Gingrich's Social Security plan is insane.

[Wonkish1]

Ugh, sick of this "Social Security is in imminent danger!" crap.

Well the liabilities are growing to fast. You can choose to ignore reality on that front, but then expect the "I told you so moment" down the road.

[Torie]

OK, you are the expert. I get it Wonkish1. I give up.

You might however want to recheck the implicit social security return thing.

By the way, did you ever hear of "Dunn's Law?"  

Dunn's Law has nothing to do with what we're talking about.

Private analysis has the rates of returns lower than ones listed in your link. I think that comes from the fact that a private analysis is going to utilize the cost of buying a COLA adjusted annuity at the date of distribution for example.

Was the "private analysis" your own perhaps? 

Playing with annuities just reduces the time period where there is exposure to equity risk (and actuarial risk). 

The idea here is to get folks to pay taxes in exchange for getting a guaranteed old age pension, when they retire essentially broke, as most do, immune from creditors prior to payout. I commend KISS to you here. Really.

[Wonkish1]

OK, you are the expert. I get it Wonkish1. I give up.

You might however want to recheck the implicit social security return thing.

By the way, did you ever hear of "Dunn's Law?"  

Dunn's Law has nothing to do with what we're talking about.

Private analysis has the rates of returns lower than ones listed in your link. I think that comes from the fact that a private analysis is going to utilize the cost of buying a COLA adjusted annuity at the date of distribution for example.

Was the "private analysis" your own perhaps? 

Playing with annuities just reduces the time period where there is exposure to equity risk (and actuarial risk). 

The idea here is to get folks to pay taxes in exchange for getting a guaranteed old age pension, when they retire essentially broke, as most do, immune from creditors prior to payout. I commend KISS to you here. Really.

No!

You're all over the place. You keep harping on equity risk. I've said on here that I'm perfectly fine limiting equity exposure. And a COLA adjusted annuity is the closest private market equivalent to the distribution phase of social security hence why I mentioned it since its quantifiable in price.

You accomplish the same exact thing with a defined contribution system that doesn't add substantial risk onto the public balance sheet and out performs the current system. With a guarantee added in you can guarantee that the defined contribution system will at least tie the current benefits while not taking on substantially less liability.

[Torie]

If you limit equity exposure, your expected return goes down. The inflation adjusted expected return for bonds is close to zero at present, and about 4% for equities, prior to fees and expenses and so forth. Your proposal is the government in essence has a defined contribution plan with no upside potential (since the beneficiaries get that), but all of the downside, and the beneficiaries get a defined benefit plan (via the guarantee) with upside potential.

Or, the game is to keep the benefits up without raising taxes, but just assuming higher rates of return waiving the equity wand. As I said, that is a risky scheme for somebody.

Right now, the government actually does "invest" the trust fund in bonds, all via ledger entries of course. All gain, no pain folks are just desperate to make it all go away with higher expected returns, which you get with some degree of equity exposure.  You haven't mentioned in our conversation just what percentage of all of this goes into equities by the way. But whatever the percentage, it just either mitigates or exacerbates the problem as it goes down or up, but the problem remains.

[Wonkish1]

Think about it Torie. What outpaces the other? Capital asset growth as a broad group or wage inflation which is what SS is based on?

[Wonkish1]

If you limit equity exposure, your expected return goes down. The inflation adjusted expected return for bonds is close to zero at present, and about 4% for equities, prior to fees and expenses and so forth. Your proposal is the government in essence has a defined contribution plan with no upside potential (since the beneficiaries get that), but all of the downside, and the beneficiaries get a defined benefit plan (via the guarantee) with upside potential.

Or, the game is to keep the benefits up without raising taxes, but just assuming higher rates of return waiving the equity wand. As I said, that is a risky scheme for somebody.

Right now, the government actually does "invest" the trust fund in bonds, all via ledger entries of course. All gain, no pain folks are just desperate to make it all go away with higher expected returns, which you get with some degree of equity exposure.  You haven't mentioned in our conversation just what percentage of all of this goes into equities by the way. But whatever the percentage, it just either mitigates or exacerbates the problem as it goes down or up, but the problem remains.

