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Thread: Panel to suggest cuts to Social Security, Medicare

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    Re: Panel to suggest cuts to Social Security, Medicare

    my solution:

    allow workers to opt into a partially privatized system, where of their 7.65% FICA expenditures, 5% goes into a private TSP-style account; and the Employers match follow the same. the remaining 2.65% (or, when you count the match, 5.3%) will go straight into SS, but it will be revenue for which SS will never see a liability. the cost for opting out is that part of your pay continues to go to pay for others, but the upside is that you get a combined total of 10% of your annual income going into a retirement account that belongs to you, and grows tax-free. Social Securities' revenues will instantly drop, but nowhere near as severely as their liabilities. To ensure solvency in the adjustment period (and to make it politically palatable); lift the cap. Higher paid workers will see more of their money leave in the form of taxes, but they will get back even more in the form of ownership of personalized accounts, and so they will be willing to make the trade. Poorer workers can either spend their lifetime building far more wealth than they ever would have seen under Social Security if they are younger, or keep the guaranteed program benefits if they are older.


    ta-da! the American people and the Government are left better off.


    Because I am a nerd, and I like doing this sort of thing, I ran the numbers.

    Joe graduates High School and goes to work, making 25,000 a year. Not anyone's idea of incredible pay, but there you are. Joe gets' a 2% raise every year to account for his increasing talent, experience, etc. the 10% of his income goes into a mix of funds that matches the S&P 500 average since 1982: 7.98%, after you account for inflation. If Joe retires nice and early at 62; his retirement fund will be worth $1,030,110, and if placed into an annuity / conservative account that generates a 5% annual return, his monthly benefit will be $4,292. That would be slighly less than his last monthly paycheck of $4,979; but still quite livable. If Joe works until he's 65, his monthly benefit will climb above his monthly income to $5,473; and if he decides (as most of us probably will) to delay retirement to 68, he's looking at a monthly retirement check of $6,966.

    And remember, Joe isn't exactly one of society's higher paid workers.

    But he also had the advantage of time. Let's say instead Joe went to two years of college, and got an associates before entering the workforce to earn that 25,000; and let's say that instead of 2%, Joe turns out not to learn new skills that well, and his annual raise above inflation is actually 0.5%. We're stacking the deck a little against ole Joe, but he still seems to come out okay; his monthly benfit at age 62 is $3,050; at age 65 it's $3,875; and at age 68 it's $4,915. It's worth noting that under this model, the most Joe ever made was $31,672 in a given year; and that his monthly retirement benefits at age 65 represents a $1,200 monthly pay increase over his monthly income. Even if Joe retires early at 62 he will have more in income off of his account than he would from working; and the longer he chooses to keep working, the greater, obviously, his return is.



    AND ALL THIS WITHOUT COSTING OLE JOE A SINGLE RED CENT. since the money was cash he was losing to taxes in the first place, his take-home pay wasn't reduced one iota; but because we partially privatized social security, Low Income Worker Joe can retire a millionare.

    OR, if he didn't want the 'risk' of the marketplace, he could have chosen to stay with regular social (in)security. average monthly payout: about $1,100 dollars. or, roughly 1/3rd of what Joe made in our worse case scenario at age 65.


    BUT WAIT!!! WHAT IF THE MARKET TANKS!!!

    Markets recover. If the market tanks right as Joe was planning on retiring, he can work for an extra year while it rights itself, or simply choose to draw less from the account in order to leave more in there to ride the recovery. OR, if Joe makes the worst decision possible, at the worst time possible and withdraws all of his money while the market is at the low point on the trough (say, a 40% drop, similar to what we just saw), to purchase a 5% annuity, then his monthly income in our worse-case scenario at age 65 will still be more than twice what he could have expected from Social Security.


    perhaps that's the real problem with privatization of social security; it gives poor people freedom from dependence upon government spending?

  2. #32
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    Re: Panel to suggest cuts to Social Security, Medicare

    Quote Originally Posted by hazlnut View Post
    That's not even half of what they recommended.

    *Closing tax loopholes.

