have a replacement system, some debt during the interim period is fine.

[samclem]

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Originally Posted by dshibb Do you get what I'm trying to say to you, that the best way to get this cleared up is to have a replacement system on the back end(where future retirees opt out of the current one).

Yes, we get it--and the rude brusque, condescending tone is not helpful.

Now, if I may suggest a change in direction, I recommend that you drop out of "transmit" mode for a moment and go into "receive" mode. I always learn when I do this. Like you, I am a strong believer in individual freedom and an opponent of a safety net that serves to strangle rather than support. Social Security is a wealth transfer program--it transfers wealth along two axes: from the young to the old and from the well-off to the poor. This is indisputable. Now, consider for the moment that maybe this little bit of socialism is productive in that it has enabled the rest of our capitalistic, free-market system to avoid the societal upheavals that doomed many other capitalist economic systems. That's exactly the function it has performed. No, I don't like it, but it's a relatively small price to pay to keep the much bigger and more important game in operation.

Old people vote. Poor people vote. These voters can assure that government takes everything from those who have things. Hungry, destitute people take to the streets and break things. Set fire to things. Steal things. Make the cost of doing business go very high. There aren't enough cops or private security guards in the world to keep order once a large number of people are desperate and believe that others have unfairly taken what should rightly be theirs. If modest wealth transfers have kept a lid on this so that the rest of the economy can function, it may be a price worth paying.

We get it--almost everyone knows SS is a "bad deal" for all but the poorest Americans. That's a simple answer to a question that is not important.

A very well written piece ("God Bless Ths Ponzi Scheme") to which I've linked previously.

[CCdaCE]

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Originally Posted by dshibb <snip> There is one particular detail that everybody left out that made all the arguments against it a mute point. And they should have stressed it endlessly. Under the GOP plan, a very small percentage of the money that went into private accounts would go to purchase secondary insurance. That insurance said this, if an individual reaches retirement age and due to crash, losses, etc. the amount in the account wasn't sufficient for paying an income at least equal to what the current system provided, the secondary insurance would make up the difference. <snip>

So "a very small percentage" of money paid as insurance against catastrophic blowup? 1% fee? 10% fee?

Uhh... Guaranteed return? Where do I sign up? Last time I looked these are called options, and they aren't very cheap over the long term. Annuities? Not cheap, either.

Enlighten me.

-CC

[OhSoClose]

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Originally Posted by samclem Yes, we get it--and the rude brusque, condescending tone is not helpful. Like you, I am a strong believer in individual freedom and an opponent of a safety net that serves to strangle rather than support. Social Security is a wealth transfer program--it transfers wealth along two axes: from the young to the old and from the well-off to the poor. This is indisputable. Now, consider for the moment that maybe this little bit of socialism is productive in that it has enabled the rest of our capitalistic, free-market system to avoid the societal upheavals that doomed many other capitalist economic systems. That's exactly the function it has performed. No, I don't like it, but it's a relatively small price to pay to keep the much bigger and more important game in operation. Old people vote. Poor people vote. These voters can assure that government takes everything from those who have things. Hungry, destitute people take to the streets and break things. Set fire to things. Steal things. Make the cost of doing business go very high. There aren't enough cops or private security guards in the world to keep order once a large number of people are desperate and believe that others have unfairly taken what should rightly be theirs. If modest wealth transfers have kept a lid on this so that the rest of the economy can function, it may be a price worth paying. We get it--almost everyone knows SS is a "bad deal" for all but the poorest Americans. That's a simple answer to a question that is not important. A very well written piece ("God Bless Ths Ponzi Scheme") to which I've linked previously.

Very, very well stated! And a great link.

We can't ignore the invisible hand of Adam Smith. But we also can't ignore that we live in a society that requires us all to get along with each other, rich and poor. Social Security is a safety net, not an investment. I hate the SS taxes, know I won't collect nearly what I put into SS -- yet I understand its tremendous value to our society as a whole.

[dshibb]

CCdaCE, to be quite honest I was quite disappointed to not hear the details of this segment of the plan. They only provided that it was in the plan. I do know that there would have been a specific secondary market created to service this. And its probably for this reason that they avoided talking about details, how do you give them for a market that doesn't exist and that you are going to create.

It is clearly different than options and annuities, while I'm sure that something like options will be employed on the books by the firm offering the insurance, its not the same thing. An option pays the same amount regardless of the performance of the rest of your assets. This type of insurance would mean that if you outperformed the target you would be out your premium. If you slightly underperformed the insurance would make up the difference. If a crash happened right before you were going to retire(actually I believe there was going to be a forced transition to "conservative" investments and out of equities starting at a certain age so we'll say a crash before that happened) then the insurance will pay out quite a bit. This type of insurance would be more like a credit default swap than anything else. The only real risk is what we just experienced, and that is counterparty risk, but I would rather the government guarantee the counterparty risk(like they do for FDIC), than be the ones that furnish all payments all the time.

