clear the myth, please

[kaigou]

Disclaimer: I'm not rambling on like this because I want to convince anyone that Talking Head A is better or worse than Talking Head B. And it's not because I think political ideology A is better or worse than its opposite. I could care less about political agendas in the sense of holding any one dear to my heart. I just want to know as many facts as possible, on all sides, with as nonpartisan slant as feasible, so I can make my own decision. And if you think that making my own decision somehow means I'm slamming on your favorite politico or cause, then that's your problem, not mine.

If you can present facts and explanations in a mature, thoughtful manner, with research to back it up, then I will always do my best to listen. And since I have no emotional lockdown on any one POV, I'm open to reconsidering my attitude if the new facts convince me overwhelmingly in a different direction. But I won't be swayed by party lines or spouting rhetoric. If that's all ya got, don't bother. If you wanna get my respect, bring me more than that. EoD.

---

For the one who said, SS administration eats 75% of the funds coming in...

No.

Actually, it doesn't.

From Social Security's online pages:

At less than 2 percent of total outlays, SSA's administrative expenses continue to be a very small portion of the Agency's overall spending.

See the Social Security Budget, under Limitation on Administrative Expenses. Here's more:

The Limitation on Administrative Expenses (LAE) account provides resources for SSA to administer the OASDI programs, the SSI program, certain health insurance functions, and the Special Benefits for Certain World War II Veterans program. Funding for this account is financed from the Social Security and Medicare Trust Funds. The Trust Funds are subsequently reimbursed for the administrative expenses of the SSI program, which are covered by General Funds, as well as for other costs not related to the Trust Funds. Funds are included for personnel costs and operating expenses such as equipment, space and building services. [emphasis mine]

SSI, to clarify, is the Supplemental Security Income. It is not a part of Social Security, and in fact, you cannot draw from Social Security unless you have made payments. From the SS's Internet Myths page, "SSI is a federal welfare program and no contributions, from immigrants or citizens or anyone else, is required for eligibility. Under certain conditions, immigrants can qualify for SSI benefits. The SSI program was an initiative of the Nixon Administration and was signed into law by President Nixon on October 30, 1972."

So what does the SS do? Well, it's not just a retirement fund. Not even close.

These resources are applied to: processing retirement, survivors, disability and SSI claims; continuing to implement the Ticket to Work and Self-Sufficiency Program; updating beneficiary eligibility information; processing applications for Social Security numbers and posting annual earnings to workers' records; operating a nationwide 800-number; continuing to educate the public on long-term financing issues affecting solvency; and operating and improving SSA's automated data processing and telecommunications systems. In addition, SSA is facing new responsibilities as it prepares to play an important role in the implementation of the Medicare prescription drug law recently signed by the President.

Hey, you can even go to the website and look up the most common baby names for the past year. You can also search the Social Security Death Index, if you're doing genealogical searches, but there's a fee for this, as the SS pages point out--they're not in the business to do genealogical records, so they will charge you to offset their costs. That's reasonable, IMO. Regardless, for a rather small division (compared to what they manage), they're doing an unbelievable amount of stuff.

One of the best explanations I came across, after reading way too many pages to count, is in an article by by Kilolo Kijakazi and Wendell Primus: Would Using the Budget Surplus for Tax Cuts or Entitlement Expansions Affect Long-Term Social Security Solvency?, posted on Mar 13 1998 by the Center on Budget and Policy Priorities.

When the Social Security payroll taxes collected exceed the benefit payments made, the surplus revenue is reflected as additional holdings of the trust funds, with these balances earning interest at the same rate as other Treasury securities. This interest is credited to the trust funds. No actual cash is held in the trust funds, as the funds hold Treasury securities instead.(3)

The trust funds operate somewhat like checking accounts. They are credited with the deposits made and debited for checks written. When a deposit is made in an individual's checking account, the bank that holds the account uses the money for other purposes (such as loans for mortgages) until the funds are needed to cover a check the individual writes. Similarly, when the Treasury receives payroll tax deposits, it issues bonds to the Social Security trust funds while placing the cash in the same pool of funds as other federal revenue, and there is no legal restriction preventing the Treasury from using these borrowed funds to help finance other government costs. As Social Security benefit payments are needed, the Treasury makes funds available to redeem the bonds. If the Treasury does not otherwise have enough cash available to redeem these securities (or to meet other, non-Social Security obligations), it borrows money from the private sector.

The (3) refers to a citation from David Koitz, "Social Security Taxes: Where Do Surplus Taxes Go and How are They Used?," CRS Report for Congress, 94-593 EPW, Updated May 1, 1997. In case that sounds confusing to you, this is what's happening, in plainer english, as I understand it: SS gets your $5 FICA payment for this payroll. It then purchases $5 worth of bonds from the Federal Government, which then uses the $5 cash to do as it will. But SS holds the $5 bond, and when it needs $5 in cash, it cashes in the bond, and pays out the $5 wherever it needs to go. In other words: money is exchanging hands but the amount on each side remains even.

