Social Security Fix

JoeTheEconomist said:

No reasonable people see the employment world as a competitive market place. What Liberals in general fail to see is the consequences of stupidity. It isn't that they fire everyone making $110,000 or more. It is that 1 company decides that the costs are simply cheaper overseas. We lose not just the $110,000 job but everyone who reports to him. "If you lay off workers you will LOSE money not save." In that case, they don't lose anything they make more.

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If that were true then the first jobs to be outsourced would be the CEO's whose pay is astronomical. Only simpletons think that all jobs can be outsourced to the lowest bidder.

iguanaman said:

If that were true then the first jobs to be outsourced would be the CEO's whose pay is astronomical. Only simpletons think that all jobs can be outsourced to the lowest bidder.

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Iggy, It is pretty clear that you have never worked in Corporate America. The CEOs pay is astronomical, and only simpletons think that CEOs won't try to outsource whatever work there is to the lowest bidder so that they can justify their pay.

cpwill said:

as I told you before, all numbers as presented in the post were adjusted for inflation.

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In the other thread you said that they were not adjusted for inflation. I would like to see your numbers. Someone starting work in 1965 at 3,500 (or roughly $25,000 in 2012 dollars) whose salary goes to 34,670 over 47 working years will have a retirement account of about $569,933 assuming a return of 10% on which they can expect to draw about $854 a month.


But walk me through the 54 year-olds numbers and see how well this works out.

I have been thinking about an idea for SS. If we could somehow tie a person's home
mortgage into their retirement.
So SS can invest in special mortgage funds.
You Borrow money from yourself, and the interest paid builds up SS.
If a person defaults, it directly affects what they get in retirement.
I have not polished this idea any, it's just a concept.

JoeTheEconomist said:

Is there any data that suggests this will pay for the transition? You are diverting more to private accounts than is actually being collected for SS today.

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since government is on the hook for the difference, the cost slides downward off the baseline the further we get in.

What happens to the 54 year-old, who is stuck in a system that can't deliver any benefits. Let's look at a guy who has a $50,000 a year job - not poor Joe. This guy has probably lost $800,000 to $1 million in savings to the system. Your plan will leave him with $113,000 at the age of 67. That assumes no unemployment.

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well, Medium Income Joe ended his working life with a $63,408 a year income. Using back of the napkin math, and just multiplying his total life earnings by 15%, that means that Joe has paid in a grand total of $297,575.70 to in FICA taxes.

someone with 50K at 54 whose income goes up 2% every year and whose money averages at 7% (adjusted for inflation) every year ends up with $125,904 in savings at age 67. That gives you about a $525 a month benefit from the account, which means to get Medium Income Joe up to par (at current rates) is only going to cost the Government about $705 rather than $1,230. That's before any COLA adjustments or means-testing take place.

Also worth noting - for the average incoming participant, the system will be entirely self-funding 10 years after that, as that is the cohort that totally replaces their SS check. So those 45 and above would generally still get some form of government aid, and those 45 and below would generally not need it.

cpwill said:

Also worth noting - for the average incoming participant, the system will be entirely self-funding 10 years after that, as that is the cohort that totally replaces their SS check. So those 45 and above would generally still get some form of government aid, and those 45 and below would generally not need it.

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"some form of government aid"

okay everybody, rest easy now. :roll:

No option for independents = no vote.

CPWill,

You have mentioned Chile a number of times. I can't get much quality information on the subject. I get conflicting data, and little of it is current.

Here is our piece on Chile And Galveston. You are free to write a counter piece.
The Results Of Chile And Other Privatization Efforts

If you are going to use economic returns of the investments, you need to include or at least mention the transition costs create increased income taxes. You need to mention the fact that Chile subsidies its system so the returns are juiced. Again, I can tell you that subsidies exist ranging from 2-20% of the revenue. I have heard that transition costs were as little as selling state industries to as much as yearly expenses that have become a burden to the government. My guess is that the truth is somewhere there, but I don't know what the costs are.

The guarantees vary in size and scope. I have heard a variety of explanations. I have nothing reliable on exactly what the guarantee covers.

haymarket said:

"some form of government aid"

okay everybody, rest easy now. :roll:

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yup. benefit remains guaraunteed. It will just so happen to go up dramatically for future retirees in the context of also saving the system from fiscal collapse.

you're welcome. I'll be here all week.

cpwill said:

yup. benefit remains guaraunteed. It will just so happen to go up dramatically for future retirees in the context of also saving the system from fiscal collapse.

you're welcome. I'll be here all week.

