A Social Security Question

[JSojourner]

Since, like Senator McCain, "economics are not my strong suit"...I will ask you guys. 

If The Decider had succeeded in privatizing Social Security -- at least partly -- can you describe what condition it would be in at this time, as we teeter on the brink of economic collapse?  I'm thinking -- all that SS money invested in the markets...

But I could be missing something major.

[opebo]

Precisely JSojourner.  We should think of Social Security as a transfer payment, not an 'investment'.  'Investment' is an illusion for the working class - they can only attain some semblance of security through political power.

[NDN]

Probably not that bad. The amount Bush was suggesting allowing workers to invest in stocks, bonds, etc. was only 4% -- and only for people under 55. Most people would not be feeling that. The main problem with Bush's plan was really the transfer costs, which some people estimated around $2 trillion. Although that amount was to be spread over several decades, it's still hard to sell lowering benefits and borrowing money to do so to the public.. Even if liabilities are actually pretty high and the potential returns of private accounts are greater.

[Smid]

Your question supposes roughly the Australian state of affairs. We have compulsory superannuation (see my point in the other superannuation thread). There are real people hurting right now in Australia, because the money for their retirement that had been invested on their behalf has devalued because of the falls in the market. That said, it's possible that the increased funds in the market may have provided greater stability, although that's not a definite. I know that my superannuation has gone done by a grand or so over the past six months. I think I'm averaging a -10% growth or thereabouts on my super over that time.

[J. J.]

Since, like Senator McCain, "economics are not my strong suit"...I will ask you guys. 

If The Decider had succeeded in privatizing Social Security -- at least partly -- can you describe what condition it would be in at this time, as we teeter on the brink of economic collapse?  I'm thinking -- all that SS money invested in the markets...

But I could be missing something major.

It would depend on the percentage and what, if any, guarantees there were (a floor), the start time, and the type of investment permitted.

Keep in ming that right now, the value of my retirement fund would be much lower than in 2007, but much higher than 1997.

[The Duke]

Let's find out how an average person would be doing by looking at some numbers.

The oldest you could be and still get a private account under Bush's plan is 55.  So let's use a hypothetical person who is 55, since that will let us see the worst case scenario (A 25 year old has plenty of time to make up any losses from the past two weeks whereas a 55 year old has less time until retirement).

Let us assume that this person earns a very average $45,000 per year (Which makes his FICA tax liability $5,580, of which he can put $1,800 in his personal account.).  Let us say that his income does not change during this time and he puts the maximum allowable amount in his personal account every year.  To make the math easy, I will assume Hypo Man invest his yearly earnings in his personal account at the end of each year even though the real accounts would have had him invest the money each month when he pays his FICA taxes.

And let us also assume that his private account tracks the DOW average exactly.  Essentially, we have put Hypo Man in a DOW index fund.

We will call this fictional private account holder Hypo Man.

Hypo Man puts his $1,800 in the private account in 2005.  The DOW closed 2005 at 10,717.  Let us say that Hypo Man's private account is worth $1,800 at this time at the close of 2005 when the DOW is at 10,717.

The DOW rose to 12,463 (Up about 16%) in 2006 so Hypo Man's original investment grows to $2,091.  To this he adds another $1,800 at years end, giving Hypo Man $3,891 total.

The DOW rose to 13,264 (Up about 6%) in 2007.  So Hypo Man's private account grows in 2007 to $4,140.  To this he adds another $1,800 at year end, goving Hypo Man $5,940 total.

The DOW fell to 10,854 today.  This was a bad year for Hypo Man.  He had invested a total of $5,400 in his private account and he now has $4,856.  Hypo Man is down a total of $544 since he started his private account.

So I've outlined a simplified version of the worst case scenario: Someone who was the maximum age to get a private account has invested the maximum amount allowed and been hit with a stock market crash.  And you know what?  He is really not in that bad a shape.  He still has $4,856 out of his initial investment of $5,400.  This means he still has almost 90% of the money he initially invested.  He also is 58 years old in 2008, meaning he has 7 years to recover what he has lost when the market rebounds.

Is this really the seniors-eating-dogfood world opponents of private accounts warned us of?  I'm sorry, but this scenario just doesn't scare me that much.