As long as I'm educating myself (and dragging readers along with me), let's review some of the more common misunderstandings about Social Security.

1. Money from the Social Security (Trust Funds) can be used by the government as a slush fund and spent.

Hey, even I thought this one was so, but this is probably from misunderstanding the bond/cash switch that goes on with payments.

But regardless, it's not true, and you can read all about it in Neta Warren's article, "Social Security and the Federal Budget". Some of the confusion may also stem from the fact that "in fiscal year 1969, Social Security and other Federal programs that operate through trust funds were counted officially in the budget." This doesn't mean the money was accessible, or even used to offset losses elsewhere. It simply means the money appeared on the general (Unified) budget. In 1990, "Congress excluded the program from calculations of the budget and largely exempted it from procedures for developing and controlling the budget." At no time has this changed how SS Trust Funds were or are administered. It was simply that by 1990, the amount in the Trust Funds was so massive that the numbers were throwing off everything else and making it look like we had a smaller deficit than we did. So for a short time (compared to the life of the program), SS was 'on-budget', and now it's 'off-budget' again. But the administration of the Trust Funds haven't changed.

2. SS is taxed like income.

Yes, that changed occurred during Reagan's administration, but both parties participated. Again from the Internet Myths page: "The taxation of Social Security began in 1984 following passage of a set of Amendments in 1983, which were signed into law by President Reagan in April 1983. These amendments passed the Congress in 1983 on an overwhelmingly bi-partisan vote. The basic rule put in place was that up to 50% of Social Security benefits could be added to taxable income, if the taxpayer's total income exceeded certain thresholds." Read the 1983 Amendment for more details.

Note, though, that this requires one's income exceed specific thresholds. In fact, a later law under Clinton's administration raised the tax level again, but only for higher income participants. Those with an income lower than a certain level only deal with 50% taxation, and those below that, possibly none at all. For once, it appears, the rich really are getting taxed more than the poor. Go us.

3. In a few years, we'll be facing more payouts than incoming, for the first time ever! *insert panic here*

Again, yes and no (in great part because it can change based on the economy's performance along with several other factors). I was surprised to discover that there have been 11 different years in the 65-year history in which incoming has fallen short of outgoing payments. (Remember that SS is a revolving fund: the money that comes in, this year, is paid out this year. Your money is not going into a bank somewhere, but is deposited in bonds, gains interest, and is paid out as needed to someone currently on SS.) During those shortfall years, bonds of about $24 billion total made up the difference. And, in 1982 (when we hit one of the worse recessions in a long time), the shortfall was substantial enough to require borrowing from the disability and medicare trust funds. It was repaid by 1986; this is the only time such a cross-fund loan has ever occurred. Since then it's been operating with a strong surplus.

Incidentally, Kijakazi's and Primus' article also observed that the real drain on SS funds is actually healthcare, as I mentioned in the GAO post:

CBO also projects that although the unified budget will be in surplus for a period beyond 2008, deficits eventually will reemerge. CBO director June O'Neill testified on January 28, 1998 that CBO expects deficits in the unified budget to return after 2015.

Their return will be due primarily to mounting costs for government health care programs; as the population ages and medical advances continue to prolong life, health care costs are projected to rise significantly. Average health care costs are much higher for elderly people than for the non-elderly. The health costs of the very old, a group expected to become much more numerous in coming decades, are especially high.

4. Social Security is for retirement.

Yes, and no. From the SS FAQ:

Under the 1935 law, what we now think of as Social Security only paid retirement benefits to the primary worker. A 1939 change in the law added survivors benefits and benefits for the retiree's spouse and children. In 1956 disability benefits were added.

Keep in mind, however, that the Social Security Act itself was much broader than just the program which today we commonly describe as "Social Security." The original 1935 law contained the first national unemployment compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program.

And then, of course, there's the question about privatization. I'm going to ignore the recent pushes by the GOP to call this 'personalization', because it's privatization and let's just call a spade a spade, because 'privatization' is not an obscene word; there's no reason to act like it is except for those big on spin. I touched on this in my post about the GAO, but I have gotten several responses that indicate not everyone's had the time, inclination, or energy to dig through the good and bad. Not saying I'm doing the most thorough job, but I figured I'd at least pass along what I've learned.

First, privatization can be a good thing. In some cases, smaller government is a positive. But in the wake of Enron, Worldcom, Arthur Anderson, and the like, I'm seriously dubious that I'd want to entrust my retirement foundation to a corporation.

