SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

Foxfyre,
I read Shipman's report. It is out of date (10 years old) and I don't like his numbers. He assumes 10% return for stocks. Definately a no no in figuring reasonable rate of returns. Then he fails to take into account that a poor person has a higher cost of investing. This is simple fact. Call any brokerage firm. They will charge a lower rate for the large investors and they usually have a minimum charge that eats heavily into small investors.

In this day and age of flat fee for online accounts, a person that has $2000 or more has a much bigger advantage than someone that has $200.
Once again, simple math. At $15 a trade, if I buy $2000 worth of stock it only has to go up .75% to cover the cost. If I buy $200 worth of stock it has to go up 7.5%. With a minimum wage investor, they would have $412 in the first year if they saved 4% in private account. They lose an entire year of investment returns because of investment cost if market return is average.

I am using basic spreadsheet formulas for my numbers. I will be happy to talk you through setting them up yourself or I can email you one.
The formula to use is fv, which figures future value base on interest rate, time period, amount per period and present value.

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Oh dear, thanks Parados but no. We use prospectuses and 5 -10 and 15-year track records of the stocks and funds we invest in and if I had any more information than that, I would think about it too hard and screw it up.

You say Shipman's study is out of date by 10 years, yet the Cato guys seem to think it is pertinent still. What do you think has changed in his formulas over the last 10 years?

Do you agree that markets go up and down, but overall the trend has been up over the last 60 years and the long term investor assumes much less risk overall than does the short term investor?
There has to be some kind of overall consistency over a person's 40 to 50 years of employment if privatized accounts will be feasible.

By the way, we invest only in no load funds in families of funds and there are no transaction fees. There is a nominal annual management fee (less than $25/year) for each family and a one fee per year from the brokerage firm we use but our overall costs for fund management are less than $100/year. I would presume the government would set guidelines for the types of investments that would be acceptable for social security funds and issue guidelines to all the brokerage firms who wanted to handle these kinds of accounts. I don't ever envision highly speculative penny stocks being an option nor do I see the people just being handed a check and told to go find someplace to invest it. The government can't invest the funds without inviting a lot of racketeering, but it certainly wouldn't give up all control on how the funds were handled.

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Here's my three ways of saving Social Security:

Increase taxation:

If the innflow of money keeps up with the outflow the system will remain solvent. This can be done by raising the cap, increasing the tax, supplementing the tax with another tax, subsidising the program with federal money, (charged in various taxes) or any number of combinations of the above.

Cut benefits:

Cut enough benefits and the system will remain solvent. This can be done by means testing, (which wil discourage private savings) or any number of alterations in the formula calculating benefits.

Set up a trust fund:

With a large enough heap of money invested the system could sustain paying more in benefits than it earns in taxes indefinately. The fund would grow in proportion with the population, and exess growth would be harvested to sustain SS despite the deficit.

Such a fund could be structured as a bunch of sepparate "private accounts".

The only problem is, where does the money come from? SS taxes can not be diverted to private accounts without cutting benefits for the recipients of today, or adding to the taxburden on todays workers. Borrowing the monney sounds a bit risky wouldn't you say?

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Einherjar writes

Quote:

The only problem is, where does the money come from? SS taxes can not be diverted to private accounts without cutting benefits for the recipients of today, or adding to the taxburden on todays workers.

Here's where I think I disagree. Currently, even though the numbers are all on paper because Congress spends every penny of Social Security it takes in, there are many billions more in the fund than are being paid out. The fund won't be in the red for some time yet. So now would be the perfect time to start setting up private accounts.

It would mean Congress would have less money to spend of course or they would have to borrow from other sources, but they would not be able to hide such borrowing any more. That is a good thing.

I am very much opposed to raising taxes because 1) it would hurt today's workers, 2) the rich would just move compensation from wages to stock options or whatever to avoid the extra tax, 3) employers would be hurt and that would cost us in jobs and/or wages, 4) it would just allow Congress to hide more money.

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Foxfyre wrote:

Einherjar writes

Quote:
The only problem is, where does the money come from? SS taxes can not be diverted to private accounts without cutting benefits for the recipients of today, or adding to the taxburden on todays workers.

