Social Security: "break even with a privatized '3% return'" is a sham

[muriel_volestrangler]

Bush's regime has been claiming that, under their plan, someone who invested their privatized Social Security and got a 3% return would break even. If you did better than 3%, you'd be richer at retirement, they claim.

But that is a meaningless statement, since, at present, Social Security is mildly redistributive - the poor, and the married, do better out of it than the single and rich. Take a look at the table from "Ask an Actuary" - government figures, back from December 1994 (when government employees could tell the truth without getting sacked): http://www.ssa.gov/OACT/ASKACT/part2.html

(note that the table assumes various growth rates, like 6% interest, that apply to everyone, so the important comparison is the relative gain/loss by the different categories of people, not a single person's taxes and benefits).

A low income married man with a family does the best - he roughly doubles his money; increasing income, or being single, means you get less, compared with your input (a single man on the maximum income loses roughly half of his money, assuming the 6% growth).

So, if you switch to a system in which the benefits are directly proportional to the amount of money taken in taxes from you, those earning the maximum amount for the Social Security tax will do better, while the poorest workers will have to get a much larger rate of return if they are to get the benefits they do now.

Bush's attempt to privatize Social Security will hurt the worst off in society the most. No surprise there, but the main argument has been "would the money grow faster in the stock market?" The fact that Bush wants to make the rich-poor gap even larger than now is going unreported.

[papau]

1. Upper middle class and rich might do better under Bush SS - so middleclass

and poor should be in favor because someday they might be rich.

At least that is how the liberal media sells us this crap.

[ladjf]

2. People cling to hope, that someday "their ship will come in".

That's human nature. The biggest problem about the phenomenon is that
it seduces individuals into making some serious mistakes when dealing with current issues. They are so focused on the potentials of making it big someday, they are unable to see the pitfalls of schemes such as the privatization of SS.

We all make similar mistakes in our everyday life, i.e. smoking, drugs, overeating, no exercise. In these cases, we trade our future for the current pleasure and in so doing show that we are willing to be escapists with regard to the long range outcomes.

[papau]

4. true - we need Dr Phil to do a week long program on this! :-)

:-)

but I am not sure even then that "greed" will stop being a winning mantra for the GOP!

:-)

[detroitguy]

3. And beyond that...

...He always "forgets" to mention the fees. Those small accounts would be expensive to run. I'd expect Wall Street to ask for not only a management fee on the mutual funds, but also to impose administrative fees on individual accounts.

Think about it: If you are putting away $500 per year in your "private account," but pay a 1% management fee for the mutual fund and another $15 flat account fee, that would really eat into your return. You'd start that first year 4% IN THE HOLE!

To make up for the fees deducted, you'd have to make a positive return just to remain even under this scenario. Over the long run, you probably could -- but it's hard to know.

And the whole POINT of Social Security is to provide a risk-free "base" for your retirement savings -- allowing you to take such risks in OTHER portions of your overall retirement plan (IRAs, 401(k)s, etc.).