Let's start with the obvious, that corporations expect to be paid. They're not funding this with taxes, after all; the privatization is expected to pay for itself. Traders and stock actions usually cull a commission off your funds, on top of that. For instance, Bank of America takes $20 for every transaction; and for "stocks priced $2.00 or less, add $5 + $.01 per share over 2,500 shares." That's in the fine print at the bottom of the page. So if you have 2,500 shares each worth $2, that's $5,000 of stock. You'll be paying $20 flat fee, plus $5, plus $25 per share. So for $5,000 worth of stock, you just paid $50 in fees to manipulate it. Heh, that's 1%, right? I say that with the rather amused acknowledgement that in my life I've met plenty of people who can't even spell stock market. The idea of trying to explain to them why they have to pay out money to rearrange their own money would leave them cold; after all, banks don't make you pay to open, close, or shift money from one account to another. I can't see the average person understanding even the beginnings of how to work with the stock market, not when most people consider SS more of a pension/savings account.

And then there's the short-term focus on the stock market, that often befuddles even those with some experience. The stock market goes up, it comes down, and it's only over a long term (or when lucking out and buying shares in something that later becomes inordinately lucrative), that you'll see benefits. I've been watching 401K plans (which were created when the tax laws changed and allowed corporations to create an alternate form of pension plan). Over the past four or five years, 401K plans for many of my friends have lost money, not gained it. There's something just not right about saving for retirement and finding that you now have 50% less than you did two years ago.

Bottom line: the stock market is a risk. In the long run, you'll average out, but it's still a risk. I don't want my primary retirement funds put at risk. I would rather take additional funds of my own, and put them at risk, with the hope and intent of adding to my retirement funds -- not losing them all.

But we also have to consider the overall ramifications of dumping social security funds into the open market. I agree that it would be nice to manage my retirement funds. I can understand and relate to the notion that I should be better able to manage my own money, and not have my money managed on my behalf by the government when I could potentially make more via interest or wise investments on my own. However, I think the problem isn't just the lack of education on the part of Americans about the alternatives, but also the sheer scope of Social Security, and the impact that it would have on our economy.

Now, bear with me. This is highly simplified, and I'm glossing over stuff, but I trust a few wiser souls to point out information and send me off to research if I've got the gist wrong. (If so, I'll edit this post for posterity.)

When more money enters the stock market than leaves, the stock market index goes up. When more money leaves than enters, the stock market drops.

Simple.

So what happens if we dump several trillion dollars into the stock market?

We get a bubble.

A very BIG bubble.

A bubble that will make the dot-com boom of four years look like a frickin' kid's lollipop next to the Earth-sized bubble of that much money flooding the market.

Hey, kids! What happens when a bubble pops?

That's right.

We get to suffer a recession the likes of which we've not seen since...oh...the thirties! Right! When Social Security was created. What delicious irony.

Yep. That was the original plan. Privatize Social Security. Roll it all over into the stock market. This was modified quickly, although I'm sure most folks missed the economists screaming in panic (or falling on the floor laughing in hysterics). I do recall a number of articles that lambasted the economists for being panicmongers, but this isn't rocket science. It's just money in, money out, do the math.

Now, the one thing I've not been able to determine, which may become moot if SS is successfully protected (as I do think it should be--it does far more than just provide 'retirement' funds as you can see above). SS has been running in the black since 1986, with overages on payouts. This means there's money to dump into the stockmarket, while still making payouts. There's good and bad in the plan, in some ways.

Good: wooo! Look at all that capital, suddenly available! Talk about a massive, unbelievable shot to the arm when it comes to the economy.

Bad: That's a crapload of capital. Remember that bubble? Yeah. It'll be a great start, but I sure don't wanna be there when the party ends.

At current projections, we'll run out by 2018 [this morning, media reports the White House is now saying 2042]. Okay. That's reason to tweak SS and do something, but I'm not convinced putting our economy at risk is really the way to do it. Even if it makes things bright and rosy for a decade, I sure don't wanna be around when the bubble pops because when that bubble goes, it'll take everyone with it, even those of us who invested wisely. And frankly, giving our economy an artificial boost in the arm by slamming the surplus over to the stock market...no. I suppose the idea of 'privatization' sounds good if you're for smaller government (which, frankly, I am, totally), but I'd rather that be a more intelligent mechanism for achieving smaller government, thanks.

---

And, in the morning after the state of the union address, there's now more information, and it's not making me feel much better. I'm still reading up on the articles, but I'm withholding my own decision on good/bad until I've had a chance to find some nonpartisan economical points-of-view. Might as well start somewhere, so we'll go with an explanation from Jonathan Weisman's Participants Would Forfeit Part of Accounts' Profits, an article this morning in the Washington Post about Bush's plan and its consequences.

Highlights of the Proposal

• ELIGIBILITY: People born before 1950 would not be affected.
  