Here's where I think I disagree. Currently, even though the numbers are all on paper because Congress spends every penny of Social Security it takes in, there are many billions more in the fund than are being paid out. The fund won't be in the red for some time yet. So now would be the perfect time to start setting up private accounts.

It would mean Congress would have less money to spend of course or they would have to borrow from other sources, but they would not be able to hide such borrowing any more. That is a good thing.

I am very much opposed to raising taxes because 1) it would hurt today's workers, 2) the rich would just move compensation from wages to stock options or whatever to avoid the extra tax, 3) employers would be hurt and that would cost us in jobs and/or wages, 4) it would just allow Congress to hide more money.

So you think it would be a good idea for the federal government to borrow a sum of money equal to what they "owe" the SS trust, then transfer it to another branch of government (SS) for investment?

Anyway, you seem to have gotten my main point, that setting up any sort of investment accounts takes money, which translates into tax hikes and/or budgetcuts either now or in the future. There is no free lunch.

I agree that the debt to SS should be brought out in the open, but this can be acomplished by a simple lockbox.

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No, I'm saying the government should just start the accounts with incoming monies. More is coming into the system now than is needed to pay current benefits. This will not be the case in another 15-20 years so, if we are going to do the privatization thing, the time to start is now. I think since it will start out small with only some workers opting to do that, a small percentage of funds can be diverted without depleting any of the funds needed to pay checks to those currently receiving social security.

The government should just get whatever other money they need from somewhere else and accept the criticism for overspending since they won't be able to hide the overspending as easily.

I am adamently opposed to raising the social security taxes and I am opposed to raising any other taxes. Government is too big and it spends too much. I opt for smaller government spending far less.

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Quote:

By the way, we invest only in no load funds in families of funds and there are no transaction fees. There is a nominal annual management fee (less than $25/year) for each family and a one fee per year from the brokerage firm we use but our overall costs for fund management are less than $100/year.

The costs for no load funds are higher annually than they are for load funds. Your broker is making money from the fund as well as from you. A no load fund rolls the sales costs into the fund instead of charging an upfront fee. Hidden charges that you perhaps don't see but they are there. It is standard for every no load fund.

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Foxfyre wrote:

No, I'm saying the government should just start the accounts with incoming monies. More is coming into the system now than is needed to pay current benefits. This will not be the case in another 15-20 years so, if we are going to do the privatization thing, the time to start is now. I think since it will start out small with only some workers opting to do that, a small percentage of funds can be diverted without depleting any of the funds needed to pay checks to those currently receiving social security.

The government should just get whatever other money they need from somewhere else and accept the criticism for overspending since they won't be able to hide the overspending as easily.

I am adamently opposed to raising the social security taxes and I am opposed to raising any other taxes. Government is too big and it spends too much. I opt for smaller government spending far less.

Your government is in debt, every dollar not repaid is a dollar borrowed. When the government is debt free you can start thinking of diverting government income to investment accounts, or investing government money. (im leaning towards the latter)

I think there should be some failsafe foolproof system in place to keep the elderly from living in poverty though, and currently SS is it. Anyone who wants to invest money in addition to that is welcome to do so.

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Of course Cato is happy to use the Shipman numbers. It supports their theory. That is what PARTISAN groups do. They write papers that support what they want to happen then use those partisan papers to write MORE partisan papers.

Because you want to believe Shipman doesn't make his numbers correct. I can give you reports by lots of other economists etc that dispute it. Earlier I posted a site that had HISTORICAL returns based on ACTUAL market computer analysis. Those returns were 7.2% after inflation. I will take the MATH over a partisan paper any day.
Let me restate my problem with the Shipman report. He uses unadjusted stock returns and compares it to adjusted SS returns. That is comparing a dollar worth $1 to one worth $.60. I don't accept it nor should you but it works GREAT for political purposes.

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Quote:

It would mean Congress would have less money to spend of course or they would have to borrow from other sources, but they would not be able to hide such borrowing any more. That is a good thing.

