shotgun wedding
8 Feb 2005 07:02 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
kaigou10 Feb - edited with corrections/clarifications from Habibti.
part one: social security redux
"It's like a shotgun wedding. You can say no, but the alternatives aren't too appealing."
For those of you who like pretty pictures or are right-brained, check out Social Security Pamphlet which explains one perspective on the proposed plan and its ramifications. It's not one of my sources for what I'll say below, but I browsed it and it seems to be pretty well-written and clear. Plus, pictures!
I'm getting closer to an understanding of the situation, and what's listed in this post is a culmination of the information so far, with attempts to arrange it into some kind of working, comprehensible order. If you're in doubt about where I'm coming from, I am ultraconservative when it comes to fiscal and economic policy. If you want to argue on politicized grounds and charge me with being against Bush, take your arguments elsewhere. This isn't about being 'for' or 'against' a polical POV, but being 'for' or 'against' a proposed fiscal and economic policy.
First, a list of the current facts that form the background. It's become clear to me that understanding these issues is crucial to understanding how the SSA reforms will impact things.
Our government is currently at a deficit of $428 billion. In 2003, the government borrowed $555 billion, and in 2004, it borrowed $596 billion. Our dollar is at its weakest point ever, and we have a trade deficit of $167 billion.
Well, can't get much blunter than that. Whether or not you understand the numbers, or can grasp how big they are, this is the bottom line: we're in the hole. Big time. We've been there before in some ways, but it's not fun digging ourselves out.
In a bad economy, people want to know they're in control of something.
I think this is what Bush & co is tapping into, and I can grok that completely. It wasn't apparent at first, but after giving the whole situation some careful thought, that's what I realized. The insight was thanks to comments from several friends: that they support privatization because they want to be in charge of their own future. What's not said, but left implied, is that the future is a pretty iffy thing. Looking at the numbers above, yeah, I'd have to agree. I don't think I want to trust the govt to handle my finances, either, especially when it's doing such a horrendous job of handling its own. So this isn't really a partisan issue, either. I think, presented as "would you manage your money, or let the govt do it?" would give us a strong "me! me!" response from the majority of Americans.
We are a bootstrap culture, after all. I've owned my own business (several, in fact), from brick-front to on-site contracting. The most common thing I'd hear as a business owner was "doing what you're doing has always been my dream." In the US, working for yourself - risks and all - is considered one of the highest pinnacles of achievement. You're a self-made person. You worked your way from nothing to something. Our class structure may still exist on some levels, but running the show for yourself garners respect from every quarter (and sometimes a dose of envy, if you look at Gates and Forbes, or Rockefeller or Kennedy before them). So to tell people, in a time of economic instability, that they have a chance to control their own destiny...well, that's a damn powerful message. And I get that it would have supporters, cause I'd be totally for that, too.
Except for one thing:
Social Security isn't an investment program. It's insurance.
This seems to be where things break down. The same folks supporting privatization often follow up with the explanation that they don't see why they should have to put money into a program when they're not going to get that money back. The folks who often put in the most money - those of us in the 80th to 90th percentile of the economy - are probably going to get the least back, comparatively. And that would be serious injustice, if this were an investment program. But that's where folks get confused. SS is not a retirement program. It's an insurance program.
The real, formal title for 'social security' is Old Age, Survivor's, and Disability Insurance (OASDI). In the SSA overview pages, disability insurance (DI) is listed as a separate fund from Old Age and Survivor's Insurance (OASI). Either way, it's insurance, and when was the last time you made a payment to life insurance and thought bitterly that you'll never see half what you've paid? I haven't. I've thought about the fact that if anything happens, my beneficiaries won't be left with nothing. I see social security as a better, more solid insurance: the disability insurance through FICA is equal to a $350,000 policy, and the survivor's insurance is a $400,000 policy. We don't pay insurance while planning on becoming infirm, or losing our jobs, or dying. We pay insurance because if that does happen, we don't want to be left with nothing. And we know, paying insurance, that there's the chance we'll only see a percentage of the dividends we pay -- but we're betting on the off-chance that if the shit does hit the fan, we'll be able to call on those dividends.
When I owned the bookstore, I worked the store and took home no income. I'd alternate with my partner and work a 40-hr job, then drive to the shop and work the afternoon shift, and twelve hours on Saturday and Sunday. When I was in the shop full-time, my partner worked two jobs, often doing 12-14 hour days between two different restaurants. This was ten years ago, but for three years running, our annual gross income never topped $32K - and we were working three paying jobs between us to manage that. I laugh in the face of anyone who proclaims that as a small business owner they'll have money for health insurance, life insurance, hell, even car insurance. You might, but you'll be borrowing your ass off to get it.
