It seems that
joefromchicago, edgarblythe, and DontTreadOnMe have either not read my original post carefully enough or chose simply to ignore it when it referred to:
Quote:"...what to do with those that depend on SS (Social Security) for their old age retirement income? Well, how about restoring such future recipients' dignity by allowing them the opportunity to take charge of their own affairs and letting them invest in their future on an individual basis."
I must assume the former and reject the latter possibility in that their response was not just a knee jerk reaction originating from the prospect of any change to SS at all. So the assumption that I wish to suspend all SS and Medicare subsidies to present and near future retirees is, well
misguided. Do I look forward to, ultimately, the end of the SS welfare program? Yes, but more on that in a while. (Perhaps my crime is that of the crow that wishes to tell Dumbo that the Magic Feather he holds in his trunk is not what allows him to fly; it is his own ability that so affords.)
But not to worry, I don't have those powers needed to eliminate SS. But wait
Congress does! Indeed, since its inception Congress has both decreased and increased SS benefits any number of times. Robert J. Samuelson has pointed out this very fact in his Washington Post column the week of Feb, 18 of 2005:
Quote:"It may shock most Americans to know that Congress could legally cut or eliminate their Social Security benefits tomorrow."
Sure enough, in my research for this response I came across this very fact in
Analytical Perspectives (of 2003) a document published as a supplement to the
Budget of the United States and seeks to explain it:
Quote:"Other Federal programs exist that are similar to Social Security in the promises they make--Medicare, Medicaid, Veterans pensions, and Food stamps--for example. Few have suggested counting the future benefits expected under these programs as Federal liabilities, yet it would be difficult to justify a different accounting treatment for them if Social Security were to be classified as a liability. There is no bright line dividing Social security from other programs that promise benefits to people, and all the government programs that do should be accounted for similarly"
Those who wish to kill the messengers (who include myself) may want to do some outsourcing since we are many and varied, but this will not change the fact that absolutely no one is owed SS or Medicare benefits (or food stamps, farm subsidies, etc). The claim exists, at this point, as a moral obligation and is neither a legal nor accounting obligation in any sense.
But where did this genuine sense of entitlement come from? From the very beginning the intent was there. In Arthur M Schlesinger's
"The Coming of the New Deal" we find this quote from the father of SS, President Franklin D. Roosevelt, of the political value of connecting SS benefits to payroll taxes:
Quote:"They [taxes] are politics all the way through. We put these payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes there no damn politician can ever scrap my social security program"
This explains Roosevelt's intent and wish, as good as it was for that time, but still gives no legal force or guarantee to future retirees towards their receiving a specific, or any amount, of government subsidy during their lifetime. Neither contributors nor recipients have the benefit of ownership in SS.
Am I beating a dead horse regarding the ultimate downsizing of SS? Well some here would like to believe so but this is tantamount to the proverbial ostrich head in the sand exercise. The week of Feb 18, of 2005 the Wall Street Journal finds economics Nobel laureate Gary Becker stating:
Indeed, around 2012 the Social Security Trust Fund will have been depleted and because of mass retirement of the baby boomers it will require 2.9 workers to subsidize one SS and Medicare recipient. Samuelson, speaking of SS resolution, again, provides clarity:
Quote:"Fourth, any sensible solution must include benefit cuts. There are many possibilities: higher eligibility ages; higher Medicare premiums; stingier benefits for wealthier retirees. Present benefit levels imply staggering future tax burdens. That would be unfair to workers and might harm the economy. Even if benefits are cut, taxes will rise because there will be, relatively speaking, more retirees and fewer workers."
Obviously the magic feather will become frayed to the point of its own destruction.
So, if SS is unsustainable in its present form what can we do to save this liberal social gem? President Bush, in his obvious attempt to visit another "fix" (like his new Drug Benefit Program) upon America's seniors rides to the rescue with (Drum roll please
) Personal Retirement Accounts (PRAs)!! But, where should we invest these funds? Stocks and bonds! Why? Because these investments have provided, over the long term, decent returns on one's investments. Sounds good!! (Why not REITs - Real Estate Investment Trusts --too?) Well, just Hoooold on there Bobbalouie!!!
