Social Security in Trouble

[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]

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]

<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]

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]

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]

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/north-american-actuarial-journal/1997/october/naaj9710_01.pdf

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

 

[dshibb]

First of all a 2% return a year is crap that doesn't even keep up with inflation. Second, a 1% a year increase in the working population of the US has to be netted against the change in post retirement life expectancy. The next problem exists in that the government engages in uniform treatment. So, if revenues drop temporarily they will take on debt at higher interest rates. Then the system has to derive revenue from some place else otherwise it will just compound.

Asset growth is a far superior system.

 

[Independent]

First of all a 2% return a year is crap that doesn't even keep up with inflation. Second, a 1% a year increase in the working population of the US has to be netted against the change in post retirement life expectancy. The next problem exists in that the government engages in uniform treatment. So, if revenues drop temporarily they will take on debt at higher interest rates. Then the system has to derive revenue from some place else otherwise it will just compound.

Asset growth is a far superior system.

In my example "real wages grow at 1% per year". The use of the word "real" in this context generally means "after adjusting for inflation". So yes, I was claiming that the IRR would exceed inflation by 2%. (If you prefer, I could change the wage growth to 4% nominal - which whould be 1% real plus 3% inflation. In that case, the paygo system would provide an IRR of 5%, and the first three percent would be the inflation offset. The numbers work either way.)

You are correct, we need to be careful about changes in post retirement life expectancy. If one generation of workers pays $4,000 of taxes for 40 years, then gets $16,000 of benefits for 20 years, they have an IRR around 2.25%. If their grandchildren pay $4,000 of taxes for 40 years, then get $16,000 of benefits for 25 years, they have an IRR of 2.75%. So, in terms of IRR the grandchildren would get a better deal, even though they have the same annual retirement benefit.

I am not claiming that a PAYGO system can provide a better IRR for each generation that it provided for the prior generation, just that it can be equal if the economic growth rate is equal. In this example, they need to adjust the retirement age by a few years to maintain the ratio of working/retired and therefore get the same IRR as their grandparent. You are claiming that each generation must do worse than the prior generation, eventually getting -100% return. You haven't explained why you think that.

(Maybe I could communicate better if I use the P word. Ponzi schemes are doomed to fail because they promise IRRs that exceed any possible rate that they could add new members. If a Ponzi scheme only promised an IRR equal to the rate that it can add new members, it could last forever.)

 

[Independent]

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.

......

"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.

I understand that you've seen a proposal somewhere that has 4% of wages going into private accounts. Your earlier post seemed to say that you thought SS had a current surplus of 4%. Have we reached an agreement that SS is currently using almost all the tax money to pay benefits?

You haven't specified when and how benefits are reduced. In other proposals like this, the drop in revenue is immediate but the decrease in benefits happens a long time from now. The borrowing occurs while we are waiting for the benefit reduction to occur. I gave you the projections of the current program so that you could make an estimate of how much would need to be borrowed. For example, if everyone opts for private accounts, then revenue will immediately drop by 4% of covered wages.

(You need to allow for the fact that the 12% you quoted is for the whole SS program including Disability. Note that the tables I linked were for the OASI portion only, which gets 10.6% of earnings. If you use 1/3 of 10.6%, then it's easier to use the tables for estimates.)

You have referenced "they" a number of times. Apparantly, you've seen something that impressed you. But, you also seem to be very fuzzy on some pretty important details. You called Bush's commission "pathetic", so I'm guessing it's not any of their proposals. Am I correct that you've looked for a link but can't find one?

 

[dshibb]

"Have we reached an agreement that SS is currently using almost all the tax money to pay benefits?"
There was never a disagreement in that regard.

"In other proposals like this, the drop in revenue is immediate but the decrease in benefits happens a long time from now."
This is correct, but it is still a good deal because you are taking a 33% decrease in revenues for a 100% decrease in liabilities/future cost. That is a good deal on the government side and the fact that the money can be invested actually makes it a good deal for the individual, too.

"You haven't specified when and how benefits are reduced."
I have given my suggestions in previous posts, and I also stated that benefits reductions would have to be a separate bill than the private accounts. You try to do both and for sure nothing will pass.