Allow a few different choices. Lets say you limited equity exposure to 50%. Of course returns go down when you limit equity exposure, but it lowers volatility as well.

Again the analysis I've seen is that to age 65 the rate of return is fast approaching 1% non inflation adjusted. This isn't a defined benefit plan. There is a key difference.

Since its not a defined benefit plan(I'm starting wonder if you get the distinction) there is no discount rate to artificially increase.

The trust fund does hold intragovernmental treasuries, but markets budget analysts don't treat that is debt anyway because its something the government owes the government.

Its not limited to only doing equity exposure as I've said before. The returns on SS are based on wage inflation not the performance of any underlying asset class.

[Torie]

Think about it Torie. What outpaces the other? Capital asset growth as a broad group or wage inflation which is what SS is based on?

It varies over time. But as an expectation, equities have a higher expected increase due to the risk. Risk is a cost. It is not free. And the idea that equity risk just goes away with a long time horizon, is fundamentally flawed, which is an underlying premise of much of this. Risk management has always fascinated me since I was knee high from a grasshopper. I find it the single most interesting issue in finance. It is also arguably the most important.

Oh, if an investor gets a guaranteed minimum return, which will then buy an annuity someday, then up to the amount of the guarantee, that is a defined benefit plan functionally.

Did it ever occur to you that many whom you think are terminally stupid around here, might be just a tad more on the ball than you assume?

[Wonkish1]

Think about it Torie. What outpaces the other? Capital asset growth as a broad group or wage inflation which is what SS is based on?

It varies over time. But as an expectation, equities have a higher expected increase due to the risk. Risk is a cost. It is not free. And the idea that equity risk just goes away with a long time horizon, is fundamentally flawed, which is an underlying premise of much of this. Risk management has always fascinated me since I was knee high from a grasshopper. I find it the single most interesting issue in finance. It is also arguably the most important.

Oh, if an investor gets a guaranteed minimum return, which will then buy an annuity someday, then up to the amount of the guarantee, that is a defined benefit plan functionally.

Did it ever occur to you that many whom you think are terminally stupid around here, might be just a tad more on the ball than you assume?

Again equities are not the only asset in the capital markets. You seem to act like it is. So then all of your following comments in that paragraph are irrelevant.

No its not functionally a defined benefit plan. Its self directed(even if its limited), its segregated, its not actuarily funded, etc.

I don't think your terminally stupid. There are a couple on this site that push the envelope though.

[Torie]

You must be logged in to read this quote.

Sigh. We aren't making much progress are we? 

For some reason, very few of your discussions with others reach "closure." By closure, I mean, you sort out matters to the point where you figure out just what assumptions,  values, and/or aesthetic preferences generate the disagreements, so that one can then agree to disagree and shake hands, or sometimes, one finds that once the hazarai is sorted out, there is some agreement.

Did you ever wonder why that is? 

[Wonkish1]

You must be logged in to read this quote.

Sigh. We aren't making much progress are we?  

For some reason, very few of your discussions with others reach "closure." By closure, I mean, you sort out matters to the point where you figure out just what assumptions,  values, and/or aesthetic preferences generate the disagreements, so that one can then agree to disagree and shake hands, or sometimes, one finds that once the hazarai is sorted out, there is some agreement.

Did you ever wonder why that is?  

Seeing that you are the first person on here that has ever been willing to look at what differences exist in assumptions I would probably say the desire of others to not want to go there.

I'm not agreeing to your assumption that the only way to increase your performance off of the rates of returns with social security is through equity exposure. You act like I have to!


Side note: since tomorrow's Thanksgiving I need to get some work done here. I'll be back in a few hours to continue this then.

[Bacon King]

At least Gingrich makes more sense supporting this than Cain did, considering he wanted to allow workers the opportunity to privately invest a tax that 9-9-9 would have abolished completely.

[Wonkish1]

At least Gingrich makes more sense supporting this than Cain did, considering he wanted to allow workers the opportunity to privately invest a tax that 9-9-9 would have abolished completely.

