Wouldn't this fix the soc. security problem?

[GePap]

Originally posted by Velociryx
So...we spend trillions on a thrift bailout or trillions on reform...either way....

-=Vel=-

The only one jacking this thread is you.

Bites lip to spare the thread, smiles sweetly, and ignores.

(that was DIFFICULT, guys, but done for you. )

NO, we need to spend trillions on this reform if that is the plan- if we do it badly, trillions MORE on a bail-out would be necessary.

[Spiffor]

Originally posted by Patroklos
I don't know why you agree with this Kid, it basically states SC is unsolvant no matter what, and is just the current gernation screwing the new ones. I guess you only care about current poor people.

I am not saying there is no solution to the looming crisis. I am saying that private schemes aren't a solution.

Solutions are pretty simple in principle, but very hard to make, politically speaking.

1. We accept it is the normal fate of a developed country to have many old people, and we accept it is the civilized thing to do, letting them live without working. Thus we raise the part of our economy that is dedicated to paying pensions (public systems raise taxes, private systems demand more and more money from the private assets they draw money from).

2. We accept that, with a longer life expectancy, people must work longer. Many SS schemes were made when the average life expectancy after work was 2 to 5 years. Not the 20 odd years we have today.

3. We consider old people as useless, and screw them, by letting them only a small share of our economy. Or letting them starve, if you prefer.

Those are solutions. They're basically the same whether the system is public or private. They all aim at letting the old leech off the working ones, in a sustainable fashion.
You'll notice privatization is not a solution. Private retirement schemes are only another form of wealth redistribution from the working to the non-working. The problem it posits is the same as public schemes.


Edit: I forgot, there is a fourth solution:
4. We encourage people to keep banknotes under their beds for their old age. This way, they'll indeed live off their actual money. Sure it'd slow down today's economy very significantly (extreme reduction of investment), but at least the young of tomorrow won't have to pay for us.

[Spiffor]

Originally posted by Dauphin
I thought pensions were often what is called 'unit' based. When you make a contribution you buy a certain number of units. The value of a unit is based pretty much on the value of the shares or investments that make up the fund you are buying into.

Yep.

I would think the money goes to buying the investment item that makes up the fund, the liability raised by giving out your money is matched by an asset created by the increased capital portfolio of the fund.

Yes, and this thing is a piece of paper / a bunch of bytes. It's worth something as long as there is no overload on the economy.

There is of course an intrinsic risk associated with what you are buying, but when you buy it you are informed of the risks involved, and you choose high risk high return or low risk low return schemes. Effectively you are investing in a kind of stock market, but the point is you are investing in your future with a level of control over what you invest in - you can invest in foreign and growing economies for example.

I am talking about macroeconomics, not microeconomics. Of course, for the individual, there's a difference between a private and public schemes. The rich and middle class will have more returns, the poor will have much smaller or no returns, given their unability to significantly save.

A state scheme does not invest, or attempt to grow the money in home or foreign markets, and as a result you get a worse return on investment, especially in countries where the population is aging.

Think of what "growing the money" means.
Say, the pension fund buys shares of a company. It helps the company invest in something productive. In return, the company owes the Fund a regular return (dividend), like any other shareholder. That's a very important parts of the money the Funds make.

At first, the Fund doesn't have too many old customers. But many working people give the Fund money to invest (expecting to get money when they reach retirement age), and only a few people demand money from the fund. All is good. The fund makes good money and can easily satisfy the demands of their old customers.

Flash forward 20 years. The part of old customers (i.e people who stop contributing to the fund, but who take money from it) has risen dramatically. The Funds need to strongly pressure the companies they have shares in, to be a ble to pay the rents they owe. The companies' part of turnover that is dedicated to paying the shareholders rise more and more... to ridiculous levels, to the point a company can't make money anymore, with so much of its wealth going to the elderly.

What is the difference between an ordinary tax, and the "tax" the Funds will take from the companies? Except probably that the workers getting wage cuts will never even benefit from the system?

Macroeconomically speaking, the "tax" the Funds will draw on companies can be offset by productivity and population growth. These are the exact same parameters that can make a public scheme sustainable on the long term.

[Bugs ****ing Bunny]

Originally posted by Dauphin


When you pay private schemes the money gets invested in stocks, shares, funds or other capital investments that get a return on investment. The value of the fund increases with fund growth and contributions. When you retire the value of the fund determines the amount of your pension payout. There is a direct correlation between what money was invested by person A and what was paid out to person A.

Or, alternatively, the fund managers botch the investment of the equity-linked funds or dodgy actuarial practices, the money in non-equity funds gets eroded through management charges and market value adjusters, the incompetent board gets the push with golden handshakes paid for by your funds, and you're left attempting to retire on a fraction of what you invested.

[Dauphin]

Spiffor, I don't think I agree with your overall analysis. I can see the argument of the drain on the economy through consumers who are not adding to the economy, and agree it would be present in both scenarios regardless of method of pension saving. I still believe that there is a differentiation present in the method of preparing for retirement though.