• INDIVIDUAL ACCOUNTS: People born in 1950 or later could divert up to 4 percent of income subject to Social Security taxes into individual accounts, up to $1,000 a year -- a cap that would be phased out.
  
• WHEN: The accounts would be phased in between 2009 and 2011.
  
• OPTIONS: Workers would be able to choose among several stock, bond and mixed-investment funds.
  
• LIMITATIONS: Participants would have no access to the accounts before retirement and could not borrow against the balance.
  
• AT RETIREMENT: Participants would be required to buy annuities to ensure steady payments out of the accounts over a lifetime.
  
• OVERSIGHT: The federal government would administer accounts.

Color me still uncertain. Many folks, myself included, have figured that the intent would be some kind of 401K. Those of us with 401K who have watched our retirement amounts fluctuate are aware that this isn't always the fastest (or best) means of investing our retirement funds. It takes a lot of time, knowledge, and a share of good luck to snag the right stocks with minimal risk and maximized returns. So I was surprised to read:

The plan is more complicated [than IRA or 401K]. Under the proposal, workers could invest as much as 4 percent of their wages subject to Social Security taxation in a limited assortment of stock, bond and mixed-investment funds. But the government would keep and administer that money. Upon retirement, workers would then be given any money that exceeded inflation-adjusted gains over 3 percent. [emphasis mine]

Waitaminnit. I reread that paragraph twice. Peter R. Orszag, "a Social Security analyst at the Brookings Institution and a former Clinton White House economist" classified Bush's suggestion not as a retirement fund but as a loan. Not from you, but to you--from the government, to you, and it'd have to be repaid. What?

Under the system, the gains may be minimal. The Social Security Administration, in projecting benefits under a partially privatized system, assumes a 4.6 percent rate of return above inflation. The Congressional Budget Office, Capitol Hill's official scorekeeper, assumes 3.3 percent gains.

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's.

With a 4.6 percent average gain over inflation, the government keeps more than 70 percent. With the CBO's 3.3 percent rate, the worker is left with nothing but the guaranteed benefit.

So wait. If I invest $1K a year for forty years in my credit union, by the end of forty years I'd have $40,000 plus the interest gained over that time period. Going with my credit union's current rate of (I think, last time I checked) 5.5% figured monthly--but let's be conservative and say 3%--I would retire with...hold on, doing the math... a little over $75,000.

Hunh.

Time for more research, so I called my favorite economist and industrial manager, as well as someone well-versed in disability and social security (having gone on disability at the age of 54), also known as Dad.

We discussed disability, pensions, social security, and the like. His military pension is not affected by his SS/disability payments, because the money put into his military pension was taxed by FICA on its way in. The only exception to FICA are pension payments made by Civil Service employees (prior to 1984 or 86, if I recall from the SS page), which means that if the SS payment to a former CS is $1,000, and the CS pension is $500, the SS amount is adjusted to be SS-CS, iow, $500, which plus the CS pension, and the SS amt is now $1000. Disability is a bit different; it's more like insurance, because what you get back may or may not be related to how much you actually put in, but you pays you back like SS (only sooner).

But then Dad raised a good point, which is rather intriguing. Need more research. Let's go back to the point in which you pay FICA $5, and SS then purchases a $5 bond from the Federal Treasury. If you or I do this, as folks in off the street, we're essentially loaning the $5 to the government. When the bond's time is up, we get back the $5 cash, plus the interest earned, which is our 'payment' for having loaned the government the use of our cash. But when SS purchases a bond from the Fed Govt, who gets the interest? Riiight. The Federal Govt keeps that interest. On the plus side, if the Govt started coughing up the interest, and paying it back to SS, then Social Security would be viable for possibly quite a bit longer than currently estimated. On the down side, this would require our Govt -- already suffering a massive deficit thanks to some stupid spending practices -- would be even more in debt.

(I think this may also be where the confusion, noted at the top, about SS and the Govt owing money, borrowing money, etc. I've come across phrases and terminology where the Fed Govt "holds" the debt for SS, or vice versa. I'll keep looking, but if anyone does grok the debt-holding notion, pls jump in and enlighten/refresh me.)

Incidentally, this isn't the first time someone's presented a plan to relate SS to the stock market. (I was rather surprised to find that the majority of notions Bush presented were actually ones originally presented by Dems.) Wiesman's article in the Post also notes:

But critics of the Bush plan said the proposed "claw back" renders the whole idea of "personal retirement accounts" virtually meaningless. Indeed, the system would ultimately look something like a proposal made by President Bill Clinton, in which the government would have invested Social Security taxes in the stock market.

That idea was criticized by conservatives because the federal government could end up choosing winners and losers in the financial markets. But under the Bush system, the government is still choosing the stocks and bonds to be bought with Social Security money, said Jason Furman, a former Clinton administration economist. Individuals would get a limited choice, and the government would still keep most of the returns.

