SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

I don't come up with the same interpretations you do Parados, but won't quibble your interpretation just yet as I haven't had time to do a lot of fact checking. I would point that that Walter Williams is a PhD economist and has headed the Economics Dept at George Mason University. I tend to think he has a pretty good rationale for the facts he presents as his reputation is on the line. Also, I haven't found anything in the Cato Institute research or in Tim Penny's analysis that disputes anything Williams has said unless one really strains to change the intent.

Right now we are taking in more Social Security $ than we are paying out and this is with (I think) 3.3 workers paying in for every retiree drawing out of the system. By the time the middle baby boomers are retiring, however, there will be something like 2 or less workers paying into the system for every retiree drawing out of the system. This is with a huge tax burden on working Americans however.

On my first paying job, I paid 2% social security, matched by my employer. In my first business, I paid 3% self employment tax.

Now I pay 6.2% matched by my employer on any wages I earn; in my business I pay 12.4% self-employment tax.

When there are 2/3rds fewer people paying into the system per retiree a few decades down the road, I can't imagine how much Cyclop might be paying just to support me, assuming I live that long, unless we find some way to ease the burden on the entitlement funds. Theoretically, privatizing a portion of social security could do just that.

Does anybody know how to post this chart in the thread?:
http://www.ssa.gov/OACT/ProgData/oasdiRates.html

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Fox,
Thanks for the link to past SS rates.

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Theoretically, privatizing a portion of social security could do just that.

There are several problems with this "theory"
1.) the average return in private accounts will never meet the average market return (several reasons for this, some listed below)
2.) the majority will make LESS than the average return for private accounts.
This can be shown with math, unlimited upside, limited downside, the mean MUST be less than the average.
3.) Some will make a LOT less from bad choices to the point of negative return bringing us back to the reason SS was created in the first place. Old age poverty.
4.) The costs of a private program will be much higher than those of SS.
It still needs govt oversight and the private costs will be higher than SS administration is.
5.) The administration costs will be a much higher % of those that most need to save. (It costs me $15 to trade a stock whether I trade $30 worth or $3000 worth. The stock goes up 10%. I lose money as a small trader.)
6.) Fraud and embezzelment will destroy some people in a private system. what is the protection? and will it cost more than it is worth?

When you factor in the costs for the investor, the cost of continued govt oversight of a more complicated system and the costs of picking up a minimum return for those that lose in the system does privatization really pay for itself?

My personal preference is means test benefits. People can and should save on their own. You keep the administration costs in the present 401K, IRA system and reduce costs of SS by eliminating payments to those that don't really need it. Problems with this plan too.
1.)This requires a complete change of mindset. Patriotism over selfishness. Are you willing to forgo your SS payments for the good of the country?
2.) need to prevent cheating with trust funds and giving to kids.

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Also, I haven't found anything in the Cato Institute research or in Tim Penny's analysis that disputes anything Williams has said unless one really strains to change the intent.

All your research seems to be on one side only. Try this one

http://www.epinet.org/content.cfm/issueguide_socialsecurityprivfaq#10

The report includes lots of great links to technical papers and government research and studies.

Here are other links from Economic Policy Institute
http://www.epinet.org/content.cfm/issueguide_socialsecurity

I was just looking at the Cato project on Social Security Privatization, Much of it is out of date, from the 90s. Let me quote from one of them

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"By the year 2005, the last year covered by Congressional Budget Office projections, the cost of the Social Security program in constant 1995 dollars is expected to increase to $556 billion."

The actual projected SS cost for 2005 in 2005 dollars from the Bush 2006 budget papers is $519 which works out to $422 billion in 1995 dollars. So some of the dire predictions on the Cato website are 25% off. Many of the papers list 2030 as the year SS goes broke, another wrong number based on present accounting.

This paper by a person that is a principal at a brokerage firm has some lovely numbers but when you investigate them they have some real problems. http://www.cato.org/pubs/ssps/ssp2.html Look at the numbers. He assumes a return on stocks of 10% and 7% on bonds. Stocks have not returned a historical 10% after adjustment for inflation. They have only increased by 7-8% and bonds are in the 3-4 range. Its easy to make stocks and bonds look great when you don't adjust for inflation and use numbers that are higher than the average. He fails to account for the fact that any investor has investment expenses then too while he uses the SS numbers that do have them in. Comparing apples to oranges makes private investment look good. But in this case the only thing that looks good is the brokerage firm is looking to make some money.

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http://www.evansonasset.com/index.cfm/Page/14.htm

Here's research supporting my statement about stocks only returning 7-8% after inflation.. 7.2% to be exact based on computer simulations of historica data and that includes dividends as well as capital gains.

