A simple reason why Bush's SS plan is stupid

[TCO]

Where is all the money dissapearing to in the Bush plan? Higher benefits?

[Dinner]

No. The Social Security Administration recieves less money under the Bush plan because part of its income has been redirected to private accounts. Social Security must still mail checks to seniors but since it is making less money it goes broke much, much sooner. Ergo there is a much longer period where it cannot cover it's bills and money from the General Fund must be used to cover to retiree's benifets.

If we did nothing then at least we wouldn't lose part of the SSA's income. Better yet just remove the income cap and make everyone pay Social Security taxes on all of their income and watch the system remain sound at least until the end of the century.

(edit: For those who don't know what the Social Security income cap is here's an explaination. By law people only pay Social Security taxes on the first $90,000 they earn each year. Any money over $90,000 is not charged any Social Security taxes. That means middle and lower income people must pay taxes on every penny they earn but rich people get a huge tax break. By eliminating this tax loop hole the Congressional Budget Office estimates Social Security would remain solvent at least until 2100.)

[TCO]

you're blathering. you're not making a sound argument. It's a three-card monte argument. And you're too dumb to even realize it.

[Dinner]

I'm blathering?

Sorry man but you've been insulting to just about everyone in every thread you've posted in today. Please forgive me if I laugh as you are behave stupidly in yet another thread.

Look, the numbers are simple and I will break them down so even you can follow it. If we divert money out of the Social Security program into private accounts then Social Security recieves less money. Because it recieves less income it goes broke much faster because, as Bush says, everyone 50 years or older will still recieve the same SS benifets. Since those people still have to be paid but much less money is coming in Congress has to make up the difference out of the General Budget Fund.

Bush's phase out plan makes Social Security go in the red much sooner so more money must be borrowed to pay the seniors their monthly checks. That adds up to a lot of extra money; $2 trillion dollars instead of $1 trillion (the cost of doing nothing and just borrowing money to cover the short fall).

This isn't rocket science and I'm sure you can follow it if you tried.

[Dinner]

TCO: "I've lost the argument so I will simply call people names instead."

I hope you don't run off to FFZ again because it is to fun having you here to laugh at.

[pchang]

$2 trillion to fix the problem once and for all or $1 trillion to limp along and pass the problem on to the next generation.

As for administrative fees, I pay 25 BASIS POINTS to Vanguard. Don't you think the entire SS fund can get a better deal?

[Mr. Harley]

Oerdin's argument is sound, and TCO is rebutting it by just claiming it is "blathering". PWND.

There are some social as well as economic arguements for the privatization, but saying someone is dumb and name-calling only proves you are either a) uninformed b) too lazy to participate or c) looking to start a flame war, i.e. a jerk. TCO, if you want to research and cite the issues for SS privatization - some of which I skipped because I was not writing a review of all possible positions - do your work. People make fun of Ned's research due to bias - well, at least do the research instead of being unpleasant.

[TCO]

Originally posted by Oerdin
TCO: "I've lost the argument so I will simply call people names instead."

I hope you don't run off to FFZ again because it is to fun having you here to laugh at.

Actually no. I love it when someone wins the argument. You continue to make an accounting based argument and cite names in the newspaper. You still don't realize what point 2 was that I wrote initially and that it is identical to what pchang wrote. I bet you think the debt to equity ratio changes if you do a lease versus borrowing.

[Kidlicious]

Another interesting post shawnmmcc

[TCO]

I can't see what he writes...

[Kidlicious]

Oh shut up.

[Dinner]

Originally posted by pchang
$2 trillion to fix the problem once and for all or $1 trillion to limp along and pass the problem on to the next generation.

As for administrative fees, I pay 25 BASIS POINTS to Vanguard. Don't you think the entire SS fund can get a better deal?

It would be nice if it was the entire Social Security fund getting a better deal but we're talking about 200 million fish all getting their own private accounts remember? Also the problem wouldn't be fixed for ever because some people (let's face it a lot of people) just aren't going to make wise investments and will lose their money. What do we do then? Just let them starve? What happens if the market tanks right when someone is getting ready to retire? They won't have 10 years to wait for the market to recover.

If the government is going to tell people they can only invest in index funds then will people buy into the idea of private accounts when they can't control how their money is invested? Once private accounts are established and people are only allowed to invest in low cost funds how long will it be before Republicans push for "greater freedom" or "more choices" to let people decide to select higher cost funds? Those costs will eat up the returns so that people won't be making much more money but will have much more risk.

Here's a nice selection from one of Krugman's articles.

Rates of Return on Private Accounts

Privatizers believe that privatization can improve the government's long-term finances without requiring any sacrifice by anyone - no new taxes, no net benefit cuts (guaranteed benefits will be cut, but people will make it up with the returns on their accounts.) How is this possible?