At this point let me address this quote because the response is germane:
joefromchicago wrote:
Quote:"...I fail to see your point: people who attack a non-existent plan (like JamesMorrison) are just as misguided as those who support it."
This denigration is unwarranted. I first became aware of the President's PRA proposal to help "fix" SS in a summer 2005 column by Paul Krugman but in my research found a somewhat less shrill source located at:
http://www.irrationalexuberance.com/shillersocsec.doc
Just to be sure that no one mistakes this proposal for PRAs as the "
Morrison Plan" I have pasted it onto the very end of this post. In case any one has trouble with the URL and would like the complete text, let me know and I will P.M. it to you in its entirety.
The relevant section comes from Robert J. Schiller of the Cowles Foundation for Research in Economics and International Center for Finance at Yale University (e-mail=
[email protected]). The Title of the paper is:
The Life-cycle Personal Accounts Proposal for Social Security: An Evaluation. The section quoted below is located on page 1 of the main body of text (not the summary) Under:
I. How the accounts would Work and starts on line 14 of that section.
This paper is germane, not so much because the proposal I outlined in the original post is indeed the President's (not mine) and did and does exist with some details, but more so in its object of examining the viability of using a mixture of stocks and bonds as investment vehicles for that 4.0% of our SS payroll tax "contributions". The hopeful claim that the President has no plan at all is baseless. The debate should then proceed to the plan's details or lack thereof.
President Bush's plan does have details enough (including the general details of types of portfolio's that might appear in the PRAs) so that Mr. Shiller was able to construct mathematical models shedding light on various investment strategies involving these accounts from low risk conservative portfolios to those more aggressive and therefore more risky. These use historical returns from 1871-2004 and involve separate calculations with only U.S. returns and then International (more real world) stock returns and bond yields. This is a 32 page (double spaced mostly) non technical paper that should be required reading for legislators (or layman) promoting or investigating "substituting" PRAs for SS benefits. Those such as joefromchicago or edgarblythe will find succor.
Indeed, here is the last part of the no nonsense summary of Shiller's paper regarding SS and a Life-Style Account to replace SS benefits (that type that would approximate most PRA portfolios after a worker's age of 47):
Quote:"In addition, life-cycle portfolios are considerably riskier than what some would think. By suggesting that the life-cycle portfolio is the recommended portfolio for everyone, the [President's] plan neglects the variability across workers of economic situations, and of psychological barriers to good financial planning: given the risks, the plan could be disastrous for some workers."
Indeed the median value at the end of the game is only $15, 172 (mean= $17,634), that is a rate of return of only 3.4% (this figure takes into account fund expenses and the 'offset' value {that owed the government}). This is well below the 6.5% assumed by the Social Security Actuaries. Using more real world international data the returns are worse yet. But using the more hopeful figure of $15,172 we calculate its lifetime annuity value to about $1000 a year
Hmmm. Even the lowest SS benefit (using price indexing) is $14, 025 per year. The worker comes up short
way short.
I know right about now some might ask: So how do people make money with stocks and bonds? Well the paper being discussed reveals a clue, actually two, towards that end. If one consults Shiller's charts There are only two) he finds that it is the balance between equities and fixed income (stocks and bonds respectively) and the timing of the necessary re-balancing of those instruments that works towards higher returns.
Individualism begins to rear its ugly head.
But why do the PRAs show such an abysmal final return on investment? Well the Bush plan sets in motion the Life-Style Accounts at workers age of 47, almost 20 years before the target retirement age. There is a way for the worker to raise his rate of return by rebalancing his portfolio but he must sign a waiver to do so but this would require joefromchicago's devil "
individualism" hindmost and all.