This was my point from earlier. The CRISIS is not in the SS fund but in the LACK of funding for the General fund. SS will only have 75% of what it needs in 30 years. The general fund only has 70% of what it needs NOW. The crisis is NOW and the CRISIS is the budget deficit because THAT is what creates the SS crisis in 30 years.

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Not if we demand fiscal responsibility from our elected leaders. Social security is currently solvent on paper but won't be in another decade or two. So to keep it solvent, changes need to be implemented now.

I heartily support Newt Gingrich's recent admonition to just take social security off budget and make it its own thing. That, if nothing else, would force Congress to be more accountable in both its budget and its spending. The current budget in the works now is what - 2.3 TRILLION dollars. Good lord that's obscene. And there is no way to manage that kind of money within the mega-bureaucracy that is the U.S. government, without many billions of that 2.3 trillion being used wastefully or ineffectively.

I say the American people should be encouraged and empowered to do much more for themselves and the government do far less. That would eliminate the looming crisis in the general fund and Social Security will be left in peace.

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Quote:

I say the American people should be encouraged and empowered to do much more for themselves and the government do far less. That would eliminate the looming crisis in the general fund and Social Security will be left in peace.

And there is the problem. If the people were more inclined to get involved rather than just complain, we wouldn't think that 60% voter turnout would be considered outstanding.

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Hi Tommrr and welcome to A2K.

Sometimes the people can almost be forgiven, though ultimately I think everybody should be held accountable and accept the consequences of the choices they make. But we have a government that has been using our money to buy our votes for a very long time now. Slowly but surely our government has weaned a substantial chunk of the American public away from a spirit of 'can do' to a spirit of entitlement.

I think social security can be restored to solvency and for it original intended purpose. Alan Greenspan and most respected economists out there are supporting privatization, but are urging that it be started on a very small scale and taken very slowly. If that is done, the future looks very bright indeed.

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Fox, Here's an idea not being considered, but has great potential. It costs the taxpayers over $60,000 a year to house criminals in our prison system. For the first six years of an infant's life, invest $10,000 a year into their education/retirement fund. By the time they reach college age, they'll have enough to fund their college education, and what's left over can be left there to accumulate until retirement. They will have enough to support their retirment, and most of the kids headed for delinquency will be diverted into productive citizens instead. Prevention is the key.

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That's an interesting concept C.I. But I can't help but think it is no different than communism. We offer free education to all U.S. children and illegal immigrants now and there are enough grants, scholarships, and other funding programs out there to ensure that pretty much any kid who prepares himself/herself to go to college can go. And still our prisons are full. I think we already spend more per capita on education than any other country spends. I think throwing more money at it won't accomplish much, if anything.

I prefer empowering people to do it themselves.

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I found the below article a very accessible analysis on the privatization debate. Pay particular attention to the proposed justifications for privatization. Note that the linchpin of the privatization argument is not that private returns will be vastly higher than current returns. As the author concludes, the new system would not be strikingly different than the present system. The theory behind privatization is that it would spur savings by involving the public in their own investments and retirement funds. In other words, one needn't buy Shipman's biased and outdated report to make a sound argument about SS privitization. You may or may not buy this argument, but it's something to chew on. (The article also gives a superficial overview of other pressing fiscal issues).

Quote:

source: http://economist.com/agenda/displayStory.cfm?story_id=3732459

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Link Steppenwolf? Nevermind, I see you added it.

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Yeah, the quoted text is a bit messy. I suggest clicking the link instead.

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Steppenwolf, We already have the ability to have "private investment accounts" through Individual Retirement Accounts. Most workers are allowed to invest $3,000/year into their IRAs, but not many do. Forced investments through the reduction of social security hardly seems like a successful program; many will result in reduced social security benefits, and the investments do not guarantee their investments will gain value. IMHO, a slow program to convert the present system to 1) reduced benefits by increasing the retirement age, 2) allow for converstion to private accounts over a long time span - say 25 years, and 3) still maintain a form of social security that provides for "guaranteed" income in old age which keeps up with inflation.

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http://taxpolicycenter.org/TaxFacts/TFDB/Content/GIF/hist_receipt_source_GDP.gif

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SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

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