Also, from a personal finance point of view, doesn't Social Security
diversify risk? Sure, it carries political risk. But a 401k in
equities carries market risk, a defined benefit pension plan carries a
institutional risk, cash carries inflation risk, etc...

Holding equities long term seems like a very small risk, but isn't
there's a good chance of survivorship bias in mining only US
historical data? (Of course, I shudder to think of the disruption
that would have a long term affect on US equities.)

darkness39[at]yahoo.com wrote:

- quote -

Of course, SS comes up here frequently. In some of those discussions,
Chile has been held up as a model of how to do privatization correctly
(I was not aware that Britain had any form of privitization in its
entitlement system). Has that changed? Has it encountered problems? I
do like the reasoning your using above, though. You don't happen to
have references for the issues now facing Chile and Britain, do you?

-Will

Jose Bailen wrote:
- quote -

Or increase SS tax revenue, e.g. by removing the salary cap, making more
benefits taxable, or finding money elsewhere.

-Will

Greg Hennessy wrote:

- quote -

A while back, when the market still showed a 10yr return of 13%+ I read
that the 'typical' investor's return was less than 3%. I'd like to
believe most people are capable of learning how to invest and balance
risk/reward, I don't believe most are inclined to do so. I think that
the posters here are likely better off if moved to a private system, but
the majority of people would have their safety net pulled out from under
them. And the creation of 100 million small accounts along with the cost
of administering, would be a nightmare. Along with the non-working
women, are the non-working men, and children who lost a parent, or those
on disability. Ask about rates of return. As a concept, I have no issue
with it (even though in reality, it's not applicable to SS) but the real
question is, "what is the cost of the other aspects of SS, all the
payments outside the standard 'pension-type' payouts'"?
If privatized, these thing would have to be broken out, the worker would
need to explicitly see that he is paying for disability, life insurance,
etc. (agreeing with you, Greg)

- quote -

The one part of the system that I have an issue with. "If you are
married and file a joint return, your modified AGI plus one-half of your
Social Security benefits would need to exceed $32,000 before taxes kick
in." Whatever the mix of income and SS, I think this is too low a
number, this creates a potential phantom bracket of 50% for someone at
$32K income in retirement. (which is one of the reasons I say beware the
overfunding of 401(k) you don't need to be rich to have your retirement
tax rate be double your pre-retirement rate).
JOE

On 2007-01-31, Jose Bailen <jose.bailen[at]gmail.com> wrote:
- quote -

Perhaps. I personally don't think it is wise financial planning to be
100% exposed to equities. Nor do a lot of other people. And many non
working women would be at a financial disadvantage were anyone try to
convert social security to a invest in the stock market. It is
important to remember that social security is not a retirement fund,
it is a anti poverty program.

- quote -

I suspect the size of those taxes would be far greater than you might
sugguest.

- quote -

I sincerely doubt that 70 to 80 percent figure is correct. And when
you figure in non working wives, I suspect that the number of people
who gain is about the same as the number of people who lose.

Right now I pay into an anti poverty program (Social security) and I
save for my retirement (TSP). Under your sugguestion I'd pay into a
subsidy for low income persons, pay into a new Social Security that
invests in the stock market, and would pay into my existing retirement
fund. I don't see that as an advantage.

- quote -

Right now the incentive is that the more I work and earn, the more my
social security benifit goes up. If that isn't the right incentive,
what incentive should there be?

On Feb 2, 1:36 am, Greg Hennessy <greg.henne...[at]localhost.localdomainwrote:

- quote -

I've already specified that I was talking about the pension component
of the Social Security system. This is what it would be better if
privatized, and I gave a compelling argument for it: the much higher
long-term rate of return of stock market investments. What is your
argument to defend the current pay-as-you-go pension system?

- quote -

It depends on how you design the transition between the two system. If
you just ask new entrants in the labor market -i.e, young workers- to
switch to the privatize, the foregone revenue by the SS is not large.
That would make sense also because young workers are the only ones who
have time enough to accumulate wealth in private pension accounts.

- quote -

That's beside the point of the thread. We are talking about the Social
Security system, not about my first ammendment rights. What are your
arguments to defend the current system???

