Social Security Privatization by the Republicans.

[oc2002]

The WSJ yesterday, on its editorial page, had a couple of interesting articles/opinions regarding privatizing a portion of SS. As you recall, this was one of President Bush's biggest iniatives in the 2000 campaign, and with the new Medicare Bill passed (thats another thread for another time), he is turning his attention to this.

Today, the Social Security Administration is set to announce, after a study of the numbers, that 6.4% of the 12.4% SS tax could be set aside in "private personal accounts" without hurting current and near future retirees. Also, this would make SS solvent through at least 2077, and most likely, longer.

I think this is one for the most dymanic conversations our government has had in years. The impact of creating these "private" accounts would be staggering.

Consider:

1) The annual rate of return of the current SS account is 2% (or less).

2) Most financial advisors recommend people save between 10% - 20% of their current income for retirement.

3) Most people fail to save that much

4) The SS "tax" amount won't change. Meaning, that 12.4% will come out of everyone's paycheck.

Currently, the SS tax isn't counted as "current" savings, since the tax you and I pay are going to current retirees. So, the 10 - 20% number is above and beyond the current 12.4% tax. If, instead, we get to keep half of that tax to invest in personal accounts, that are OURS, then we only have to save between 4 and 14% of our income.

That would be a tremendous windfall in income added back into a household. Additionally, since most people (especially in the lower income brackets) don't even save 6%, this would, at the very minimum, force people into saving for their own retirement.'

Now, before all the SS hawks step in about "oh, but the stock market sucks..." These new accounts will have some sort of government protection for those not market savy (like a T-bill account or something). Remember what the current rate of return is on the SS account. You can beat that with CD's.

However, these accounts will be set up through major investment firms. If you are familiar with the State sponsored 529 plans, that is how I see this happening. So, financial advisors and places like Schwab and Fidelity will have these "accounts" available, with, probably, a set of investment choices (Conservative, moderate, growth, aggressive...) that will ease the investment decisions.

Bottom line, SS security is broke. Once the baby boomers start to retire, en mass, there will not be enough youngers workers to support them, and leave any SS benefits for us. This is the first step to fixing that problem.

What are your opinions?

[dmkinsey]

1. Windfall Profits

for Schwab, Fidelity other denizens of the bush base.

[bryant69]

2. I'm dubious too, but that's not a response

The fact that some corporations will benefit is not necessarily a reason not to do it.

Bryant
Check it out --> http://politicalcomment.blogspot.com

[Maurkov]

3. Black Hole

I have zero confidence that SS will exist in a meaningful form when I am wealthy enough to retire. Government coerced saving is better than just throwing money away, so yeah, I'm in favor. I just hope they let me choose an efficient vehicle, like a low overhead index fund.

[papau]

8. What you are saying is that you do not trust your kids - or the math

that indicates the kids will not have a problem returning the trust we put in them.

The "government" is us - but I guess we are the enemy.

[newyawker99]

25. Hi Maurkov!!

Welcome to DU!! :toast:

[trotsky]

4. Common misconception

"rate of return" for Social Security

It's a pointless figure, because THERE ISN'T SUPPOSED TO BE A "RETURN".

SS is an entitlement. The SS taxes we pay today are supporting TODAY's retirees, not us. It's always been that way, until Reagan jacked up the SS tax to help mask the trillions of debt he racked up. (And also put a "buffer" in place for when the boomers started retiring - THAT was the "first step.")

Again, a massive windfall for the investment houses, which is why they (and the Republicans) are pushing this bill.

[oc2002]

10. Re: "Common Missconception"

If today's workers are paying for today's retirees, what happens when tomorrows retirees OUTNUMBER tomorrow's workers?

Why does every good idea, that involves someone making money, have to be shot down, immediately?

Obviously, some people here either don't believe in the markets, or have never invested in the markets properly. For those people, leave the entitlement the way it is.

For the rest of us, please give us a choice.

[trotsky]

15. Ask Reagan/Bush/Bush*

what happens when tomorrows retirees OUTNUMBER tomorrow's workers?

Remember the Social Security surplus? The one that had to be raided when the Reagan budgets busted the bank? (The same one that Bush the Elder and Bush* the Stupider raided?)

That surplus WAS built by taxing the boomers more, so they (as a generation) could help pay for themselves, since the baby boom was followed by a baby bust.

But now, by siphoning off that surplus into the general fund (to cover the deficits), the regressive payroll taxes (disproportionately paid by the working class) are financing further regressive tax cuts. So us working stiffs get shafted twice.

