SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

Foxfyre,
Several points.
1.) Your experience might not be indicative of the market as a whole. Enron employees had great return on their Enron stock investments up until they crashed. Imagine if the market drops 50% the year you retire. How will you recover?
2.) Everyone overestimates their return in the market. You are not counting the costs associated with your employer 401K to begin with, a cost you would have to take care of yourself in a private system. Its easy to look at an investment growing because you put money into it every month and not see the growth comes from the deposits and not the return. This is human nature. The woman's investment club that was touted for such great returns a few years ago redid their math and it wasn't nearly as good as they thought.
3.)

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

Every major market, NYSE, NASDAQ and S&P are DOWN from what they were 5-6 years ago. Dow hit an interday high over 12,000. presently less than 11,000, Nasdaq was over 5,000, presently barely above 2000, S&P was over 1500, , today at 1200.
4.) Don't worry about Social Security. The False argument that social security can be eliminated by Congress anytime they want is just that, a FALSE ARGUMENT. What do you think would happen to politicians that voted to eliminate it? What do you think the NEXT Congress would do? Just because someone can do something doesn't mean they can or will do it. I could go shoot 20 people but there would be consequences.
5.) Social Security isn't meant to give you a wonderful retirement. It is meant as a basic minimum. It is insurance for those that have problems or a catastrophe. You aren't forced to live on SS alone. 401Ks and IRAs are designed to encourage people to not try to live on only SS.
6.) Insurance is hardly an ironclad "legally enforcable contract". Insurance companies cancel policies. (My father had his cancelled after he got cancer. The same insurance company then offered to sell my mom a policy a year after my father died. Thank god my parents lived in a state that restricts lawsuits.<sarcasm> Can't have those "frivilous" lawsuits. I really thank god there are institutions like Mayo that charge on a sliding scale for 18 years of cancer treatment.) Insurance companies can stop doing business in your state. Insurance companies can go out of business leaving all policy holders without a "legally enforcable contract." Some Insurance companies commit FRAUD in selling policies and have to be sued by State AGs 10-20 years later. Insurance companies are there to make money. There is no guarantee that your policy will never change or that you can recoup legally if it does. I would consider SS to be safer than insurance because it is protected by 200 million voters. The only thing protecting me from an insurance company is my pocketbook and whatever lawyer I can hire.

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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.

Well, here's the thing. I like and support the idea of fixing social security, but you are making the mistaken assumption that what works in the micro will work in the macro. The effect of dumping tons of money into 'private accounts' has to be calculated as if everyone will take the option. It's difficult to imagine that we could know what the effects of pouring billions of dollars into the market will be.

Not to mention that the few real-world examples that we have (Galveston, Chile) are not all roses, as some make them out to be.

And, this isn't even the biggest problem I have with the proposed plans the admin is showing:

http://www.thinkprogress.org/

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The Price of Price-Indexing
No one has spoken much about President Bush's other proposed reforms to Social Security, particularly changing the formula by which benefits are calculated. And when President Bush tries to address the suggestion, it comes out something like this:

"Does that make any sense to you? It's kind of muddled. Look, there's a series of things that cause the - like, for example, benefits are calculated based upon the increase of wages, as opposed to the increase of prices. Some have suggested that we calculate - the benefits will rise based upon inflation, as opposed to wage increases. There is a reform that would help solve the red if that were put into effect. In other words, how fast benefits grow, how fast the promised benefits grow, if those - if that growth is affected, it will help on the red."

Still don't get it? Right now, Social Security benefits are calculated through what is called "wage-indexing," which adjusts a worker's earnings based on wage growth during the worker's lifetime. President Bush is proposing switching to a "price-indexing" formula, which essentially adjusts earnings based on inflation. That means huge benefit cuts since wages always increase faster than prices. For example, if today's retirees benefits were calculated using price-indexing their benefits would be cut by 60 percent. And the picture for future retirees doesn't look much better.

For the sake of future generations, we need to call attention to all the questionable parts of President Bush's Social Security overhaul, not just to private accounts.

I'm certainly against that....

