View Poll Results: Your Identity and For/Against this SS Reform model

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Thread: Social Security Fix

  1. #291
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    Re: Social Security Fix

    ran across an interesting piece comparing our current system to one which had already imposed something similar:


    The Proof is in the Pension

    I made a pilgrimage to Santiago seeking to resolve the Social Security debate with a simple question: What would Pablo Serra do?

    I wanted to compare our pensions to see the results of an accidental experiment that began in 1961, when he and I were friends in second grade at a school in Chile. He remained in Chile and became the test subject; I returned to America as the control group.

    By the time we finished college, both of our countries' pension systems were going broke. Chile responded by pioneering a system of private accounts in 1981. America rescued its traditional system in the early 1980's by cutting benefits and raising taxes, with the promise that the extra money would go into a trust to finance the baby boomers' retirement.

    As it happened, our countries have required our employers to set aside roughly the same portion of our income, a little over 12 percent, which pays for disability insurance as well as the pension program. It also covers, in Pablo's case, the fees charged by the mutual-fund company managing his money...

    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....

    The biggest problem in Chile is that many workers don't contribute regularly to their pensions because they're unemployed or working off the books. That's a common situation in the developing world, no matter what the pension system is. But if you contribute for at least 20 years, Chile guarantees you a minimum pension that, relative to the median salary, is actually more generous than the median Social Security check....

    "I'm very happy with my account," he said to me after comparing our pensions. He was kind enough not to gloat. When I enviously suggested that he could expect not only a much heftier pension than mine, but also enough cash to buy himself a vacation home at the shore or in the country, he reassured me that it would pay for only a modest place.

    I'm not sure how much consolation that is, but I'm trying to look at the bright side. Maybe my Social Security check will cover the airfare to visit him.

  2. #292
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    Re: Social Security Fix

    Quote Originally Posted by cpwill View Post
    Here is my proposal:

    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.
    I have to question the numbers. Today SS gets 8.6% of your wages. DI gets 1.8%. And HI gets 2.9%. The total is 15.3%, currently 2% is in the payroll tax holiday. So your numbers are pushing money that is dedicated to Disability and Medicare into SS. How will you fund Disability and Medicare?

    The 10.6% (the general taxpayers are paying the 2% for the holiday) is not covering existing benefits. If you reduce it to 2.65, you will have a substantial shortfall. While the Trust Fund will absorb the different it will not last.

    I can point you to Crestmont Research that will tell you that for the investment cohort 1982-2010, the S&P dividend reinvested no taxes taken inflation adjusted return was less than 7%. What is the source on your returns?

  3. #293
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    Re: Social Security Fix

    Quote Originally Posted by JoeTheEconomist View Post
    I have to question the numbers. Today SS gets 8.6% of your wages. DI gets 1.8%. And HI gets 2.9%. The total is 15.3%, currently 2% is in the payroll tax holiday. So your numbers are pushing money that is dedicated to Disability and Medicare into SS. How will you fund Disability and Medicare?
    Disability I haven't considered I'll admit - I assumed it came out of the same pile of money. Medicare expenditures I would push down by switching to a means-tested premium support model.

    The 10.6% (the general taxpayers are paying the 2% for the holiday) is not covering existing benefits. If you reduce it to 2.65, you will have a substantial shortfall.
    which is why we adjust the age upwards, switch COLA increases to match inflation rather than wage-growth, pop the cap, and consider introducing means-testing as necessary.

    I can point you to Crestmont Research that will tell you that for the investment cohort 1982-2010, the S&P dividend reinvested no taxes taken inflation adjusted return was less than 7%. What is the source on your returns?
    CAGR Annualized Return of the SP 500 from Jan 1 1982 through Dec 31 2010, adjusted for inflation, comes out to 8.15. Which would alter the numbers in the OP upwards - but the basic result (that private accounts give a level of fiscal security and financial independence to our lower income workers that Social Security currently does not) would remain if you dropped it to 7%.
    Last edited by cpwill; 04-05-12 at 02:02 PM.

