November 08, 2004

The Simple Arithmetic of Social Security Privatization

The word is that the Bush administration will shortly propose the diversion of 2% of the taxable Social Security payroll to private Social Security accounts, leaving 10.4% of taxable payroll in revenues for the current Social Security system.

At the moment, under current law, Social Security benefits are projected to have a long-run cost of 14% of taxable payroll. 10.4% is three-quarters of 14%. If the remaining pieces of Social Security are to be self-financing in an expected-value sense, benefits must be cut by a quarter. Since benefits for the next generation or so are not going to be touched, that means that benefits for those of us half a generation or more from retirement--say, in their early 50s, or younger--must be cut by proportionately more: 40 percent or so.

In return, as compensation, those of us in our early 50s or younger will get our private Social Security accounts. Will this be a good deal? It could be, if:

  1. The large premium return on equities really is a market failure that private accounts can profit from, rather than merely compensation for risk.
  2. Private accounts are set up so that they are not eaten away by high administrative costs.
  3. Private accounts are set up so that they are not decimated by improperly balanced and diversified portfolios.
  4. Private accounts are set up so that they cannot be pledged or emptied by imprudent and impatient beneficiaries.

I can imagine private account plans that I would think are worth risking. I'm impressed enough by the large size of the equity premium to think that there are some $1,000 bills left on the table here that the Social Security system might as well try to sweep up. Propose a private accounts plan by which Social Security beneficiaries' private accounts are managed by the Treasury employee's Thrift Savings Plan, and according to which accounts cannot be tapped or pledged before retirement, and you could get me to sign on.

But what are the chances that the Bush administration will do this competently? Think of its economic policies: the farm bill... the steel tariff... the deficit... the recent corporate tax monstrosity. It's batting zero for four on economic policy. And economic policy is, as we all know, a relatively bright spot for the Bush administration: its batting average is even worse on foreign policy.

Isn't that track record sufficient reason to reject whatever the Bush administration will propose as likely to be a disaster in its implementation, no matter how good it sounds in advance?

Posted by DeLong at November 8, 2004 06:20 PM | TrackBack
Comments

past performance is no guarantee of future results.

nonetheless, yes.

Posted by: howard at November 8, 2004 07:06 PM

If Clinton had endorsed this precise formulation when he wasted a year dispatching his wife to wrestle with health care financing (reminder: she had zero experience in this field), Gore would be enjoying a second term today.

This will work only if it goes to a rigidly controlled index menu - per the Thrift Savings Plan -- or if individual taxpayers get shares in a Provident Fund invested as a unitary fund per the Singapore or Kuwait funds.

Posted by: john at November 8, 2004 08:09 PM

If Clinton had endorsed this precise formulation when he wasted a year dispatching his wife to wrestle with health care financing (reminder: she had zero experience in this field), Gore would be enjoying a second term today.

This will work only if it goes to a rigidly controlled index menu - per the Thrift Savings Plan -- or if individual taxpayers get shares in a Provident Fund invested as a unitary fund per the Singapore or Kuwait funds.

Posted by: john at November 8, 2004 08:11 PM

How does this compare to what President Clinton wanted to do? I know he and some others, like Larry Summers, wanted to do something like this.

And does anyone feel like doing this would be giving up more and more to right-wing economics? I want the best system possible for retirement, and if it can be made better by partial privatization, then let's explore the ways to do it. But as someone who would lean to the left a bit on matters of economics, it sort of feels weird to take a step that is one more in the direction of saying, "Yes, right-wingers, you were right all along." But then, can this be seen that way? (I know it's only tenuously related, but I thought that I'd throw it out there anyway.)

Posted by: Brian at November 8, 2004 08:11 PM

Does your calculation of the shortfall assume that the money paid into the so-called Social Security Trust Fund has disappeared? My understanding is that approximately half of the money that I paid into SS for the last 15 [?] years was an overpayment to make up for the coming shortfall. Can I sue if someone stole it?

Posted by: SusanJ at November 8, 2004 08:13 PM

John,

Interestingly enough, I had thought that if Kerry were elected and couldn't get his health care plan through, he could bargain with congressional Republicans and exchange some form of privatization for his health care program. It would have taken way two big problems, or at the very least, reduced them in a considerable way.

But oh well.

Posted by: Brian at November 8, 2004 08:20 PM

Yes, it assumes that the current Trust Fund balance is devoted to paying future Social Security benefits...

Posted by: Brad DeLong at November 8, 2004 08:22 PM

Right-wing economics? It always seemed to me that massive investments of public funds in the private equity markets resembled nothing so much as the people taking ownership of the means of production.

Posted by: trostky at November 8, 2004 08:33 PM

You're leaving out a few things from your assessment: the Social Security program is more than a retirement program. It also provides disability insurance with (if the WE-wage earner has paid in sufficiently) benefits to dependents as well. A wage earner must be "fully and currently insured" at the time he/she becomes disabled. A disabled adult child (became disabled prior to the age of 22) may be entitled to receive benefits based upon the wage earner's record of a parent (see below). The dependents of a deceased wage earner may receive survivor's benefits--dependents can include a spouse, children (including children born after the death of the wage-earner--how long after depends on state law), even grandparents (if they are taking care of a deceased WE's child). An unmarried disabled adult child (who becomes disabled prior to age 22) may receive benefits on the record of a wage earner who is deceased or disabled or receiving retirement benefits. Thus, if you are going to talk about the possibility that any "private" plan is going to be equivalent to the current program, you would have to propose a plan that provides similar benefits to the those now provided by Social Security.