On Feb 1, 7:23 pm, "Elizabeth Richardson" <erich...[at]worldnet.att.netwrote:
- quote -

Elizabeth

I'll try to keep this focused on personal financial planning.

SS is funded to 70% of benefits from 2045. Before that, there is no
problem. that is the latest report from the Trustees and the
assumptions on which it is based are quite conservative (much more so,
than, say, the forecasts from the Administration re shrinkage of the
deficit).

(you'll read quite a bit about 'social security trust fund' and how
after 2018, the government can't pay that. What that is saying is
that the US Treasury will fail to honour a debt. Since in the entire
231 years of the Republic, this has never failed to be the case, I
sincerely doubt it now-- during which time the Republic faced foreign
invasion, civil war, war with Nazi Germany etc. In reality, the US
government will either shrink other spending, or raise other forms of
taxes).

After 2045, there is a problem. Either benefits are cut by 30%, or
revenues are increased. The best summary I have is the one below:

http://www.bc.edu/centers/crr/issues/ib_46F.pdf

That summary also outlines some of the possible solutions (eg raising
employer and employee contributions now by 1% of payroll).

I believe that the experiences of Great Britain and Chile, in
particular, suggest that a 'private accounts system' is a non
starter. The basic problems are the government would have to in some
sense guarantee returns (basically wiping out the point of private
accounts), that administration costs would be high (whereas SS is very
efficient in terms of administrative costs-- less than 1/4 of the
costs of comparable private schemes), and that you would have a
generation that paid for its retirement twice (once in the existing
system, once in the new system), and that would be politically
unacceptable.

I can't legislate for ideological politics in the US government, but
basically a system which goes from 4.5% of GDP now to 6.5% of GDP at
its peak, is no great threat to fiscal stability, nor
intergenerational equity. 2% of GDP is a 10% increase in US Federal
tax revenues.

Implications for Financial Planning

- SS will be paid. I don't think the US government politically, or
morally, could get into a position where it didn't pay the basic
retirement income of the poorest and most vulnerable Americans. The
British government pulled a policy trick in the early 80s to sharply
reduce the incomes of seniors relative to everyone else, the
government now is being forced to back track on this.

You'll find this strange, perhaps, but in many ways Britain
anticipates what the US does. Margaret Thatcher was way ahead of
Ronald Reagan and to some extent Bill Clinton. It's because we have
effectively a completely centralised, unicameral legislative structure
with limited local government powers. So we can ram through radical
change that your Congress will not. So on pensions, as the t shirt
goes 'been there. Done that. Got the t-shirt'.

- Taxes are going up. Whether this is to increase the 'cap' on which
SS payroll deductions are levied (as suggested by President Bush) or
by a higher payroll tax, I don't know.

- there will be benefit cuts. Most likely an increase in the
retirement age (lower income for those who retire early)

To quote Warren Buffet on the subject of SS 'it isn't broken, so don't
fix it'.

Answering your question (at long last!)

SS is a pension, insurance, and a state benefit. Because of all of
those things, it makes it hard to work out an economic return.
Perhaps your analysis is best-- like medical insurance, it's hard to
work out a financial return.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
Elle wrote
- quote -

It is the antithesis of Rand, AFAIC. She had nothing
intelligent to say on "community" except that it should
involve people isolated from others--a pipe dream bigger
than socialism.

Elle wrote:

- quote -

I can't say it's right for me? I'm not telling anyone else to do it or
pushing my values on to them.

- quote -

I suppose I agree with this, and that doing good makes the world a
better place. And I'd certainly like to live in a better world.

- quote -

This sounds very Ayn Rand.

- quote -

I don't impose my morals on them. And I have enough of a time justifying
my actions in business when I am asked to. When asked why I send a $1000
check to a homeless shelter ( www.neshv.org ) a shelter for battered
women, or school for the blind, I usually reply "because it's right for
me, it's a good thing for me to do".
And we are way off topic. Happy to write in private, as always. I may
just plan to retire without budgeting the SS checks in, and using that
money to make my donations each year. That'll kill two birds with one stone.

JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

You are invoking morals, which are a matter of personal
taste and arbitrary, and so without logic. "Do it because
it's right." That's not enough.

