# News Is Social Security Reform really viable?

1. Feb 4, 2005

### motai

A slightly controversial topic, but this came up in our economics class, so ill try to reiterate the discussion as much as possible.

With recent addresses in the State of the Union address just a few days ago, the issue of social security reform, and the nature of privatization, has come about. If we look at the actual budget of the U.S. (which can be found in any almanac or the Office of Management and Budget), the real 'crisis' may not really be in social security. The plan itself is viable if the money generated in Social Security isn't used in the general budget.

The problem may thus lie in the general U.S. budget. Massive defense spending, in addition to interest from loans borrowed by the U.S., make up the majority of U.S. spending. Social Security comes in third, and privatizing it means that the standard 8% taxed will be reduced to around 4%(?), thus making the U.S. earn even less revenue (presently Social Security is a primary moneymaker for the U.S. govt and with our rising debt this may be a problem). In addition, the average American probably doesn't know enough about investment to properly manage that 4% and will most likely just cash it in (thus screwing their future).

Now, we could cut all of the unnecessary bureaucracies in the U.S., but that will have at best a negligible effect when compared to the defense spending and interest on loans. So cutting HUD or the U.S. Dept. of Education will not significantly affect the current U.S. debt.

According to the 1990 Almanac (slightly dated), social security had a surplus that would have accumulated (still a large expenditure but it was taking in more money than it was spending), and there wasn't that great of a problem by itself. But, social security is figured in with the general expenditures of the U.S. government, causing this crisis to occur (the money is now spent on wars of foreign intervention and other short-term goals instead of being fully allocated for seniors).

Individual income taxes and Social Security are the primary means of generating revenue for the U.S. spending machine, and slashing the revenue of Social Security will only add to the problem. Corporations pay taxes, true, but it is a fraction of what the individual income taxes are. Supposing that Social Security had a surplus now like it did in 1990, and that revenue did accumulate, then there really wouldn't be an issue with Social Security (or the budget in general). Just curb the runaway defense spending and let the accumulated revenue from Social Security gradually take chunks out of the interest on the loans.

We may be tackling the wrong issue here, but all of this recent hype may be for naught.

2. Feb 4, 2005

### Locrian

Great post Motai. Bush's "Social Security plan" has mostly been disinformation perpetuated by people without the knowledge or understanding to realize it. The Social Security crisis has, to some extent, been handled equally as well by the administration and the public.

In the end our spending will have to be reigned in, one way or another.

3. Feb 4, 2005

### Staff: Mentor

Social Security "works" in one sense and doesn't work in another. At the moment, its doing what it was meant to do (provide income for retirement and some welfare) without bankrupting the country, and in that sense it works. It will require tweaking over the next few decades, but if gov't spending is reduced, SS can help reduce the debt.

But the question people don't like to ask is: should it be doing that?(money for retirement) and the answer, IMO, is no. No, the government should not be forcing me to loan it money. It should not be forcing me to set-up a substandard retirement fund. In a free society, that isn't the government's job, its my money, my choice, my responsibility.

If I want to take that 7.5% (15%...) and throw it into tech stocks that bomb, that should be my prerogative. If I want to spend it on cigarettes, Jack Daniels, and porn, thats my right. If that means I end up with nothing at age 70 and become a burden on my family, or worse living in a homeless shelter, its my fault, so its my problem. As always, the problem (and the contradiction) is freedom and personal responsibility. We live in a supposedly free society filled with people who are afraid of - and perhaps even incapable of handling the responsibility of - freedom.

4. Feb 4, 2005

### Zlex

motai:

Who is it who will benefit when the stock market goes long term bear? Will it be, our economies, and the companies who are supposed to provide jobs so that folks entering the economies can earn a living and pay tazes to fund SS?

Will it be the US Treasury, taxing those sputtering economies?

It's a little difficult for me to see exaclty who in our economies benefit when Wall Street goes to Hell.

I mean, other then a handful of bitter old WFP cranks in the Village reading The Nation and snickering on about "The Man."

Imagine this; on an individual basis, Boomers underinvested in the market becuase of that aggregate extra 9% tax on their earnings they've paid their entire working careers, but because there are alot of them, still net an influx of buyers in the market...so far.

So, when they in aggregate leave the peak earnings period of their careers and vainly try to become net sellers, ceteris paribus, expect a decade or so long term bear market. What somehow, who could know why? felt so good on the way up is going to feel as bad on the way down. Only, in addition to seeing their underfunded self pension plans go to Hell in aggregate, thus impacting the market in the very economies that are supposed to magically ponying up all those IOUs the gov't has been collecting on their behalf, they will in even larger numbers than is evident today be turning to a SS program that is standing in line at the same sputtering US Treasury.