Govt bonds have only returned 2% after inflation

Isn't that 2% about the same thing that SS does? And people think it was so horrible that Social Security only returns 2.5%.

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well yeah parados but I've heard about a guy who invested in the market and made millions, can't everyone do that?

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dys,

Of course you can make millions. All you need is a good stock tip. Here's one for you, a company named Pipeco. They are a gas pipeline company but they may be looking to expand.

If they get into Energy trading they might even be able to use all that Enron letterhead they still have in the back room. Don't spend all your millions in one place.

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well actually parados I was thinking about Martha Stewart Living as my next big investment.

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That sounds like a good idea. I never thought about buying Martha Stewart Living(is easy while doing hard time.) Get yourself a big house though, before you go to the big house . and again, don't spend all your milliions in one place.

(I hear the chicken wings from the vending machine are pretty good in the "big house". Martha liked them anyway.)

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I have to work today Parados and thus don't have time to fully analyze the data you are posting, but I very much appreciate your posting it.

Just quickly looking at it though, it seems most consider privatization of social security too 'iffy' to be a viable plan and that the returns on the money will be marginal. That has not been the case with my own investments and I am a rank amateur at this stuff.

I have been contributing to social security steadily since I was 15 years old and it has been numerous decades since I was 15. I am far too lazy to track back over all those years, but it's a very safe bet that I've paid somewhere between $100,000 and $150,000 or more into social security and my husband's earnings have exceeded mine so he has paid more. Let's use the low number and say that together we have put $200,000 into our social security acount with our employers contributing a like amount. (Part of that was self-employment income, however, so we put it all in.)

After we were done educating kids, we started investing privately through IRA's and 401K's in 1985 and have made very modest investments into those using mostly low risk and moderate growth funds and a few speculative stocks. In other words our investments have been a small fraction of the social security taxes we paid during the same period. Over 20 years, we lost our shirt here and there on a dumb buy, but overall those investments have earned us several hundred percent. If we had been able to invest our social security taxes as well, and those investments had done as well over the last 20 years, we would be many hundreds of thousands of dollars to the good now. And that's including a couple of really tough recessions in there when the market backpedaled significantly.

Looking at the market since the 1930's, there are good times and bad times, but it has always come back and when it does it always comes back higher than the previous high. If we had privately invested all our social security from the beginning, even without the employer contributions, and those investments had done as wel, we would be millionaires and be extremely comfortable now. With the employer contributions, we would be rich, rich, RICH!

As it is, it is tough for anybody trying to live on social security alone, and many if not most are going to be below the poverty level unless they have supplemental income or resources. Even those receiving the maximum possible get less than $1500/month. Very very few are receiving the maximum.

So here we are. Admittedly, some prefer a sure thing even at subsistance levels over any kind of speculation or risk. (As Williams pointed out, however, there is no 'sure thing' out there as all the monies paid or subject to the whims of Congress.) Others, like us, would much prefer to be able to do some of it or all of it ourselves and are willing to accept the risk.

Currently there is more money in the system than is needed for current SS payments due, so diverting a small percentage to private accounts should make no difference whatsoever to the SS system. There should be no need for Congress to 'add' monies to get the accounts started. You just start them.

It will just give Congress less to borrow and spend, and most of us with libertarian souls would see that as a good thing. Then those of us with privatized accounts would receive less from the entitlement fund when we retire thus easing the strain on the system at that time.

If we start now, I cannot see how it could cost the government billions. I can see how it can benefit the investors and stimulate the economy at the same time. It only restricts how much money Congress can gerrymander while pretending to be fiscally responsible.

I am in favor of people being able to direct their own affairs as much as they are capable. I resent politicians who tell me I am not capable.

Further, as neither we nor our heirs can tap the significant amounts that are taxed away from us, the monies we receive, established by Congress, are indeed an entitlement that can be increased or taken away by a simple majority vote by our elected officials. If there is to be no privatization of social security, I think Congress should stop the subterfuge of pretending that social security isn't just another tax to bolster the general fund. They can still base the entitlement on earnings as they do now, but put it all on budget so that we get an honest accounting. (They have been using that sleight of hand since the system started in the 1940's).

So there's my initial volley on this. I'm sure I'll think differently or additionally as I/we think it through.

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Quote:

With the employer contributions, we would be rich, rich, RICH!

SS is insurance, not an investment.

You could take all the money you pay in home, fire, health, life insurance etc. and invest in in the stock market instead. You'd see incredibly higher returns on your money than what you get now, which, barring a major accident, is nothing.