You do have a choice. Choose to live more modestly, and you'll have a lot more to invest. If you already live modestly due to lower income, then you'll benefit from Social Security more than investing anyway.

[papau]

21. Projections done by Actuaries indicate retirees outnumber workers is

not about to happen in the next 75 years - and indeed the increase in the retirement age from Reagans 67 to age 70 for full benefits in years after 2043 (meaning a benefit cut for someone retiring at age 62 in 2043 from what you would get under current rules) means we are all fat and happy and the system is solvent.

Oc2002 - this "good idea" does indeed involve someone making money, by stealing it from me.

If Equities are the way to go with SS Trust investment, then SS could buy them and even allocate them to folks. Indeed I believe in the markets, and would prefer that SS invest in the markets.

But that means the current deficit must be taken care by more borrowing from the markets - can we say more demand for capital means a higher price - higher interest rates - and a slow down in growth?

Oh, there is another option increasing the tax on the rich to Clinton levels - and I kind of like that option.

But I do not think that Bush is in favor of anything other than screwing the aged.

[SharonAnn]

24. You have opportunities right now to invest, tax-free. Why aren't

you using them?

IRAs
401-Ks
SIMPLE
SEP
Keogh
etc.

The Wall Street Investment Houses pushing this are just trying to get their hands on your money. Look at their record, it won't be to your benefit or mine.

[Yupster]

11. Correct Trotsky

work low paying jobs and live to be 102 and your return is atronomical.

Die at age 61 and your return is infinitly below zero.

It's just not set up currently where returns mean anything.

[spindoctor]

5. It is wrong because I have to wear a motorcycle helmet...

...or rather, we cannot trust people (especially myself) to do the right thing unless enforced by law.

For the same reason the State does not trust me to voluntarily wear a helmet, we cannot trust people to voluntarily set aside 10% of their hard-earned money, even when times are tough.

We need better management of current SS funds, but wasn't Bush's 2001 tax-return funded from the SS "surplus"?

There are some things that you simply don't trust to corporations. For starters, anything that has the word "social" in it.

[JoePizz]

6. SS is a safety net

Safety nets should not be negotiable. That was the whole point- you are garunteed a minimum amount after retirement, so that if you don't save enough money for retirement you do not end up becoming a burden to your family.

The idea of privatizing scares the crap out of me. It will end up opening the safety to potential higher gains at the cost of security.

The idea of the government trying to protect these stock market accounts is a thiny veiled attempt to further bankrupt the federal government. If the stock market tanks at some point in the future (and it will from time to time), then the government will have to make up the difference with our tax dollars. Since the fed will have less and less money from normal SS to pay for all of this, it will have to come out of general revenue. Eventually the difference would cause the government to either kill SS altogether (a goal of the extreme right), or kill all other social spending (also a goal of the extreme right). In other words, a win-win situation for them, and a lose-lose for everyone else.

[papau]

7. Bull Shit lies - already exposed by actuaries like myself - but repeated!

Amazing.

And all that in the WSJ? - just the way you posted? OK - comments:

Why would private accounts make SS solvent through 2077 and beyond? Can we say the obvious - it would only be solvent if the 6% remaining in the payroll tax was enough to fund the REDUCED SOCIAL SECURITY BENEFITS. Golly gee - reduced benefits you say - that means the payroll tax Bush stole to finance his tax cut for the rich - and now recorded as IOU's (Gov bonds) in the SS Trust fund - need never be repaid via a raise in the FIT tax on the rich to get funds to redeem those bonds so SS can use the money to pay benefits. Yet another transfer of wealth to the rich - this time via the payroll tax (Gore wanted to "lockbox" - meaning pay down the national debt with the payroll tax surplus - boy the media sure showed how stupid he was!!)

Did anyone mention that SS solvent is solvent through 2043 (2039 if lousy Bush econ results continue) and if a Dem ever gets elected it is solvent forever via better growth. And worst case lousy GOP growth means a simple solution - the same one Reagan used when Reagan increased the retirement age for full benefits to 67 from 65 - - namely raising the retirement age by 2043 to 70 from the current 67?

And did anyone note that a pay as you go social insurance system does not have a rate of return on assets because you have survivor and disability benefits - and not a lump sum at the end. So "The annual rate of return of the current SS account is 2% (or less)" is bull shit - the assets in the trust fund earn 5 to 6% - determined by Bush as being what is a market rate - there just are not many assets - and the assets - and the interest earned on them - are taken by Bush to finance the tax cuts for the rich - those assets and interest are just Gov IOU's - Government bonds - promises to raise the FIT tax on the rich in the future to get the funds - the real cash - the SS will need when it redeems the bonds and uses the money for benefits (of course with lower benefits those "assets" need never be turned into cash.

