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October 24, 2008

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Well said.

The really scary thing is the Democrats (supposedly) want to create another social security type system, in which everyone puts in another 5% and earns some sort of guarandteed return (I believe it is 3%). All of this while doing away with any tax benefis for 401K's (doing away with any incentive for employer's to provide matches, or for you and I to invest period).

It seems instead of moving in a direction of doing away with some entitlements, some want to move further that direction. It is really scary to think of the national deficit that could occur if we don't start to tackle some of these issues responsibly.

It really makes one want to stop producing.

@ wanzman

Source, please. FMF start telling your readers to link sources when they want to make claims such as this :)

@ Anom - here is a link.

http://www.workforce.com/section/00/article/25/83/58.php

Really frightening stuff.

I agree with the basic concept that long term its best if we transition to a private investment system rather than the current tax based ponzi scheme. Personally I think that diverting over 4% of the taxes to private system would be too much and we should start with a lower amount at first.

Structuring a privatized national retirement system to replace SS would be difficult. If you divert too much money right now then you run defecits. Currently SS has an annual surplus of over $200B. Putting 4% into private system would divert 1/3 of the tax revenue and turn a $200B surplus into a $50B defecit. You'd have to have time for the private investment accounts to grow to offset the difference. So a gradual transition would make more sense.

But theres a whole lot of details about privatization that could make a huge difference:
What about the cost of fees for private investments? Who would we allow to run such systems and how would we regulate them?
Would individual investors be allowed to manage their money or would the government do it for you?
If individuals managed their money then what happens when people make bad investments like 100% allocation in Enron or Lehman bros.?

I don't believe that social security is a horrible failure by any objective measure. The system could use gradual changes and revision to suit our needs in the coming decades. But for the past 70 years social security has served its purpose well.


I question the numbers that Marotta presents.

Marotta claims a deficit return of -7%. How do you come up with -7%? I'd like to see the data behind that and what assumptions are being made. The SSA calculated internal rates of return and they ranged from best case of 9% to worst case of -0.5%: http://www.ssa.gov/OACT/NOTES/ran5/an2004-5.html

Someone retiring today at age 65 who was a maximum wage earner for their life would have paid SS taxes of about $240k in their lifetime. Their SS benefits would come out to about $2200 a month or $26k a year. TO buy an joint survivor, inflation adjusted annuity for that much would cost around $480k. That equates to a nominal return of about 5%.

Marotta talks about defecits starting in 2037. Where did 2037 come from? Social security is expected to be fully funded till 2041. 2008 annual trustee report: http://www.ssa.gov/OACT/TR/TR08/trTOC.html

Marotta states that SSA could run up a defecit of $30 trillion. The SSA says that "Through the end of 2082, the combined funds have a present-value unfunded obligation of $4.3 trillion." So why is Marotta's number 7 times higher?


As with other Marotta articles I seem to agree with the underlying point to a degree, but the way the material is presented is biased and the numbers used are questionable.

Jim

Please, no more of this BS. How about a flat tax while we're at it?

I work for SSA and when I went through training it was all about helping out the public to get the best deal for them. You see, you'll never have an organization that cares about people when it's privatized. They only care about the bottom line b/c that's their function. If we ever privatize SS then get ready for the fiasco that private health insurance has caused - no service, stinginess with eligible benefits, etc. etc.

Let the private side stick with widgets but don't expect them to manage something that's not in the interest of profit. Simply won't work. Privatization will be the end of SS just like when they privatized water in South America they had gouging and shortages and when they privatized electricity in the states here we had gouging and blackouts. Let the corps stick to wants (widgets) and leave to the needs to an organization without profit motive - please!

I want to opt-out of SS. Keep my money, I don't care. Just don't steal anymore from me.

@ Anom

I am referring to a link FMF posted via a blog post on Friday, October 17th.

@ Matt

You said:

"If we ever privatize SS then get ready for the fiasco that private health insurance has caused - no service, stinginess with eligible benefits, etc. etc."

Obviously working in the government has made you biased. Have you ever tried working with a goverment entity. Service is not exactly a feature I have even seen the government display in any way, shape, or form. Going to the post office to mail a letter or the SS office to get a replacement card is an absolute nightmare.