Samclem, I completely agree with everything you said. My problem is that Social Security is a horribly inefficient delivery system. A ponzi scheme will eventually blow up no matter what. You can keep on bandaiding it all you want to, the outcome is inevitable. The reason is that a ponzi scheme's future liabilities will always outpace future revenues if you give it a long enough timeframe. So your are forced to either continuially raise revenues or lower the liabilities against the "promises" you've made. I am okay with the idea of having a retirement system for poor people(at least I can understand it), but not one that is extremely inefficient and destined to collapse the whole system if you give it long enough time. I mean do you think your corporate pension could survive if it didn't hold assets and just used current employees to pay off retired ones?

[dshibb]

Don't misinterpret bluntness for condescention or rudeness. He made a statement that didn't at all fit with what I was communicating. I'm a blunt person, and so I asked if he understood what I was trying to say. I could be like, "I'm sorry I'm not trying to be condescending or rude, but would you like me to explain a little bit more about what I mean in regards to X because this statement doesn't seem to fit with what I was trying to convey?" Would that be better?

[samclem]

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Originally Posted by dshibb My problem is that Social Security is a horribly inefficient delivery system. A ponzi scheme will eventually blow up no matter what. . . . I mean do you think your corporate pension could survive if it didn't hold assets and just used current employees to pay off retired ones?

First, I'm very uncomfortable being in the position of defending the government's forced transfer of personal property which we know as Social Security. That said:
It's not inefficient. The "overhead" of SS (all the administratiove costs of transferring this money) is less than 1%. That's efficient by almost any measure--compare it to a private pension plan.
A "real-time" wealth transfer scheme (that is, one that does not have an investment/interest component) is not inherently unstable. There's no mathematical/actuarial reason why it can't work. A Ponzi scheme explodes because the number of folks joining at the bottom grows exponentially and eventually you run out of suckers new participants, which makes it impossible to continue the payments. This isn't necessarily the case with other populations. For many decades SS took in more money than it paid out. It could do so again immediately today if we reduced payments (e.g. bumped up the retirement age to 80, or cut payments to all present recipients by 25%, etc) or increased inflows to the SS system (e.g. by increasing SS taxes, removing the cap on income subject to SS taxes, etc). If we put in place a mechanism to match income with payments, there's no reason it the system can't continue indefinitely.

Yes, a corporate pension plan could theoretically be devised that would pay retirees directly from the contributions of present workers. It would not necessarily collapse. But it would sure require a lot of trust from the current employees, and I'm not sure it would even be legal. The government can do lots of things that is forbidden to private entities.

It's not a retirement plan. It's a social welfare plan.

[dshibb]

You are looking at this in a vacuum.

"There's no mathematical/actuarial reason why it can't work."
Yes there is.

"For many decades SS took in more money than it paid out."
Correct, but the trajectory will always be down. There may be a slight uptick when the baby boomer generation starts dying off, but the trajectory will remain the same constantly getting worse. This has been boiled into Gammons Law of Economics.

"It could do so again immediately today if we reduced payments (e.g. bumped up the retirement age to 80, or cut payments to all present recipients by 25%, etc) or increased inflows to the SS system (e.g. by increasing SS taxes, removing the cap on income subject to SS taxes, etc)."
These are bandaids they aren't permanent solutions. You will have to continually cut benefits or raise taxes. None of these will fix the system in perpetuity.

"If we put in place a mechanism to match income with payments, there's no reason it the system can't continue indefinitely."
You are correct about that it would continue into perpetuity, but the return on investment would erode overtime. Until the system after long enough time period(I am fully aware that it could take 250 years) gave out next to nothing in the form of payments. You can't fight the laws of compound interest. Either you are taking on more future debts/liabilities than revenue or you are taking on less future debts/liabilities than revenue. One leads to insane wealth and the other leads to eventual collapse(if you give it enough time).

The difference in time has to do with how inefficient the system is. More examples of these things and you collapse fast--Soviet Union. Less and you decay very, very, very, very slowly. But it still happens.

"Yes, a corporate pension plan could theoretically be devised that would pay retirees directly from the contributions of present workers. It would not necessarily collapse."
Yes it would. Example: big three automakers. One of the few corporate pensions in the country that uses(or at least used to) incoming revenue to pay retiree pensions and benefits. It got so bad, that as of the last several years about half the price for every American car you bought was going directly to pay for retirees benefits.

[dshibb]

The only exceptions to that rule are as follows. The economic growth is significantly higher than the rate of cost increase. This a spread would open up. A country that was doing this effectively would involve one that was constantly cutting tax rates as they would continually need less revenue. Also, the portion of gdp that was public would reduce every year. The other exception is building up a capital fund and only using the withdrawal rate to fund government activities. This is what the soveriegn wealth funds in UAE(for example) do.

[Independent]

Quote:

Originally Posted by dshibb You are looking at this in a vacuum. "There's no mathematical/actuarial reason why it can't work." Yes there is. .

SamClem is correct. If you think about it for a while, you will see that a pay-as-you-go retirement system has enough money to provide every cohort of workers an IRR which is equal to the total growth in the economy (more correctly, the total growth in covered wages). For example, if the working population grows at 1% per year, and real wages grow at 1% per year, the PAYGO system can give everyone a 2% return.

One of the commentors on this paper has a formal proof http://www.soa.org/library/journals/...aaj9710_01.pdf

I can give you a simpler mathematical argument if you are interested.