Social Security debate 2006...

[Moooooo]

Washington Post:

The next six months could be a productive time for economic policy. After a wasted 2005-06 cycle, in which the Bush administration approached entitlement reform too confidently and Democrats refused to talk, both sides may return to the table. The administration, now led by a practical Treasury secretary with the heft to sideline ideologues, may be willing to make concessions. The Democrats, faced with the challenge of living up to their unexpectedly clear election victory, may decide it's time to make policy rather than just block it.

The most interesting debate will revolve around retirement. This will start with a rerun of the Social Security argument of 2005; but it could easily blossom into a discussion about the inequality and income volatility that's grown with globalization.

<snip>

A solvency fix will involve some cuts in future benefits. Democrats won't love this, but there are ways to do it progressively. During the 2005 debate, President Bush endorsed an idea that would inflict no cuts whatsoever on low-income workers and would allow the value of middle-class retirees' benefits to rise, albeit less quickly than now scheduled. Because this formula (devised by a Democrat named Robert Pozen) spreads the burden fairly, Democrats who worry about rising inequality should be open to it.

The solvency fix will also require increases in revenue. Again, during the last Social Security debate Bush left open the possibility of doing this in an extremely progressive way -- by lifting the cap on the payroll tax, which currently exempts income above $90,000. This reform would raise revenue exclusively from the richest 6 percent of taxpayers. It's hard to see how Democrats could object to that.

The next question is where to put the extra revenue: into the notional Social Security trust fund or into personal accounts. The administration will prefer private accounts, partly because it would like a face-saving link to the president's 2005 proposal but also because personal accounts provide a way of walling the revenue off from the general budget and so reduce the government's tendency to spend it. Meanwhile, Democrats will prefer to put the money into the trust fund. They reason that any personal account created as part of a reform that cuts Social Security benefits is headed the wrong way: toward replacing the security of the traditional guaranteed benefit with the uncertainty of 401(k)-type investments.

Judging from the hints flying around Washington, the administration sees how to bridge this divide. Democrats may be allergic to personal Social Security accounts, but they are enthusiastic about other ideas for personal retirement accounts that just don't have "Social Security" in the title. For example, Gene Sperling, a former Clinton adviser, has called for a "Universal 401(k)" that would extend the benefits of 401(k) saving to workers whose companies don't offer such accounts. In Sperling's vision, everyone would get the chance to contribute to an account and receive a government contribution as a match, with the most generous match going to low-income workers. To pay for this program, the government could prune the existing $150 billion patchwork of tax breaks for saving. This patchwork is extraordinarily, scandalously regressive: 90 percent of the tax breaks go to the richest 40 percent of taxpayers.

Sperling is motivated by a desire to help low-income people. As he writes in his book, "The Pro-Growth Progressive," 85 percent of workers in the bottom fifth of the labor force have no access to a company 401(k), nor do 75 percent of Hispanic workers or 60 percent of black workers. Globalization, which has boosted the volatility of family incomes, makes it especially important to help workers build assets that can cushion them against job loss, illness or the financial fallout from divorce. Although the Universal 401(k) would be primarily aimed at retirement security, there could be limited earlier withdrawals at times of misfortune.

So while Republicans have been pushing personal retirement accounts as part of an entitlement fix, Democrats have been pushing personal retirement accounts because they worry about worker insecurity. By enlarging the debate so that it's about savings in the era of globalization rather than just Social Security, negotiators can conjure up the common ground that was missing during the 2005 train wreck. Personal accounts need not be merely the alternative to the traditional Social Security benefit. They can simultaneously be the alternative to the nation's outrageously regressive system of tax breaks for saving and a way to help ordinary people build nest eggs. When personal accounts become both of these things, perhaps Republicans and Democrats alike will back them.

