David Clay Johnston on Franken: interesting note about SS "reform"

[FormerDittoHead]

David Clay Johnston, Pulitzer Prize-winning reporter for the New York Times, was on Al Franken 1/13.

I just listened to his interview via MP3's at http://www.airamericaplace.com (no commercials!)

He makes (at least) three very good points about the upcoming proposal about SS reform. It contradicts other info I've read here (like it will reduce the employer/corporate contribution, it will NOT) but reveals the hypocracy and deception of the Bush plan.

1) "It's your money" Johnston calls the neo-cons out with their own words. If it IS "your" money, Johnston challanges, then why not just reduce people's SS tax by this given amount, let them invest it for themselves, spend it or do anything with they wish, and then, come time for retirement, if they have nothing to show for it, that's the price of living in a 'free' society...

But that's not the plan.

The plan will NOT reduce the amount taken out of one's paycheck, rather, it will divert it to funds managed by the government for THEM to manage. That's right. This won't be any 'IRA' - where YOU make the decisions of how YOU want "YOUR" money invested.

2) Making government smaller? Guess again. The plan that Johnston reports is to create a new department / division (whatEVER you want to call it) that will 'manage' this money on the stock market. In other words, POLITICAL APPOINTEES will be controlling (eventually) TRILLIONS in the stock market.

3) Government shouldn't get in the way of business... That's what they SAY, isn't it? Yet with this control, these political appointees will be picking winners and losers by buying and selling companies and industries, and have more influence on the markets than any private mutual fund or pension.

Furthermore, (my own observation) you could look forward to companies changing what they do, and investment bankers tailoring IPO's just to "sell" to these gov't fund managers.

In the end, government (the political forces in control) will be bigger than ever, will have control more over the market than ever, and be able to give more and more benefit to their favorites and punish those that don't "tithe" to the political party in power....

[SheepyMcSheepster]

1. thanks for posting, these are some very good points. eom

[BlueEyedSon]

2. David CAY Johnston has written an excellent book on the US tax system

"Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else"

http://www.amazon.com/exec/obidos/tg/detail/-/1591840198/qid=1106141221/sr=8-5/ref=sr_8_xs_ap_i5_xgl14/102-7373226-0454545?v=glance&s=books&n=507846

[papau]

3. Indeed his tax analysis is one of the best - his Soc Sec comments, while

true, can be fixed in a 401k add on payroll deduction voluntary system investing in index funds with no investment managers.

[DaedelusNemo]

4. Why not leave it entirely voluntary?

People can invest whatever they want and can afford, including index funds. Why does this need to be a government program at all?

Maybe a better system of tax incentives for savings or retirement accounts would get at the problem with less muss and fuss. For example, our current tax credit system gives the most incentive to those who need it the least.

I can see why there should be a government role in guaranteeing some minimum retirement income, but for the most part i prefer the solution that requires the least governmental process.

[papau]

5. It should be voluntary - with the gov giving only the ease of payroll ded.

and the usual list of 401k obtions

:-)

[DaedelusNemo]

11. How do you make up for loss of revenue (payroll ded.)?

Given that you're keeping up with payments and want to retain that minimum guaranteed security for everybody?

[FormerDittoHead]

6. Mgmt fees would eat up small amounts.

For low income workers, the amounts in the beginning wouldn't be large enough to generate the income needed to pay the expenses for managing the account individually with a broker.

The gov't can take advantage of the economies of scale, managing and buying in bulk like a mutual fund.

As for individuals, here's a good personal example: I opened up a Roth IRA with $2,000 a couple of years ago and I've just ignored it. No rush, I figured. I didn't put anything more into it since.

I made no stock investments, etc. Just put it in a money market with low (insured) interest, but, I check it out when I get the time to review my options, only time became scarce when I had twins last year!

Well, I FINALLY look at my statement - Ooops!

There's LESS IN THERE NOW THAN I PUT IN! Why? A $10 annual "custodian" fee and some other $2.50 per MONTH fee - AND THIS IS FROM A VERY WELL KNOWN NO-LOAD MUTUAL FUND COMPANY!

The point is that this is exactly what would happen with small income earners (it may take them a few *years* to get to $2,000 in their account!) and they would NEVER be able to "get off the ground" otherwise...

[ProfessorPlum]

7. Do you think the fees are going to be smaller for the government

run accounts? Why should they be? Neither the government nor the people running the accounts would want them to be smaller, and once they are set up, people can bitch all they want with no recourse.

No thanks to this scheme for privatization. Bleh.

[FormerDittoHead]

8. Yes they would BUT (we agree)

...the mgmt fees *would* be smaller, but considering that the brokers wouldn't be getting ANYTHING IN THE FIRST PLACE, it's a GIVE-A-WAY from the GET GO.

Furthermore, you have to consider the SIZE of the overall account.

Why? Because, for example, some brokerage houses offer NO COMMISSION FEES (you read that right) if you have like, $1 million in your account. A seat on the stock exchange (how much does one go for nowadays?) gives you that right as well. So, you'd think there shouldn't be ANY mgm't fee, (or next to zero) right?