Forced savings can be done without touching Social Security - so those financial advisors that recommend people save between 10% - 20% of their current income for retirement will be happy and we will not have the problem of folks that do not save that much

Of course the SS "tax" amount won't change -12.4% will come out of everyone's paycheck - half that is now paid by business will be paid by individuals - in theory not a change if business increases everyone’s salary so as to not decrease their employee cost - NOW do we have any bets that business will not just pocket the transfer of SS tax to individuals?

Of course if SS tax moves to "current" savings, rather than payments to current retirees, I suspect current retirees will be unhappy. Say I have an idea - lets tell those folks getting a cut in benefits that their private account investments will earn such a high rate of return that they will get MORE than they would have got under the evil Social Security system! - God I expect an editorial in the WSJ soon on this point!

So we have a tremendous windfall in income added back into a household by cutting SS benefits - and we can pat ourselves on the back because we have replaced an inter-generation promise with a visit to your broker and high hopes.

But wait - we are smart and will give a guarantee of a given rate of return so folks do not lose in the market - of course that cost will never be included in the cost of this system since we want to kill Social Security, damn the cost full speed ahead.

A hundred ways to keep lawyers and brokers happy - and a clone of 529 plans fits the bill - but did anyone notice the cut backs in the 529 guaranteed benefits the states are giving out because of the need to cover the decrease in investment performance?

Bottom line, SS security is NOT broke. Once the baby boomers start to retire, en mass, it can continue forever without this bull shit destruction of the living standard of the aged so as to protect the rich from repaying the payroll tax surplus that Bush uses to finance his tax cuts for the rich.

And that is just my opinions.

Bill

Fellow of the Society of Actuaries (FSA)

Member of the Academy of Actuaries (MAAA - lets me do legal things like report the truth to the States about insurance company financials).

Enrolled Actuary number 02-2478 under the IRS for pensions (lets me do legal stuff like represent folks in front of the IRS on pension deduction questions, tell employers how much they must put in their pension and out of their control so as to fund their pension plan, and to answer IRS - and employer - plan design questions).

[trotsky]

9. *applause*

Well said, papau. Nice to hear from someone with a real grasp of the numbers.

[HFishbine]

12. Bill

You go boy!

Question, maybe I didn't quite understand it in your post, or maybe you were discussing something a little different but, in layman's terms, what are the consequences of taxing people in order to have them invest in government securities?

[papau]

20. To the extent the voluntary or forced tax is not replaced by borrowing,

we have increased "savings" - and that is happy days! More investment, more growth, and a better life for all! And investing in gov securities is fine if the gov uses the money to decrease its debt (redeem other gov bonds owned by the public) as this increases savings.

But if the worker keeps current life style via their credit cards - the workers debt become more than they can handle. And to the extent the worker decreases consumption, we have companies laying off workers and bad economic times. sigh.....

The key is to do these things on the margin - in small amounts - because the hit from consumption cuts occurs before the good from investment. So Gov purchases over a short term increase consumption to offset, but the resultant deficit decreases total savings so we are back to no change! :-) Under Clinton in 1993 the era of Greed - folks saving little - was what Reagan had given him, so the only solution to get a future for our kids was to increase savings via cutting the gov deficit (stopping the negative savings by the gov).

Total savings equals private savings plus gov savings - and a deficit is negative savings - and indeed that is why we have near zero current savings currently. Meaning Bush has robbed our kids of future economic growth so as to give money to the rich.

And the Bush tax cuts give money to those who move it overseas - a disaster to the future of our economy when done in large amounts (again the different friction of different economic activity can be played with in small amounts via gov spending changes - but only for short periods that reflect the different speed at which these things have an affect on the economy).

The Clinton/Rubin lesson is the importance of the effect on the margin (at the margin?) - the deficit does not make large changes in the long term interesr rate. The 10 year rate reflects the current economy for 95% of its value - only a small change occurs because of investor expectations of deficit out of control versus decreasing deficit/surplus. But that has a major effect - the hurddle rate for new business investment is "just a bit" higher, and "just a few" business investments do not get made, and soon you have a Reagan recession - or a Bush no jobs "growth". I like the other side where fiscal sanity via Clinton yields Growth far ahead of Reagan/Bush41 growth.