How many people currently have an equivalent disability insurance policy through his/her employer or can afford to purchase a "private one"? How much are the premiums? Will any private plan be Guaranteed to produce enough income to purchase an equivalent disability insurance policy? In addition, premiums for disability policies are sure to go up if Social Security is 'privatized' at all--since most of the ones I've seen require people receiving benefits to apply for Social Security disability benefits and pursue benefits up to at least the hearing level AND if SS disability benefits are awarded, to repay benefits paid from SS retroactive benefits. If you want a policy w/out those provisions, you pay considerably more (that's if you're buying a private policy, if you got a policy through an employer, you might not have that option). Some of the standardized policies pay a pretty low benefit, some do not compensate for some conditions (some exclude disability resulting from a mental disorder)and some only pay out for 3-4 years. I paid for a private policy for 3-4 years (I'm self-employed),
no health problems, policy was cancelled out of the blue, no reason given. Unless Congress changes the Social Security statutes (as Bush wants Congress to do) that can't happen with Social Security. If you are "fully and currently insured" when you become disabled, you get the disability benefit for as long as you are disabled. Not to say it's a perfect program--as you can end up with almost nothing if you don't have a competent attorney and also happen to get a big WC award around the onset date (date of onset of disability).

It's important in the "privatizaion" debate to understand what's at issue or at stake--and to take all issues into consideration. It is NOT just retirement benefits. It's easy to see why the Bushies and their Congressional cronies/allies prefer not to discuss (or think about) ALL the benefit programs involved but I fail to see why anyone else would--so why are you, Professor DeLong, and so many other people?

Some years ago, Social Security predicted that more people would be filing for disability benefits--because the number of people who become disabled increases with age (the frequency starts increasing in the mid to late '40's) and the baby boom generation is getting older. Add to that an increasing number of people unable to find and keep jobs, plus a health care system that's better at keeping badly injured people alive (but not well or healed) and you've got more people filing for disability benefits. Those of the Iraqi vets who have managed to accumulate sufficient quarters of coverage (to be fully/currently insured) will probably file for disability benefits too (interesting to see who can take longest to award benefits, the VA or SSA).

It turns out that SSA's projection was correct, more people are filing for benefits. Quite a few people, because of the length of time it may take to get benefits (may take years), or because quite a few people do not want to be "disabled", may have very little left in the way of savings, real property, etc., by the time they are awarded benefits. Many owe relatives and friends money. Like the retirement benefit, the disability is not meant to replace one's working income. So the average disability benefit isn't very large. How good an idea is it to make that monthly benefit amount even smaller? And unlike money in a retirement account, the sum you've paid into Social Security isn't included in bankruptcy proceedings and Social Security benefits, up to a certain amount aren't subject to garnishment except for specific purposes (child support is one). Whereas 401(k)s, etc., are much easier to get at (by creditors, etc.). Can't imagine the Bushies defying their corporate handlers/puppetmasters to make any "private" account as protected.

Posted by: azurite at November 8, 2004 09:11 PM

Die at age 70 and make out OK.
Die at age 90 and lose big time.

Posted by: bakho at November 8, 2004 09:14 PM

Even if our social planner is a benevolent dictator, the potential benefits are small and the potential risks are large. Want to add a mandatory savings plan? Stick an extra 2% on top and do it that way. If 30 years from now all is going well, start dialing down guaranteed benefits slightly .

Posted by: Atrios at November 8, 2004 09:20 PM

I still don't see a better SS program proposed anywhere than the one we currently have. While not perfect, it is good.

Some questions (sorry if they are dumb ones):

Why not reform what exists?

Why haven't they raised the ceiling on FICA and pegged it to say something like congressional salaries? Why is it currently so low?

Who picks up the tab if something goes wrong with privatization? If the answer is the taxpayer, then why move to privatized accounts if taxpayers have to kick in more funds?

Posted by: Susie Dow at November 8, 2004 09:49 PM

Bakho,

Won't the government end up taking care of those who outlive their savings accounts anyway? I think it's more likely if you die young you come out far ahead (or at least your relatives do) and if you live long you do about the same. Why do I get the feeling this reform will end up being an expansion once you allow some people to win but nobody will tolerate losing.

Posted by: snsterling at November 8, 2004 10:03 PM

"I think it's more likely if you die young you come out far ahead ....."

I love economic calculus like this. ;) I have a Republican friend (I think) who wants to privatize all of SS and when I say what about your benefits, he says he doesn't plan on living
long enough anyway to collect, thus he's doing his part to make things cheaper for all of us.

I tell him he should die right now; hey, let's save as much money as we can.

Posted by: John Thullen at November 8, 2004 10:23 PM

Mightn't a wider-known rational expectation for the equity premium start to negate it?

Posted by: Lee A. at November 8, 2004 10:42 PM

The privatization of social security is worse than 401k plans, as a liberal 25 year old, I am astonished that the seasoned liberals on this list would consider this as a viable solution to a nonexistent problem.

Raise the payroll tax cap, and perhaps lower the rate on those that make less than 20k, and be done with it. Sometimes I think everyone is bought out by the FIRE industry.


Privatizing Social Security to Inflate Stock Market Prices

http://michael-hudson.com/speeches/0111PrivatizingSecurity.html
-----

Why were 401k plans bad? Two reasons, it increased the liquidity of the job market and it created the stock market bubble. Old money 2, labor 0.

And while we are at it, why is a human being taxed at a higher rate than money when it finds work.

Also, the double taxation of dividends of course was unfair. Individuals are taxed once and have full liability for the actions. Corporations, however due to their size and power, need to pay taxes once, have limited liability, and can write off all of their expensises needed to exist. The inefficent governmet will clean up the mess.

Yes, good point, the workers taking ownership of the means of production. However, this relationship that you speak of is a zero sum game at best, unless we can confiscate some of the shares from those who already own them. That is if you believe in the free market.