This instance involves how we are all social beings that
must live in harmony with others or else die (internally or
literally). There is good reason for wanting to make society
as livable as possible.

I think one ought to base all one's actions in how they
serve one's self. Unfortunately, understanding how
contributions to the less advantaged do serve one's self
requires a bigger and more experienced mind.

Just a little proposal to how to explain this to your
acquaintances who do not want morals imposed on them but
instead demand more justification.

On 2007-02-01, Jose Bailen <jose.bailen[at]gmail.com> wrote:
- quote -

As to your last point, since it is obvious that redistribution, social
safety net, etc, do not depend on having a public pay as you go
pension system, since Social Security is NOT A PENSION SYSTEM.

As to the first point, even if we ignore the VERY LARGE COSTS of
switching from the existing system to make it a pension system, it
would benefit some tax payers at the expense of others. Changing the
system the way you advocate would increase the percentage of people
living below the poverty level.

Are you either a US citizen or living in this country? I think you
have said you live in Spain, and if you don't live here or are a US
citizen, why are you even commenting on our system?


======================================= MODERATOR'S COMMENT:
We are beginning to get off-topic.

Elle wrote:

- quote -

You snipped me. "The liberal in me says that if I need to contribute
some portion to subsidize people in need, maybe it's still 4% to that
system. I'm okay with that, too."

I don't want to help the poor for some benefit that would trickle back
to me. I want to help because it's the right thing to do. Which is part
of my approach to annual donations I make. Only there, I get to choose
the charity.
JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

People seem to be touching on it, but to get it out there:
One very difficult-to-quantify benefit of Social Security is
how it helps ensure that human potential is not thrown away
via, for one, throwing innocent kids into poverty. The
alternative typically is to produce criminals instead of
productive human beings. Who will, by the way, ensure that
nice, increasing stream of dividends continues through your
and my old age, by working for companies that need labor and
often talented labor.

One need not be a socialist to understand one can profit
mightily and literally from investing en masse in the less
fortunate.

Jose Bailen wrote:

- quote -

Elizabeth - the nicest 'cause and effect' I've seen in a tax is my
property tax. I can glance at the annual report and see 2/3 goes to the
schools, which happen to be worth every penny. The rest is divided
amongst identified expenses including police, and local town overhead.

The point you make well is that SS is a tax, not a pension. The problem
is that it 'looks' like a savings plan. I have nearly 15% (between
company and my deductions) withheld each check. I get an annual
statement of what my 'benefit' would be at retirement or disability. And
like Sgt., I would opt out and give up any claim to the accrued
benefits. Understanding that it's not the pension plan many hope for,
there has to better way to understand its components, the survivor
benefits/disabilty benefits, etc. Aggressively saving for our
retirement, 20%+, I can't help but think how much closer we'd be if we
had most of that 15% to tack on. Probably retired already.
The liberal in me says that if I need to contribute some portion to
subsidize people in need, maybe it's still 4% to that system. I'm okay
with that, too.
(And I do know that some of my money goes to real state police who had
to take care of the "Aqua Teen Hunger Force" in Boston and surrounding
towns. I can't make this stuff up)

JOE

On Feb 1, 8:23 pm, "Elizabeth Richardson" <erich...[at]worldnet.att.netwrote:

- quote -

SS contributions are a tax, but of a very specific kind: it is an
earmarked tax, a tax allocated to very specific uses (pension
benefits, disability/life insurance, and so on). This is not the case
of most other taxes, like income or sales taxes, which finance
undefined public expenditures.

Therefore, we have the right to see if this money that the government
takes from our pockets to finance these specific expenditures could be
used more efficiently. Well, this is the case: you get a much better
return for your hard-earned dollars if you take this money and you use
it to fund your own pension plan. This is the central issue under
discussion here. The rest -redistribution, social safety net, etc...-
does not depend of having a public pay-as-you-go pension system, if
the society considers that these are things that have to be done, they
could be done through other ways than wasting resources in an
inefficient social security system.

