Gingrich's Social Security plan is insane.

[Torie]

Of course it is insane, and Newt totally mischaracterized what happened in Chile. Talk about an unfunded government guarantee!  Newt will be owned on this issue, if he ever is truly taken seriously, and he is just quite yet.

[Torie]

Of course it is insane, and Newt totally mischaracterized what happened in Chile. Talk about an unfunded government guarantee!  Newt will be owned on this issue, if he ever is truly taken seriously, and he is just quite yet.

Your absolutely wrong on this front. Explain it to me in the context of Galvaston then. Then explain to me how Defined Benefit plans that are falling apart and being transferred to the PBGC have been a better alternative to Defined Contribution plans.

Lets assume the private accounts can only be invested conservatively. So lets say 4-5% assumption with little volatility. Social security currently earns between .5% and 2.5% annually(depending on dob, married vs. single, and a little bit based on income) and if your under the age of 40 it will be nearly impossible to get more than 1.5% going forward even among married couples. For most people under the age of 40 the rate of return will be less than 1% when they hit 65(and that doesn't include any reductions due to budget shortfalls).

Now if you are going to tell me that a guarantee to step up any shortfall of accounts to 1% a year that should average at least 4% and have many years of growth is a massive unfunded guarantee is a joke. The base of that guarantee is just too low. And that should just point out to you how bad our current Social Security system is at providing for retirement. It takes into much and pays out to little because the money isn't invested in anything its a pay-go system of which the only other thing in the US that is pay-go vehicle is a ponzi scheme.

The rates of return you cited for social security are real rates of return adjusted for inflation. What is the rate of return on long term inflated adjusted treasury bonds, TIPS?  It is about 1%. For 10 year TIPS it is at zero percent. If you invested in the stock market in 1966, your portfolio in purchasing power would be about the same in the late 1980's as I recall, a very long period with no real return, after huge loses in purchasing power in the interim.

And this is all from data over about an 85 year period, when the US became the dominant economy, and was a success. A lot of markets totally failed. The past may not be the future. You are extrapolating forward the track record of the guy who won the race as it were, and just because the race was won in the past, is no "guarantee" that that will obtain going forward. Also during that period the markets matured, and expected returns went down. The days of dividend yields of 5% are just so over. At the moment it is a tad under 2%.  So the real returns of equities can be expected to be considerably lower than has been the case over the past 85 years, which over that period was about a 6% annualized real return. Going forward, 4% might be more like it.  

On paper the social security accounts are invested in treasuries now, and it's insolvent. You could statistically calculate the implicit value of the government guarantee that you are going to hand out for free (e.g., running Monte Carlo simulations). It would amount to trillions of dollars.  And there are more than statistically insignificant odds, that the guarantee could turn the US into Greece.

You also have cross subsidy issues. The return is very low for high income workers, and considerably higher for lower paid ones, as you alluded.  So the odds that the guaranty would kick in for some are considerably higher than others.

Finally letting individuals invest if that is on the table is even more insane. The average investor after fees and expenses and trading and chasing performance, under-performs the market return by something like 3% per year. The folks who really make the money are the wire houses, from all of their fees and expenses. Most folks simply don't understand that for the equity portion of your portfolio you just buy the total stock market Vanguard index fund with an expense ratio of about 10 basis points (and maybe a similar fund for a slice for ex-US international stocks), and just forget it.

I hope this helps. Sadly, there is just no painless magic bullet out there. If entitlements are to be maintained, or expanded, they need to be paid for the old fashioned way, not by getting into the inflated expected returns business that has sunk so many state and local government defined benefit plans.

[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?"  

[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.

[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.

[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?

[Torie]

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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? 

[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.