Think you'll do it?

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I think Congress should stop the subterfuge of pretending that social security isn't just another tax to bolster the general fund. They can still base the entitlement on earnings as they do now, but put it all on budget so that we get an honest accounting. (They have been using that sleight of hand since the system started in the 1940's).

This is specifically done to allow the rich to not pay SS. I don't have a problem with changing this either Smile

Cycloptichorn

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Insurance is a legally enforceable contract, Cyclop. You buy a policy and it is spelled out what you are guaranteed in payment if you need the insurance. The premiums are fixed or, if they do increase and become too expensive, you can cancel the policy and look for something more affordable. Social security is neither insurance nor a guarantee. There is no contract of what you can expect to collect many decades from now nor what your 'premiums' will be over the next many decades. There is no guarantee that you will collect anything at all. And you aren't allowed to cancel it.

Social Security is an entitlement prescribed by the government. And what the government gives, the government can take away.

Social security does not afford my husband and me a comfortable retirement now--at most it provides a subsistance. But if we had been able to direct that money ourselves, we would be quite comfortable and the government would owe us nothing. As it is, we have elected to keep working and building up our private investments so we have income to supplement social security. Each subsequent year however, we are more and more resentful of how social security has been squandered.

As long as you are fixated on what the rich vs the poor are paying, you'll simply miss the point here. How about not making this a partisan or class warfare kind of thing, but look at it from your own standpoint. Would you like to know that at some point you can stop working and travel or go fishing or otherwise have the wherewithall for a time of stimulating, carefree leisure? The privatization plan, if it works as those promoting it suggest it will, can accomplish that for you with very little sacrifice on your part.

If no significant changes are made in the system, however, you could be paying 15 to 50% of your income supporting my subsistant retirement in a few more years. It's too late for me to benefit much from any repairs, though I would like to be assured the fund won't run dry before I die. But let's find a better way to do it for my kids' sake and your sake.

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Quote:

As long as you are fixated on what the rich vs the poor are paying, you'll simply miss the point here. How about not making this a partisan or class warfare kind of thing, but look at it from your own standpoint. Would you like to know that at some point you can stop working and travel or go fishing or otherwise have the wherewithall for a time of stimulating, carefree leisure? The privatization plan, if it works as those promoting it suggest it will, can accomplish that for you with very little sacrifice on your part.

This is the part I take issue with. It's simply not true. There is no guarantee that I will make a higher return under any privitization plan.

If we have a huge economic downturn (which we will, if you haven't been paying attention, our economy is in the crapper) then you could easily end up doing much, much worse.

The residents who take part of the Galveston plan haven't found themselves to have done better than SS, and they're actually trying it. The only people who say they should be doing better are the ones who have designed the system; actual workers, who have retired, all say they are making less. Why should I believe a macro-version of the plan would work any better?

People also like to point to Chile; but there's another system with major problems.

Privatization is just the first step in getting rid of SS altogether. Since you seem so eager to invest your portion of SS privately, I guess you don't have a problem with that.

Cycloptichorn

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Good grief Cyclop, you aren't reading any of this stuff that's being posted here are you? You're ignoring it all and just spinning your preconceived and unproven notions. The things I'm presenting as fact here are from my own experience. Other facts presented here are from people with the education and experience to have some basis for them. You haven't lived long enough to have experienced any of it yet. So please lets keep an open mind and not make silly, unsubstantiated statements.

I will agree there is no guarantee that privatization will give a greater return on our money than we will get from government largesse. Experience and history over the last 60 years, however, suggests that it is highly probably that private investment will net substantially higher income for investers than they will receive from the current social security entitlement.

It is a certainty that there is no guarantee of what anybody will receive from social security, if anything.

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Oh and Cyclop, the stock market currently is higher than it has ever been before in history. Some crapper.

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And finally, why should the government be able to say that nobody should have the right to assume risk on their own behalf?

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Foxfyre wrote:

Insurance is a legally enforceable contract, Cyclop. You buy a policy and it is spelled out what you are guaranteed in payment if you need the insurance. The premiums are fixed or, if they do increase and become too expensive, you can cancel the policy and look for something more affordable. Social security is neither insurance nor a guarantee. There is no contract of what you can expect to collect many decades from now nor what your 'premiums' will be over the next many decades. There is no guarantee that you will collect anything at all. And you aren't allowed to cancel it.

Social Security is an entitlement prescribed by the government. And what the government gives, the government can take away.

Social security does not afford my husband and me a comfortable retirement now--at most it provides a subsistance. But if we had been able to direct that money ourselves, we would be quite comfortable and the government would owe us nothing. As it is, we have elected to keep working and building up our private investments so we have income to supplement social security. Each subsequent year however, we are more and more resentful of how social security has been squandered.

