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07 February 2005 @ 04:27 pm
Sick, rambly musings on Social Security  
I obviously need to do more research on this topic (esp. when I'm not sick), but my thoughts for the moment are:

I've been listening to the pundits on NPR and their take has been that the fund is not in trouble. There were steps taken in the eighties and again in the nineties which righted the course it takes, according to them.

There have been others, in fact there was one on today who talked about perceptions of SS by age group and he also maintained that the fund was not in trouble, nor would it be until at least 2052 and even then there were simple steps to be taken to correct it's course. He also said that the tax cuts did as much to jeopardize SS by the stresses it places on the budget deficit now and in the future.

All the math on SS shows that SS is still pulling in more money than it pays out. This has been the case for many years, and SS will still continue to build up its nest egg for about another 10 years. After that point, SS will be paying out more than it takes in. The nest egg will be depleted at about the year 2045 or so (depending on which estimates you look at).

NOTE: Without any changes to the system at all, you will indeed get some of your SS contributions back in 40 years. Maybe not a whole lot, but at least some. Current math shows that one way to do it would be to cut SS payouts by about 25%, so you would indeed get something back. Many people are of the mistaken notion that without any changes, SS will somehow disappear altogether in 40 years. This is not true.


There are two separate and distinct debates going on that are getting confused (and I'm of the opinion that the creation of the confusion between the two is deliberate):

1) There are those that believe that SS is an effective and worthwhile insurance program against poverty for older Americans, and for people who are injured and can't work. (Many people seem to forget that SS is *not* just for older retirees--a big chunk of SS payouts goes to people who are injured and can't work, and to their children.) These people want to see SS continue to function.

2) There are those that believe that SS (as well as other social programs) is based on an idea whose time has passed. SS was started in 1935 during the depression, when poverty and unemployment were rampant. These people believe that the conditions that sparked the need for SS no longer exist. These people believe that everyone should be responsible for funding their own disability and retirement.

It depends on which group of people you fall into when you look at a proposal to 'fix' SS. Taking money out of the system allowing people to put it into private risk-based accounts (as opposed to the current guaranteed accounts) moves in the *opposite* direction of 'fixing' SS if you're in group 1). If you're in group 2), the private accounts do indeed move in the direction of 'fixing' SS (by moving towards dismantling it).

If you're in group 1, there are 2 options to 'fix' it: Either take more money in (raise taxes--for example, if you eliminate the current $90k FICA limit, SS is then 'permanently fixed' because it will continue to take in more money than it pays out. But you also have the big discussion about the ‘rich’ subsidizing the retirement of the ‘poor’), or have it pay out less money (for example, raise the retirement age or tie the SS payout formula to inflation instead of the wage index).

So, which group are you in, 1) or 2)? That will lead you in the direction of what you'd like to see done to 'fix' SS.

So, in 40 years or so it is possible that if nothing is changed the SS system will be "bankrupt." But of course in some sense our own federal government right now is "bankrupt": it is operating in deficit, spending more than it takes in in revenues. So presumably if the political will were there in 40 years to continue the SS program, the state would enact policies to divert funds from the rest of the budget into SS.

One of the most worrying things about the current plan to "privatize" SS is the amount of debt that it would force the government to incur in the short-term. If money is diverted away from paying the current benefits for SS, then the state has to step in now to make good on those benefits. This money has to come from somewhere, and if it doesn't come from SS taxes then it will come from general revenue (other taxes). Of course, increasing other taxes is unpalatable, so instead it will be just added to the deficit where the debt will accrue interest, and taxpayers in the future will have to pay the debt.

In individual terms, for the average person's self-invested money to do better than the returns that person would get on taxes paid into the SS system, the economy would have to perform, on average, extraordinarily well. And if the economy goes through its usual cycles, recession years are going to significantly cut into the projected returns which are being presented. That of course begs the question of what will the government do about people who may have honestly invested their money, but who have over the years earned less than the 3% per year average rate of return to the SS taxes. What, for example, if a substantial number of people actually *lose* money? *Should* the government do anything?

Remember that in investing, high rates of return are associated with high risk. So if the state allows people to invest in stocks or whatever that have the potential to greatly outperform the Treasury Bonds that the current SS Fund is invested in, those people are also substantially at risk of losing their investments. If the state puts restrictions on the kinds of investments that are possible, it's quite likely that the best you could hope for would be to duplicate the Trust Fund's rate of return; at worst you might earn somewhat less (in the 1 or 2% range).