We have to make some tough decisions to save SS, IMO. We're either going to have to take it off-budget and admit that it's a money loser (though why this is any different than how we run other branches of the gov't, I hardly see the problem with this), or, we're going to have to recalculate the way we hand out benefits and raise taxes. Private accounts don't shore up the system at all, though they can be good for the individual.

I really believe they are the first step to dismantaling SS completely. The same arguments have been used against it by the Republicans since 1940, and it's still going strong....

Cycloptichorn

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Oh and Cyclop, the stock market currently is higher than it has ever been before in history. Some crapper.
Every major market, NYSE, NASDAQ and S&P are DOWN from what they were 5-6 years ago. Dow hit an interday high over 12,000. presently less than 11,000, Nasdaq was over 5,000, presently barely above 2000, S&P was over 1500, , today at 1200.

Yeah, I meant to talk about this too.

The stock market levels aren't really that great compared to performances a while ago. And even more importatnly, they aren't really a good judge of the overall economy.

The markets are, for the moment, ignoring the fact that our trade defecits are truly scary and that our national debt hasn't gone over 5% of our GDP. At this rate, however, it will. Bush has promised to cut the defecit in half by 2009 (somehow), which would keep this from happening, and the investors are coasting on the promise without heavily looking into the lack of reasoning behind it.

Asian banks have been meeting lately and trying to figure out ways to seperate their currencies from ours. And it isn't because ours is doing great, I can tell ya.

What are some other ways, besides the idea of Private Accounts (which have been admitted to not actually solving the problem either), in which you think SS could be improved?

Cycloptichorn

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Cyclop and Parados, you're talking to a member of the investor class here, however small potatoes it may be. We've never had employer directed 401Ks....all our retirement accounts have been fully self directed with no limitations on where we put our money.' Your gloomy forecast of investments just can't be demonstrated by anybody I know or by any of the financial advisors that I trust.

So far as not translating to the macro concept, I suspect those close to retirement will see no advantage to privatizing any o their account. My 50-year-old niece doesn't think she has time to do much good that way. (I think she's wrong but she is reluctant to take the risk at her age and she is more conservative than I am.)

So I would guess that its the forward thinking youngsters, maybe 40 years old or under who will take the option and only some of them will.

The reason some don't want to offer the option, I am guessing, is because once it is obvious how well it will work, many will want to do it with all their money, not just a small fraction. And of course that takes a great deal of power out of the hands of the politicians.

I still want to see somebody put together some figures that shows how it can work.

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Your gloomy forecast of investments just can't be demonstrated by anybody I know or by any of the financial advisors that I trust.

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If your financial advisor is promising returns of greater than 7% after inflation, he can not be trusted. Ask him about guarenteed returns on your investments. He is required by LAW to tell you that there is no guarentee of return in investments of stock and bonds. Ask him what the historic return has been on stocks after inflation since 1945. If he tells you it is greater than 8%, he can't be trusted.

My financial advisor refuses to run return numbers of greater than 5% in his planning analysis in spite of fact I have averaged 12.5% for the last 5 years.

If you and I both made money in the last 5 years but markets are down that means that 3 or more people lost money to compensate for our winning.

For some simple math to show you what I am saying about majority of investors will make LESS than the average. 3 people each start out with $100. one person makes 10%, one makes 40% and the third makes 100%. The average return was 50% but 2 of the people made less than and only one made more. Size the group up to any size you want. All it takes is one person to make substantially more than anyone else and you get more under avg than over it. Its a bell curve with an unlimited upside and a limited downside. The mean average is always less than the average.

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Parados, the DOW was at 1100 when I made my first investment in 1985. It is now teasing the 11000 mark. All I know is that our very conservative investments have done almost as well as the more aggressive growth funds and we've done better than 7%. But it doesn't really matter whether it's 7% or 70% does it when compared to the 0% your current social security investments are making. And not even 0% because uninvested money steadily loses value unless inflation is also at 0%.

But the bottom line is that it is my money. I earned it the hard way. I worked for it. It is taxed by the government presumably to give back to me at a later time for my benefit. Who is to say I should not have the right to risk a small percentage of it if I want to do that?

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Even Cato and the Heritage Foundation don't claim SS returns 0%. It returns about 2.5% for a present 50yr old according to them.

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What 50 year olds are getting social security retirement benefits?