However, there is something else. For those that read the excerpt found at the end of this post, please recall Shiller's:
Quote:"But, according to the President's plan, the personal account does not come for free...So, in an attempt to preserve balance over an infinite horizon, the plan specifies that when the individual finally retires, an "offset" value, the terminal value of the personal account contributions cumulated at a 3% real interest rate, will be annuitized (converted into a series of payments for life, analogous to the payments that people make on mortgages) and subtracted from the traditional Social Security benefit."
Remember when I said that that part of your SS tax contribution earmarked for investment in PRAs was a loan from the government? Well this is where you get to nobly pay your debt to the government. Your "contributions" the government considers its own and now it is time to fulfill your Faustian deal with the Federal government and severely decrease your returns on investment. Afterall, it turns out you bought your investments on margin--you took out a loan, from the government, to invest in your retirement.
So, why in heaven would I go to such lengths to cite hard evidence that seems to favor
joefromchicago, et al's case to leave SS alone? Two reasons:
1. SS, for those beginning their work lives now, is going to go the way of the Dodo bird.
2.With reason #1 a given, workers should be able to keep that portion of what would be considered their "contribution" to SS sooner rather than later and allowed to invest it in tax deferred accounts (IRAs) for their retirement. They should be allowed, nay, required to invest the tax relief portion afforded them sans SS taxes into tax deferred accounts. Borrowing money from the government (or anyone) for a long term retirement account is a bad financial move.
We will probably never rid ourselves of government welfare (corporate or otherwise) programs entirely. But the more individuals keep of their own money the less the government gets to mismanage. Someone once said that, essentially, citizens are exposed to less fiscal abuse when Congress is in recess, I agree.
JM
P.S. all emphasis, except in the quote from joefromchicago, are mine:JM
Robert J Shiller explains the meat of the Presidents plan to fix SS:
Quote:"The proposed new personal account system would be optional: people can stay in the old system (subject to future changes in that system that Congress might make) or elect to have 4.0% of their 6.2% contribution (up to a maximum amount that would be phased out by 2041), diverted into personal accounts. They can then allocate these accounts, according to their tastes, into a portfolio of their choosing, subject to the restriction that it be comprised of a few broadly diversified investment funds of stocks and bonds along the lines of the options currently offered to Federal employees through the Thrift Savings Plan (TSP), and including as well a life-cycle fund option, which the TSP has announced plans for, but which it does not currently offer.
But, according to the President's plan, the personal account does not come for free. Indeed, there is a much-discussed budget problem that the President's plan must allow for. A plan that simply allows workers to divert part of their Social Security contribution into a personal portfolio will mean that the government will no longer be able to use this part of current contributions to support the current beneficiaries of Social Security. The government will have to borrow money to make up for the money workers have diverted to the personal accounts. So, in an attempt to preserve balance over an infinite horizon, the plan specifies that when the individual finally retires, an "offset" value, the terminal value of the personal account contributions cumulated at a 3% real interest rate, will be annuitized (converted into a series of payments for life, analogous to the payments that people make on mortgages) and subtracted from the traditional Social Security benefit. In addition to this reduced traditional benefit due to the offset, the worker will also get the lump sum value of the personal account, although he or she would be required to annuitize at least enough of that so that the combined traditional benefit and personal account would be above the poverty line, whenever there is enough in the personal account to make that possible. In effect, the worker has not really "diverted" his or her Social Security contributions into a personal account, but has merely borrowed from the government to invest in a personal account, and must eventually pay the loan back. The offset will eventually help the government deal with the debt it incurred to maintain benefits to retirees.
While the plan is described as a way of "fixing" Social Security, in effect, the new personal accounts are nothing more than a plan to encourage people to buy stocks and bonds on margin that is to borrow money to buy stocks, with the Federal government as the lender offering a 3% real interest rate on the loan. The computation that is made when a worker retires is the same as one that a brokerage firm would do for customers with margin accounts who elected to put the equity in their margin account into a retirement annuity on the day they retired. In the brokerage business, the "offset" would be called the "debit balance" in the margin account."
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