A problem caused by the govt's overtaxation, to the tune of an extra 9% over historical norms, of their earnings.

Thus, Bush's plan. Change the boundary conditions on younger workers, providing an increased incentive to self invest in relation to their fewer numbers. This is NOT a subsidy of the market, as it is accomodated by changing the boundary conditions(ie, not an increase in deferred spending, but a reallocation of taxed earnings/deferred spending, by some small %.) This ameliorates the impact of the Boomer effect. A larger number of relatively underfunded sellers will be chasing a smaller number of relatively better funded buyers, evening out the demographic effect caused by the gov't to begin with. It may not totally balance the impact of the gov'ts 'spend to the hilt when the subsidy is at its maximum' gluttony, but it may ameliorate the impact.

Is that generation hurt...by a stronger than would be otherwise Wall Street?

Is the US Treasury hurt...by a stronger than would be otherwise Wall STreet?

And finally, they retain equity in that investment. Even if they were to somehow, in aggregate as a generaiton, manage to lose 90% of their investment, they would be yet that 10% ahead of where the boomers are today, in terms of converting deferred present value into an actual future value with sound accounting. The liability represented by their equity would be the obligation of folks out attempting to build the new economies, exactly what needs to be done if deferred present value is to be converted into an actual future value.

If, in aggregate, 90% of their investment is lost, then the country as a whole has much greater problems to worry about; the economies will have tubed.

5. Feb 4, 2005

### Kerrie

Staff Emeritus
I agree Russ, 100%, however the reality is, many people will become a burden on society as they get older because they have no family to take care of them. If a retirement system is not mandated, it could take a severe toll on our welfare system. If everyone had the same mindset as you, it might not be a problem.

6. Feb 4, 2005

### Staff: Mentor

Yes, I guess that's a reality that has to be dealt with: if welfare later in life is something government should be doing, then it practically has to mandate some kind of savings. Otherwise, people won't bother saving for themselves and we'll end up with....well.... pretty much what we have now. :grumpy: Its a catch-22, I realize, and if we're going to be a welfare state at all (and we are), there almost isn't any middle ground.

7. Feb 4, 2005

### wasteofo2

Russ, that's just your opinion, and it's an opinion not held by the American populace. There is no signifigant outcry in the public for the dismantling of Social Security, only reform of it so that it won't dissapear and not be there for some people.