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Its called a projection of the return a 50 year old will get when they retire. Present retirees are averaging about 3.5% return or higher

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Parados, the DOW was at 1100 when I made my first investment in 1985. It is now teasing the 11000 mark. All I know is that our very conservative investments have done almost as well as the more aggressive growth funds and we've done better than 7%.

Your investments have done better than 7% before inflation. If we take the inflation from 1985-2005

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while I realize that Foxfyre has stated that this topic shall not consider politics or personalities on this thread although it is under the FORUM of Politics, I heard this evening that the demographics opposing privatizing SS are not by party or age but by household income, the demographic most opposed are the households earning under $50,000 per annum. Seems as though this group feels it has the most to lose and the least to gain from the Bush (not yet seen plan). Its going to be a hard sell, seems to me.

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oops,
hit submit when I shouldn't have. Continued from previous post.

A dollar invested in 1985 is worth 58 cents today based on the inflation from then to now. The stock market went from 1269 on March 4, 1985 to 10,940 today. That works out to 11.4% growth before inflation. When we factor in inflation then the market only grew at 8.6%.

Of course 1985 to today is a time of historic high growth. Lets look at the previous 20 years, 1965-1985.
March of 1965, the Dow was at 869, by 1985 it had grown to 1269. That works out to 1.9% growth before inflation. After we factor inflation in a 1965 dollar is only worth 30 cents in 1985. We put that number in the market number and the DOW didn't grow at all. It SHRUNK by 5.5% per year after inflation. (remember the high inflation rates in the 70s?) That is a negative return over a 20 year period.

Now imagine that you retire in a year similar to 1965 and the market goes down for the next 20 years. Or even if you take some safe 5% T-bills and suddenly the inflation rate hits the 10% rate that it did in the 70s.

Past performance is no guarentee of future earnings There is a very specific reason that every speculative investment is required to say this.

Dow numbers can be found on Yahoo. The inflation index numbers were found in Bush budget historical documents, table 1.3

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I don't want you to think that private accounts can't be part of the solution here. But, they are not a magic bullet that will eliminate SS completely. Everyone won't get rich with a private account nor will everyone go broke with them.

There has long been a discussion amongst older financial experts about how the young ones have never had to go through a major down turn and now many of those older people are retiring. A lot of the numbers I have seen by economists show that the economy can't keep growing at the rate it is. The market is at record high price to earnings ratios. The market is overdue to stagnate for a while. No guarantee it will or it won't.

The point I am trying to make is before we rush into anything we have to seriously look at all the consequences. On the thread I started I listed 3 possible ways to fix SS with an upside and downside to each.

My requirement for any plan to change SS is that it must always have a safety net for those at the bottom. Without that, there is no way I can support the plan.

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Dys writes

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while I realize that Foxfyre has stated that this topic shall not consider politics or personalities on this thread although it is under the FORUM of Politics, I heard this evening that the demographics opposing privatizing SS are not by party or age but by household income, the demographic most opposed are the households earning under $50,000 per annum. Seems as though this group feels it has the most to lose and the least to gain from the Bush (not yet seen plan). Its going to be a hard sell, seems to me.

Hard sell indeed. The reason I requested we not deal in politics or personalities is once we do that, everybody will revert to getting in their licks, bashing each other's parties/leaders, and any constructive discussion will come to a screeching halt. It isn't surprising that the people easiest to scare (the low income and elderly) are the most scared by the naysayers predicting doom and gloom if the President's yet unveiled plan is implemented or if any part of social security is privatized. Some are going so far to suggest that some are out to destroy social security.

The only way to combat this kind of stupidity is to first understand how it works or could work and then patiently explain it to any who are willing to be educated.

Parados is making a good case in what appears to be well reasoned arguments, but I, for instance, don't understand how 1100 to 11000 could be only 7+% growth. So somebody explain that to me along with why the market is so popular as an investment medium for so many. And, it would seem that even at today's ridiculously low interest rates, an interest bearing account would at least create some growth (though below the rate of inflation.)

I do agree that those who privatize a part of their social security in return for a lower entitlement at retirement time will likely comprise only a relatively small number of workers at the beginning. As I said I think older workers who are closer to retirement will not choose to do that, nor will those who for whatever reason do not understand it well enough or are just not inclined to fool with it.

