Reinventing Social Security (continued)

I've posted my thoughts on social security reform, both the practical and the political.

Since my friend Bob accused me of putting politics before principals, I'll go back to the practical side of the equation.

A big issue with "privatizing" social security, and one I've mentioned a couple times already, is what happens to the people who invest the money foolishly and end up with nothing, particularly since half of the money was contributed by their employers. That sounds like a really bad scenario to me.

Well, I am not alone in worrying about that. My friend Gordon Gould has an excellent post on this exact topic.

Gordon doesn't have any easy answers, probably because there aren't any, but he outlines the issue really well.

Comments

[Otis Nixon]

I doubt the government will allow you to invest in anything you want. The likely options will include some sort of index fund or highly diversified equities fund. Now I'm not saying you can't lose your money in such a fund, but it would be highly unlikely to lose money in such a fund, even in real terms, if invested continuously over a 40 year period (a resonable estimate of a complete career). And, I will practically guarantee that you will beat government obligations (the current investment vehicle) over the same time period.

The worry that someone will lose money over a long time period invested in equities is not what concerns me. What concerns me are issues of transition, the process of picking which stocks or funds the government will invest in, and the effect of such a system on our capital markets.

[druce]

A good article: Why the Left Should Favor Social Security Privatization (and the Right Should Oppose It).

The Ponzi analogy can be taken too far. From a macro perspective, the working population always has to create the income to support its retirees, because who else will?

But under a sound retirement system, people save and invest, creating factories, infrastructure, technology, and the jobs that will let their children support them in their old age, making the burden manageable without the children sacrificing their own prosperity and eventual retirement.

The fact that we don't save is the broad problem. The current SS program is a symptom of the same system that Americans use in our own finances: pay as you go, borrow from the future, and hope economic growth solves everything.

The success of reform hinges on what it does to the savings rate. Assuming it's not a purely ideological plan to gut the government, the point is to build a system where people start saving again, through SS and their own accounts, and don't leave future generations with a huge burden. But a transition to a new world, in which the US isn't the world's consumer and the sponge absorbing the rest of the world's savings, could be a global recession or depression.

(IMHO will be, regardless of whether we get our own house in order or the rest of the world decides to stop feeding our addiction)

[Bob Struble]

Your friend Gordon misses the point. Of course some will have above average returns, some below, that's math, and falls into the true but irrelevant category. What does matter is that anyone is 98% certain to get better returns with a privaye account than the government guarantee over a career. Overly risky investments can be prohibited. And the growth and success of 401ks indicate the populace likes and is good at managing their own money. This is an absolute non-issue.

[Druce]

A balanced account will indeed be better than just government bonds for a large majority of people.

However, many studies show that people think they are good at managing money, but in fact would do much better in index funds. And that's the self-selected, not the cashier at Wal-Mart.

Furthermore, how well people would do with equities is highly dependent on when they cash out. At equity market lows, equities will typically have underperformed bonds for the trailing decade (something like 7 years in 2002, 16 years in 1974).

This gentleman compared his return on Social Security contributions with the Dow for 45 years ending in 1994 and found that SS provided a better return.

[Maged Taman]

Americans' Future In One Plan
I know that most of you are busy to read my book. As I explained previously that Taman Health Plan (www.trafford.com) takes care of all the health care, Medicare, Medicaid and social security. It will threw away all bureaucracies out of window. Let me explain shortly how it works:
1- there will be no more health care insurance companies, no Medicare, Medicaid or Social Security. My plan will take care of all.
2- Basically will be only one Big Health care organization (Taman Health Plan or THP).
3- The center of the plan will be in Washington while the health departments in every state will be the branches.
4- One organized body will be taking care of the Health Care and long term care of all Americans replacing 1500 insurance companies, Medicare, Medicaid and Social Security.
5- This will allow us to provide a uniform service to all Americans every where in both inpatients, outpatients and long term care.
6- When you go to any Duncan Donuts branch your expectation is to have a fresh coffee and a donut with no long wait. We will try to provide a similar predictable service everywhere as Duncan Donuts. With having only one body will be able to do that.
7- The Capital of the plan will be the funds of Medicare and Social Security (before the bankruptcy of both systems). The maintenance will be a yearly tax from each of us (will replace our yearly social security and Medicare holding taxes). A percent of each of us go to his account cards and a percent go to THP itself. The money of the plan will be invested by the investing sector of the plan very likely in Wall Street.
8- We will have 5 ATM cards with a corresponding accounts. Card A (children), Card B (working group 18-65years old), Card C (Medicare card >65 years old), Card D (Medicaid card), Card E ( expensive medicines or investigations).We will have the health cards devoted to health care and long term care. Thus we will have: health cards, banks with accounts to each card and credit card machines in outpatients care and hotelling part of hospitals and nursing homes.
9- Cards will pay for the outpatient medical care including doctors, emergency room visits, investigations, medical supplies, pharmacies and the hotelling part of hospitals and nursing homes. While the medical part of hospitals and nursing homes will be budget by the plan itself.
10- In the first year of issuing cards: Card B and C (most of people) will have a bonus it could be a percent of their Medicare and social security withholding (70 % or so). We will try to be fair to every one but every one has to now that most of us already lost a lot of money with the HMO's. For next year new comers to card B at age of 18 when first issued will have a bonus of 50,000 dollars. It will change every year by a percent a according to inflation.
11- every one of us will get a statement every one or two months of his card account. Card B account will phase in card C at the age of 65. If card C account is vanished Card D will be issued (hoteling part will be less luxurious). Only few of Card B will have card D if there account vanish most likely those with severe medical problems.
12- So basically most of us will have our own account Card B then card C. Say you are 45 and you have now in your account $ 200,000 you can take one or more years out of work, you Can retire early if you like and with your card you will control all the medical services and its prices.
13- With this card system we will end all bureaucracies of health care, Medicare and Medicaid. No one will stand between you and any medical or long term service (only your card). Shop around with you card, have early health care security and responsibility and invest in your health.
14- We will not need Social Security since after age of 65 we will be able to use our cards to stay in any nursing home each according to his account in card C or card D. So when you invest well in your health you will be able to enjoy a nicer nursing home when you get old (actually it will be also a kind of tourism).
15- The money in cards do not get inherited when we pass away but recycle in the plan to support the next generations.
16- The plan will have very positive effects not only in simplifying our care, save a lot of waste in health care, give early health care security and responsibility to Americans it will also have a positive effect on the economy, saving billions of dollars to Americans, creating jobs in health care and cutting outsourcing.
Very likely, you figure it by now I could have sold the plan to one of the presidential candidate before the 2004 election for millions of dollars (they already spent 2 billion dollars). It is my gift to the American people (it will help the healing process of the two worlds America and the Muslim/Arabs).

