by Deb Cupples | I'm getting nervous and hoping that I have no cause. The New York Times tells us that President-elect Barack Obama is considering some sort of changes for Social Security and Medicare, though he isn't yet giving details about what he has in mind:
"Speaking at a news conference in Washington, he provided no details of his approach to rein in Social Security and Medicare, which are projected to consume a growing share of government spending as the baby boom generation ages into retirement over the next two decades. But he said he would have more to say about the issue when he unveiled a budget next month."
Social Security is not bankrupt and doesn't have to become bankrupt. The Social Security Trustees' 2008 report indicates that payouts will likely start exceeding revenues in 2017 and that the Social Security trust's funds will dry up in 2042 -- IF (big "if") we keep the program exactly as it is now.
Fact: things could be done differently. For example, as of 2009, people pay social-security tax only on the first $106,800 of their earnings. Thus, someone who makes $500,000 a year, is paying the same to social security as someone making $106,800 a year. If higher earners were required to pay the tax on more of their salary, we could probably prevent the trust's funds from drying up in the 2040s.
Other people have come up with other possible solutions: even the Social Security Trustees (see report).
Incidentally, Nobel Prize Winning economist Paul Krugman has some interesting insights into the so-called Social Security crisis.
Back to the New York Times article: I hope that President-elect Obama isn't thinking about the P-word. Wall Streeters certainly would love to have billions more dollars flooding the stock market, which would likely happen if Social Security were privatized.
That's what President Bush had attempted to do, but the public wouldn't have it. And thank God the public wouldn't have it -- given what we've learned about the incompetence (perhaps malfeasance) of so many folks running public companies, banking firms, brokerage houses....
Then there's the enormous cost of setting up and running a privatized system. Why would it cost so much? Because brokers and fund managers and bureaucrats would get fees or commissions.
Every dollar that flows into the pocket of a broker, fund manager, or bureaucrat is one less dollar for retirees.
Back in February 2005, when President Bush was pushing to privatize Social Security, the Washington Post reported:
"Bush says the accounts would cost about $754 billion over the next 10 years. This might be true, but only because it is based on the program starting in 2009 and being fully implemented in 2011. The costs skyrocket when the new accounts are open to all. Senate Minority Leader Harry M. Reid (D-Nev.) says that it will cost $4.9 trillion over a 20-year period, starting in 2009.
"Vice President Cheney recently said the accounts would cost 'trillions of dollars,' which is probably the most honest, if vague, estimate, budget experts said."
Even if it wouldn't cost a ton to set up and run, a privatized system would be incredibly risky -- kind of like giving millions of Americans their retirement funds and sending them to a Las Vegas casino.
We've repeatedly seen just how risky the stock market can be: during the tech-stock bubble of the 90s; during the new millennium's wave of corporate scandals (e.g., Enron, WorldCom, Adelphia); and right now - as we taxpayers are sending more than $1 trillion to executives who helped drive their companies into a ditch.
No, the let-them-take-responsibility-for-their-investments argument doesn't hold water. Why? Because if millions of Americans lost their retirement funds in the stock market, we would have three options: 1) let them live on the streets, 2) kill them, or 3) subsidize them.
America is far too humane a nation to pick option 1 or 2. Thus, in the end, we taxpayers would end up shouldering the responsibility for people who lost their retirement funds in the stock market under a privatized Social Security system.
Memeorandum has commentary.
Other Buck Naked Politics Posts:
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* Execs Made Millions While Driving Companies into Ditch
* Someone Please Take the Economy Away from Mr. Paulson
* Are Bailout Funds Being Misused?
* Lehman Execs Redistribute Shareholder Wealth (to Themselves)
* AIG Execs Redistribute Shareholder Wealth (to Themselves)
* Cleaning up Political and Corporate Culture Could Help Economy
* High Cost of Private Contractors
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"The Social Security Trustees' 2008 report indicates that payouts will likely start exceeding revenues in 2017 and that the Social Security trust's funds will dry up in 2042"
Question: If a corporation issues itself its own bond, is it an asset?
Follow-on question: If the federal government issues itself its own bond, is it an asset?
Bonus question: If you answered these two questions differently, why?
"If higher earners were required to pay the tax on more of their salary, we could probably prevent the trust's funds from drying up in the 2040s."
I think you could come close but ONLY if you didn't pay higher benefits to those who would then be paying higher taxes. That's been the entire premise of Social Security all along. That's why it's called the contribution AND benefit base.