I myself need to know a whole lot more before I make a definitive personal ruling on whether I support it or not. The idea appeals to me a whole lot, but the devil is always in the details.

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Parados, would you consider posting your three scenarios you mentioned here?

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The reason I requested we not deal in politics or personalities is once we do that, everybody will revert to getting in their licks, bashing each other's parties/leaders, and any constructive discussion will come to a screeching halt.

OK, but then if you don't want to deal with the politics of SS (which is 99% political) why did you start with topic in the Politics Forum?

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Because it is political, it is being bandied about as a political football on the national scene, and I hoped we could do better than that. I think Edgar Blythe has a thread on how the GOP plans to Destroy Social Security or something like that. Surely those who just want to flame could do it there?

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http://www.cato.org/images/pubs/ssps-gifs/4-fig2.gif

Monthly Benefit Comparison of Returns from Social Security
and Capital Markets for a Low-Wage Worker
Source: William G. Shipman, "Retiring with Dignity: Social Security vs. Private Markets," Cato Institute Social Security Paper no. 2, August 14, 1995, p. 4.

Foxfyre's note: These figures may or may not contradict Parados's posted source:

Most financial planners suggest that if one's preretirement standard of living is to be maintained, retirement benefits of between 60 and 85 percent of preretirement income are probably necessary.10 Clearly, then, Social Security fails to provide sufficient income to afford poor workers a dignified and secure retirement.

Perhaps that is one reason why poverty rates remain higher for people over the age of 65 than for people aged 18 to 65. Although we have made extraordinary strides in reducing poverty among the elderly, in 1992, 12.9 percent of seniors were poor, compared to 11.7 percent of 18 to 65 year olds.

Consider the advantages that privatization of Social Security would bring to the elderly poor. In his 1995 study for the Cato Institute, financial analyst William Shipman of State Street Global Advisors compared the Social Security benefits that an individual is scheduled to receive under current law with the potential return that the individual would received if he or she had been allowed to invest an amount equivalent to the OASI portion of payroll taxes in either stocks or bonds.

Shipman found that the 25-year-old low-wage worker described above is scheduled to receive Social Security benefits of $769 (1995 dollars) per month upon retirement at age 67. However, if that young worker were allowed to invest his payroll taxes in bonds, he would be able to purchase an annuity upon retirement that would provide benefits of $1,085 per month, assuming that the average performance of the bond market over the next 40 years remains approximately the same as the average over the last 60 years. Again assuming historic rates of return, investing in stocks would provide that worker with benefits of $2,419 per month.

With those higher returns, the worker's retirement income would equal 92 percent of his preretirement income if he had invested in bonds and 188 percent of preretirement income if he had invested in stocks. Clearly, the higher rate of return would benefit the elderly poor, providing them with a higher postretirement standard of living.

Moreover, any discussion of scheduled benefit levels or projected replacement rates assumes that Social Security will be able to pay all the benefits promised. But only 70 percent of future benefits are fully funded.14 Thus, unless additional funding is found, benefits will have to be reduced and replacement rates will fall, perhaps by as much as 30 percent.

Entire article at:
http://www.cato.org/pubs/ssps/ssp4.html

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Here it is Foxfyre,

When it comes to SS in the long term. The only way to fix the 50-100 year problems is means testing in one form or another. There are several ways to address this; three that I can think of:

1. Raise the income level at which SS taxes are taken. Downside - the maximum benefit would not go up for those on the high end that have to pay more. Upside - If we paid SS on every dime made, everyone would be able to get benefits for centuries.

2. Means test benefits. Reduce the benefits paid out based on earning of the recipient. Downside- it punishes those people that planned ahead and didn't hit any unexpected problems in life. Upside- If you did plan ahead and then had some unforseen circumstance you would then get benefits.

3. Private accounts - This can take many forms beyond what is presently being floated. Upside - Some people would get more in benefits Downside - some people would get less in benefits. (It has to account for those that would lose most if not all. In any market the majority of investors make less than the avg return.)

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Thanks Parados. I'm sure we'll be discussing components of each.

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SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

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