    *No more earmarks.
    both of those = less power for congresscritters

    and are thus unlikely to get statutory backing.

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    Re: Panel to suggest cuts to Social Security, Medicare

    aaand again no replies to my plan.

    that makes me suspect few can argue with it; maybe i'll make it a poll.

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    Re: Panel to suggest cuts to Social Security, Medicare

    Quote Originally Posted by cpwill View Post
    my solution:

    allow workers to opt into a partially privatized system, where of their 7.65% FICA expenditures, 5% goes into a private TSP-style account; and the Employers match follow the same. the remaining 2.65% (or, when you count the match, 5.3%) will go straight into SS, but it will be revenue for which SS will never see a liability. the cost for opting out is that part of your pay continues to go to pay for others, but the upside is that you get a combined total of 10% of your annual income going into a retirement account that belongs to you, and grows tax-free. Social Securities' revenues will instantly drop, but nowhere near as severely as their liabilities. To ensure solvency in the adjustment period (and to make it politically palatable); lift the cap. Higher paid workers will see more of their money leave in the form of taxes, but they will get back even more in the form of ownership of personalized accounts, and so they will be willing to make the trade. Poorer workers can either spend their lifetime building far more wealth than they ever would have seen under Social Security if they are younger, or keep the guaranteed program benefits if they are older.


    ta-da! the American people and the Government are left better off.


    Because I am a nerd, and I like doing this sort of thing, I ran the numbers.

    Joe graduates High School and goes to work, making 25,000 a year. Not anyone's idea of incredible pay, but there you are. Joe gets' a 2% raise every year to account for his increasing talent, experience, etc. the 10% of his income goes into a mix of funds that matches the S&P 500 average since 1982: 7.98%, after you account for inflation. If Joe retires nice and early at 62; his retirement fund will be worth $1,030,110, and if placed into an annuity / conservative account that generates a 5% annual return, his monthly benefit will be $4,292. That would be slighly less than his last monthly paycheck of $4,979; but still quite livable. If Joe works until he's 65, his monthly benefit will climb above his monthly income to $5,473; and if he decides (as most of us probably will) to delay retirement to 68, he's looking at a monthly retirement check of $6,966.

    And remember, Joe isn't exactly one of society's higher paid workers.

    But he also had the advantage of time. Let's say instead Joe went to two years of college, and got an associates before entering the workforce to earn that 25,000; and let's say that instead of 2%, Joe turns out not to learn new skills that well, and his annual raise above inflation is actually 0.5%. We're stacking the deck a little against ole Joe, but he still seems to come out okay; his monthly benfit at age 62 is $3,050; at age 65 it's $3,875; and at age 68 it's $4,915. It's worth noting that under this model, the most Joe ever made was $31,672 in a given year; and that his monthly retirement benefits at age 65 represents a $1,200 monthly pay increase over his monthly income. Even if Joe retires early at 62 he will have more in income off of his account than he would from working; and the longer he chooses to keep working, the greater, obviously, his return is.



    AND ALL THIS WITHOUT COSTING OLE JOE A SINGLE RED CENT. since the money was cash he was losing to taxes in the first place, his take-home pay wasn't reduced one iota; but because we partially privatized social security, Low Income Worker Joe can retire a millionare.

    OR, if he didn't want the 'risk' of the marketplace, he could have chosen to stay with regular social (in)security. average monthly payout: about $1,100 dollars. or, roughly 1/3rd of what Joe made in our worse case scenario at age 65.


    BUT WAIT!!! WHAT IF THE MARKET TANKS!!!

    Markets recover. If the market tanks right as Joe was planning on retiring, he can work for an extra year while it rights itself, or simply choose to draw less from the account in order to leave more in there to ride the recovery. OR, if Joe makes the worst decision possible, at the worst time possible and withdraws all of his money while the market is at the low point on the trough (say, a 40% drop, similar to what we just saw), to purchase a 5% annuity, then his monthly income in our worse-case scenario at age 65 will still be more than twice what he could have expected from Social Security.


    perhaps that's the real problem with privatization of social security; it gives poor people freedom from dependence upon government spending?
    Sometimes markets tank and take longer then a couple of years to recover

    The Nasdaq is around 50% of its historical high, the DOW is pretty much flat over the last 10 years with some rather wild swings.