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While you are here, can you explain what this article is saying : http://www.nytimes.com/2006/01/10/world/americas/10iht-chile.html?_r=3.

"At the moment, the government pays about 5 percent of gross domestic product, or more than it spends for either health or education, on pensions for the poor, payments into a separate military retirement plan, and so-called transition and administrative costs.

Supporters of the privatized system argue that the state's burden will diminish as older retirees enrolled in the pay-as-you-go system that prevailed here before 1981 gradually die off."

It was 2006 which is a long time ago, but it makes me wonder what the success is and where the failure is seen.

5% sound like a long way from "the system will be entirely self-funding 10 years after that, as that is the cohort that totally replaces their SS check"

Again, I get conflicting commentary, but it would help to understand why you think the article is wrong.

JoeTheEconomist said:

While you are here, can you explain what this article is saying : http://www.nytimes.com/2006/01/10/world/americas/10iht-chile.html?_r=3.

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only got a minute, but I would say that the critical piece is this issue right here:

...Other studies, including one conducted by the World Bank, indicate that pension funds retain between a quarter and a third of workers' contributions in the form of commissions, insurance and other administrative fees....

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Meanwhile in the US, managed funds will run you... what? 1%? And broad index funds cost significantly less than that.

Many young people, who should be enrolling in the system early to accrue maximum benefit, are staying out or paying in very little. Some cannot afford to contribute beyond the obligatory minimum payment, which is 10 percent of wages,

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since our model was actually run with a 10% of wages, I would say we are still good. American wages being rather significantly higher than Chilean ones.

It was 2006 which is a long time ago, but it makes me wonder what the success is and where the failure is seen

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well, it's an opposing view. This is from just the year prior, where we can probably assume conditions were similar.

...After comparing our relative payments to our pension systems (since salaries are higher in America, I had contributed more), we extrapolated what would have happened if I'd put my money into Pablo's mutual fund instead of the Social Security trust fund. We came up with three projections for my old age, each one offering a pension that, like Social Security's, would be indexed to compensate for inflation:

(1) Retire in 10 years, at age 62, with an annual pension of $55,000. That would be more than triple the $18,000 I can expect from Social Security at that age.

(2) Retire at age 65 with an annual pension of $70,000. That would be almost triple the $25,000 pension promised by Social Security starting a year later, at age 66.

(3)Retire at age 65 with an annual pension of $53,000 and a one-time cash payment of $223,000.

You may suspect that Pablo has prospered only because he's a sophisticated investor, but he simply put his money into one of the most popular mutual funds. He has more money in it than most Chileans because his salary is above average, but lower-paid workers who contributed to that fund for the same period of time would be in relatively good shape, too, because their projected pension would amount to more than 90 percent of their salaries....

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Again, I get conflicting commentary, but it would help to understand why you think the article is wrong.

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:shrug: I wouldn't say that they are right or wrong, I would say that they appear to be a 2006 editorial, pushing a program (revamping their private pension system) which apparently wasn't terribly popular, because it didn't happen. I would also say that American wages are significantly higher than Chilean ones, and American fees are significantly lower than their Chilean counterpart.


Again, I've run the numbers for you multiple times now for regular and low income earners - and compared them to what the social securities' own formula's say they would receive under the current system.

cpwill said:

Again, I've run the numbers for you multiple times now for regular and low income earners - and compared them to what the social securities' own formula's say they would receive under the current system.

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You have run them multiple times with the wrong tax rates, wrong time periods, not inflation adjusted, and you compare a nominal annuity with an inflation-adjusted annuity as though they are the same. While I appreciate your time, nothing you have written gives me confidence that the Social Security's actuaries are wrong. I have given you their source material from SSA, and instead of telling me where they are wrong, you go back to your data which wasn't right in the first place. The fact that you haven't even corrected the tax rate which was close to 4% in 1965 tells me that time isn't the problem. The problem is a lack of seriousness.

No one disputes that a private model is going to be better but the results you claim about low-wage workers is off-the-charts. And the question remains how are you going to pay for the transition. You can't compare SS today vs a privatized model with a soak-the-rich tax structure. You need to compare a privatized model with a STRTS vs Social Security with a STRTS to be apples to apples. Time is not the problem here.

"but lower-paid workers who contributed to that fund for the same period of time would be in relatively good shape, too, because their projected pension would amount to more than 90 percent of their salaries.... "

The problem is that lower-paid workers do not participate. Participation in Chile is around 60%. It is 94% in SS. You can't compare these systems. The article you cited compares high-wage workers so it has nothing to do with low-wage workers. The biggest problem here is that the article does not look at the full cost of the system. Pablo may get $100,000 in retirement, but it is meaningless if his taxbill for the legacy costs and subsidies is $100,001. Chile subsidizes its system.