Believe it or not, not everyone in America is that great with their money (the average credit card debt for Americans is just over $8,500) and not everyone wants to accept greater risk for greater chance of reward, some people like having a portion of their money garunteed to be their for them. People remember what happened during the Great Depression, where people didn't have anything like Social Security and retired people who didn't plan out their life well were living in poverty all over the country. Seriously, do you think that people who can't handle their money that well, or people who happen to be the vitim of a market turned sour, or a shady stock broker, should just have no help from the government at all? What if they can't afford a home, or food, because a stock broker took advantage of them, or the market crashed, or they just spent too much money without planning for the future? Not everyone in America is so brutally darwinistic as you, fortunately. 8. Feb 4, 2005 ### phatmonky Apparently there's enough outcry for: 1> us to be having this conversation 2> there to be a compromise looked at in which some of us get to manage our own money Plenty of us also remember the fact that the government, and entity that has lost money on it as an investment for the last hundred years is probably not a smart place to place your retirement investment 9. Feb 4, 2005 ### wasteofo2 There's no outcry for the abolition of Social Security, there's an outcry to reform Social Security, because at the rate it's going, not everyone is going to get all the benefits the government has promised them. People don't want to government to get rid of Social Security, they just wanna make sure they get all the Government benefits that they've been promised. Have you heard the specifics of the Bush plan? From what I've heard, it's that you get less garunteed government benefits, and get to put a portion of your money into a small group of heavily government regulated, heavily diversified funds that have minimal risk, from which the government taxes your profit and pretty much gives you back the same amount of money that you're promised from Social Security anyway. 10. Feb 4, 2005 ### Moonbear Staff Emeritus Actually, the Bush plan isn't to just toss the money back to people and let them completely do what they want with it. It recognizes that if you give it back to the people who are strapped for cash every Thursday waiting for their Friday paycheck because they spend every dime they get their hands on, they'll spend that too. This is, sadly, far too high of a percentage of the American public. Instead, what was proposed is to allow people to invest in a very restricted set of stocks and bonds (such as well-diversified mutual funds). You don't get to just put it in your pocket, you have to still invest the money. The difference between this and social security as it currently exists is you get your entire profit, and if you do really well, your kids can even inherit it. You also wouldn't be allowed to draw it out early or in one lump sum. It really would be a retirement fund. My mistrust in this doesn't lie in this general idea, but more in who determines what a "safe" investment fund is, because I'd worry this would be open to more corruption of people in Congress helping out their buddies by recommending investment brokers who include their buddies' corporations' stocks in the portfolios rather than truly solid investments. 11. Feb 4, 2005 ### wasteofo2 Oh, I know that what Bush is proposing isn't what Russ wants, but Russ was talking about just abolishing Social Security entirely, and I was responding to Russ, not Bush's plan. I see the worry; politicians are of course, all scumbags... 12. Feb 4, 2005 ### BobG If you want to come right down to it, Bush's plan does nothing to solve the current problem. It prevents it from happening again. The big problem with past 'fixes' is that we've pushed the date Social Security will run out of money by collecting a surplus in advance. The surplus has been invested in Treasury bonds and the government has been spending it. Social Security, itself, has problems that won't end until the baby boom generation has died off and, presumably?, the labor/retirement balance achieves some long term balance. The bigger problem is what happens to the deficit when the Social Security program starts cashing in the Treasury bonds it's invested in and the 'General Funds' part of the government has to start paying on those bonds. The general funds starts experiencing problems before 'Social Security' starts to have problems. If you toss out the categories of which part of the government is short of funds and just look at the overall amount the government has to pay out, it's a big problem that has to be solved either by increased income (higher tax rates), or lower spending (either lower Social Security/Medicare benefits or lower spending on other government services such as Defense, Education, Welfare, etc). In fact, the biggest problem isn't Social Security, but Medicare. Bush's plan addresses none of that. However, if the funds being collected for retirement were separate from the rest of the government, future problems way down the road would be nowhere near as big as what we're going to be facing in the near future. Provided you can trust the folks picking the investments for you, of course. Privatization also has a few other complications. All retirees won't necessarily earn the same benefits. Long term, I think it's safe to say folks would do at least as well as they would under Social Security. Short term, ups and downs in the market can have a big effect on whether you're a "winner" or just a little better off (the difference is sure to cause a lot of complaining). The drop in the stock market around 2001-2002 is a good example. For those who are 20 years or more away from retirement, the attitude is "so what?". The long term return is almost sure to stay relatively constant and the market will come back. But, the folks already drawing out those investments took a big hit. Either they reduce their living standards to match the market or else they're taking out a bigger percentage of their retirement to live on. The fact that the market will come back doesn't help them, since the money they pull out is already spent by time the market comes back. By the way, Zlex brings up an interesting point. With a higher percentage of people cashing in their investments to pay for retirement, what happens to the market? Any way you look at it, I don't think all of us old baby boomers are going to be very popular with young people. Can you say "Soylent Green?" 13. Feb 4, 2005 ### Moonbear Staff Emeritus There's another solution...everyone start having LOTS of children to pay for our retirement. This won't help them much, but our generation will be okay with all of them paying in when we're retired. (This is not to be taken seriously...somehow I feel the need to point out sarcasm when posting in this forum.) 