Originally posted by Spiffor
Think of what "growing the money" means.
Say, the pension fund buys shares of a company. It helps the company invest in something productive. In return, the company owes the Fund a regular return (dividend), like any other shareholder. That's a very important parts of the money the Funds make.

At first, the Fund doesn't have too many old customers. But many working people give the Fund money to invest (expecting to get money when they reach retirement age), and only a few people demand money from the fund. All is good. The fund makes good money and can easily satisfy the demands of their old customers.

Flash forward 20 years. The part of old customers (i.e people who stop contributing to the fund, but who take money from it) has risen dramatically. The Funds need to strongly pressure the companies they have shares in, to be a ble to pay the rents they owe. The companies' part of turnover that is dedicated to paying the shareholders rise more and more... to ridiculous levels, to the point a company can't make money anymore, with so much of its wealth going to the elderly

I would expect a fund to sell assets and reduce the fund wealth once more people are withdrawing pension. If you had the extreme situation where everyone withdrew and no-one paid in, then you would anticipate the fund being bankrupt eventually. Of course, if the fund was managed properly the point of no net worth should coincide with the last person buying their pension with the last assets remaining in the pension fund. A case of you intend to spend your last penny the day you die.

I also recall that dividends are not necessary to obtain money from any share assets that you own. If a company pays out a dividend it reduces the value of a share, thus reducing the market value of pension funds portfolio. The same position of share portfolio value and cash in hand can be acheived by selling shares equal in value to the dividend that you want paid out. I would expect that as more and more people are buying their annuity pensions the funds would prefer to sell shares - and so decrease the number of shares in their portfolios- rather than demand dividends which would reduce the share values.

I admit I am basing most of this on intuition and basic knowledge of financial markets, so I may be off base with my expectations.

Edit - attempt at clarity.

[Dauphin]

Originally posted by Lazarus and the Gimp


Or, alternatively, the fund managers botch the investment of the equity-linked funds or dodgy actuarial practices, the money in non-equity funds gets eroded through management charges and market value adjusters, the incompetent board gets the push with golden handshakes paid for by your funds, and you're left attempting to retire on a fraction of what you invested.

Are they that bad that you would recommend not having a private pension in principle?

[pchang]

Spiffor's explanation is a bit confusing. Here is another one:

When you buy shares in a company, you would like to think that the value of those shares is some portion of the value of the company. In reality, the value of those shares is whatever someone else is willing to pay to buy it from you.

Consider some far off future where tons of retirees start collecting from their pension fund. The pension fund must start selling shares to collect enough money to distribute. This works as long as there are enough buyers. But, if most of the population is retirees, there will not be enough buyers. The price of those shares will fall and the pension plan may not have enough money to pay the retirees (There are things like annuities and pensions which guarantee a certain payout). 401Ks and things like that will just see their value collapse and the retirees' collections will suffer a corresponding collapse.

edit:
BTW - My sig is about 5 years old.

[Ming]

However... think about the other side of the equation.

If people were allowed to invest "X" percentage of their regular Social Security payment into a private fund, this would mean an incredibile amount of new money going into the stock market on a regular and consistent basis...

[pchang]

That is currently what happens with any 401K like plan or defined benefit contribution plan. However, this has nothing to do with an eventual collapse when the number of retirees exceeds the number of working people. After all, who is going to buy all those stocks when the retiring people need to sell them?

[Ming]

While the number of retired folks continue to increase, the demographic information I look at still shows that we are in no danger of having more retired people than employeed people in the future.

While SS may not remain solvent for much longer, a percentage allocation to private funds would allow for a continued influx of cash into the markets, which would be a good thing

[pchang]

Just what does your demographic data show? Say in 10 years, 20 years, 50 years?

[Ming]

It varies a lot depending on what the "average" retirement age will be as the years go by. Originally, the age was getting earlier... but after the latest crash in the market after 911, the age has leveled off some as many people could no longer afford to retire as early as they would have liked.

While the numbers do show that SS as it is currently funded will be toast... the number of working people will still outnumber retired folks for the next 10 - 20 years (I have not seen number for 50 years out, but the trend lines would indicate that it won't happen even then... but it is based on MANY ASSUMPTIONS)

[pchang]

Well, the maximum ratio of retired people to working people that an economy can support depends upon the productivity of the working people and the minimum standard of living all the people will accept. I figured 1:1 was the most anyone coculd reasonably expect out in the future. If we are talking 10 years from now, I think the ratio is much less. Probably no more than 1:3.

[Dis]

Originally posted by Kidicious


Maybe not, but some people obviously do. If we allow you to opt out the system will break. You might as well say you're against it.

that means the system was designed wrong.

redesign it.

unfortunately because of the way it's designed, getting rid of it now would screw everyone near or at retirement age. I'm afraid we are stuck with this system. We have to make it work one way or another.

[Spiffor]

Pchang:
Thanks for helping me explain. It is a delicate explanation I still haven't mastered, and I can't help but sound overly complex whenever I speak about it.