[David S]

 I have a problem with giving control of my retirement money to the same people who created an $8 trillion national debt and $60 trillion in unfunded future liabilities. Unfortunately during my working career there was no other option.  I would be strongly in favor of allowing people to invest their SS in personal accounts. The big hiccup though is that government has promised benefits to people in exchange for their SS tax, but government has spent all the money. All that's left is Treasury bonds which represent IOUs from government to the SS trust fund.

Right now SS takes in more than it spends, but rather than save the excess, government spends it on other things and puts a treasury bond (IOU) in the trust fund. In a few years when the boomers reach 62 the cash flow to SS will reverse and the fund will be spending more than it takes in. At that point government will lose that excess cash from SS and will also have to start paying off all those IOUs. So it will be a double hit to the general funds. Anyway government will need all of the SS tax it collects plus more just to pay off the existing retirees. There will be nothing left to put in individual accounts. This is the mess government has gotten us into. We would have been better off if they had simply put the excess SS revenue into an empty pickle jar and burried it in the backyard of the Whitehouse. At least then there would be something there.

[David S]

OK the last post was about the way SS works or maybe I should say doesn't work.

This post is about the way things could be. I'm going to use my own financials since I have all the data.

I retired in 2004 at age 55. Over the course of my career I paid about $90,000 into SS. My employer paid an equal amount into the system for a total of approximately $180,000. Let's assume that money had been put into a private account and allowed to grow tax free. We won't invest in stocks or anything fancy that might entail high risk. We will just put the money in FDIC insured 6 month CDs using the going rates that were available each year. Using that method the total amount in the account would have been about $350,000 by the time I retired.

Now you cannot collect SS at age 55 so for a fair comparison lets let the money continue to grow until age 62 when SS payments could commence. By today it would be worth about $380,000 because CD rates have been low for the last two years. But the rate is about 5% now, so lets let it grow at the rate from now until age 62. At that time it would be worth about $500,000. If I decided to start collecting then I could withdraw the 5% interest without touching the principle. That would be $25,000 per year forever without ever touching the $500,000! By comparison the Report I just got from SS tells me that at age 62 I will be elligible to receive $17676 per year in SS benefits. Hmmm lets see; with my own private account I get half a million bucks that pays $25 grand a year in interest, or I can have door number two and get $17676 per year and forget the half million bucks. Which one would you choose?

Let's consider some other comparisons too. If I kick the bucket my wife would only receive a portion of the $17676 in SS benefits. But with the private account she gets the whole thing -half a million bucks and $25,000 in interest every year. Also if we both kick off, our kids would inherit the half million, but with SS they get nothing. Finally with the private account no one else has to fund my retirement. Neither you, nor my kids, nor anyone in the next generation would have to pay high taxes to fund my
retirement. With the private account I would not have to depend on a bunch of fiscally irresponsible folks in DC for my retirement, and DC would be relieved of one huge debt.

I don't know exactly how the private account works out for every individual but lets say that everyone would end up with a very large chunk of change by the time they retire.

If anyone doubts my numbers, I have it all in a spreadsheet. If you send me your e-mail address I'll send it to you.

[Moooooo]

Intersting FDR quote from 1934...

"We must not allow this type of [social]insurance to become a dole through the mingling of insurance and relief. It is not charity. It must be financed by contributions, not taxes."

[○∙◄☻¥tπ[╪AV┼cVê└]

Intersting FDR quote from 1934...

"We must not allow this type of [social]insurance to become a dole through the mingling of insurance and relief. It is not charity. It must be financed by contributions, not taxes."

Yeah, FDR was a moderate for his first 2 years, until he got stabbed in the back by the conservatives, and he realized that being more liberal is more useful.

[True Federalist (진정한 연방 주의자)]

David, I love how you seemingly randomly choose the numbers that present your case in the best possible light.  First of all, whlie you've had the good luck of not needing to collect on Social Security's disability benefits, you're including the portion of what was paid in for them as part of your retirement benefits.  You need to either separate out that portion (difficult since it's lumped in with the OASDI) or compare it with a private annuity that would begin payment if you were to become disabled or if you reach returement age.  Secondly, you chose to start receving benefits at age 62, which reduces your benefits by 25%, compared to age 66 when you would get full benefits.  (Which would be better depends on how sick you are, but if you make it to age 80, you'd break even and life expectancy for a somone who's already reached 62 is well over age 80 these days.)  You're also neglecting the fact that Social Security benefits are automatically hedged against inflation, which your CD's are not.