Posted by: Jerome at November 8, 2004 10:47 PM

Point 2) is the real sticking point. The numbers just don't add up. 2% of an average monthly salary would be, what, $80/month? I would work on a rule of thumb that long-term savings accounts of less than $7500 are not economically viable to administer with the savings industry as it is currently designed. The administrators would be losing money for the first seven years under this plan.

Posted by: dsquared at November 8, 2004 11:18 PM

Partial privatization would have been a good idea when the country was running over a $200 billion federal budget surplus back in the Clinton days. The 2004 federal deficit (about -$415b) includes the Social Security Trust Fund surplus over payments to current beneficiaries. Every dollar the government puts into private accounts reduces government tax revenue by a dollar and increases the deficit by the same amount.

Partial privatization may increase annual deficits by almost $200b. Unless there is a requirement that all the money saved in the new private accounts is used to purchase U.S. Treasuries, the federal government will need to increase borrowing from foreign lenders, leading to a higher likelihood of a dollar crash as Prof. DeLong has well documented in this forum.

As suggested in a previous posting, the only sensible way to finance is to raise the cap on payroll taxes well beyond the current $87,900 level. But this would result in a tax increase on upper-income Americans, so donít expect this complementary idea to be seriously considered.

The truth of the matter is that Wall Street is pushing hard for partial privatization. This will increase the purchase of stocks and management fees for brokerage-managed mutual funds. As soon as we see 2% privatization, the chorus will start for a 4% privatization.

To answer a previous posting, many years ago the Supreme Court ruled that individuals who pay into Social Security have no legal right to the money that they contributed.

Posted by: Jay at November 8, 2004 11:43 PM

Brad DeLong said, "Isn't that track record sufficient reason to reject whatever the Bush administration will propose as likely to be a disaster in its implementation, no matter how good it sounds in advance?"

What difference does it make whether we reject it or not? The election is over. Bush is the president and we have a solid republican house and senate.

I suppose if you have an academic reputation it might enhance your reputation in future years for you to predict the bad results now and be right. But it doesn't look like you can do anything to stop the process.

Posted by: J Thomas at November 9, 2004 12:48 AM

"The large premium return on equities really is a market failure that private accounts can profit from, rather than merely compensation for risk."

Do any of the economic pros have a take on Mandelbrot's analysis of this? I've recently read *The (Mis)behavior of Markets* his "popularization" of his arguments. Does anyone have a feeling for whether his arguments are valid?

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Posted by: shohreh at November 9, 2004 03:05 AM

Color me incredulous.

See, I think Brad is, shall we say, 'hedging his (career) bets' with his qualified endorsement of Social Securtity 'privatization' based on the notion that "the larege premium return on equities really is a market failure."

Surely, I said to myself, he MUST (in his 'heart of hearts', anyway) know that SOME of those 'foreign savings' he's been going on about recently--the ones he readily acknowledges have financed our large, chronic trade--

-----------------------

http://mwhodges.home.att.net/energy/trade_all.gif

-----------------------

--AND federal--

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http://www.kowaldesign.com/budget/

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--deficits over the past 25 years--have inflated their way into US EQUITIES market prices TOO.

-----------------------

http://money.cnn.com/popups/markets/djia_graph/djia.gif

-----------------------

And surely, I mused, being the politically savvy economist he is, he MUST know who CURRENTLY holds MOST of that CURRENTLY rather pricey paper:

-----------------------

Merrill-Lynch report: concentration of wealth at the top resumed upward spiral in 2003

http://www.wsws.org/articles/2004/jun2004/rich-j22.shtml

------------

The Wealth Divide: The Growing Gap in the United States Between the Rich and the Rest

http://multinationalmonitor.org/mm2003/03may/may03interviewswolff.html

-----------------------

And it would INDEED be a wonder if a smart guy like Brad never wondered how many of THOSE folk are, in THEIR 'hearts of hearts', likely to be (or care to hire) an honest to God Democrat. Wouldn't it?

So anyway, that's why I say, color me incredulous. And save the 'Social Security privitization' party for AFTER the crash.

Too.

Posted by: Mike at November 9, 2004 03:20 AM

Isn't it obvious and undeniable that if/when we get to the point that some of our 90-year-olds are broke, because we've privatized or partially privatized SS, public sympathy will demand that we return to SS payments by another name anyway?
And that money has to come from somewhere, so we're back to where we started. Except that in the meantime some fund managers will have made themselves slightly richer. I don't think "looting" is too strong a word for it.

Posted by: Merkin at November 9, 2004 04:31 AM

"Since benefits for the next generation or so are not going to be touched..."

There is one way to make both the next generation and even the present one provide some of the financing for this partial privatization conversion without actually reducing benefits. Raise the income tax on social security benefits for higher incomes from the present 85% to 100% of the benefits received.

For someone in the 25% income tax rate bracket and receiving $25,000 per year in social security benefits, the additional income tax would amount to about $937. Use these additional revenues to help finance the conversion.

Seems like one reasonable way to spread the pain to help get to a desirable end.

Posted by: Lawrence at November 9, 2004 04:46 AM

Following Josh Marshall's discussion of parliamentary forms of government,
http://www.talkingpointsmemo.com/archives/week_2004_10_31.php#003942
the Democrats need either to propose their own plan, or gain the support of the nation for another action. Mindless obstructionism is not an option. It would be good discipline to use this issue as a first shot at our new minority status.

Posted by: masaccio at November 9, 2004 06:12 AM

Even if the equity risk premium were zero, PARTIAL privatization might make public policy sense. Everyone's future well-being should be "at risk" with respect to the country's economic growth. If productivity growth remains robust and if we get our economic policies reasonably right, then we'll all be better off than we would be otherwise. If we mess up, we'll all be worse off than we might have been.