This is what I understand to be the proposed changes in SS

- Individual accounts. Workers would get their own accounts, but their mandatory contributions would be invested in a massive global index fund of stocks, bonds and real estate. There would be none of the day trading that some proponents of privatized accounts dream about. The transaction costs of allowing people unfettered access to their money, plus the risk of failure, would be too high. So how does this match up with the presentations of managing our own retirements?

- Few guarantees. Your rate of return would depend on market forces and wouldn’t be guaranteed. Your principal would be, however. The least you’d get back is everything you paid in, and your balance could be bequeathed to heirs if you died prematurely. More of a guarantee than we have now.

- Annuitized payouts. If you made it to retirement age, you wouldn’t be able to get your benefits in a lump sum. Your account would be converted into an annuity that would pay you a stream of income for the rest of your life. Rather than replacing a certain portion of your working salary, the size of your monthly checks would depend on how much you and your employer contributed, plus how well your investments performed.

SS should be looked at as a TAX (which it is) and as an INSURANCE fund (which it is). It is an insurance fund because it insures you will have *some* money coming to you for your retirement.

How many of you pay homeowners, car, medical insurance with no thoughts that you will ever get any of that money back if you don't use it? Do you think you would be better off putting that money into a fund yourself to use only for the times when your house is damaged, your car is damaged, you have medical costs?

No, insurance works because a lot of people put a bit of money into a general pool of money, that money gets invested (and not too wisely in some cases) to make more money so that when your home is damaged by the latest weather disaster, you can get it repaired.

SS is the same way. A lot of people put in a bit of money so that when people retire (or are disabled or children loose a parent), there is some money for them to *help* with expenses. SS is not and never was meant to be the sole retirement income.

Why do we look at SS so differently? Is it because of the way it has been presented?

There are two separate and distinct issues here:

1) Is Social Security in a fiscal crisis, and, if so, what is the level of urgency of this crisis?

2) Philosophically, should the USA continue with the current model of Social Security?

LEE PRICE, kconner@epinet.org, http://www.epinet.org/content.cfm/issueguide_socialsecurity Price is research director at the Economic Policy Institute. He said today: "Four years ago, President Bush assured us that we could afford his massive tax cuts tilted toward the well-to-do and still maintain a budget surplus large enough to maintain Social Security commitments. Now, four years later, we have deficits largely caused by tax cuts that have cut revenue more than 2 percent of GDP indefinitely. Wanting everyone to forget his commitments of four years ago and the fact that private accounts would require 'massive new borrowing' immediately, the President bemoans the projection that it would take borrowing from the general fund to maintain Social Security benefits beyond 2042. The Congressional Budget Office projects that the Social Security system's 75-year shortfall is only 0.4 percent of GDP -- one fifth of the size of the President's tax cuts."

MARK WEISBROT, weisbrot@cepr.net, http://www.cepr.net, http://www.cepr.net/publications/facts_social_security.htm Weisbrot is the co-director of the Center for Economic and Policy Research and co-author, with Dean Baker, of "Social Security: The Phony Crisis" (University of Chicago Press). He said today: "In his State of the Union speech, President Bush declared: 'Thirteen years from now, in 2018, Social Security will be paying out more than it takes in.' ... What President Bush is saying is that in 2018, Social Security will have to pay out more in benefits than it receives in payroll taxes. About $16 billion more, according to his (Social Security Trustees) estimates. What he did not say is that the Social Security Trust Fund in 2018 will have more than $3.6 trillion in assets, as well as $206 billion in interest income that year. (All numbers are expressed in today's dollars.) So even if Social Security cruises along on auto-pilot for the next 13 years, 2018 will arrive and depart quietly and without notice. In 2018 a small fraction of Social Security's interest income will be used to pay benefits."

DIANA ZUCKERMAN, dz@center4policy.org, http://www.center4policy.org Zuckerman is president of the National Research Center for Women & Families. She wrote the article "Social Security and Women." She said today: "President Bush's promise that he will 'not touch Social Security' for anyone over 55 seems like a strategic move to divide and conquer, since the people most concerned about Social Security and most enamored of the current program are those who are retired or soon will be. They also happen to be most likely to vote. Younger voters are more interested in personal private accounts because they have been repeatedly (and falsely) warned that Social Security won't be there for them. ... Personal private accounts would require cutting guaranteed benefits, which would hurt millions of Americans, especially women -- since women are less likely to have private pensions."