"Then there's the enormous cost of setting up and running a privatized system. Why would it cost so much? Because brokers and fund managers and bureaucrats would get fees or commissions."
Why? Why couldn't I just take my FICA dollars over to Vanguard and dump it in their S&P 500 index fund? Their expense ratio is a mere 0.18%. Social Security's overhead is almost 7 times higher.
"Every dollar that flows into the pocket of a broker, fund manager, or bureaucrat is one less dollar for retirees."
I would GLADLY pay Vanguard their 0.18% expense ratio if it meant that I had an excellent chance of earning the historic average 6% real return instead of the negative real return guaranteed by Social Security.
"We've repeatedly seen just how risky the stock market can be"
Only in the short term. In the long term, the stock market is a rock-solid investment. Even with the 40% loss in 2008, the S&P 500 has still yielded a 5% real return over the past 40 years.
"Thus, in the end, we taxpayers would end up shouldering the responsibility for people who lost their retirement funds in the stock market under a privatized Social Security system."
I would gladly pay for welfare FOR THOSE WHO NEED IT. But Social Security is not needs-based. Social Security takes money from workers and gives it to retirees, period. Roughly 12 minimum wage workers have to pool their Social Security taxes so that Warren Buffett can receive his Social Security check. You know, Warren Buffett, the richest man in the world?
In 2006, it only would have cost $195 billion to completely eliminate poverty in the United States. Instead, we spent $595 billion on Social Security and there were STILL 30 million Americans living in poverty. Yep, that's a GREAT government program. Let's have some more of that.
Posted by: Bill Woessner | January 08, 2009 at 12:33 PM
"The Social Security Trustees' 2008 report indicates that payouts will likely start exceeding revenues in 2017 and that the Social Security trust's funds will dry up in 2042"
Question: If a corporation issues itself its own bond, is it an asset?
Follow-on question: If the federal government issues itself its own bond, is it an asset?
Bonus question: If you answered these two questions differently, why?
"If higher earners were required to pay the tax on more of their salary, we could probably prevent the trust's funds from drying up in the 2040s."
I think you could come close but ONLY if you didn't pay higher benefits to those who would then be paying higher taxes. That's been the entire premise of Social Security all along. That's why it's called the contribution AND benefit base.
"Then there's the enormous cost of setting up and running a privatized system. Why would it cost so much? Because brokers and fund managers and bureaucrats would get fees or commissions."
Why? Why couldn't I just take my FICA dollars over to Vanguard and dump it in their S&P 500 index fund? Their expense ratio is a mere 0.18%. Social Security's overhead is almost 7 times higher.
"Every dollar that flows into the pocket of a broker, fund manager, or bureaucrat is one less dollar for retirees."
I would GLADLY pay Vanguard their 0.18% expense ratio if it meant that I had an excellent chance of earning the historic average 6% real return instead of the negative real return guaranteed by Social Security.
"We've repeatedly seen just how risky the stock market can be"
Only in the short term. In the long term, the stock market is a rock-solid investment. Even with the 40% loss in 2008, the S&P 500 has still yielded a 5% real return over the past 40 years.
"Thus, in the end, we taxpayers would end up shouldering the responsibility for people who lost their retirement funds in the stock market under a privatized Social Security system."
I would gladly pay for welfare FOR THOSE WHO NEED IT. But Social Security is not needs-based. Social Security takes money from workers and gives it to retirees, period. Roughly 12 minimum wage workers have to pool their Social Security taxes so that Warren Buffett can receive his Social Security check. You know, Warren Buffett, the richest man in the world?
In 2006, it only would have cost $195 billion to completely eliminate poverty in the United States. Instead, we spent $595 billion on Social Security and there were STILL 30 million Americans living in poverty. Yep, that's a GREAT government program. Let's have some more of that.
Posted by: Bill Woessner | January 08, 2009 at 12:33 PM
Hey Bill W,
So you'd be OK with the S&P 500 returns from 2006 to now (the period we'd be talking about if Bush HAD succeeded in privatizing Social Security then) if you were about to retire?
Especially if that was your entire pie of retirement money?
I guess you're quite self-reliant. Or would you be happy with being given welfare (if judged to be one of "THOSE WHO NEED IT") ...after a lifetime of work?
...Me, I'd rather count my blessings that we have at least dodged ONE Bush nightmare over these years...
Posted by: Bill | January 08, 2009 at 06:56 PM
"So you'd be OK with the S&P 500 returns from 2006 to now (the period we'd be talking about if Bush HAD succeeded in privatizing Social Security then) if you were about to retire?"