Under the current system future social security recipients are sheltered from this risk; real payments won't get lower. So the current system transfers the risk from future recipients to future taxpayers. Private accounts invested in equities would partially redress this inequity. The question is whether the benefit of putting future recipients at some risk is worth the transition cost.

If, as is likely, the first administration to enact such a reform gets it partially or mostly wrong, there'll be time to fix it when the pendulum swings the other way.

But I still wish Kerry had won.

P.S.: By the way, in this context it would be odd to invest any of the private account money in bonds since the bulk of the provision would remain in the social security trust fund, which is all bonds.

Posted by: Aaron Gurwitz at November 9, 2004 06:14 AM

I know I am sounding like a broken record, but I will continue to post in every Social Security thread ever put up until the idea of privatization is put to its well deserved mercy death.

There is no economic model out there that will yield historic returns on equities that doesn't fix Social Security as is. Startling but true. And if more people had done what I have done every year since 1997 we would not be having this discussion.

Read the 2004 Report of the Trustees of Social Security . Examine the principal economic assumptions in Table V.B1 (p.88). Then examine the results for the Trust Funds under each of the three alternatives in Figure IV.B3 (p.53). Duh-oh. 1.9% growth in productivity over the long run yields a Trust Fund ratio of 400% for OASI (retirement/survivors) and 1300% for DI (disability). That is if we can peg 2% productivity growth we can indeed grow out of this "crisis", and with a four year reserve to boot.

I have been waiting for someone to produce an economic model that would produce historic returns on equities based on sub 2% productivity growth. And perhaps a forum led by an Economics Professor from my Alma Mater (Bears #4 and counting) is the place to find someone to do that.

Privatization only makes sense, particular for lower end earners, if we can show the whole system actually needs a fix. Atrios touched on this with his 2% boost in payroll tax, which indeed is the fix needed under the Intermediate Cost alternative. But that assumes 1.6% productivity growth in the outyears. We can do better than that.

BTW the current forecasts were based on 2.7% growth in 2004 and 1.8% in 2005 (p.88). We have already blown away the first number, and anyone who suggests they can sell privatization in an economy that is putting 1.8% up on the board can buy my penny stocks. Absent some major tinkering with the numbers the exhaustion date will be shoved back from its current 2042 when the next report is released March 30. Because while liars figure, figures don't lie. If anyone actually looks at them.

Posted by: Bruce Webb at November 9, 2004 06:36 AM

Thoughts from a non-economist observer. During the GWB Admin, the stock mkt has pretty much marked time. So no doubt, it's 'poised for a big upward surge.'
Fortunately, most of us have short memories, & for the scenario to work according to the outline of 'If's' in the Professor' presentation, we would have to forget the last organized looting, the S&L collapse, which took Congress years to set up.(both sides of the aisle). I suspect the trip wire for this one was last yr (or 2?) when Congress abolished the barrier to permitting banks to enter the stock broker business, a barrier in place we are told since the mid-1930's.
Fortunately, altho my wife & I have each pd into the system half enough to be entitled, we have other resources, but it does seem a shame people who will get seriously harmed by what will happen, thought the important issues of the day were elsewhere on Nov. 2.

Posted by: Allen Thomas at November 9, 2004 06:42 AM

Susan Dow: the maximum is indexed; it goes up slightly every year. (Not certain--others will know--but I believe indexing was part of either the last GHWB or first Clinton tax bill, which also eliminated the cap on Medicare/Medicaid payments.)

While I remain unconvinced that the "equity premium" is real--a large portion of the "historic" number is presumed dividend reinvestment without considering tax consequences; if you add in the incremental risk and consider (read: adjust for) the regulatory effect on Treasuries in the pre-LBJ era, you end up with a number somewhat close to the historic fees--Lee A.'s point remains true: adding money without adding value means that the value of the money must decline. Add in a historically high P/E multiple (which Malkiel notes has never produced a premium for investors), and you would have to argue that a major, PERMANENT paradigm shift has occurred.

I don't see anyone--not even the Cato Institute--trying to make that argument.

Posted by: Ken Houghton at November 9, 2004 06:43 AM

I fear that the risk of this plan is being seriously underestimated, from both an individual and social point of view.

For the individual, it is deceptive to talk about the long-run returns without recognizing that the bulk of the risk is borne in a few later years, when funds have accumulated. A downturn when one is near retirement, and has a large account, can wipe out lots of years of good returns on smaller amounts.

For society, it is important that when the inevitable downturn occurs, it will hit hardest at the cohorts near retirement, and those recently retired, and will hit a very large proportion of those individuals.

Imagine the problems this will cause.

Posted by: Bernard Yomtov at November 9, 2004 06:44 AM

Some random thoughts, hope it is coherent;
If you look at the big picture for retiring I would think you would have to look at 401k/IRA as well. Currently, SS should be looked at as the defined benefit portion of an entire package. People should aggressively invest 401k/IRA in equities and know they have at least SS should 401k/IRA underpreform. As stated above SS also offers an insurance benefit.
-Privatization of SS reduces your defined benefit portion and thus one might need to rebalance 401k/IRA to less aggressive and purchase additional insurance. (is there a net positive difference?)
-Privitization also is gift to current holders of equities.
Seems to me that if all you do is SS your not going to be fairing very well with or without privitization. Is the added risk worth the added benefit at $80 a month? If that is all your saving you probabley have no business in the equity markets.
Will private SS accounts be a disincentive for younger workers to persue other forms of saving including 401k/IRA? I will tell you that as younger worker I neglected IRA becuase of 401k.
Who is this whole schemed designed to make feel better feel better?
Is it getting legs because young workers are afraid they'll never get any SS? So how does a partial privitization solve the alleged problems of the other 98% of your contributions? Shouldn't people be trying to refute the right wing canard that SS won't be there when young workers retire?
Man, I get more depressed every day as up continues to be called down.