I'll grant that a private program would still come out ahead of Social Security, if you had the discipline to invest the money instead of spending it, but the differences aren't as dramatic as you make them out to be given your consistent slanting of the numbers to make Social Security look worse than it is.  Until proponents of Social Security reform start using real comparisons instead of slanted ones that cause doubters to distrust their math, privatization will be a no go.  If anything they'll need to slant the numbers slightly in Social Security's favor and still be able to show that people would do better with their reform proposals if they expect them to fly politically.

[David S]

Ernest I have given you the numbers exactly as I have them. If you choose to retire  latter then the numbers work this way. According to SS if I start collecting at age 66 I'll get about $24,000 per. During the same time frame the private account will have grown to well over $600,000 and the amount you could collect in interest alone would be $30,000 per year at 5%. (I think the 5% figure is conservative since the average rate for Cds since 1964 is 6.6%.)  You would also have the $600,000 which you could draw on for emergencies. You could also annuitize the money either by buying an annuity or calculating the amount you could withdraw to exhaust the account by the time you pass on.  That would give you more per year but would exhaust the account eventually. You could also invest in stocks rather than Cds for a higher return. Although you might be better off if you diversify your holdings with stocks, bonds, FDIC insured CDs and possibly gold if you like that option.  In any event you have a very large sum of money which you do not have with SS.

You should also realize that SS is not adequately funded to meet future ogligations. So either taxes must go up or benefits go down or government will simply have to print money to cover the cost. That will cause inflation and reduce the purchasing power of whatever benefits you have.

The way government runs SS is akin to a Ponzi scheme and I'm sure you are aware that Ponzi went to jail for his "creative financing scheme."

Anyway if you have better numbers lets see them.

[True Federalist (진정한 연방 주의자)]

You're still neglecting that a porton of your OASDI contributions paid for disability insurance that you were fortunate enough to never use and you're still cherry-picking your numbers.  That average CD rate you quote includes a number of years with high inflation that would erode the value of your CD's, and are also probably for taxable interest as well.  You're also assuming that your CD's or other investments will never go in default, so apparently you're comfortable with the government backing your retirement as long as it does so with the FDIC instead of the OASDIF despite the fact that it's promises are just paper as well.  Oh, and let's not forget the risk of bankruptcy taking a large chunk of those savings you're planning on if you should ever run into that unfortunate condition.

To make it an honest comparison you have to account for the value of the risk assumption that Social Security provides.  Your numbers are not doing that and any numbers that do not do so are bogus.  You also make the mistake of assuming that the optimal choice for a single individual is to maximize expected value over all incomes.  Let me veer into hypotheticals to show what I mean.

Suppose I gave you at age 65 a choice between having a secure $200,000 at retirement or you can choose from one of three cases. Case 1 has $1, Case 2 has $200,000, and Case 3 has $1,000,000.  Now I ask you, is the fact that the expected value of choosing from the three cases is $200,000 higher than the sure thing worth the risk that you would end up with zilch for retirement?  Obviously different people have different risk tolerances, and one could fault the government for not allowing people to make that choice, but the fact is that the removal of risk (we can argue separately how much is a perceived rather than an actual removal) increases the value of Social Security when compared to riskier options if one looks only at the expected value as you are stubbornly doing.  If everyone felt the best choice was to do as you argue and always maximize expected value, irrespective of the degree of risk that you would end up with less than a desired minimum value, then Deal or No Deal would be the boringest game show ever devised (save for the ladies) as every contestant would refuse every deal.

Average expected value is not the measure people use, nor should it be the one they use when judging the worth of various retirement options.