There is a difference in these articles. One is an agenda driven advertisement. The other asks reasonable questions. I don't get the sense that either of us has the answers, but you at least have to look. The one thing that we know is that the Chilean system was re-reformed in 2008 after both articles.

The only thing that you have convinced me of is that we should have privatized Social Security back in 1981. But that didn't take a lot.

JoeTheEconomist said:

You have run them multiple times with the wrong tax rates, wrong time periods, not inflation adjusted, and you compare a nominal annuity with an inflation-adjusted annuity as though they are the same.

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:doh

I ran them as though the accounts were allowed to grow tax free (I see a hard time selling that they shouldn't be), I ran them inflation adjusted (as I have explained to you multiple times), and I assumed an annual 5% removal, which again, adjusts for inflation.

No one disputes that a private model is going to be better but the results you claim about low-wage workers is off-the-charts

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Actually it's in the charts. Specifically, it is in the charts that I have provided ad nauseum.

And the question remains how are you going to pay for the transition.

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we covered that as well.

You can't compare SS today vs a privatized model with a soak-the-rich tax structure.

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When I first sat down and ran the numbers, I tried to figure out at what point popping the cap net cost high-income earners given the 10% savings and tax-free growth. As I recall, all income earners up to about $460,000 a year came out ahead, and then you started on the downside. That's not exactly soak-the-rich, though it will increase the amount deducted from their pay.

The only thing that you have convinced me of is that we should have privatized Social Security back in 1981. But that didn't take a lot.

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well it would have saved us alot of pain with the Baby Boomers. but better late than never.

Trying to integrate this idea with this one here.

It seems for purposes of plausibility (hah - as if anything decent is plausible in our sclerotic nightmare of a bungle up there in DC), that we are going to need to make sure that we assign a higher-benefit-default, that the elderly are guaranteed either 50% reimbursement of all income below 200% of the adjusted poverty line, or the guaranteed continual SS payout, whichever is larger. Given that the average social security check is around $1100 or so a month, however I'm thinking that the NIT will remain the bigger bet, for the duration of the adjustment period. This means that raw outlays to individuals will be increased, but that former pure Social Security outlays will count against them, likely making for a net deficit-reduction.

Sounds like maybe it would work for a while. A few problems/concerns pop right out at me.

1) If Joe has paid into SS for 40 quarters (10 years) and then opts out what happens if he becomes disabled in three years?

2) If Joe (currently age 40) now qualifies for SS (with a projected SS benefit of $2.5K/month at age 62) then he must consider that he will likely never accumulate private savings (in just 22 years) to beat that deal; yet Joe has absolutely no guarantee that SS will actually remain "as promised" when he retires in 22 years either.

3) My biggest concern is that as less and less voters remain in the "public option" form of SS then there is ever diminishing political pressure not to simply screw them over later.

ttwtt78640 said:

3) My biggest concern is that as less and less voters remain in the "public option" form of SS then there is ever diminishing political pressure not to simply screw them over later.

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And make no mistake about it - that indeed is the plan for many on the right who have hated Social Security from day one and have never stopped attempting to kill it. They will attempt to give us some in-between plan that keeps seniors on it but then 15 or 20 years down the road they will kill the remains of the program and the nightmare scenario comes true. Of course for them, its more like a wetdream.

ttwtt78640 said:

Sounds like maybe it would work for a while. A few problems/concerns pop right out at me.

1) If Joe has paid into SS for 40 quarters (10 years) and then opts out what happens if he becomes disabled in three years?

2) If Joe (currently age 40) now qualifies for SS (with a projected SS benefit of $2.5K/month at age 62) then he must consider that he will likely never accumulate private savings (in just 22 years) to beat that deal; yet Joe has absolutely no guarantee that SS will actually remain "as promised" when he retires in 22 years either.

3) My biggest concern is that as less and less voters remain in the "public option" form of SS then there is ever diminishing political pressure not to simply screw them over later.

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Shouldn't it be Joe's personal responsibility to carry disability insurance?
Joe if he is smart, knows anything government promises can be broken like "if you like your healthcare plan you can keep it." So wouldn't it be advantageous for Joe to be in a position where he had more control over his own money? It looks like there is already bi-partisan agreement on raising the age in which you will be allowed to collect S.S. so the one that has a private account is already in better shape than the one who relies on the public option.

vesper said:

Shouldn't it be Joe's personal responsibility to carry disability insurance?
Joe if he is smart, knows anything government promises can be broken like "if you like your healthcare plan you can keep it." So wouldn't it be advantageous for Joe to be in a position where he had more control over his own money? It looks like there is already bi-partisan agreement on raising the age in which you will be allowed to collect S.S. so the one that has a private account is already in better shape than the one who relies on the public option.