Posted by: repoman at November 9, 2004 06:56 AM

Aaron,

I worry about any analysis that leans heavily on a "should," but please tell me why we want the public portion of our retirement plan to vary with the performance of the economy. Why should I want those most vulnerable to economic shocks to be more vulnerable? If there were some mechanism for collective decisions to forego wage increases today to boost productivity tomorrow or some such thing, I could see the argument, but then you need a benign philosoper economist of great skill to tell you how to get better results that the markets for labor, savings and consumption now do. Bernard's worry about the risks makes me worry. And why would we want a pro-cyclical government program that would rival counter-cyclical programs in size and impact?

Posted by: kharris at November 9, 2004 06:59 AM

I agree with Atrios that if we move in this direction, we should add 2% on top for private accounts. Then raise the F.I.C.A. cap.

Also, Adam Gurwitz, your reference to the social security trust fund being all bonds makes no difference any longer. Republican demagoguery has placed in at least 51% of the electorate's minds the image of little slips of paper called I.O.U.s scattered in musty vaults somewhere in Washington D.C. Just as Ronald Reagan's fairy tales about fat-black-cadillac-driving-welfare-mamas-stealing-millions was the beginning of the end for welfare.

I'm not sanguine. I use phrases like this to say politely that I'm fucking pissed off. If 2% is diverted to private accounts, expect the republican candidate in 2008 to run on 4% or 6%.
Look, he or she will demagogue, the trust fund is a fiction (see little slips of paper above) and, by the way, even liberals are complaining that 2% won't amount to a hill of beans, especially after all those awful fees are deducted which William Donaldson would have regulated, but whoops, we fired him. Larry Kudlow already has his script written for that show.

Social Security is dead. Yes, the program has various infirmities and aches and pains. But the Republican Party will treat the symptoms with an overdose of morphine. And while we're busy disbelievingly tapping the heart monitor for signs of life, the Republican Party will have already shown the next patient (Medicare) into the examining room for a routine palpation of its sore spots. Then you'll notice it too leaving feet first under a sheet with a tag on its toe.

No autopsy; straight to the landfill in the middle of the night.

Then we'll check our spreadsheets to see if the numbers predicted this. Nope. But you'll soon see the examining doctors have plenty of hot looking nurses on the staff and drive top of the line sedans and blow cigar smoke in your face when you politely inquire about the island getaway.

Posted by: John Thullen at November 9, 2004 07:04 AM

Rendered the HTML but didn't give a live link.
http://www.ssa.gov/OACT/pubs.html

Posted by: Bruce Webb at November 9, 2004 07:15 AM

Rendered the HTML but didn't give a live link.
http://www.ssa.gov/OACT/pubs.html

Posted by: Bruce Webb at November 9, 2004 07:16 AM

Paper, paper everywhere. And an ocean of red ink...

-----------------------------

The Wealth Divide: The Growing Gap in the United States Between the Rich and the Rest


"...The richest 10 percent of families own about 85 percent of all outstanding stocks. They own about 85 percent of all financial securities, 90 percent of all business assets. These financial assets and business equity are even more concentrated than total wealth."

http://multinationalmonitor.org/mm2003/03may/may03interviewswolff.html

-----------------------------

Merrill-Lynch report: concentration of wealth at the top resumed upward spiral in 2003

"...The number of people with over $1 million of financial assets increased last year to 7.7 million worldwide, an increase of 7.5 percent over 2002. According to a June 15 report issued jointly by Merrill Lynch, the worldís largest stock broker, and business consulting firm Capgemini Group, the total wealth of this elite group rose to US$28.8 trillion, an increase of 7.7 percent over 2002...

...The reportís authors pointed to a rising stock market in 2003, and the decision of the wealthy early on in the year to significantly increase their stock holdings. On average, high net worth individuals (HNWIs, as the report labels them) increased their investments in stocks to 35 percent of their holdings in 2003 from 20 percent in 2002. World stock indexes obliged them, with the Dow rising 22 percent and the NASDAQ 45 percent in the US, Germanyís DAX up 30 percent, and Japanís Nikkei up 25 percent..."


http://www.wsws.org/articles/2004/jun2004/rich-j22.shtml

-----------------------------

Posted by: Mike at November 9, 2004 07:20 AM

I would add that I've done some financial planning for friends and family and manage a little money in the stock market for a few.

Few, if any, are saving enough money in their 401K or I.R.A. as it is. And if you look at stats on investment choices most folks make in those accounts, you will see not nearly enough is invested in the stock market, which hurts long-term returns. That's before we even get to the argument over whether the stock market does in fact "do better" than Social Security.

This is all very interesting. But these discussions are decoys. The people who just won the election hate government (except as conduit for cash to their benefactors), hate taxes, and don't give a crap whether anyone in particular has a retirement of medical safety net, as long as they don't have to pay for it.

They are ideologues. Some of whom consign you to the flames of Hell in the afterlife if you're not born again. The others are happy to move the flames of Hell into this life because, heck, it looks like such fun .. why wait.

Posted by: John Thullen at November 9, 2004 07:27 AM

John,
I would concur with your idelogues comment. However, these discussions are not worthless. The more people that realize SS is not endangered and that idelogues have an agenda potentially in conflict with the SS stakeholders the better.