"They hope people will think they will take on these accounts and after 40 years, they'll have this huge windfall, but that won't happen," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "I think they're trying to confuse people."

Stephen Moore, a conservative supporter of Bush's Social Security effort, said the mechanism would undermine the president's notion of an "ownership society."

(Yes, liberal = ideology. It does not necessarily relate to Dem/Repub. FWIW.)

That said, I do think a lot of folks have the general impression that they'll be able to take the value of their FICA payments, invest them wisely in the stock market, and upon retiring be very happy. And as Dad and I figured out, discussing the information available (so far), it's not that you'd pay $1000 into FICA and get $1000 back when you retire. It's not like that now, either, although your SS payments are somewhat connected to your income over your lifetime (and are taxed accordingly, as well). But for the money paid in, you see a percentage of it, not the entire amount, and certainly not more than you paid in.

But the information available is rather confusing, and I blame that on several things. One, it's a complex and muddied issue, with a lot of numbers and terms that aren't clear on first sight. Two, the White House has waited quite some time to give more than the most general of outlines, so the information coming in still has to be disseminated fully. Three, a lot of people have misimpressions of how SS works and how the stock market works, and when you start talking interest rates, their eyes glaze over.

In essence, this is what I've gathered would be the ideal notion from Bush's plan. You pay FICA -- let's stay with the $1K amount for ease of math -- and this is dropped into the stock market. You would not, in fact, get to pick and choose where it would go (more about that later) except among a limited selection that's managed by the Govt (in which case, fewer worries about private corps demanding commissions, a plus). The stocks pay back, say, a 5% return on investment, and the government takes a chunk of that, including the principle. You keep the amount of gains above that principle+rate of increase. It's a head scratcher, but that's how it reads to me. Weisman notes:

If instead, workers decide to stay in the traditional system, they would receive the benefit that Social Security could pay out of payroll taxes still flowing into the system, [a senior administration official before President Bush's State of the Union address] said. Which option would be best is still unclear because the White House has yet to propose how severely guaranteed benefits would be cut for those with individual accounts.

[...]

"In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system," the official told reporters. "Basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase."

Obviously there are still a number of holes in the plan, enough to make me leery of the idea that the White House wants this settled before the end of the year. But the idea that the stock market might even out to relatively flat, with minimal gain (for whatever reason) and I'd end up with nothing thanks to the stock market? That doesn't inspire happy feelings in me, and makes me damn glad I do have a credit union savings account (and use it). It might not be the biggest money maker, but it's reliable, consistent, and it's all MINE.

And then we get to the part that makes me really scratch my head about how privatized (ahem, personal for the Newspeak readers) accounts would be better than the current system. Changing over would cost "$754 billion through 2015. But because of the phase-in, the personal-accounts system would not be fully effective until 2011." Other economists counter the costs would be over $1 trillion in the first decade, and going up in the following decades. Dan Balz's article is a bit more clear about the results of the possible changes, as outlined by Bush last night:

For the first time, he put on the table a series of changes in the system that would result in lower benefits in the future, including raising the retirement age; limiting benefits for wealthy retirees; and indexing benefits to prices, rather than wages, thereby reducing their value over time. The only thing he explicitly ruled out was raising payroll taxes. [emphasis mine]

Lower benefits? I thought the reason for doing this was to protect our benefits, not to cut them. I thought the best quote (in terms of humor) was caught by Fletcher and Baker:

Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings," [Senate Minority Leader Harry M. Reid (Nev.)] said. "But that doesn't mean taking Social Security's guarantee and gambling with it. And that's coming from a senator who represents Las Vegas."

Heh. Hey, a little levity never hurt anyone. And it unnerves me when the same article mentions the debriefing by the senior administration official from the White House, mentioning he'd also said "[the plan] would cost the government $700 billion in additional debt because of the diverted payroll taxes." Dude, we're already massively in deficit. The budget on the table is one that would freeze all discretionary funding except that for the military and homeland security. Where is this extra money going to come from?

Just to be as fair as possible, I also checked Fox news, well-known as a bastion of conservative reporting. Its overview is a bit more on the positive side, but even it doesn't shirk from admitting the drawbacks. First, the types of investments posited (including a potential mix of the funds):

The accounts would be modeled on the current Thrift Savings Plan for federal workers, in which there are five investment options, all mutual funds. One holds stocks of large companies; a second holds stocks of small companies; a third holds international stocks. All would be broadly diversified.

The remaining two funds are bond funds. One has corporate bonds and the other has Treasury bonds yielding the same amount as the bonds where Social Security funds are now deposited.