"I gave you the projections of the current program so that you could make an estimate of how much would need to be borrowed."
This is pointless because some of the shortfall could be made up in reduced benefits, some of the shortfall could be made up with budgetcuts elsewhere and a shift of money from one side of the budget to SS, and then after that you take on a portion of it in debt, but that only makes sense if you come out on the other side with a lot less costs.

"For example, if everyone opts for private accounts, then revenue will immediately drop by 4% of covered wages."
That is correct or 1/3 of SS revenue.

"If you use 1/3 of 10.6%"
Actually you are correct it would be just over 40% which would mean that the numbers for the private accounts are slightly better than my numbers provided above in comparison to the current system. But this one is only on the performance side, its not on the revenue side. For the revenue side you would still use 12%.

I called the entire attempt to market and explain this bill as pathetic. They got destroyed because the average American didn't understand it. It is a political reality that if the GOP wants to pass a bill on SS they have to bring in AARP to collaborate in exchange for their support. AARP will be reasonable they are not a liberal group they just want to help write the bill so that their current members don't get screwed.

"Am I correct that you've looked for a link but can't find one?"
I don't need to, I remember getting the specifics when the bill was introduced. Common sense says that buying off a future liability at a fraction of the cost is common sense. And if it benefits the other party to, then it is a win, win and a no brainer. The only other issue is the one of market risk and the insurance(essentially swap agreement) takes care of that one.

 

[dshibb]

"If one generation of workers pays $4,000 of taxes for 40 years, then gets $16,000 of benefits for 20 years, they have an IRR around 2.25%. If their grandchildren pay $4,000 of taxes for 40 years, then get $16,000 of benefits for 25 years, they have an IRR of 2.75%. So, in terms of IRR the grandchildren would get a better deal, even though they have the same annual retirement benefit."
You got this completely backward because you already went against your paygo. In order for the system to remain in balance you would have to lower yearly annual benefits as people lived to be older. Higher benefits for less years, or lower benefits for more years, think like an annuity actuary once. People live longer and the benefits will go down precipitously.

 

[Independent]

"In other proposals like this, the drop in revenue is immediate but the decrease in benefits happens a long time from now."
This is correct, but it is still a good deal because you are taking a 33% decrease in revenues for a 100% decrease in liabilities/future cost. That is a good deal on the government side and the fact that the money can be invested actually makes it a good deal for the individual, too.

....

"Am I correct that you've looked for a link but can't find one?"
I don't need to, I remember getting the specifics when the bill was introduced. Common sense says that buying off a future liability at a fraction of the cost is common sense. And if it benefits the other party to, then it is a win, win and a no brainer. The only other issue is the one of market risk and the insurance(essentially swap agreement) takes care of that one.

Okay, I think I’m getting it. You see a concept that is so powerful that the details don’t matter. The first part of the concept is that an advance-funded public retirement system is vastly superior to a pay-as-you-go system. The common response to this is “Even if advance funding were better, the transition costs are too high for us to change.” You have the 33/100 solution: We say to everyone below age XX, “We’ll put 4% of your wages into an individual account. In exchange, you give up 100% of your SS retirement benefits.”

From your perspective, this is a win-win deal. The gov’t is better off, even if it has to borrow all the money going into the individual accounts. The reason is that borrowed money, accumulated with interest at Treasury rates, will still be less than the SS benefits that aren’t paid.

At the same time, individuals are better off because they will put the money into stocks. The accumulated balances in their accounts when they retire will be more than the SS benefits they give up.

Do I have right concept?

 

[dshibb]

Thats pretty much it.

Keep in mind the decision of what system to participate in is optional, but I'd opt into the private accounts if it was me. I think most of America would, and eventually practically everybody. The Chileans have the choice, too. 99.9% of the public elected the private pension system. Initially it was like 60%.

 

[Independent]

"If one generation of workers pays $4,000 of taxes for 40 years, then gets $16,000 of benefits for 20 years, they have an IRR around 2.25%. If their grandchildren pay $4,000 of taxes for 40 years, then get $16,000 of benefits for 25 years, they have an IRR of 2.75%. So, in terms of IRR the grandchildren would get a better deal, even though they have the same annual retirement benefit."
You got this completely backward because you already went against your paygo. In order for the system to remain in balance you would have to lower yearly annual benefits as people lived to be older. Higher benefits for less years, or lower benefits for more years, think like an annuity actuary once. People live longer and the benefits will go down precipitously.

Maybe I mis-interpreted this statement

"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).