Posted by: repoman at November 9, 2004 07:36 AM

Humm.... I remember back in the 90s when the SS tax was raised to produce a surplus in the SS fund so that interest revenue could start accumulating to offset future expenses. Well we know what happened to that surplus, it was used to gap the US deficit. I don't trust privatization of SS. The real beneficiaries will be business. The first thing you will see is the employer's portion, 7.5% I think, of the tax slowly absolved. Business has been a big lobbyist for SS privatizations. Another thing, why invest in the stock market? There is already too much liquidity in the financial markets. Can't we put the private SS funds into highway, school or utility bonds? Our infrastructure is in need of much repair. We would enjoy both the present benefit of improved infrastructure and interest accumulation. Both generations would benefit. Probably less risky too

Posted by: Dennyr at November 9, 2004 07:53 AM

We might readily shift 2 or 4 or 10 percent of our payroll tax collections to a total stock market index, and hope and expect the equity premium will improve the return to Social Security over the years. We might even gradually allocate the stock returns to individual accounts over time. There is reason to invest the payroll tax surplus for another 30 years in stocks. But, there is no reason to develop a system that will swallow up investing gains in administrative costs. There is no reason to increase the size of the budget deficit at this time, or to cut Social Security benefit guarantees for those from 55 down and break the promise we have made them through their working years.

The Social Security system has been a wonder of a success since it began. Indexing Social Security to the cost of living was a dramatic gain. The system is not failing, and can thrive for generations with minor increases in revenue, but most Americans have been convinced the system is failing or will soon fail. We are about to seriously question whether the New Deal compact and the arise of middle class America ought to further continued.

Posted by: anne at November 9, 2004 08:09 AM

Meet Bill Bernstein, if you have not had the pleasure:

http://www.efficientfrontier.com/ef/102/index102.htm

A degree of SS privatization might be a good idea if:

either

1) U.S. stocks will return significantly more than fixed-income instruments over the long term--a questionable proposition at this time.

or

2) The investments of SS funds are global so as to represent all the world's economic growth and reduce the effect of individual market misvaluation on returns.

3) Administrative and asset management fees are appropriate to the scale of the funds invested--i.e. cheaper than any institution pays now.

4) Individuals have no control over their investments whatsoever. The drag on investor returns from poor decision-making is preposterously large, thanks in part to the miserable job our educational system does in teaching basic economic, financial, and investment knowledge, and mostly ends up somewhere on Wall Street's income statements.

W's people, I am quite sure, are great believers in the U.S. stock market, would scoff at the idea of investing American tax dollars in overseas equity markets, would favor "healthy competition" among asset managers rather than using the government's bargaining power to get better prices from a single big index shop, and trust (at least publicly--who knows what they are chuckling about in Karl Rove's conference room right now) in the ability of individuals to make their own investment decisions.

The red states would concur.

My advice for blue people under 55, if SS privatization happens: invest a significant portion of your income in emerging market stock and bonds + international small-cap stocks (and pound the table at your neighborhood ETF provider--Barclays, Vanguard--to get vehicles out there that enable you to do this) and assume that you will get no more than 50% of your parents' SS benefits when you retire.

For red people: man proposes, God disposes.

NM

Posted by: Nicholas Mycroft at November 9, 2004 08:14 AM

"Isn't that track record sufficient reason to reject whatever the Bush administration will propose as likely to be a disaster in its implementation, no matter how good it sounds in advance?"

No, Brad, it's not. You're sounding like an obscurantist. You know perfectly well that the ultimate form of the required legislation would be set by Congress, and that even with the newly rightward-shifted Congress a number of moderate Democratic votes would be required. Your automatic opposition thus smacks of a convenient abdication of responsibility and a sad excuse to score points by blocking what could be a useful improvement. Perhaps you should once again reflect on Keynes' attitude towards new data...

Posted by: Bernard Guerrero at November 9, 2004 08:29 AM

Kudos to Bruce Webb. The reality is that Social Security is a rationally financed social insurance program that provides protection of citizens and their dependents from the vagaries of fate...dieing too soon, living too long or becoming disabled. It is rationally financed because current receipts plus the present value of future taxes is roughly equal to very long term liabilities based on conservative assumptions about future market environments. It has worked amazingly well.

Indeed, based on a review of an upcoming study sponsored by the World Bank in the 9/25 edition of the Economist, the combination of Social Security with voluntary savings iniatives such as IRA's looks much like the preferred way to deal with this social issue. Mandatory savings get a very bad rap based on the experiment (which the World Bank "oversold" in the words of the Economist) in Latin America.

Brad's position seems uncomfortably like his position on the invasion of Iraq.

Posted by: Sam Taylor at November 9, 2004 08:45 AM

Bernard, the only new data that has come in is that the Bush administration has been rewarded for their last four years of corruption, lies and incompetancy. And that Congress is now more GOP-dominated than before.

Posted by: Barry at November 9, 2004 08:49 AM

Who's most vulnerable.

% of Population living in Poverty

Total 11.7
Under 18 16.3
18 - 24 16.3
25 - 34 11.0
35 - 44 8.6
45 - 54 7.1
55 - 59 8.7
60 - 64 10.3
65+ 10.1

Source: Statistical Abstract of the U.S., 2003

The stats for the 18 - 34 age group probably don't mean that much. But it's not obvious that the elderly are the most vulnerable. We're all vulnerable to what happens in the future, and the structure of the retirement system should recognise that.

But isn't this really all a distration from the much, much bigger problem of Medicare?

Posted by: Aaron Gurwitz at November 9, 2004 09:38 AM

Dear Aaron Gurwitz at November 9, 2004 09:38 AM:

The New York Times ran an interesting piece on that a couple of weeks ago. I wonder. Did you notice?