As for the cost:

Independent estimates have ranged as high as $2 trillion, although the administration puts the figure at about $750 billion. The administration has not discussed possible benefit cuts for future retirees to close the gap between what the system takes in and will have to pay out.

And the pro/con:

Over the long haul, individuals can expect to earn higher returns by investing in stocks, or a mix of stocks and bonds, than from what is generated now by the low-yielding Treasury bonds held by the Social Security trust fund. Also, the accounts would be individually owned, and could be passed along to heirs — with certain exceptions.

Treasury bonds are virtually risk free; stocks and corporate bonds are not. Prolonged periods of market decline or lack of growth could eat into one's retirement assets.

Those certain exceptions? One of the other articles pointed out that principle does not relay to inheritors.

Even the New York Times [note: registration required], another moderately conservative slanted newspaper, remarked:

When workers retired, most would be required to use at least part of their accounts to buy from the government lifetime annuities, financial instruments that provide a guaranteed monthly payment for life but that expire at death. Despite Mr. Bush's declaration that money in the accounts could be passed on to children and grandchildren, the principal of an annuity cannot be inherited. [emphasis mine]

I smell spin. The NYT article elaborated:

The administration official acknowledged Wednesday that the accounts, alone, would not resolve Social Security's solvency issues. But while the President delivered a rousing appeal to step up to the challenge of Social Security, he largely avoided the painful questions of cuts and costs. Instead, he presented his private accounts as a historic new benefit for Americans. [emphasis mine]

I'm not hearing anything that makes me comfortable about the amount of money it's going to cost, versus the reduced benefits to workers, and it's not even expected to resolve the issue of SS solvency? What's the point, then? I'm waiting for the good news.

Choice, for me, ain't it, either. I won't argue that choice is a good thing, but even at that, I tend to be someone who invests not always wisely but always by my conscience. Twigging back on the mix of possible mutual funds, I have to ask: who are these major companies? Who are these smaller companies? I don't want money going to Dow Pharmaceuticals, for instance; I consider their track record in workers' rights to be utterly reprehensible. I don't want money going to Coca-Cola or Pepsi, or Domino's. I won't support companies like MacDonalds or Walmart, who consistently break up unionizing attempts, practice sexual discrimination in hiring/promoting, or basically treat their employees like crap -- yet these are all major, international companies for whom (from what I hear) the returns are consistently large. You can have 'em if you want 'em. I'd rather live on a lower retirement than know I'm living on blood money.

That sums up my attitude, so far, barring more information to clarify.

The SS admin & Fed Govt will be spending massive amounts of money in a budget that's already significantly in the red, for a reduced benefits plan that may send my money where I don't want it, and it might not even solve the SS 'crisis'.

I think I'll stick with my savings account, thanks.

If you find something that I didn't cover, contradicts what I found, or can explain any part more clearly, let me know. Thanks.

---

While running errands, I turned on WTOP, our local all-news AM station, and happened to hear Dave Ross' (CBS) short commentary on social security. He summed the entire thing up rather succinctly, and I recognise the quote as being from that unnamed White House official who spoke to reporters just prior to the President's address. In essence, the change in SS would only benefit you if you'll get more than a 3% return on your investment. How do you know if you'll get more than 3%? Well, don't bother calling the SS administration; they're swamped. (And boy, do I pity their souls this morning.) But, on the bright side, Ross added: "It gives us something to worry about other than terrorism for the next twenty years."

Bwahaha. Okay, well, I thought it was amusing.

This just in from Dad.

I think the US could learn from studying the swedish reforms. Certainly has more potential than George's promises. He had traffic tied up this morning on Connecticut so he could go to a breakfast at the hilton(?) at Conn. and Fla. Ave. supposedly for prayer but really to talk about SSA reform. Some people say he doesn't know anything about domestic issues [some say that about foreign policy also] ....but his speech on SS reform certainly diverted attention away from Iraq.

I think that's what we call wagging the dog, but every politician does that. Actually, I can't think of any who haven't! I guess that's why us inside the Beltway are so jaded sometimes...oh, look, meet the new boss, just like the old boss. (Heh.)

A few years ago, Sweden revamped its social welfare/retirement program. An important note is that Sweden is a socialist democracy, which means many of the functions that are private in the US (television, radio, trains, mail) are govt-owned in Sweden. For instance, the govt controls what can be exported for some items and industries. If it's not on the govt list, the retail establishment can't import it. This heavy lean towards socialism is also part of Sweden being a welfare state; it's possible in Sweden to make more money on disability than you would at a job. It also means taxes are unbelievably high -- I think somewhere between 50-60% or possibly higher. Makes sense -- all those social progs have to be paid for, somehow. Don't get me wrong; if this country turns into a socialist democracy, I'm so frickin' outta here. SS is one of our few near-socialist progs, but it's been wildly successful for 65+ years and has done all it promised and more (which is probably the only reason I lean towards keeping it, rather than turning up my nose at the hint of socialism).