I saw the phrase "return on investment" and started thinking about IRR. Maybe you were focusing on "next to nothing in the form of payments".

Let's clarify. I said "A paygo system can continue indefinitely, giving each cohort of workers an IRR equal to the growth rate of total covered wages." You seem to be disagreeing, but do you mean A, B, or C?

A) Independent's statement is false, even if mortality rates are constant.
B) Independent's statement would be true if mortality rates were constant, but it becomes false when mortality rates are falling.
C) Independent's statement is irrelevant because IRR is irrelevant. "Success" means that monthly payments remain the same, even if people are living longer.

 

[samclem]

The only other issue is the one of market risk and the insurance(essentially swap agreement) takes care of that one.

Yep. We've never experienced any problems with default and risk swaps. There are plenty of strong, private insurers out there capable of insuring against the risk of default for the pension accounts of tens of millions of people. Or, the government could insure against bad market results--I was just telling someone that is what we need right now, more public subsidies for private risk taking.

We have IRAs, 401Ks, and the ability to save outside these programs for our individual retirement. SS should be recognized and accepted for what it is--a wealth transfer program that assists the aged and permanently disabled at the expense of everyone else. It helps the poor far more than others. Through it, middle-class people who saved absolutely nothing in individual accounts will still receive a monthly check that prevents privation and keeps them off the (other) public dole programs. That's it. Those who want to "supercharge it" so that it can provide the majority of the income for a middle-class retirement should realize that they are inviting more, not less, government control of more Americans and more government entanglement with the US financial market--assuming the government will be providing a safety net under this whole thing. Will the "private" program really allow 80 YO Mr Smith to put all his money into American Styrofoam Lawn Ornaments, Inc? If the government (you and I) are underwriting the market risk for these accounts, you can bet there will be limits on types of investments. More government review, committees, approvals, etc. Nope--just keep SS as limited as possible and let the rest of us tend to our affairs, thanks.

 

[dshibb]

B!

But there are more problems than that. Natural changes in the situation causes mismatches between revenues in costs. For example, an economic downturn causes revenue to drop. Under true Paygo you would have to drop the payments so you wouldnt go into deficit. But that wouldn't be "fair". If you tried to make payments uniform the deficit created during times like these would cause the system to rise. Once the system went back into equilibrium the revenues still coming in would still have to be dispursed meaning that there wouldn't be anything to pay off the debt unless you cut future payments which also wouldn't be "fair". There is also the flip side to this equation and that is what we are going through in the next few years. What if revenue is coming in just fine, but your costs due to a higher population in this generation(baby boomers) are higher. Do you cut this generations benefits to make sure revenue meets payments? Many people would deem this to not be "fair". Or do you take on deficit and cut future payments to pay of the debt? This could also be construed as not "fair".

 

[dshibb]

Samclem you don't get my position at all. I'm not saying that we "supercharge it". I am agreeing that it should a retirement system for only the poor and lower middle class(why I support means testing). I'm not suggesting that either the current system or a private account system should be a majority of an individuals retirement(unless you were already extremely poor and pretty accustomed to eeking out an existence). It clearly would lead to less government involvement into the markets. It wont allow an 80 year old to invest in equities, I believe it was in a persons early 50s that they would start being forced into more conservative investments. This is small portion of a persons money and they will be able to invest all their other money as they please. The current system is much more intrusive. The regulations on the accounts will be pretty basic and probably wont be much different than how they regulate qualifed plans(like 401ks where they ban shorting, etc.)

I said they were like credit default swaps, I didn't say they were the same thing. The insurance wouldn't carry that much risk on them because they are so long term in nature. You aren't insuring default risk here. Where's the debt for their to be default risk? You are insuring against underperformance. All the individual needs to do is average 4.75% return a year for over the course of their working life inorder for them to match the amount in the current system. So the insurance policy would only pay out the difference if the individual averaged less than that. These things do exist in the private market today, life insurance companies provide minimum guarantees on their life products. I've seen one company offer a 4%(2-3 is most common) minimum guarantee if lets say the market performed horrible for several decades, they would bump up your return. Its such a low probability that the cost is negligible.