--------------------------------

The Health of Nations

By DONALD L. BARLETT and JAMES B. STEELE

For years the people in Washington have offered one plan after another that they said would provide health care for all Americans and rein in costs. Each plan has failed. Today more people than ever have inadequate coverage or no insurance at all. And still costs continue to spin out of control.

Notably absent from the rhetoric has been any mention of the existing system's inherent flaw - the inability of market-based, for-profit medicine to deliver on the political promises.

Two decades ago, when Washington embraced the for-profit model to curb escalating charges, health care spending represented 10.5 percent of gross domestic product. Now it is approaching 16 percent. We spend more per capita on health care than any other developed country. Yet on the important yardsticks, like life expectancy measured in healthy years, we don't even rank among the top 20 nations. In fact, according to the World Health Organization, we come in an embarrassing 29th, sandwiched between Slovenia and Portugal.

The explanation for this abysmal record is one that politicians decline to discuss. The market functions wonderfully when we want to sell more cereals, cosmetics, cars, computers or any other consumer product. Unfortunately, it doesn't work in health care, where the goal should hardly be selling more heart bypass operations. Instead, the goal should be to prevent disease and illness. But the money is in the treatment - not prevention - so the market and good health care are at odds....

...What's needed to control the costs and to provide basic health and hospitalization coverage for all Americans is an independent agency that would set national health care policy, collect medical fees, pay claims, reimburse doctors fairly and restrain runaway drug prices - a single-payer system that would eliminate the costly, inefficient bureaucracy generated by thousands of different plans. It's not such a radical idea; a single-payer system already exists for Medicare...


..Under a single-payer system, never again would you be asked, when calling to make a medical appointment, "What type of insurance do you have?" Never again would doctors need bloated office staffs to track what is and is not covered under thousands of insurance plans. Never again would you have to worry about being bankrupted by a medical emergency. Never again would American business be saddled with the responsibility for providing health insurance.

A unified, single-payer system could do more than pay the bills. It could gather information to more accurately identify the surgical procedures and drugs that work, and those that don't. It could funnel research money to where it will do the most good rather than to those areas with the largest and most vocal constituency, thereby treating the victims of various diseases and conditions more equitably.

It could make possible a centralized computer network to reduce the 100,000 deaths each year from adverse drug reactions - a number of fatalities five times greater than those caused by street drugs like cocaine and heroin. Similarly, a nationwide network could track medical errors across the country to increase accountability and to identify hospitals or surgeons who make repeated mistakes. And it could guarantee supplies of needed medications. In short, over time such a system could transform the practice of medicine and give all Americans the first-class health care they deserve - without breaking the bank."

--------------------------------

You can read the whole thing here:

http://www.newmediaexplorer.org/sepp/2004/10/25/us_health_system_needs_radical_overhaul_new_york_times.htm

Or you can buy it here:

http://www.nytimes.com/2004/10/24/opinion/24barlettsteele.html?oref=login&pagewanted=print&position

Your choice.


Posted by: Mike at November 9, 2004 10:01 AM

Barry,

Not at all. Whatever you might think of the Admin (and I clearly don't share your views, or Brad's), a given proposal (particularly one which must inevitably be vetted by your own side before passage) has to be weighed on its own merits. To do otherwise would simply mean that you're wedded to dogma and beyond rational debate. ;^)

Posted by: Bernard Guerrero at November 9, 2004 10:19 AM

Actually, no, it doesn't. And should not be, if there is adequate information available which shows that the proposers are some combination of ill-intentioned, corrupt, and incompetant.

Posted by: Barry at November 9, 2004 10:52 AM

A very nice way of posing how the Bush "reform" (I call it massive wealth transfer) might look. But I think you are too generous for saying this could be a good deal for our generation - my comments posted over at Angrybear.

Posted by: pgl at November 9, 2004 12:12 PM

A very nice way of posing how the Bush "reform" (I call it massive wealth transfer) might look. But I think you are too generous for saying this could be a good deal for our generation - my comments posted over at Angrybear.

Posted by: pgl at November 9, 2004 12:17 PM

"I can imagine private account plans that I would think are worth risking.... you could get me to sign on.

"But what are the chances that the Bush administration will do this competently?..."
---
Translation:

"Good idea! And we Democrats were sure never going to propose it (just look at the private account baiting we used to try to scare up votes in the last election!)

"But ... we can't give Republicans any credit for coming up with this good idea and actually pushing it in reality, like we would never do, because ... they're bad people.

"If only we could support this good idea ourselves we could trust ourselves to implement it. Too bad we can't."

See, this is what makes it difficult for independents like me on election day.

I have to choose between the party of bad people with good ideas that they will implement badly, and the party of good people that demonizes good ideas to make sure they won't be implemented at all.

Posted by: Jim Glass at November 9, 2004 01:26 PM

Barry,

Ok, so you're wedded to dogma. You can't provide a specific fault (since no proposal yet exists), so you'll fall back on the incompetance (sic) of the folks who _might_ propose such a thing. Ad hominem, ad astra!

Posted by: Bernard Guerrero at November 9, 2004 02:04 PM

So SS privatization is "theoretically" a wealth-creation scheme.

I think SS privatization is a cleverly disguished boogdongle so Bush can contine to be "the Buck stops over there" President. It will be years down the road before America and Americans can measure the efficacy and Bush will be laughing on his ranch in Crawford saying this was his biggest sleight of hand for his Corporate American sponsors. Unfortunately, I'm afraid many middle class Americans will not be laughing.

More importantly I'd like to know what George Bush is doing to address these present day fiscal issues ?