    That is 10 years of investing that where a person may have gotten zero capital gains, or lost a boat load of money. Using arbitrary dates and historical returns is not a good method to determine future returns, especially if you use what have been around the start dates of a long term bull market. What would happen to your analysis if you used the historical returns on the SP from 1962, or for just the last 10 years. Generally if you do not account for long term bear markets in your analysis, you will get far to rosy a picture, and will be in world of pain when the time comes to actually retire. This is the problem most pension plans have had over the last 10 year, each has overestimated the returns they will get because they were using long term average returns which included the boom years, and have not accounted for the fact we are have not been in a boom/bull market for over a decade
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    Re: Panel to suggest cuts to Social Security, Medicare

    Quote Originally Posted by cpwill View Post
    aaand again no replies to my plan.

    that makes me suspect few can argue with it; maybe i'll make it a poll.
    Good idea, honestly it looks like an interesting alternative.

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    Re: Panel to suggest cuts to Social Security, Medicare

    Social Security should not have even been considered by this commission- Since S.S. is mandated to be self-funding, it can never be part of the deficit. It is a separate and distinct- Congress needs to address the problems of the baby boomer demographic but it is extremely misleading to include it in a deficit commission.

    The primary reason for the coming fiscal train wreck is the spiraling cost of health care and the medicare/medicaid bomb that it creates, yet this commission does nothing to address the underlying reasons behind spiraling H.C. costs..

    While it is obnoxious that huge mortgages and and multiple home mortgages can be deducted, elimination of the home mortgage, whole cloth, will result in a housing industry that will never recover. Since many retirees have no pension, rely on a combination of Soc. Sec. and the savings embedded in their homes, for their "golden years", I believe these recommendations will further reduce the middle class to penury.

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    Re: Panel to suggest cuts to Social Security, Medicare

    Quote Originally Posted by cpwill View Post
    my solution:

    allow workers to opt into a partially privatized system, where of their 7.65% FICA expenditures, 5% goes into a private TSP-style account; . . . .
    I have that kind of TSP-style account. My money plus matching funds are invested. I choose half for invetment, and the services choose the other half. Neither did wel during the last crash. Private, but not successful.

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    Re: Panel to suggest cuts to Social Security, Medicare

    Quote Originally Posted by cpwill View Post
    aaand again no replies to my plan.

    that makes me suspect few can argue with it; maybe i'll make it a poll.
    Your plan does not address the long term deficit, only S.Sec.

    What happens when Joe loses his job and needs to tap into some money to pay his mortgage and his medical bills. Is he able to access his retirement fund?

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    Re: Panel to suggest cuts to Social Security, Medicare

    Quote Originally Posted by cpwill View Post
    my solution:

    allow workers to opt into a partially privatized system, where of their 7.65% FICA expenditures, 5% goes into a private TSP-style account; and the Employers match follow the same. the remaining 2.65% (or, when you count the match, 5.3%) will go straight into SS, but it will be revenue for which SS will never see a liability. the cost for opting out is that part of your pay continues to go to pay for others, but the upside is that you get a combined total of 10% of your annual income going into a retirement account that belongs to you, and grows tax-free. Social Securities' revenues will instantly drop, but nowhere near as severely as their liabilities. To ensure solvency in the adjustment period (and to make it politically palatable); lift the cap. Higher paid workers will see more of their money leave in the form of taxes, but they will get back even more in the form of ownership of personalized accounts, and so they will be willing to make the trade. Poorer workers can either spend their lifetime building far more wealth than they ever would have seen under Social Security if they are younger, or keep the guaranteed program benefits if they are older.


    ta-da! the American people and the Government are left better off.


    Because I am a nerd, and I like doing this sort of thing, I ran the numbers.