You have two options, keep social security as is with slight (3-5%) adjustments in either incoming or outgoing payments OR eliminate it all together. "Privatization" is just a nice way of saying eliminate it all together as it would fundamentally break the contract that current workers have with current retirees. It is a radical and deeply stupid idea that gets considered by radical and stupid people from time to time.

Privatization of SS is a terrible idea. What happens when the stock market tanks like it is now and everyone's account balances decline (of course the media will claim it is a "loss" but that's another story)? Everyone will want a bailout and a guarantee of a certain level of income and we'll be back to square one.

Aren't we currently seeing the result of the financial sector absent government regulation and risk controls? And the argument now is to expose the entire SS system to the volatility of the equities markets all in the name of Capitalism and High Finance?

If I'm not mistaken, the entire point of the SS system was to be a backstop to provide retirees with a minimum income beyond their own personal savings. I fail to see the point of risking that backstop on some ideological "free market" argument. Sure, the system can be reformed in whichever way to ensure the sustainability of the program beyond the lives of the Boomers, but to turn over even a portion of the retirement-of-last-resort to the same Wall Streeters who can't determine credit quality from a pile of manure seems a bit silly.

In my mind, the argument for privitization is simply another shill for the financial community with the premise that what is good for Wall St. is good for Main St. Perhaps we can get all those folks from Bear Stearns and Lehman Bros to manage SS for us! After all, there is plenty of talent on the market these days...

Oh, and how is everyone's 401K doing so far this year?

My fix:

o Don't mess with 401Ks.

o Do the private system. Have cheap, broad-market indexes, including overseas indexes, available for the investment mix. My biggest worry with the private system is if we don't do it broadly, it could end up being a massive sovereign wealth fund, subject to all sorts of Congressional monkey business.

o Have SS be a net-worth-tested (versus income-tested) program for genuinely poor old people.

This way, the tax-funded part of SS forms an income floor, but doesn't bankrupt the country.

After trust fund exhaustion Social Security won't have any deficits by definition since benefits will be cut to revenue, about 78% of future planned levels, from 42% to 33% of preretirement income. If you want to cut SS, nothing need be done.

I am a mid to late boomer and neglecting all insurance aspects will see a 3% real return, say 6% nominal. The fact that he can't manage to calculate his real return accurately points up the shortcomings of taking any advice from him. A large difficulty is if SS does as poorly as calculated, the market won't do well either. The idea this is just a boomer problem shows just how minimal his understanding is. Slower population growth means lower returns of all kinds for all future generations.

Private accounts are available today and are much more flexible than anything proposed for SS. What is peoples excuse for not using them? Don't give me that lame excuse they can't save because they have to pay taxes. They are just living beyond their means. This is the time to invest in markets. At the same time, SS is safety net and has to be there to take care of all of those, including those who will lose in the market. Don't forget return does not come without risk. The equity premium is real, but it is not certain. Leaving govt with mess of cleaning up with the aftermath of the next time Wall Street strips the naive of their investments would be greater crisis than we now face.


Privatization is a four-letter word for a significant number of people. It may be easier to convince people to make Social Security optional.

You'd get to keep the FICA taxes you see taken out of your paycheck. The employer portion would remain to cover those currently on SS and those who remain. Also, you may be able to receive your contributions in the form of a trade able government bond that matures at retirement.

One other thing. We need to do away with inflation. Then people don't need to take risks to preserve the value of their money.

FMF,

When you have guest posts can you ask the authors to cite sources or give data on their numbers? At the very least could the authors come and explain where/how they get their numbers?

Jim

RE: "Obviously working in the government has made you biased. Have you ever tried working with a government entity. Service is not exactly a feature I have even seen the government display in any way, shape, or form. Going to the post office to mail a letter or the SS office to get a replacement card is an absolute nightmare."

I'm actually biased b/c I've worked WITH the government. Everyone craps on the govt, it's a fun pastime but you'd never be able to mail a letter to anywhere you want for the price you get the the postal service. Not perfect (and calling it a nightmare is ridiculously overboard), but we don't need perfection, we need a system that is founded on the principle that its there to serve the people, period. Not that ole' BS about the customer being first we get from corporations - actual service to the people first.