* The federal budget surplus of $236 billion dollars in 2000 has turned to an deficit of $422 billion dollars in 2004.
* America's trade deficit is running at a record annual rate of $590 billion.
* Non-defense discretionary spending has increased 8.2% per year under George W. Bush.
* Interest rates going up

The NET NET is America is consuming more than it is producing, and requiring foreign investors to fill the gap with capital but foreign investors like China and Japan aren't that keen anymore on the financial "game".

What are the Republicans going to do about their fiscal mess, further weakening of the dollar, eroding US living standards, and possible destabilization of the global economy ?

And Bush says I'd rather play financial shell games like stripping $85B from the Social Security fund for starters.

Oh the pain the pain that is going to be inflicted on many middle class Americans over next 4 yrs. with current fiscal issues and beyond ( SS privatization ).


Posted by: standa at November 9, 2004 07:28 PM

So SS privatization is "theoretically" a wealth-creation scheme.

I think SS privatization is a cleverly disguished boogdongle so Bush can contine to be "the Buck stops over there" President. It will be years down the road before America and Americans can measure the efficacy and Bush will be laughing on his ranch in Crawford saying this was his biggest sleight of hand for his Corporate American sponsors. Unfortunately, I'm afraid many middle class Americans will not be laughing.

More importantly I'd like to know what George Bush is doing to address these present day fiscal issues ?

* The federal budget surplus of $236 billion dollars in 2000 has turned to an deficit of $422 billion dollars in 2004.
* America's trade deficit is running at a record annual rate of $590 billion.
* Non-defense discretionary spending has increased 8.2% per year under George W. Bush.
* Interest rates going up

The NET NET is America is consuming more than it is producing, and requiring foreign investors to fill the gap with capital but foreign investors like China and Japan aren't that keen anymore on the financial "game".

What are the Republicans going to do about their fiscal mess, further weakening of the dollar, eroding US living standards, and possible destabilization of the global economy ?

And Bush says I'd rather play financial shell games like stripping $85B from the Social Security fund for starters.

Oh the pain the pain that is going to be inflicted on many middle class Americans over next 4 yrs. with current fiscal issues and beyond ( SS privatization ).

Posted by: standa at November 9, 2004 07:30 PM

So SS privatization is "theoretically" a wealth-creation scheme.

I think SS privatization is a cleverly disguished boogdongle so Bush can contine to be "the Buck stops over there" President. It will be years down the road before America and Americans can measure the efficacy and Bush will be laughing on his ranch in Crawford saying this was his biggest sleight of hand for his Corporate American sponsors. Unfortunately, I'm afraid many middle class Americans will not be laughing.

More importantly I'd like to know what George Bush is doing to address these present day fiscal issues ?

* The federal budget surplus of $236 billion dollars in 2000 has turned to an deficit of $422 billion dollars in 2004.
* America's trade deficit is running at a record annual rate of $590 billion.
* Non-defense discretionary spending has increased 8.2% per year under George W. Bush.
* Interest rates going up

The NET NET is America is consuming more than it is producing, and requiring foreign investors to fill the gap with capital but foreign investors like China and Japan aren't that keen anymore on the financial "game".

What are the Republicans going to do about their fiscal mess, further weakening of the dollar, eroding US living standards, and possible destabilization of the global economy ?

And Bush says I'd rather play financial shell games like stripping $85B from the Social Security fund for starters.

Oh the pain the pain that is going to be inflicted on many middle class Americans over next 4 yrs. with current fiscal issues and beyond ( SS privatization ).

Posted by: standa at November 9, 2004 07:32 PM

Brad,

Before you flirt further with the idea of private accounts in Social Security managed by the Thrift Savings Plan, read the work of Francis Cavanaugh on this issue. Frank is the former Executive Director of the TSP. He has written extensively on the feasibility of TSP-style accounts. His conclusion: It won't work.
See

http://www.ourfuture.org/issues_and_campaigns/socialsecurity/key_issues/admin_costs_of_privatization/index.cfm

Posted by: James at November 10, 2004 04:14 AM

Brad,

Before you flirt further with the idea of private accounts in Social Security managed by the Thrift Savings Plan, read the work of Francis Cavanaugh on this issue. Frank is the former Executive Director of the TSP. He has written extensively on the feasibility of TSP-style accounts. His conclusion: It won't work.
See

http://www.ourfuture.org/issues_and_campaigns/socialsecurity/key_issues/admin_costs_of_privatization/index.cfm

Posted by: James at November 10, 2004 04:15 AM

Brad,

Before you flirt further with the idea of private accounts in Social Security managed by the Thrift Savings Plan, read the work of Francis Cavanaugh on this issue. Frank is the former Executive Director of the TSP. He has written extensively on the feasibility of TSP-style accounts. His conclusion: It won't work.
See

http://www.ourfuture.org/issues_and_campaigns/socialsecurity/key_issues/admin_costs_of_privatization/index.cfm

Posted by: James at November 10, 2004 04:17 AM

I haven't seen any suggestions that included postponing the age at which an indiviual could get social security. If the age is increased over a few years to 70 or 72, what happens to our unfunded liability? After all, we are all living longer and more healthily.

Posted by: john a. coleman at November 10, 2004 01:27 PM

It is amazing just how much discussion can be generated that simply fails to perceive the fundamental point. SS is not, and was NEVER, an investment scheme. It IS an income redistribution scheme (yes, conservatives, I'll be more than happy to admit it). Its purpose was simple: to prevent the poor and lower class elderly from living out their golden years while eating dogfood and sleeping under bridge abutments. Those working poor will never be able to accumulate the assets required to live a barely decent life in retirement, and in the greatest nation in the world, they shouldn't have to suffer. It's called 'compassion'... no, not the same kind as in 'compassionate conservative', which so far hasn't been shown to contain any compassion whatsoever!

Posted by: Norm Bernstein at November 10, 2004 05:09 PM