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
news:1170355652.450041.11450[at]q2g2000cwa.googlegroups.com...
- quote -

Well, since your SS Money In is a tax, there's nothing that says you will
get a return on your money. Do you get a return on your income taxes? Would
you try to calculate a return on your Medicare taxes? (Just playing devil's
advocate here.)

Elizabeth Richardson

- quote -

Those words could spark much discussion.

This thread has actually changed my stance on SS somewhat. The
insurance aspect of SS in particular has been an effective way to
communicate values of the system.

There are 3-4 ways to look at the rate of return.

1) What is the value of having the insurance safety net? (and when
would this "insurance" get paid out- disability, survivor benefit).

2) Income relative to benefit. What incomes get what rate of return?

3) Money in/ Money out. I pay into system. What is probability I
will get back all of what I put in? There would be a return on this
(which could be calculated once I die).

4) If SS is considered income on most income tables (when evaluation
mean/median US household incomes), what would median income be without
SS benefits? Implying that maybe 20% of country is living off SS
alone, if these people are removed from the mean/median equations,
what would new numbers for 1-3 be above.

On Feb 1, 6:34 pm, darknes...[at]yahoo.com wrote:
- quote -


Nothing is certain but death and taxes. Neither are social security
pensions. They are subject to demographic shocks -faster-than-expected
population ageing reduces expected benefits- political risks -the
benefits are decided/can be changed at any future time by Congress-
and economic growth risk -lower-than-expected economic growth reduces
future pension benefits because it slows down contributions to the
system-. By comparison, stocks have yielded a high long term rate of
return in the past 135 yrs under all types of shocks: life expectancy
is now about twice than in 1871, more than 20 different Presidents and
many more Congressmen have been in positions of power during the
period, and there had been many business cycles during the period,
including the Great Depression.

- quote -

Actually, the US SS system in its current form is actuarially broke,
like all systems around the world. The reason is population ageing.
Longer life expectancies mean that the ratio of retired people to
working people is increasing steadily over time. The only ways to fix
the system, in the long term, is to either cut benefits or to raise
the retirement age. It is unrealistic to say -as some politicians
clainm- that benefits are not going to be cut or/and the retirement
age is not going to be increased, because that means that the system
is at some time going to fall into ever-increasing deficits, i.e., the
system would go bankrupt.

On Feb 1, 3:08 pm, "Jose Bailen" <jose.bai...[at]gmail.com> wrote:
- quote -

Likely is not certainty.

The past does not guarantee the future. Higher return must mean
higher risk.

Administration and fund management costs on private accounts will eat
much of the surplus 'created'. That, in fact, is why the financial
services industry wants it.

SS also has an insurance function as we have argued elsewhere.

You can't magically create a return for a society that is determined
by the dependency ratio: whether it is mediated by the stock market,
or by the tax system, it exists.

US SS is anything but broken.

On Feb 1, 10:49 am, darknes...[at]yahoo.com wrote:
- quote -

Just put it this way. Take Shiller's data for stock market returns
since 1871 (I posted these data in the files section of this group:
http://groups.google.com/group/small...ap-value?hl=en ). Then take
ANY 40-year period : this is a conservative relevant period, because
the working life of most people is 40 yrs or more: they start working
around 20 -depending on the education they get- and they retire at 65,
assuming 2-3 yrs of unemployment during the whole working life gives
you a working life of more than 40 yrs. You get a total of 94
subperiods, given the low standard deviation of 40-yr returns data
this makes the results statiscally significant. The LOWEST real rate
of return of the stock market during more than a century is 4.56%
(that's the 40-yr superiod that ended in 1920).

What this means? Assume that an average worker has the choice of
investing in the stock market or pay the social security tax. The
minimum return of 4.56% a year means that the worker would have
acuumulated a wealth about 50 percent HIGHER under the LOWEST, most
pessimistic scenario of investment in the stock market than the
implicit wealth he would have obtained under the pay-as-you-go social
security system, which has an average rate of return equivalent to the
long-term growth rate of about 3%.

Therefore, the case is pretty strong for a privatized social security
system. I agree that the system needs to be complemented by a social
safety network to take care for the minority of people who would get a
lower return under the new private system, but this is no argument
that invalids the simple fact that a privatized system would generate
more welfare for everybody in the society.