The fact they they'll be EVEN A SMALL PERCENTAGE, much smaller than a small investor would pay, will still mean BILLIONS for whoever's involved. That's just mgmt' fees, I'm not even talking about supporting "politically favored" companies and industries, as I addressed in my original post.

In the end, we agree, however, the only reason I'm posting *this* is to anticipate the "spin" which will be used when it finally gets rolled out.

[DaedelusNemo]

12. While that might be reasonable,

it also would've been reasonable to think the Bush administration would have taken advantage of that same leverage to get the bulk price on drugs - but no. And i don't believe we'll get a no brokerage fee deal, either. Instead, i expect to see, in the face of an administration that has shown absolutely no resistance to profiteering at all, the financial industry to take full advantage. How would it be rational for them not too? It's like leaving your steak out in front of a dog.

But the real cost comes in the annuities, which you would have to set up for yourself when the time came to start living on that money - total fees frequently hover around 20% of the money. With SS, you get the same service for free. I wonder how many people will manage a 20% return on their investments?

[DaedelusNemo]

13. You're right, we need a solution for that.

Two problems, actually: first, people at the bottom end of the pay scale simply don't make enough to save a substantial amount - if, indeed, they are not instead slipping further into debt. I see basically three
approaches to this:

One, take the revenue you get from lifting the special wage cap exemption for the wealthy, which amounts to roughly 30% of the current payroll tax, and use that money to match funds for savings accounts up to some amount, or by some decreasing amount. If you match dollar-for-dollar, say, there's much more incentive to save than if you're just getting a 15% deduction for that dollar.

Somewhat similiar, simpler but not as quite as effective, perhaps, would be to make deductions on savings a flat rate at the highest tax bracket. I like this one somewhat better than the other in its form - it's better to not take the money in the first place than to take it and give it back. But then the amount of incentive is limited by the tax they pay, which gets us back to the original problem - but it's better than what we're doing now, certainly.

Three: simplest and best, and very popular in the polls: increase the freakin' minimum wage, for crying out loud. In real terms, our minimum wage is lower than it was decades ago. Minimum wage should have, at the very least, been keeping up with inflation for that whole period and there's really no excuse for not fixing that now. The minimum wage update should be formulated into law so that it operates automatically from now on. The argument that such a minimum wage would choke the economy is thoroughly bogus - the last time our wages were up to that level we experienced a huge boom; and when wages went back up some in the Clinton years, we had another big boom. Obviously, minimum wage increases do not kill booms.

And consider how many problems that solves! Suddenly, no more SS shortfall; less need for personal aid; affordable health care and education suddenly much more attainable and cheaper to provide; a massive surge of spending and savings and investment that finally restores the demand side to the supply-demand equation and kick-starts the economy. All that with no added hassle, no extra government shuffling to be administrated.

The other problem is that the economies of scale are against the small investor. One approach would be to establish a collective deal in which any citizen is eligible to participate - a deal appropriate for the largest collective they deal with. However, there would inevitably be expense to fiddling with the investments and maintaining personal accounts - unless of course there was to be little or no 'personalization' of these accounts - your account would be yours in name only, and you would simply get your cut of whatever happened.

The problem with this sort of approach, however, which i can't find my way around yet, is that this sort of centralization of the economy - hundreds of millions of investors in a single plan - is fundamentally bad for the economy - that it limits the broad-based participation of free agents that constitute the virtue of the market in the first place, and the source of its success.

THe only other approach i can think of is to hope that competition amongst finance houses after the whole new class of investors brought about by an increase in the minimum wage in the internet age would tend to decrease those fees in competitive fashion, but the bastards always find a way to surprise you, don't they?

Not sure what to do about the scale problem without an undesirable centralization, i guess.

[FormerDittoHead]

9. That's CONSERVATIVE, NOT Neo-con...

>but for the most part i prefer the solution that requires the least governmental process.

Very well stated CONSERVATIVE perspective. (and I don't fault you on that)

*YOU BROKE THE CODE*: These guys are *NOT* CONSERVATIVES.

[DaedelusNemo]

14. Thanks, i labored on that one :)

Perhaps instead of trying to talk about the disaffected libertarian-leaning wing of the republican party, i should be referring to them as 'the real conservatives'.

Hm, i'm inspired to rant some about the next step for liberals, but i think i'll post it in a new thread. Probably in 'democratic party' forum.

[wishlist]

10. He is right- it still won't be our own money to take out whenever we want

Many people who think the idea of managing your own money instead of having it going directly into the program don't understand that they will still have virtually no control over how it is invested and when they can draw it out and that they will still have to meet all of the SS eligibility requirements before drawing benefits.

This costly new program (of which the details have not been explained) will add much complexity and bureaucracy and many new rules and regulations on top of the existing program that has been fine-tuned and very efficiently run over the past 70 years.