    Joe graduates High School and goes to work, making 25,000 a year. Not anyone's idea of incredible pay, but there you are. Joe gets' a 2% raise every year to account for his increasing talent, experience, etc. the 10% of his income goes into a mix of funds that matches the S&P 500 average since 1982: 7.98%, after you account for inflation. If Joe retires nice and early at 62; his retirement fund will be worth $1,030,110, and if placed into an annuity / conservative account that generates a 5% annual return, his monthly benefit will be $4,292. That would be slighly less than his last monthly paycheck of $4,979; but still quite livable. If Joe works until he's 65, his monthly benefit will climb above his monthly income to $5,473; and if he decides (as most of us probably will) to delay retirement to 68, he's looking at a monthly retirement check of $6,966.

    And remember, Joe isn't exactly one of society's higher paid workers.

    But he also had the advantage of time. Let's say instead Joe went to two years of college, and got an associates before entering the workforce to earn that 25,000; and let's say that instead of 2%, Joe turns out not to learn new skills that well, and his annual raise above inflation is actually 0.5%. We're stacking the deck a little against ole Joe, but he still seems to come out okay; his monthly benfit at age 62 is $3,050; at age 65 it's $3,875; and at age 68 it's $4,915. It's worth noting that under this model, the most Joe ever made was $31,672 in a given year; and that his monthly retirement benefits at age 65 represents a $1,200 monthly pay increase over his monthly income. Even if Joe retires early at 62 he will have more in income off of his account than he would from working; and the longer he chooses to keep working, the greater, obviously, his return is.



    AND ALL THIS WITHOUT COSTING OLE JOE A SINGLE RED CENT. since the money was cash he was losing to taxes in the first place, his take-home pay wasn't reduced one iota; but because we partially privatized social security, Low Income Worker Joe can retire a millionare.

    OR, if he didn't want the 'risk' of the marketplace, he could have chosen to stay with regular social (in)security. average monthly payout: about $1,100 dollars. or, roughly 1/3rd of what Joe made in our worse case scenario at age 65.


    BUT WAIT!!! WHAT IF THE MARKET TANKS!!!

    Markets recover. If the market tanks right as Joe was planning on retiring, he can work for an extra year while it rights itself, or simply choose to draw less from the account in order to leave more in there to ride the recovery. OR, if Joe makes the worst decision possible, at the worst time possible and withdraws all of his money while the market is at the low point on the trough (say, a 40% drop, similar to what we just saw), to purchase a 5% annuity, then his monthly income in our worse-case scenario at age 65 will still be more than twice what he could have expected from Social Security.


    perhaps that's the real problem with privatization of social security; it gives poor people freedom from dependence upon government spending?
    There are some other issues that you have not covered with your proposal. First, as you know social security covers a variety of things other than a retirement benefit. I don't know them all but they pay a stipend to children if a parent passes away, burial costs etc.But this is a small issue.

    A bigger issue is how this would play out in markets. First the size of the inflows would be huge distorting prices. Then you have the question of does the person pick individual stocks, which most people would not have a clue how to do. Is it some type of market basket, does this market basket cover every issue regardless of size or financial strength. Does this include just U.S. securities or is it a global fund. Do you just but equities which should not be anyone's investment criteria but also bonds, real estate, commodities?

    You raised the issue of what happens in a market decline which is a good point and should not be dismssed so easily. For example the NASDAQ was about 5,000 in 2000 and is about half that today. The Japanese market was something like 40,000 in 1989 and is about 11,000 today!

    Lastly you would have a huge issue about who gets to invest this money. Congress would have an army of people loking over their shoulder, probably impossible to administer.

    It is clear why something like this is attractive, but as they say for every difficult question there are a thousand easy answers. But usually none of them are right.

  10. #40
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    Re: Panel to suggest cuts to Social Security, Medicare

    I had time to look at some analysis of this thing and I think we can do better.

    I largely agree with the cuts to SS and Medicare, however I strongly disagree with the changes in taxation, many of those deductions exist to encourage healthy behavior and should stay there.

    Otherwise, its pretty good.

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