It may take a bit to get a replacement card but so what? You would have to pay for the card if it was privatized AND it would take some time also. Bureaucracy isn't limited to the govt. The Federal govt is actually the world's largest employer. The private sector is good with widgets but we all appreciate the the time before a democratic, large government with services was literally the Dark Ages.

Yeah, it's great to complain about the govt and its slow services but those services wouldn't be there at all if all we had was the private sector b/c it's not profitable to help people in the long. Some areas need to be protected from the damaging effects of the profit motive. Not perfect but better than nothing which is what you'd get in the private sector.

Servius - the only way to get rid of inflation (at least at a minimum) is to abolish the Federal Reserve. Inflation is actually the devaluation of money, not rising prices. The govt doesn't want to raise taxes so they print money (actually they procure loans at interest from the Fed, a cartel of bankers, then the Fed authorizes the money to be printed - "Reserve" notes not American money).

Whenever you have a fiat (or paper) money supply that isn't backed by something physical (gold) then the govt, in collusion with the bankers, will print too much money and therefore inflation. http://video.google.com/videoplay?docid=-9050474362583451279

I'm not optimistic of this ever happening. Throughout history every paper (fiat) money system has crashed eventually through runaway inflation.

I don't know if it's the election or what, but this personal finance blog is increasingly morphing into a right-wing voodoo economics blog. I'm about ready to cull the link list on the right hand side and drop FMF from my RSS reader. The guy asking for sources above is absolutely correct.

What's tomorrow's big post? "Why Liberals Never Give Money?" "How to Keep Hobos off Your McMansion Lawn?"

The quality here is dropping significantly, and you're alienating a lot of readers who generally enjoy your blog. Your call.

Long Time REader, you are insane. there are as many lefties here as there are righties.

Long Time Reader:

Pardon us for being against government handouts in every phase of life. Pardon us for being opposed to being owned by China.

Right wing voodoo economics? Isn't crazy to think the government should actually be able to afford what it spends.

I think this is FMF's blog, no one has a gun to your head making you read it. Just like no one had a gun to anyone's head making them take out an ARM on a house they couldn't afford.

Holy Cow!! Privatize SS?? Haven't they heard that Bush wanted to do that and was met disdain from all of the azzbag liberals. Even though it is the best thing to do since SS won't be around for most of us no matter how much were told it will. After trust fund exhaustion?? What a fool you are!! Listen carefully.... THERE IS NO TRUST FUND.... VooDoo Economics?? What the hell is that supposed to mean?? Is that better than the FUZZY math Nancy Pelosi and her cronies are spouting??? Freaking liberals, I hope your "BOY" gets elected and all of you fools finally get what you so truly deserve..... Ha Ha Ha.... You liberals shouldn't threaten to leave here, just do so cause your stupitity won't be missed.

Now I get it. Privatize social security just as we embark upon the biggest NATIONALIZATION scheme in world history: the United States Governments' (that would be us, the taxpayers) takeover of the entire financial services industry.

We would be privatizing the system back to ourselves!

And why calculate the return on stocks based on their performance since 1978? Especially when you consider that stocks in 78 happened to be at levels that were around in -- 1964? Using 64 as our starting point, stocks appreciated at a paltry 4.9% rate over 44 years. And it the S&P collapses further, say to 600, then that yield fall to under 4%.

I really got nothing against the laissez-faire capitalists, but one suspects that their ideas may not find much of an audience at this point in time.

Stay classy, second jim. You know some of these recent comments, I'd swear FMF had turned the blog over to hus teenagers, except I imagine he's bringing them up to be smarter. Interesting comment and links, first Jim.

Privatize social security. I say go for it. But what does privatization really mean, where are the details. I know what I want out of it.

1) Don't tax the portion of my income that I put away for retirement.
2) Don't tax the gains I make when this money is invested.
3) Make investing for my retirement mandatory. Force me to invest a minimum percentage of my income whether I want to or not.
4) Don't put a cap on how much of my income I can put away for retirement.
5) Don't let me borrow against my retirement account.
6) If my partner doesn't work because they run the household then force me to put money away for them too and/or allow me to use my retirement account for my partner.


@ Matt - I think you miss the point in your first comment..."You see, you'll never have an organization that cares about people when it's privatized." This article is not talking about replacing the SSA but more along the lines of greatly reducing it. It is about the people investing their own money. Not handing control of SS to a private company. I am not sure where you got that. In this case, service would be a moot point because it would be my private account.