14. Feb 4, 2005 ### loseyourname Staff Emeritus Isn't there a third option here that no one discusses? Give people an actual choice. If they prefer to invest in the government, let them invest in the government. If they prefer to invest in the market, let them invest in the market. If they want experts, or even politicians, deciding where their investments go, let them have experts. If they want to pick stocks for themselves, or go with a broker, let them do that. What's with the prevailing assumption here that all Americans are just too stupid to handle their own matters and need the government to force them into smart money choices (although calling Social Security a smart investment at this point seems dubious)? 15. Feb 5, 2005 ### russ_watters ### Staff: Mentor Quote frankly, wasteofo2, if you pretend to give people a handout, they'll sit up and beg for it like a dog. Phat is right - a significant number of people are not happy with SS - but most that are are just happy keeping their eyes shut and their hands over their ears. What I would propose (spelled out in the other thread) goes much further than what Bush has - but Bush's plan seems to me to be a good start. And no, it wouldn't be an abolition of SS altogether. That isn't true - Bush's plan will not affect anyone who is currently getting SS or soon to get SS. And over a 10+ year time horizon, the stock market is a virtual guaranteed winner. What gets me rolling my eyes is that people will fight tooth and nail for such a thing. Social Security is the government telling you you're a dumbass! Are you...? We know you won't save this money, so we're going to invest it badly for you! Sign me up!! See my plan in the other thread... Last edited: Feb 5, 2005 16. Feb 5, 2005 ### russ_watters ### Staff: Mentor The other thread seems to be dying, so... The reason I consider SS a farce is what it is/does: Its a forced savings plan with virtually no growth. No one who is alive today and getting SS would have done worse investing that money in the S&P or even a bond fund. The problem is that people make bad choices and wouldn't save that money if the had the choice. If SS is supposed to be welfare, make it welfare - but I suspect the AARP wouldn't like that name change because of what it implies. Its dual-purpose nature means that it doesn't do either particularly well. People can't handle/don't want the responsibility (sad), so I'd still make it mandatory (like in the Bush plan). I don't know what fraction of SS is the welfare part, but if its half, you could keep that half paying for the welfare and open up the other half for voluntary investing. And here (imo) is the beautiful part: if you tax the returns like a loaded mutual fund, the program, while a short-term loser for the government, would in maybe a decade become an enormous cash-cow. Eventually, you could make all 15% eligible for investing and the gov't could pay for the welfare portion from the taxes of the earnings in the retirement account portion. 17. Feb 5, 2005 ### Zlex It is another unintended consequence of the SS debacle, which is why Bush's plan is so crucial to all of our economies. The Boomer demographic, as a whole, was surcharge taxed by an almost 10% more than generations that paid 3%/3% FICA. This means, they had access to 10% less of their total earnings for their own pension assets(both employer sponsored, which come from their earnings, and self, after tax planning.) This is when you consider Boomers as individuals. In fact, when you look at the 'average' Boomer balance sheet, it doesn't look as good as it should going into the home stretch. However, there are a lot of them, so cumulatively, this compensates for the fact that individually, each is investing less, on average, into the capital markets(pension assets typically get invested in the capital markets in some form or another.) So, the capital markets are responding to the investment in total, not the average investment, and our economies are sputtering along just fine. Very soon, however, this demographic, in aggregate, will start to long term try to become net sellers in the markets(4 bedroom real estate and capital investment.) There will be an approximately 10 year period of an every year increasing trend of this, then it will level off at a high level of 'net seller' activity, then there will be another 10 year period of an every year decreasing trend of this. (Gradients drive everything, especially markets.) So, at the very time that folks are claiming that future efficient economies will grow us out of the obligation of paying off those SS debts, the impact of this will tend toward less investment capital flowing into the markets. Foreign investors are not idiots, will respond to the long term trend, and will wait until the bottom comes before propping it up. Yet, Gov't does better taxing healthy economies then it does taxing weak economies. We all do better, in fact. Bush's Plan, by changing the boundary conditions, increases incentive to invest during this period. This changes the dynamic. It does so without raising taxes on young workers, but it doesn't exactly lower taxes, either. It diverts what were 'surplus spending' taxes into individual investment funds. By doing it now, instead of later, the sooner the better, because we can take advantage of the trailing edge of the Boomer generation at or near the peak of its earnings years. Waiting until the Tsunami crashes to actually change anything is shortsighted nonsense. This is not a 'subsidy' of the Boomers weak assed average individual portfolios; it is a subsidy of our common economies, the ones we all need to either work in, tax, or live in in the future. It was wrong to surcharge tax an already going to be paying surplus demographic, just to convert that surcharge taxation into a future demand for yet more taxation, and a correction is long overdue. This is the time to make the coirrection. 18. Feb 13, 2005 ### SOS2008 No, the problem is that it won't be your problem. You're neglect would remain a problem for our country and it's tax payers, since you would then go on welfare or what ever progams there may be. The current average SS check is about$900. Since very few people will receive pensions (except government employees, and after only 20 years--what's with that?), and those who do have 401K funds (with some funds matched by corporations) have seen poor performance nonetheless--even with aggressive stocks, I'd say you will want that \$900 guaranteed PLUS what ever you can do on your own--like your parents who owned their homes, who had little or no credit card debt, who had savings accounts, you know--the things younger generations have no clue about.

So I agree we need to stop government spending of the SS trust fund NOW (no more war) and no more unfair trade with China, no more outsourcing of American jobs, no more illegal immigrants, etc. Our government does need to be fiscally responsible in regard to it's citizen's future, and the problem is so far beyond SS it IS a "crisis."