It wouldn't be one insurer, there would at least be several. I would say that the government would guarantee the counterparty risk(like FDIC) not underwrite the risk. Essentially if the market had a worse crash then what we just went through, and the insurers couldn't makeup the difference in the private accounts the government would step in and liquidate the company paying off most of the insurance and the government would pick up the rest. This is no different than what they currently do under the PBGC if your company went under with your pension included. The odds of this happening to these insurers is highly unlikely probably not even once in a century. And I would rather the government foot a small portion of a small portion for one year than managing an entire ponzi scheme pension every year to the end of time.

 

[ziggy29]

Samclem you don't get my position at all. I'm not saying that we "supercharge it". I am agreeing that it should a retirement system for only the poor and lower middle class(why I support means testing).

Here's the rub. Let's say they started very heavily means-testing SS. Presumably that could mean lowering FICA taxes substantially since you're only paying a fraction of the benefits out.

Older folks benefit because they'd almost certainly be grandfathered in, and no one receiving benefits today would likely lose them.

Younger folks benefit from many years of lower payroll taxes, meaning more they can save and invest for their own retirement.

People in their 40s and perhaps their early 50s would be screwed, after paying increasingly high FICA taxes for 20-30 years and then told they get nothing.

As someone in that "likely to be screwed" age group, I have obvious reservations about heavily means testing something we've paid into in good faith for 20+ years.

 

[ziggy29]

Oh, and one more thought to add on to my post above: We could VERY easily engineer a "lower middle class" income for ourselves and be comfortable. We have zero debt, the house is paid for, it's cheap and modest with low taxes, utilities and insurance, and we live a simple life. We could probably live a pretty decent life with $30K a year. If someone tells me I can only collect if I get my income down to a "lower middle class" level, I'm likely to do so.

What I'm not likely to do is continue to "add value" to society as a productive taxpayer one second longer than I need to if you pull the means-testing lever too hard, and I don't think it's a good idea to discourage people from trying to earn more and pay more in taxes.

 

[dshibb]

"People in their 40s and perhaps their early 50s would be screwed, after paying increasingly high FICA taxes for 20-30 years and then told they get nothing."
You would do it on a sliding scale over several decades, but when you officially stopped "sliding it", you would want it down to only those that were in that were truly in the lower income range.

 

[Independent]

Thats pretty much it.

Keep in mind the decision of what system to participate in is optional, but I'd opt into the private accounts if it was me. I think most of America would, and eventually practically everybody. The Chileans have the choice, too. 99.9% of the public elected the private pension system. Initially it was like 60%.

Okay, I think I understand how you get the win-win. Now I'll imagine Representative Smith who sees your SS changes and decides to run with the same idea.

Smith believes that Pell grants are the government's best program. He's always looking for a way to increase funding. So he introduces a bill that does this: First, the gov't issues $100 billion of new bonds and uses the money to buy stocks. (It picks exactly the same stocks as the Federal TSP "C" fund.) These bonds don't pay cash interest, the interest accrues inside the bonds. Then we wait. Since stock returns outrun Treasury bond interest, eventually the balance in the stock fund will be twice the balance owed on the bonds. At that point, we cash in half the stocks and pay off the bonds. The other half of the stocks become a permanent endowment supporting Pell grants. Rep. Smith points out that this is absolutely free money, it didn't cost the taxpayers a dime.

Maybe his colleague, Rep. Jones is a big fan of air superiority fighters (which happen to be built in his district). He copies Smith's idea to provide long term funding for fighters.

I think that Smith's idea is economically identical to yours. He is using the Treasury/stock spread to fund Pell grants, Jones is funding fighters, you are funding the transition to an advance-funded retirement system.

There are two differences in details. First, you will issue a new set of bonds for multiple years in the future. Maybe $100 billion in 2010, $110 billion, in 2011, ... $200 billion in 2018, etc. You will eventuall have $10+ trillion of bonds outstanding. Second, the stocks will be "owned" by individuals instead of the gov't, although their ownership rights may be limited. Neither of these differences is economically significant.

I'm a believer in the "no free lunch" school of economics. Maybe Rep. Smith's program appeared to be free money, but I think it's simply shifting money from one pocket to another. I wouldn't support his program without identifying the losers. I feel the same about yours. I'm thinking that the most likely losers are the taxpayers who pay the interest on the other federal debt, and savers who were planning to buy stocks outside the SS system.

(Note that Smith's program does not increase real capital investment in the US economy. The money that the gov't puts into the economy by buying stocks is exactly offset by the money that the gov't is taking out of the economy by borrowing.)