Maged Taman.
2/20/05

[David Locke]

Well, no you won't be able to pick your investment. Instead, you will have to pick a mutual fund like collection of stocks selected by the Secretary of the Treasury. This means that your investments will be used as pork by the administration of the time. It means that had we done this prior to Bush's first term, we would have been invested in Enron.

And, what happens when one of these funds fail? A bailout will have to be passed. These bailouts will cost more than fixing Social Security.

Further, Social Security is called a social program. But, the real achomplishment of the social security program has nothing to do with people. It dampens the business cycle. It eliminated depressions.

Recent legislation allowed people to work while on social security. This lets them invest their proceeds instead of spending them. They need to be spent, not saved.

So here we are with private accounts. Since the mutual fund companies are there only because they paid huge contributions to the politicians that put them in the fund, they don't really have to run a profitable operation. Professional fund managers might not have invested in these companies. So the funds will be weak. When a depression does hit, and the right is clear about wanting one and undoing the safety net, these funds go broke, and say the right does what its demonstrated as compassionate conservatism, and doesn't bail the funds out. That's what's going to happen.

The right has already demonstrated their compassionate conservatism by refusing to reauthorize emergency unemployment payments to IT industry employees. They did this, so that we would fall off the unemployment rolls, so Bush could claim that his tax cuts did something. They did, but nothing good. You can't trust the right when it comes to people.

If you take a careful look at Treasury Department data, you'll see that it got corrupted during Bush's first term. If you don't say what they want you to say, the undersecretaries make you their project. This is happening all across the administrative law units. Civil service protections are being eliminated. We have forgotten that they were eliminated to prevent machine politics. We are becoming a Cleptocracy. Actually, we are one. Civil service is not about unions. It's about doing your job and stating your opinion as you see it. What would happen if a Department of Software Coding arose and told you to conform to the adminitrations wishes? It would be a disaster. That is where we are today.

Social security got us off the farms. It made us wealthy. And, it made us subject to urban poverty. My grandfather was a subsistance farmer, so I get to hear about how poor they were. But, they always had food. They didn't use much electricity. They had their land and were never going to lose that. They really were not poor, not in the sense of urban poverty. If we go back to before antitrust laws were enacted and get back to robber barons and castle estates, most of us will be poor, and we won't have the farm to fall back on.

Savings rates are not the problem. High savings rates are the way in every country except the U.S. And, the U.S. has the best economy, which implies that high savings rates is the wrong way to go. Regeanomics didn't work. Games were played with equity, but wealth never trickled down. Higher savings rates is the wrong way to do.

The games being played with the dollar and deficits are more a factor than savings rates.

[David Locke]

The stated reason that social security will fail is a false one. What happens when all these people retire and there are fewer people paying in? Wages go up. Immigration goes up. Somebody still has to do the work. Machines won't do it. Only people can do that work.

Are we going to outsource all this "local" work? Well, you can't outsource or offshore "local" work.

Will management live overseas? Only if we sell out country to foreigners. Will an offshore employee be taking our orders at the Jack-in-the-Box? I've already heard that some fast food joints are using telemarketers to do this. So sure it can go overseas.

But, one of the central tenats of economics is that demand will be served. Local demand will be served locally.

The retirees will be spending their money unless, of course, they can't because they don't have it to spend. Then, instead of social security failing, our economy will fail.