Anyway, in one of the economic papers [note: pdf dl] reviewing Sweden's change in retirement, it mentions some of the issues with the old Swedish system:

Sensitive to changes in economic growth. The flat-rate and earnings-related pension benefits, as well as the earned pension rights, were indexed to follow prices rather than wages. Therefore, in times of rapid economic growth the relative value of pension benefi t s declined. On the other hand, in times of negative growth, pension rights and benefits rose faster than contributions.

Principle of compensation for loss of income had eroded. Indexation to prices also meant that in times of real wage growth successively larger proportions of the population earned the maximum pension benefit. At some point, the earnings-related pension would have become a flat-rate benefit.

Unsystematic and inequitable distribution of contributions and benefits. Contributions were paid on all earnings during a worker’s lifetime, while benefits were only based on the 15 years with highest earnings. This policy redistributed income from those with long working lives and flat life-cycle income (typically low-income workers) to those with shorter work histories and rising earnings (typically highincome workers).

Labor market distortions. The benefit formula implied that reducing labor force participation did not necessarily translate into lower pension benefits.

Now, IIRC, currently our SS is tied to wages, not inflation (which is the White House's suggested change). But from the remarks above, it looks like this isn't much better. Is there a difference between 'tied to price' and 'tied to inflation'? Someone, anyone? I'm not sure on that terminology, so I'm not sure whether we're backwards from Sweden (and they converted to a system more like our SS) or if it's something else entirely.

In the US, our SS system is also based on an estimate of the highest years of earnings. From the SSA pages, about how retirement benefits are calculated:

Retirement benefits are calculated on earnings during a lifetime of work under the Social Security system. For most current and future retirees, we will average your 35 highest years of earnings. If you have less than 35 years of earnings, we do average in years of zero earnings to bring the number of years to 35.

Your actual earnings are first adjusted or "indexed" to account for changes in average wages since the year the earnings were received. Then we calculate your average monthly indexed earnings during the 35 years in which you earned the most. We apply a formula to these earnings and arrive at your basic benefit, or "primary insurance amount" (PIA). This is the amount you would receive at your full retirement age, for most people, age 65. However, beginning with people born in 1938 or later, that age will gradually increase until it reaches 67 for people born after 1959.

Okay, now my brain hurts.

I'll read the paper on the Swedish retirement reform later, but it's still an intriguing question of what we could possibly learn from other govts and/or attempts to come up with a better system. From what my father's sent me so far, the Swedish system appears to not only be a success, but one that's been duplicated in several other EU countries as well. Maybe there's some lessons learned in there that would cast a better light on what I've seen so far.

Stay tuned until next time, when Sol cries: "and all I really wanted was to be a car mechanic when I grow up!"

Comments

[underpope.livejournal.com]

I think that the problem is that Bush &c. have gotten it into their heads that Privatization Without Regulation is, by definition, good, despite all evidence to the contrary (and you'd think that Californians, having lived through the lunacy that was our energy deregulation process, would know better, too). If SS is privatized, then one can only wonder which of Bush's cronies will benefit; it certainly won't be American people.

My father-in-law works for PeopleSoft -- or he did, until PeopleSoft was bought by Oracle. Now he works for Oracle. When Oracle first began their hostile takeover bid for PeopleSoft, it was because they were afraid they'd lose a segment of the CRM market of the software industry (never mind that Oracle had no decent CRM products to speak of; this was all about Ellison's ego). PeopleSoft made noises about refusing the buyout, until Oracle finally made them an offer that they liked. Then Oracle bought PeopleSoft. Thousands of people lost their jobs, and thousands of PeopleSoft customers were left in the cold; many former PS customers are switching over to Microsoft, because they know that Oracle has no interest in supporting PeopleSoft technology.

Unfortunately, Oracle and PeopleSoft do not care about their employees, nor about their customers. What they care about is maximizing income for their shareholders. The customers and employees can just deal.

And this is what scares me about Bush's talk of the "ownership society" and the whole notion of privatizing everything they can think of. The government is run by crooks and liars and thieves and old white men withot honor or integrity, but at least it's held somewhat accountable, unlike the crooks and thieves who are in charge of the private sector.

[kaigou.livejournal.com]

I lean towards free markets and smaller government, but I'd say my faith was shaken badly by Enron, Arthur Anderson, WorldCom, and watching people's jobs end with total loss of their pension, their 401K, their health insurance, everything -- and all because some bastards at the top dicked around with the numbers. Most of those bastards weren't even charged with criminal actions, either, which really pisses me off. That lack of accountability, really.