As long as you are fixated on what the rich vs the poor are paying, you'll simply miss the point here. How about not making this a partisan or class warfare kind of thing, but look at it from your own standpoint. Would you like to know that at some point you can stop working and travel or go fishing or otherwise have the wherewithall for a time of stimulating, carefree leisure? The privatization plan, if it works as those promoting it suggest it will, can accomplish that for you with very little sacrifice on your part.

If no significant changes are made in the system, however, you could be paying 15 to 50% of your income supporting my subsistant retirement in a few more years. It's too late for me to benefit much from any repairs, though I would like to be assured the fund won't run dry before I die. But let's find a better way to do it for my kids' sake and your sake.

Now contrast this with the following scenario:

SS was privatized (fully for simplicity) utilising private accounts for your generation, and the old system for the generations before you. You did not pay SS taxes to support the older generation before you, and the money was instead raised by means of income taxes making up the difference to the dollar. Off course the private accounts were not robbed by the government, but government spending was unaffected, and the lost "revenue" was made up for in incometaxes. Thus you paid the exact same amount in, in addition to setting up your private account. (you did this in the above alternative as well, on your own initiative.) You could then expect the contents of that account to be delivered to you uppon retirement, just as you at present own the money you saved by yourself.

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There is a parable in the Bible regarding the master who entrusted his fortune to his servants when he went away on a trip Upon his return he asked them for an accounting. One had conservatively invested the money and doubled it. One was more aggressive and presented the master with a fivefold return on his money. The third had buried the money in the back yard, dug it up, and returned it intact to the master. Which do you think received the praise?

Uninvested money will automatically lose value as in no time in history has interest kept up with inflation. And we do not own the money that was confiscated from us for social security. If we die, our spouse receives a tiny amount that won't even cover the flowers for the funeral. If there is no spouse, the heirs receive nothing. The money is swallowed up and gone forever.

With private investment, the money you earned is yours and can be passed on to your spouse or children when you die.

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Foxfyre wrote:

There is a parable in the Bible regarding the master who entrusted his fortune to his servants when he went away on a trip Upon his return he asked them for an accounting. One had conservatively invested the money and doubled it. One was more aggressive and presented the master with a fivefold return on his money. The third had buried the money in the back yard, dug it up, and returned it intact to the master. Which do you think received the praise?

SS money does not simply lay around in a hole in the ground, it is spent right away. You could say some of it is borrowed to the government, but then if SS gets a raw deal government gets a good one, and vica versa.

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Uninvested money will automatically lose value as in no time in history has interest kept up with inflation. And we do not own the money that was confiscated from us for social security.

Which is sort of the point.

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If we die, our spouse receives a tiny amount that won't even cover the flowers for the funeral. If there is no spouse, the heirs receive nothing. The money is swallowed up and gone forever.

Correction, the money goes to the other guy who lived on longer than he expected to, and would have run out of savings if it wasn't for Social Security which continues to offer benefits for as long as the retired person lives. This is what puts Security in Social Security.

Quote:

With private investment, the money you earned is yours and can be passed on to your spouse or children when you die.

And people who fail to die as soon as they had estimated starve? Or will there be some means-tested paperwork-intensive back up programme?

And what about people who have work accidents or some such, are retirees the only beneficiaries of SS?

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Einherjar writes

Quote:

Correction, the money goes to the other guy who lived on longer than he expected to, and would have run out of savings if it wasn't for Social Security which continues to offer benefits for as long as the retired person lives. This is what puts Security in Social Security.

Correction. Both my husband and I receive social security benefits based on our own earnings. If there is a large disparity between those benefits (which wasn't the case in our case) the lower earning spouse can opt to receive a percentage of the higher earning spouse. If one spouse has no earnings, upon the death of the wage earner, the widow or windower can receive a percemtage (not all) of the dead spouse's social security. When both are gone, however, all remaining monies (except for that tiny one-time death benefit) are gone with nothing passing on to the heirs even if hundreds of thousands that were paid in have not been paid out.

Thus, social security taxes are nothing more than a somewhat differently structured mandatory income tax and social security itself is a pure entitlement issued to wage earners by the grace of government.

I think most educated young people could not fail to see the benefits in being able to own and direct the investment of at least a portion of that money.

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Do you think we'll be able to pass go soon? Will we start seeing some ideas about what will work instead of so much on what some think won't work?

http://politicalhumor.about.com/library/graphics/bush_ss_monopoly.jpg

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SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

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