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OK. Assuming that Joe makes $25K/year he can get private, individual disabillity insurance for about $2K/year that would pay him about the same as SS which is now "free". So, sure, Joe can reduce his income by about 10% and pay for that private, individual disability insurance but why is that a good deal for Joe?

Do You Have Enough Disability Insurance? | Bankrate.com

vesper said:

Shouldn't it be Joe's personal responsibility to carry disability insurance?
Joe if he is smart, knows anything government promises can be broken like "if you like your healthcare plan you can keep it." So wouldn't it be advantageous for Joe to be in a position where he had more control over his own money? It looks like there is already bi-partisan agreement on raising the age in which you will be allowed to collect S.S. so the one that has a private account is already in better shape than the one who relies on the public option.

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To think that a private account as the sole provider of a person is going to be enough to live off of until one dies is incredibly naive. The best thing about the SS program is that is provides defined benefits for the life of the person. The person who has both private investments and social security should be fine during retirement. The person with only one will have more of an issue. Those without defined benefits are basically screwed.

ttwtt78640 said:

OK. Assuming that Joe makes $25K/year he can get private, individual disabillity insurance for about $2K/year that would pay him about the same as SS which is now "free". So, sure, Joe can reduce his income by about 10% and pay for that private, individual disability insurance but why is that a good deal for Joe?

Do You Have Enough Disability Insurance? | Bankrate.com

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Social Security is neither self sustaining nor a true anti-poverty program. The idea that Joe thinks he gets something for "free" is a big part of the problem. First off, reform to S.S. disability has to be addressed redefining what truly disables a person from providing for themselves. Second, those opting out of the system will need to take personal responsibility for their own disability insurance. Something has to be done because every time S.S. has been reformed in the past it was with very optimistic ideas that it would remain solvent for many years and it never does. Social Security is projected to remain solvent through 2033, but its annual cash-flow deficits are already adding to federal deficits. In reality it may have 11 years.

vesper said:

Social Security is neither self sustaining nor a true anti-poverty program.

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Social security has reduced poverty for the elderly.

rabbitcaebannog said:

Social security has reduced poverty for the elderly.

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For those who currently rely on it they keep full benefits. But it can not be sustained as is nor is it fair to those who are younger to be forced to pay into something that may not be there in full benefits by the time they are old enough to collect. Let them have the option to open their own retirement accounts where they will get a much better return for their money. And to others still a couple of decades from retirement, why can't they reimburse them for the money they have paid with interest to add to their own retirements? Why does government have to be the answer for everything? Can't people be allowed to make their own choices and be allowed to pay the consequences for them? We should be sending the message to our youth to prepare and not count on government to take care of you!

vesper said:

For those who currently rely on it they keep full benefits. But it can not be sustained as is nor is it fair to those who are younger to be forced to pay into something that may not be there in full benefits by the time they are old enough to collect. Let them have the option to open their own retirement accounts where they will get a much better return for their money. And to others still a couple of decades from retirement, why can't they reimburse them for the money they have paid with interest to add to their own retirements? Why does government have to be the answer for everything? Can't people be allowed to make their own choices and be allowed to pay the consequences for them? We should be sending the message to our youth to prepare and not count on government to take care of you!

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It's a lie to say that we can't except to get much better return. We can tweek the system like Reagan did back in the 80s. I would say raise the cap. It's a much better option than privatizing it. If you privatize, you have less of a pool which in itself means less return. Also, money that should be yours is going toward private fees. That loss over time can be substantial. Plus you take on all the risks.

vesper said:

Social Security is neither self sustaining nor a true anti-poverty program. The idea that Joe thinks he gets something for "free" is a big part of the problem. First off, reform to S.S. disability has to be addressed redefining what truly disables a person from providing for themselves. Second, those opting out of the system will need to take personal responsibility for their own disability insurance. Something has to be done because every time S.S. has been reformed in the past it was with very optimistic ideas that it would remain solvent for many years and it never does. Social Security is projected to remain solvent through 2033, but its annual cash-flow deficits are already adding to federal deficits. In reality it may have 11 years.

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If we had a functional Congress, they could pass a few minor adjustments and keep the program going for longer. They could raise the age of eligibility, for example, and clamp down on the "disabled" who could actually work for their keep.

But, alas, a functional Congress is sadly lacking in Washington .