I'll definitely give you that. I picked that up the first time Cain mentioned private accounts after coming out with his 9-9-9 plan. It left me scratching my head a bit.

[Badger]

OK, you are the expert. I get it Wonkish1. I give up.

You might however want to recheck the implicit social security return thing.

By the way, did you ever hear of "Dunn's Law?"  

That author wouldn't be you, would it Torie? Or simply a coincidental namesake?

[izixs]

The primary goal of social security is to provide guaranteed income to senior citizens and the other wise disabled, people who are very unlikely to be working, so that we don't have people starving in the streets or stuck in poor houses being fed gruel. People don't deserve that. So I'll give Newt credit for at least recognizing that as a fundamental premiss of the program.

As social security exists today, all of its money hangs out in a fund separate from the rest of the government. As such, spending and tax issues that don't involve changes in social security or payroll taxes have no effect on social security. None. So any notion of cutting elsewhere in the budget makes no sense when talking about social security, neither is raising or lowering income taxes, capital gains taxes, tariffs, or anything other than the payroll tax.

However, the rest of the government does borrow money from the social security fund as has been mentioned through the social security fund purchasing treasury bonds and the like. This lets the rest of the government borrow at very low interest thus saving it money in the long run by not upping the payments needed for interest on the national debt. Hurray, lowering the deficit.

To change social security to a more for profit/privatized system would fundamentally change this relationship. Yes, you might be able to get a higher rate of return having your 'share' of social security invested elsewhere, but at the same time, the non-social security budget might have to borrow from those not willing to grant as low interest rates (or if you're feeling nationalistic, having to borrow more from China, ooh scary). The higher interest rates is a likely result as the social security fund is now much less likely to buy treasury bonds and the like as they give crap returns, thus decreasing the demand for them. This decreased demand is likely to yield an upping of the interest rates on this bonds, which means higher payments for the rest of the federal government. So more deficits.

Then... if you also are providing a means for subsidizing personal risk taking, a sort of TARP for old folks, that money has to come from somewhere. So you either have to break the barrier between social security and the rest of the government (fun mess that will be) which would also break the barrier between these private investments and the federal budget (could possibly make it easier for folks to cut social security in total as its now a budget related item), or you require a certain portion of each personal social security holding to be set aside as investment insurance of some sort. Yes, there are securities and things that are low risk and good return, but not everyone, if given the chance, will go for them. There will be a number of folks who will put this money towards very risky adventures. Inevitably a number of them will fail, with more of them failing when the economy gets rocky. So suddenly, when everything is going crazy in terms of the economy, the government suddenly has to manage minimal payments for folks who took big risks. That money either has to come from other social security holder's 'insurance fund' (or some other similar voodoo) or it has to be budgeted. If the setup is the second choice and the political will to spend is weak (like it is now), you'll have a collapse of the social security system as minimal payments are not made. If the insurance fund kicks in, you'll have lots of people upset as part of their now private investments are going towards paying off people who invested poorly. Either eventuality is terrible and should be avoided. The same goes for a system without a guaranteed income as you might as well not have social security in the first place without it. Which means elderly people starving in the streets. Also unacceptable.

And for means testing of the wealthy in all this mess... when you can start saying some group X doesn't deserve social security, you let politicians create the definition for what X is, which could be pretty much anyone they don't like that week. This becomes very important if congress has to authorize social security bailout funds. I think I'll pass.

There is only one sane way to 'fix' social security (though it won't need it for quite some time), and that's making changes to the payroll tax. The easiest of which is to move it from being a regressive tax and make it an actual flat tax. Republicans love flat taxes, so why do they not like this one? I don't understand... oh wait, I think I do. :-p

[Torie]

OK, you are the expert. I get it Wonkish1. I give up.

You might however want to recheck the implicit social security return thing.

By the way, did you ever hear of "Dunn's Law?"  

That author wouldn't be you, would it Torie? Or simply a coincidental namesake?

I'm afraid it's moi of course.

[Badger]

Impressive!

But you really should listen to Wonkish more closely. Trust me. He's in finance; he really knows what he's talking about!