No, I wouldn't. And no, we're not talking about that period. Under Bush's proposal, no one born before 1950 would have been eligible to for privatization. Please get your facts straight.
Investing for retirement is, by definition, a long-term proposition. Citing short term fluctuations in the stock market as a reason why Social Security shouldn't be privatized is short-sighted and ignorant. Even with the recent downturn in the market, it has has beaten Social Security by a wide margin. That's not my belief - that's objective fact.
Posted by: Bill Woessner | January 08, 2009 at 07:58 PM
Well, Bill, thanks for “straightening out” my facts… except for several relevant points that you would seemingly rather gloss over. Frankly, it’s staggering that at this moment you would still like to fight about privatization. Still, since you insist on having it out, here’s where you managed to ignore some huge facts:
1) The only places we can really see the potential effects of the Bush plan in action today are, fortunately, abroad. Ask retirees in Italy what they think of privatization now, since Berlesconi was successful in accomplishing what Bush could not with their pensions. The Italians are now faced with figuring out how to somehow compensate the 1.2 million people who thought it wise to convert their retirement accounts to private plans that have now lost 50% of their value. So much for telling them it will all come out in the long term.
2) While the Bush plan might have, had it ever actually made it to a bill, kept to his initial promise to exempt people born before 1950, we’ll never really know. (The main point of the exemption for older Americans was not to protect them, but to de-motivate their opposition to privatization. Fortunately, it failed to do so.) The point would still refer accurately to someone born in 1950. That person, now 58 years old, would be screwed today. And quite near retirement age. No long term investment opportunity there either.
3) I was born after 1950 and my private retirement savings has recently taken a 40% loss, thanks to the deregulated geniuses on Wall St. Fortunately for me, even though I am less than 15 years from retirement age, with little hope of both recouping my private losses and making my retirement goals, I know that I will still have Social Security, which was always intended as a safety net, not as a replacement for all private retirement savings or pension plans.
4) Many people like me will, in the coming days, be raiding their private pension plans just to live through this year, since the deregulated geniuses on Wall St (to whom we’d be entrusting Social Security money to under private plans) made it possible to have both double-digit unemployment and a credit freeze. They will all still have Social Security to fall back on, thank God. No thanks to the privatizers.
5) Were the privatizers really concerned about the average person, they would be more likely to be generally discussing pension reform, rather than the privatization of the Social Security safety net. I don’t see that happening. The emphasis seems to be primarily on destroying the public nature of Social Security, rather than on finding better ways to assure Americans of a stable, ample pension in old age. If that were really the goal, why not merely add to Social Security with a small percentage of mandated additional pension savings open to individual choice, rather than focusing on taking away a system that has worked well for most of a century?
One could look at a plan like the Swedes have, in which a small part of retirement set-asides are invested according to individual choices. That plan provides for a greater percentage of wage earners’ salaries going into retirement savings and does provide some choice as well. It does not chip away at the basic part of the plan that is not up for individual choice—it only augments that.
Finally, Bill, there are lots of proposals and opportunities out there to add to Social Security and to adjust for long-term demographic changes under way in America. Most of the responsible ones don’t take apart the generally accepted safety net that FDR created and that all Americans are owners of.
Those of us who cite "fluctuations" (really, you call this meltdown a fluctuation?) in the stock market aren't "short sighted" or "ignorant." We merely note that the disaster now affecting all of us could have been much worse had we privatized Social Security. And I suppose that's as close as one gets in politics to "objective fact."
Posted by: Bill | January 17, 2009 at 03:02 PM
Do you really believe that if you invested 12.4% of your salary in the S&P 500 for 49 years that you wouldn't have an ample nest egg? Can you really say that with a straight face? In the face of all historical data, it's simply an absurd claim.
And why not ADD to Social Security? I can give you 2 great reasons: 1) Social Security is already taxing workers to the hilt. 2) Social Security is giving workers a horrible rate of return. According to the CBO's latest report on Social Security, a worker born in 2000 can only expect to get back 80% of what he pays in to Social Security. Assuming a 49-year career (remember, the full retirement age is now 67), that's a annualized real return of -0.95%. Forget the stock market, I'd rather put my money in CDs!
And yes, you are still short-sighted and ignorant. Remember Black Monday? Many people do. Some don't. Black Monday was 10/19/1987. The Dow Jones fell 22.6% that day. People were screaming that the sky was falling back then just like you are today. And yet, from 10/16/1987 to 1/16/2009 (measuring from a high to a low), the stock market has STILL returned 4.32% per year above inflation.