Now you can not blow a trillion bucks into debt and not have some short term stimulus - but this was designed to give us the least amount of stimulus possible for that amount of money - a consequence of giving the money to the rich. So we will have a few quarters of growth now - enjoy - I hope we get a few jobs - I hope we get over 200,000 per month so that we can decrease the 2 million unemployed over 27 weeks crowd.

[HFishbine]

23. Thank you

Facintating. Thanks.

[Tyler Durden]

14. BIG ASS BUMP for papau!!

Most people with an IQ over 110 (10 points above the weighted average) can understand that.

So the bottom line is that since what you are saying is the real deal (and it IS), then the rePukes are just lying as usual.

SUR-PRISE, SUR-PRISE, SUR-PRISE!!!! This be my shocked look.

[Malva Zebrina]

19. thanks Papau

.

[apsuman]

13. am for privitization

FICA taxes really irk me.

First, I thought it was 7.65% that comes out of your paycheck (that you see) and 7.65% that is paid by the employer (that you don't see), for a total of 15.3%

I personally think that the law should change, and the salaries should be adjusted (meaning the 7.65 the employer pays is added into our gross wages) so that the entire sum comes out of our paycheck as a line item. I am also against withholding but my ire is many focused on income not payroll taxes but that's another item...

And, I don't care if everyone did pay into Social Security, if you are rich you should not get it. I don't want to pay out of my check so that Bill Gates can get a Social Security check.

My grandmother and both of my parents are on Social Security and since none of them are rich, I don't want to disturb their Social Security.

However, for young people, I really don't see any problem allowing them to invest some of their social security income into private accounts.

[papau]

17. 15.3 = 12.4% for OASDI and 2.9% for Medicare

OASDI means Old Age, plus Survivor, plus Disabilty income

The point of an entitlement is that it is not welfare - which what the GOP wants to make all monies not paid to the rich and corporations from the US Gov.

Once you say the rich get nothing if they have assets or income of a certain amount, you have put the rest of us on a welfare system. Indeed this was the victory of the GOP in the Medicare Drug bill - we now have a welfare like rule that over $6000 in assets you get less - sigh.....

The way the rich killed the middle class of the 20's was to use ballon payments on asset purchases - so all the assets flowed back to the rich in the 30's. FDR fixed this with monthly amortized loans for housing, and payroll deduction payment of taxes so you'd have the money paid that you owe.

As to private accounts - there is nothing wrong with folks investing - only the monies MUST come from something besides a reduction in benefits paid the aged. Clinton proposed a voluntary payroll "tax" that took that additional money and sent it into private accounts that had eith tax benefits or had a 401k like "match". As usual Clinton was spot on! Of course with the gov buying the stock assets - the brokers would have made no rip-offs!

[Gulf Coast J]

16. Why not model it after federal employee TSP accounts?

There are five funds, each with a different risk/reward ratio. We could require a certain percentage to go into the most conservative fund so that people won't lose everything if the market crashes. You could even have some sort of matching for poor workers if you want. www.tsp.gov

The only good argument against partail privatisation is the huge cost associated with paying off the people who are set to receive their entitlement. If the tax I pay is going into my account instead of going to some old person, we need to figure out how to pay for that old person's entitlement. I'm afraid that might be the downfall of privatisation.

[papau]

18. TSP is Fine - no problem - just leave Social Security alone.

"If the tax I pay is going into my account instead of going to some old person, we need to figure out how to pay for that old person's entitlement" - only 2 choices - raise other taxes/borrow for the deficit - or cut benefits.

Now which do you think Bush is pushing for?

[SharonAnn]

22. To get a return on a "guaranteed" investment, and one that has

COLA adjustments, one gets a lower rate than is paid for other, riskier investments if they're successful. That's the reason why rates are different. Of course loses the interest and one's capital if the riskier investment is unsuccessful.

Think about it, they're worried about SS outgo being more than invome in 35+ years? Really? This is the administration that doesn't worry about bankrupting the entire US in the next few years and won't do the forecasts out that far because "results are uncertain that far into the future"?

Every single thing this adminsitration has pushed has been a way to get the taxpayer owned assets and taxpayer revenue stream diverted to the cronies of * and his family. Every single thing! Without exception! So, if you "know them by their works" then you know this is a really, really bad deal. Unless, of course, you're one of *'s cronies.

[papau]

26. Amen! :-) "know them by their works" works for me! :-)

:-)