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    Re: Social Security Fix

    Quote Originally Posted by cpwill View Post
    CAGR Annualized Return of the SP 500 from Jan 1 1982 through Dec 31 2010, adjusted for inflation, comes out to 8.15. Which would alter the numbers in the OP upwards - but the basic result (that private accounts give a level of fiscal security and financial independence to our lower income workers that Social Security currently does not) would remain if you dropped it to 7%.
    I don't see the inflation adjustment. Here is the data from Crestmont, http://www.crestmontresearch.com/doc...eal3-11x17.pdf. They show that 1982 to the end of 2010 was a 7% return. This sheet also shows that as a cohort the 1982-2010 was the highest return for any co-hort for more than 100 years. Do you think it is fair to base your results on the absolute peak returns?

  5. #295
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    Re: Social Security Fix

    Quote Originally Posted by cpwill View Post
    Disability I haven't considered I'll admit - I assumed it came out of the same pile of money. Medicare expenditures I would push down by switching to a means-tested premium support model. which is why we adjust the age upwards, switch COLA increases to match inflation rather than wage-growth, pop the cap, and consider introducing means-testing as necessary.
    You asked for criticisms. I think you need more candor and more hard numbers. If you are doing to divert medicare funding that is a top-line change. I would like to see what numbers you think will enable you to pay benefits to existing retirees with a 2.65 SS tax. Without payroll taxes, the Trust Fund is gone in about 3 years.

    You can't introduce means-testing. It was introduced in 1983, and affects up to 1/3rd of retirees. Social Security benefits are already means tested based on income. As I have said else where, increasing the cap is when you have debt in reality just shifts the cost of SS to the general tax payer. If you are going to raise taxes, the money should be used to control the debt. Debt is the problem here. At some point, and you can see it in this thread, the younger generation will be forced to choose between supporting the retirees and supporting the debt created by the retirees. Increasing the cap is essentially putting your 401K contribution on your child's credit card. (I would point you to your discussion on the other thread).

    As a side note, you need to adjust your economic returns from equity investing for market cycles. Wages peak at market tops and trough a couple of months after market bottoms. 30% of my SS contributions occurred within 1 year of market tops. I was unemployed in 2002 and 2009 when I should have been buying. You can't apply a historical even dollar-weighted investment returns to a plan which calls for wage-weighted investments.

    This doesn't even get into how you will let people invest their money. Do you plan to have a control on what people can invest in? If so, who is going to make that decision - overtime it will be a Barney Frank and a Chris Dodd. You should assume that every district will have a Solyndra that want into the index.

    You asked for criticisms. Criticizing SS plans is what I do...

    Even without seeing the number I can tell you that it seems like you are setting up the 45-54 year-olds who have paid the most for this system in a position to get the least. In general, our site says that any plan that ends Social Security has to do so on a shared-basis, one on which everyone including retirees absorbs some part of the cost.

    Walk me through a 54 year-old who is due an annuity of 25K a year. Factor in the idea that labor participation rates are dropping in that age group. It is hard to find work for many of these people.

  6. #296
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    Re: Social Security Fix

    Quote Originally Posted by JoeTheEconomist View Post
    I don't see the inflation adjustment.
    You will note that if you enter the dates "1982" and "2010", that you have an "adjust for inflation" box to check. that set of data will give you 8.15%

    Here is the data from Crestmont, http://www.crestmontresearch.com/doc...eal3-11x17.pdf. They show that 1982 to the end of 2010 was a 7% return. This sheet also shows that as a cohort the 1982-2010 was the highest return for any co-hort for more than 100 years. Do you think it is fair to base your results on the absolute peak returns?
    Do you think it is fair to claim that I gave a set of data that I didn't? I gave the 1982 through 2009, which was 7.98. However, (again, I repeat myself), if you lower the annualized return, the results remain the same - private accounts give a far superior results to our lower-income workers than social (in)security. Even in our worst-case scenario, which included a complete withdrawal in the trough of a last-minute 40% market meltdown, the benefit was more than twice what the recipients' SS benefit would be.

  7. #297
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    Re: Social Security Fix

    I think it's a great idea. Certainly, some minor modifications but in principle, I agree.

    Quote Originally Posted by cpwill View Post
    Here is my proposal:

    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. We can lift the cap on only the worker (and not the employer) if we want to encourage job-creation; or lift it on both if we need the revenue to ensure solvency, or if that's the only way to get the thing passed; here is room for compromise wiggling. Higher paid workers will see more of their money leave in the form of taxes, but those making less than $604,000 will get back even more in the form of ownership of personalized accounts (assuming the employer cap isn't lifted, and that's not figuring for the added benefit of those accounts growing tax-free), and so they will be willing to make the trade. Perhaps another compromise point would be to raise the cap to $604K. 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.

    how much better off?

    welllll, let's do a quick example:

    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 Combined Annualized Growth 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 slightly 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 benefit 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 millionaire.