I guess I'm starting to hit the point in the whole SS question that I have to say: is it really broken? It doesn't seem to be, at least, not to the extent that has been broadcast over the airwaves for the past two or so months. Plus, originally it was "SS is broke!" but it's got a massive surplus. Then it became "SS will be broke by 2018!" and last night/this morning, the chant became: "SS will be broke by 2042!" ...Hello, I'll be eighty by then. I mean, that's forty years. Isn't that enough time to come up with something a bit more moderate, more intelligently planned, that won't cost us a trillion or more dollars, won't cut our benefits, and will continue a viable retirement fund for citizens?

At the very least, I don't see why, then, that this has to be decided by end of this year. That, to me, smacks of messing with the system just to 'leave a legacy' -- a phrase I saw in both the liberal and the conservative media ends (which tells you something). I can take a lot, but the whole 'leaving a legacy' seems to me, regardless of source, to be megalomania run amok.

Bleah.

[underpope.livejournal.com]

To be honest, I've gotten to the point, watching Bush and his cronies and their shenanigans, where I don't expect to ever be able to retire. What with my asthma and all, I expect I'll always have to work just to get health care (assuming health care hasn't been done away with completely by then anyway).

[betty-m.livejournal.com]

Who benefits?

The mutual fund companies, and Wall Street brokers who administer the program and get annual fees.

Who loses? Well, given that there's only so much private equity available, current stockholders lose with additional dilution.

Future SS stockholders lose because of the limitations of their choice and the flattening of any rate of return.

[kaigou.livejournal.com]

Who benefits, also, is (temporarily) the economy, but it's artificial. SS holds a massive surplus, currently. Even taking only 4% of the FICA (and even only 4% of a limited amount of the current surplus), and putting that into the stock market, and it's still a big shot to the arm, and still creating a bubble. This will boost the economy, but not necessarily in the way we really need.

I'll get into that tomorrow when I finally take a break from chapters 19-22 and ponder how international economics works, and just what our massive 'trade deficit' really means.

And I still can't find that article written by a nonpartisan accountant about the reasons for creating SS, the public's understanding of what it does, and the cultural issues that have created a reliance on SS...when I do, I'll post the link. It's definitely worth reading...if I could just find it again! Grrrr.

[habibti.livejournal.com]

My hat is off. A great analysis.

Another things that concerns me about social security is that everyone who has met their financial manager and set up a financial strategy has done so on the basis that social security is a part of their retirement, that is has a certain level of riskiness and thus made their decisions about investment of their IRA or 401(k) based on that. With the changes coming along, everyone will have to go back to their financial managers and start all over again. Sigh.

[kaigou.livejournal.com]

woah. http://www.socsec.org/publications.asp?pubid=503#2 ...century foundation (not cato, bleah)
and in contrast: http://www.heritage.org/Research/SocialSecurity/bg1802.cfm ...heritage *bleah*

[habibti.livejournal.com]

couldn't keep reading the Heritage Foundation. Those people area so stupid it hurts my head.

[achiasa.livejournal.com]

I am hampered in my understanding by being, when all is said and done, British. I know how our system works - don't I just; I'm living on Incapacity Benefit right now - but yours?

Ooooooh, privatisation. The Thatcher government started it over here back in the 80s, and IMO it hasn't had a success yet. Of course, my opinion is vastly suspect considering that I am one hell of a socialist, hehe. But private companies providing public services? Their responsibility is to their shareholders, and their first thought is for their profits; the people they are supposed to be helping are way down the line.

Maybe the most similar situation is private pension funds - when the government opened pensions up, lots of insurance companies bought the schemes from the employers. Several of those companies have rather noticeably gone bust in the last few years, leaving millions of people with absolutely nothing to show for all their saving, and the government unable to do much for all its hand-wringing.

[kaigou.livejournal.com]

Chile and Great Britain have both been used as recent examples of privatizing retirement funds. The problem is that when I do research on those two examples, the majority of what I find are criticisms of how the program has fallen far short of the original govt-run version. Healthcare seems to be going the same way. Tennesse switched over to privatizing its state-run medicaid/medicare progs, and so far it appears to be a dismal failure, including severe benefits cuts and knocking almost 300,000 people off the eligibility list, just in one fell swoop, rendering the vast majority without any health care, at all.

I see that as highly suspect behavior, and not at all deserving the accolades the prog's gotten in some quarters; the fact that you've cut expenses by X amt may look good, but not when you add in that you've cut benefits by a corresponding amt of Y. It's like saying, "woo! I pay less for my monthly grocery bills! I eat only every other day, but hey! I pay less!" *snark*

I think that's where the current admin wants us to end up: we pay slightly less, and we get less, but somehow because it's govt-controlled but with the label of 'private' on it, it's okay. Grrrrrr.

Hm, I may do an SS redux later this week, as more info trickles in about the actual elements in the White House's plans.