The answer is that they assume that stocks, which will make up part of those private accounts, will yield a much higher return than bonds, with minimal long-term risk.

Now it's true that in the past stocks have yielded a very good return, around 7 percent in real terms - more than enough to compensate for additional risk. But a weird thing has happened in the debate: proposals by erstwhile serious economists such as Martin Feldstein appear to be based on the assertion that it's a sort of economic law that stocks will always yield a much higher rate of return than bonds. They seem to treat that 7 percent rate of return as if it were a natural constant, like the speed of light.

What ordinary economics tells us is just the opposite: if there is a natural law here, it's that easy returns get competed away, and there's no such thing as a free lunch. If, as Jeremy Siegel tells us, stocks have yielded a high rate of return with relatively little risk for long-run investors, that doesn't tell us that they will always do so in the future. It tells us that in the past stocks were underpriced. And we can expect the market to correct that.

In fact, a major correction has already taken place. Historically, the price-earnings ratio averaged about 14. Now, it's about 20. Siegel tells us that the real rate of return tends to be equal to the inverse of the price-earnings ratio, which makes a lot of sense.[1] More generally, if people are paying more for an asset, the rate of return is lower. So now that a typical price- earnings ratio is 20, a good estimate of the real rate of return on stocks in the future is 5 percent, not 7 percent.

Here's another way to arrive at the same result. Suppose that dividends are 3 percent of stock prices, and that the economy grows at 3 percent (enough, by the way, to make the trust fund more or less perpetual.) Not all of that 3 percent growth accrues to existing firms; the Dow of today is a very different set of firms than the Dow of 50 years ago. So at best, 3 percent economic growth is 2 percent growth for the set of existing firms; add to dividend yield, and we've got 5 percent again.

That's still not bad, you may say. But now let's do the arithmetic of private accounts.

These accounts won't be 100 percent in stocks; more like 60 percent. With a 2 percent real rate on bonds, we're down to 3.8 percent.

Then there are management fees. In Britain, they're about 1.1 percent. So now we're down to 2.7 percent on personal accounts - barely above the implicit return on Social Security right now, but with lots of added risk. Except for Wall Street firms collecting fees, this is a formula to make everyone worse off. Privatizers say that they'll keep fees very low by restricting choice to a few index funds. Two points.

First, I don't believe it. In the December 21 New York Times story on the subject, there was a crucial giveaway: "At first, individuals would be offered a limited range of investment vehicles, mostly low-cost indexed funds. After a time, account holders would be given the option to upgrade to actively managed funds, which would invest in a more diverse range of assets with higher risk and potentially larger fees." (My emphasis.)

At first? Hmm. So the low-fee thing wouldn't be a permanent commitment. Within months, not years, the agitation to allow "choice" would begin. And the British experience shows that this would quickly lead to substantial dissipation on management fees.

Second point: if you're requiring that private accounts be invested in index funds chosen by government officials, what's the point of calling them private accounts? We're back where we were above, with the trust fund investing in the market via an index.

Now I know that the privatizers have one more trick up their sleeve: they claim that because these are called private accounts, the mass of account holders will rise up and cry foul if the government tries to politicize investments. Just like large numbers of small stockholders police governance problems at corporations, right? (That's a joke, by the way.)

If we are going to invest Social Security funds in stocks, keeping those investments as part of a government-run trust fund protects against a much clearer political economy danger than politicization of investments: the risk that Wall Street lobbyists will turn this into a giant fee-generating scheme.

To sum up: claims that stocks will always yield high, low-risk returns are just bad economics. And tens of millions of small private accounts are a bad way to take advantage of whatever the stock market does have to offer. There is no free lunch, and certainly not from private accounts.

[DanS]

Also the problem wouldn't be fixed for ever because some people (let's face it a lot of people) just aren't going to make wise investments and will lose their money.

In fact it would be damn near impossible to lose your money under the Bush plan. You would be able to invest only in a combination of 5 index funds. If you lose your money, the economy has just collapsed, and we're all going to be eating grubs in any event.

[Dinner]

A much better solution is to 1) Remove the income cap loop hole on Social Security taxes so that everyone pays the same flat tax on all earnings. 2) Move the retirement age higher so as to reflect the fact that people are living and working longer. 3) Change the law to allow the Social Security Trust fund to invest in more then just T-Bills.

The first two increase Social Security's income and lower cash outflows while the third allows SSA to get a higher rate of return on its existing assets without phasing out the whole Social Security system. Everyone will still be able to count on having the Social Security safety net and the system will remain strong and healthy well into the next century.

[Kidlicious]

We need new issues. SS is such an old played out issue.