Not only are you short-sighted and ignorant, you and other Social Security worshippers like yourself are guilty of fear mongering. Despite all objective data to the contrary, you insist that your golden calf must be preserved at all costs. What's worse is that you do so at the expense of workers, the same people whom you claim to be protecting. It's simply disgusting.
Posted by: Bill Woessner | January 20, 2009 at 09:56 AM
Hi Bill Woessner,
‘No cause for insults or hostility: they don’t contribute to rational debate, anyway.
Yes, I do question whether I would have an ample nestegg, and my face is straight.
As you obviously know, the actual value of a retiree’s investment hinges to some extent on the actual health of a company at the time that the retiree has to start cashing out stocks.
For years, I’ve worried about the actual health of public companies (as opposed to the reported health) because there’s been so much questionable – even fraudulent -- reporting.
In early 2001, Enron was considered the 7th largest company in the U.S. (and a very healthy company). In December 2001, we learned that it was based on false reporting and fraudulent accounting.
I remember Jack Grubman and his set all too well.
Then there’s looting by executives, which is often coupled with questionable accounting and reporting: see e.g., Merrill Lynch in 2006 (and maybe 2005 and 2007).
Contributing to investors’ inaccurate valuation of public companies is inadequate regulation, due partly to under-funding of the SEC and sometimes due to intentional laxity on Congress's and/or an Administration's part.
I’d like to know what you mean when you say that the S&P 500 returned 4.32% per year above inflation and how you calculated that figure.
Even if the figure is accurate, what makes you think that it will hold for the next 50 years?
Incidentally, how many companies were on the S&P 500 a year ago (or even 3 years ago) but have since dropped off? How many of those companies would be failing right now if not for huge infusions of tax dollars?
What's the effect on an investor when a company gets dropped off the S&P 500? What's the effect on the index itself, in terms of calculating returns?
Even if the S&P 500 turned out to be completely reliable, what about ordinary folks who invest their SS dollars in individual companies or in funds that track something other than the S&P 500?
Given public companies’ penchant for "re-stating" earnings downward (and engaging in questionable accounting), ordinary investors cannot always rely on 10Ks for solid info on which to base investment decisions.
We cannot even rely on rating agencies to accurately rate investments.
As for social security’s “taxing workers to the hilt”: Congress can always change the tax structure so that people who can afford it are shouldering more of the burden.
Posted by: Deb | January 20, 2009 at 11:40 PM
"Yes, I do question whether I would have an ample nestegg, and my face is straight."
Even with all historical evidence to the contrary? I'm sorry, but that's simply irrational. There's nothing I can do for that except point out the facts. It's up to you to internalize them.
"I’d like to know what you mean when you say that the S&P 500 returned 4.32% per year above inflation and how you calculated that figure."
On 10/16/1987, Vanguard's S&P 500 index fund closed at 28.39. Adjusted for dividends, that's 16.6. Inflated to today's dollars, that's 31.04. On 1/16/2009, it closed at 78.30. That's a 152% gain over 21.25 years. So the real, annualized return is ln(2.52)/21.25 = 4.35%.
"Even if the figure is accurate, what makes you think that it will hold for the next 50 years?"
History. What else can we use to predict the future? Casting bones? Tea leaves? Talking heads? Past performance is no guarantee of future returns, but it's the best indicator we have.
"What's the effect on an investor when a company gets dropped off the S&P 500? What's the effect on the index itself, in terms of calculating returns?"
If an index fund is tracking the S&P 500 EXACTLY, it would sell all shares of that company and use the proceeds to buy shares of the company replacing it. In reality, few index funds track the index exactly (it's too expensive to do so). And any member of the S&P 500 in danger of being delisted would have such a small market cap (relatively speaking) that S&P 500 index funds probably hold very little or none of it.
"Even if the S&P 500 turned out to be completely reliable, what about ordinary folks who invest their SS dollars in individual companies or in funds that track something other than the S&P 500?"
If you make that CHOICE, then you have to live with the consequences. If you CHOOSE not to diversify your investments, you're actively ignoring the collected wisdom of the entire investment community. But I would never deny anyone the freedom to make that choice, even though I think it's stupid.
I'm not saying the S&P 500 is the end-all be-all of investing. I merely cite the S&P 500 because it's the broadest commonly-cited index and data for it is widely available.
Posted by: Bill Woessner | January 21, 2009 at 11:10 AM