February 7th, 2005

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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.

Now:

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?

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-the redhead-
spinning

We all have bad spinning days

For the first time in years I had to go to see my spinning mentor to have my spinning 'diagnosed'. I've been trying to do some worsted 3-ply with a fleece (The Fleece, as it's come to be known) I've combed, and my sampling turned out badly.

I did get a very nice compliment from Maggie tho. She said 'Yes, for you this *is* hideous'. So I'm going to try forward drawing for worsted. Anyone have any good tips for worsted with a strong fleece?

-the redhead-