AMY CHASANOV, kconner@epinet.org, http://www.epinet.org Chasanov is the deputy director of policy at the Economic Policy Institute. She said today: "Younger workers will bear the brunt of the transition costs of privatization -- they will be the ones to pay back this new national debt either in the form of future tax hikes or reduced government services. Second, according to the Congressional Budget Office, younger workers will face deeper benefit cuts if the President's privatization plan is adopted. The replacement rate for the average earner decreases over time under privatization: it's 27 percent for workers born in the 1980s and 22 percent for workers born in the 2000s."

BILL SPRIGGS, billsprigg@aol.com, http://www.prospect.org/web/page.ww?section=root&name=ViewPrint&articleId=9035 Spriggs wrote the recent article "Another Mistaken Racial Stereotype: Contrary to the right's claims, Social Security is a good deal for blacks." He is a senior fellow at the Economic Policy Institute. He said today: "The President says that he will protect those 55 and over from any cuts in benefits. ... Note the ... beneficiaries he is leaving out, those who are disabled, or who are survivors. The almost 3 million children who receive Social Security, for instance, are under age 55. Adult disabled children who currently receive Social Security benefits are not included in this pledge."

-the redhead-
Musings from the CZ unitcz_unit on February 8th, 2005 01:09 am (UTC)
An interesting extra question to consider is just *where* the Govt will put all of this "money"? I find it exceptionally difficult to believe that in this administration "public funds" would be used to buy stocks in say abortion clinics. Or perhaps in pornography enterprises (Playboy is an attractive stock). Or any one of a number of socially "unpopular" funds. This is the same administration that wants "social choice" exclusions for pharmacies.

This could cut the other way. In 10 years maybe oil companies will be in the pillory. What better way to punish them then to cut them from the list. After all, why would the common man want to subsidize the evil oil companies (think early 80's here)

One could also think of serious lobbying money from companies trying to make sure they are not on the "naughty" list.

Yes, I know people would say it would be a "blind index" but honestly I don't believe that a bit :-)


Musings from the CZ unitcz_unit on February 8th, 2005 01:11 am (UTC)
Another thought: If they put the "money" in the "market" then how will they be able to "borrow" against it to balance the budget?

Govt file cabinets may be a great place for shenannigans, but stock markets tend to take a dim view of things bought with other than good old real money. Buying with govt credit would result in lower yields as the govt "money" is not worth as much as "real" money.

-the redhead-theredhead on February 8th, 2005 04:56 am (UTC)
Someone shared some further information with me. Apparently the main plan being bandied about is that 4.5% of the FICA would go into an individual account. The remaining 8% would stay in the traditional Social Security plan.

That 4.5% could be privately invested in one of the 5 plans that the US Government currently gives Federal Employees, which are tied to index funds, which I guess do fairly well in the long term (8-12% growth per year?).

The 4.5% is the 'excess' - the amount the government has been 'raiding' to pay for other programs - in Social Security. Therefore no money would need to be borrowed for Social Security - it's just that other programs would have to be streamlined/cut in order to keep the budget in the same range.

I don't know if this is exactly what's being proposed.

-the redhead-
Musings from the CZ unitcz_unit on February 8th, 2005 02:31 pm (UTC)
Ok, that is a possibility, however the trick is all the "surplus" SS money is already being spent, and is used to make the defecit look smaller than it is. If you pull that out, then even under Clinton we were running defecits.

Pull some of that money to private accounts, and the defecit jumps a good bit. Well, not jumps per se just more noticeable.

-the redhead-theredhead on February 8th, 2005 08:01 pm (UTC)
Yup. As I said Therefore no money would need to be borrowed for Social Security - it's just that other programs would have to be streamlined/cut in order to keep the budget in the same range.

It's a problem.

-the redhead-
-the redhead-theredhead on February 8th, 2005 05:07 am (UTC)
Another thought about the whole private account thing - Too often loan or government subsidies do not stack - meaning if the government feels you should $1000 a month and your personal account gives you $500 a month, they will match the remaining $500 dollars from the social security fund. But if your personal account gives you $1000 a month, then you will not get any from the social security funds and would have been better off investing it in a real personal account that is actually yours.


-the redhead-