    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 upswing. 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.





    I am particularly interested in liberal critiques of this plan. Conservative ones (it leaves Social Security, which is unConstitutional, still in place, so on and so forth) I already know, but tend to discount them as beyond the politically palatable. It strikes me that this offers a little something for both sides of the economic aisle: for you Keynesians, the existence of a retirement fund growing tax-free will spur people to consume more and save less; for you Austrians, the existence of a steady flow of capital into the market irrespective of what it is doing will smooth out the business cycle, and create a massive interest group against easy money (people like few things less than watching their nest eggs dwindle thanks to inflation).

  8. #298
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    Re: Social Security Fix

    Alright so if we go back and look at annualized returns for a 18-65 year old working life for the entire US post-war experience and average up each cohort, your return comes out to 6.9855%

    Using that return for Ole Joe of our OP fame, let's run the numbers:

    With an annual 2% raise (which is roughly what current SS figures assume), Ole Joe's monthly benefit is $4,800. Roughly 4 times the current average monthly benefit from Social (in)Security, which, as a fairly standard worker, Standard Income Joe would get from the old system.

    With an annual 0.5% raise (1/4th of what current SS figures assume) and two years of labor lost, Ole Joe's monthly benefit is $3,385. Or, roughly 3 times what the current average monthly benefit, which itself is higher than Low Income Joe's (Joe's maximum income is under $32,000 a year) benefit would have been.

    With low annual raise of half a percent and two years of working lost, Low Income Joe faces a 40% utter market crash the year he retires and he foolishly makes the worst decision possible withdraws it all at the trough. Low Income Joe's benefit is still a little over twice what he would have gotten from Social (in)Security.

    The lowest cohort was the 1962-2009 cohort, which saw an inflation adjusted annualized return of 4.92. Had Joe been in that cohort, his numbers would have been $2,654, $1,850, and $1,110 respectively.

    In other words, you have to pick the lowest scoring cohort since WWII, keep Ole Joe under $32,000 for his entire working life, which features two years of unemployment, and then produce two back to back 2008-style market crashes just to produce enough economic damage for Low Income Joe's monthly benefit to match what Standard Income Joe would have seen from traditional Social Security.



    The System Works. There is good reason why part of Chile's program is that if your private account ever drops low enough that it would not have made up for the loss of the public benefit the government covers the difference... and the government has yet to pay out a single peso.
    Last edited by cpwill; 04-05-12 at 09:58 PM.

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    Re: Social Security Fix

    Quote Originally Posted by cpwill View Post
    You I gave the 1982 through 2009, which was 7.98. However, (again, I repeat myself), if you lower the annualized return, the results remain the same - private accounts give a far superior results to our lower-income workers than social (in)security. Even in our worst-case scenario, which included a complete withdrawal in the trough of a last-minute 40% market meltdown, the benefit was more than twice what the recipients' SS benefit would be.
    Based on what? Low wage workers can receive as much as 9% real returns according to the Social Security Administration. That excludes the EITC tax credits that they receive today to compensate them for paying payroll taxes. This is part of the problem. Social Security is highly progressive. I simply don't believe that a low-wage worker selling at the trough had a benefit anything close to what SS provides. What are the details here?

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    Re: Social Security Fix

    Quote Originally Posted by cpwill View Post
    The lowest cohort was the 1962-2009 cohort, which saw an inflation adjusted annualized return of 4.92. Had Joe been in that cohort, his numbers would have been $2,654, $1,850, and $1,110 respectively.
    You are comparing apples and oranges. You are pulling money from Disabilty and Medicare into the privatized numbers. You would need to re-run them with the 10.6% payroll tax rather than 15.3% to give you apple to apple numbers.

    You are also assuming that there is some mix of other cuts which enables you to get past legacy costs with 2.65% of payroll. If you raise the cap, it comes with higher public debt. This creates a left pocket/right pocket problem. Sure your left pocket has more money, but the right pocket has more debt. All you are pointing to is the left pocket. To the extent that your plan creates public debt - and it does if you divert tax revenue away from deficit control to payroll taxes in the form of raising the taxable wage base - you are claiming victory on less than a full picture.

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