As for the general negative attitude towards the govt and its employees. Sure, there is some resentment to the largest employer in the world providing non-merit based pay increases and such. Since it comes out of our pocket, it seems that may make us a little negative. As for being the largest employer in the world...again, that is really not a good thing. All that means is there are probably a lot of redundent jobs that could be elimnated except then what would happen to patronage?

Personally, I would be happy with the gov't leaving the 401K system as it is and leaving SS as it is. I am more concerned about losing the tax benefits of the 401k than with revamping the SS system. I most certainly do not want to see the SSA getting control of my 401k.

@ Jim -- The "boy" comment was repulsive. This is a PF blog, not Stormfront.

Yeah, sure. We'd be giving them control and enabling them to opt out right? Then when they need Medicaid but they can't get it b/c they opted out, then we'll all pay 10x as much.

Luckily, it is unlikely that the govt will change SS or the 401k tax benefits. Too unpopular and people want to get re-elected. The point is that the only person to launch an national campaign to privatize social security is Bush. Bush is an incompetent leader but his incompetence is relegated on to the non-rich. He knows what he's doing and it's making the rich richer. Very simple and done over and over throughout history. If Bush was for it then that should be reason enough NOT to ever support it b/c it's probably damaging to anything other than the upper class. If you're in the upper class then I understand but then you shouldn't be wasting your time on this blog with the white collar proles.

To jim and wanzman: Voodoo economics was coined by HW Bush. He saw it for what it was and was rewarded by the powers that be with one term. It's one of the reasons he raised taxes - the deficits were incredible during Reagan. It's incredible to me that anyone ever believed that tinkle down can actually work. People that're in the top 100% have a mental problem - it used to be called the deadly sin of greed. They are no different that an alcoholic and they will never quit and once they get the money from the public trough (through corporate welfare and tax breaks for the wealthy) they will use that money to make more money through usury. That's the way it's always been and now is no different. They will not stop. Not all are evil but if you've amassed billions you are as maladaptive as a drug addict or a 400 lb glutton.

A handout isn't something that you've paid into, and calling it such is just a way to look down on everyone else as a deadbeat when you're in the same boat. We're paddling to stay afloat and you're brow beating us as we row. Wake up, you're in a boat, you're not going to be a billionaire. Sorry to disappoint you. You're on blog for Christ's sake.

Sorry, I meant "top 1%" not 100.

As a lifetime low earner in poor health with ZERO retirement savings (if anyone thinks I didn't save enough, please tell me how much I realistically should have saved on a minimum wage income), what do anti-privatization people say to someone like me?

What do you say to workers who pay in for decades and die before getting any money out?

(p.s. Low earning men have very low marriage rates, so "survivor benefits" won't be of much help to them.)

I find it somewhat hilarious to see people defend the current systems of social security and medicare versus other potential solutions, when those very programs are heading for financial disaster. Now is the time to be thinking about ALL potential solutions versus shooting down anything, including privitization.

I gotta say. 2 months ago, I was all for this. I thought it was the only way to go and that the Democrats holding it up in congress were ridiculous Socialists who were victims of munchausen by proxy syndrome. However, the past two months has shown us a couple of things that move me from a "yes" to an "I don't know." For one thing, the typical American's financial knowledge is not at all what is necessary to manage their own retirement account. Between the fear selling and the lack of knowledge with how to manage a proper portfolio (I'm sick and tired of hearing these stories of people losing 1/2 their portfolio right before their retirement--if they are entirely vested in stocks a year before they retire, they're nuts.), I think that moving directly to a privatized system wold be a bad idea 30 years down the road. I think the better solution (in my idealized mind) would be to first improve people's financial understanding at an early age, in both High School and College. Then, when the kind of useful analysis you did in your blog was understood by all, and not just by some, the consensus will be that privatized social security would be a good idea (and, in my opinion, the most natural) rather than the Dems argument of it being a ploy to sacrifice your retirement for big business.

whats in a penny?add it to everyday normal purchases.and say to certain types of a buy related to ... with the goverment we now have who can go wrong.

Remind anyone of Animal Farm? 'I will work harder!' The promise of the nice 'retirement' patch of grass = SS. The proposed 'new' SS = the glue truck.

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