For a business to succeed, every penny has to be invested back into the business, and that means you cut back on things that you see as unaffordable. We lived in a house with three fireplaces; on Mondays (the shop's one day closed), I'd drive our little hatchback to the town's printing plant where they gave away plats for free. Load up the car, drive the plats home, and chop them up in the backyard. That's how we heated our house. If we didn't have money to pay for the gas bill, could someone tell me how in the bloody hell someone could expect us to pay for retirement? Restaurants, like a lot of lower-income manual and service labor, don't provide health insurance, for the most part, and they sure as hell don't provide life insurance or death/dismemberment policies. FICA covers that, and when that's all ya got, hey, when you're living hand-to-mouth, SS is not a bad insurance policy compared to absolutely nothing.
To say, "I want to opt out of Social Security and pay for my own retirement" ignores something that I consider a fundamental aspect of being an American, and beyond that, being human/e. We may pull ourselves up by the bootstraps, but we do our best to help those in need. My father's on disability, and I know plenty of other folks who've been there, temporarily or permanently. Having been there myself, I cannot in good conscience be so selfish as to deny that this is a needed program, that helps people. I certainly cannot be so selfish as to declare that I would not participate now that I am not in danger of requiring such assistance - because the larger the pool of people participating in an insurance program, the lower (and fewer) the risks for all parties.
But people see 'privatization' and say: "Right! I want to control my own retirement," and don't think it through. I absolutely agree that we should have the right to control our own retirement. I absolutely agree that people should be educated about 401K programs, and IRAs, and the like. I absolutely agree that IRA minimums and 401K minimums should be lowered so that people with smaller incomes can still find a way to set aside $10, even $5 here and there to build up a protected nest egg. But I absolutely disagree that this should be done on the backs of those less well off than us. And I totally disagree that Social Security is some kinda retirement fund. Nothing I've read about it indicates that it works even remotely like a retirement fund, and to make it become one, we have to gut it as an effective insurance fund.
Also, for all that 401Ks are being tossed about as a similar, existing program, 401K is not guaranteed (although it is a 'guaranteed contribution' as opposed to SS, or pensions, which are a 'guaranteed benefit', but I won't go into that here). I know people who lost their 401Ks, held by their company, when the companies went under. Enron employees are the best known, but there were plenty of dot-coms and telecoms whose debt wiped out all holdings and left the employees with nothing. The vicissitudes of the market cannot always be controlled, which is the entire point of a government-run social insurance program. If you lose your retirement fund through market or risk, if your house burns down and your equity is reduced to zero, if your spouse falls ill and your money goes to pay for what health insurance won't...the govt's social insurance will still be there. Won't be a great deal, but it'll be more than nothing.
Now, I'm going to look at the program that's presented, now that it's clear that privatization is 'personal retirement fund' and in direct contradiction to 'shared insurance program.' The quote below is from a White House transcript of Bush's presentation in Florida. Read it, and you'll see why I'm not going to quote Bush nearly as much as the economists and acutaries looking at the program's concrete details, as outlined by White House officials:
For an alternate point of view, I recommend looking at reports from the Congressional Budget Office (CBO), such as the Feb 3rd Testimony on the Future of Social Security [pdf d/l], which doesn't present a solution so much as outline in clear detail the full extent of the influences on the current situation. Also take a look at Detailed Projections for the Old-Age, Survivors, and Disability Insurance Trust Funds Through 2015 [pdf d/l] if you like numbers. The basic information on the proposed budget is available through the Office of Management and Budget (OMB) site. In case you're wondering about slant, the CBO is headed by a Bush appointee, but is nonpartisan, with both parties participating in the review process. The OMB is also a Bush appointee, and is nonpartisan in that its only job is to analyze and implement the existing budgets (okay, with a bit more, but 'budget' stuff is in its purview).
The important detail to remember is that the OMB is an accountants' division, and the CBO is run by economists. The two often have radically differing viewpoints on the same subject, because each interprets 'money' in different ways, and takes slightly different issues into consideration. I won't explain those differences here, but I'm just saying it in case you do go track down the info and wonder how two different 'experts' can come up with different results.
So, now that we understand all that, where do we stand?
We are operating under a massive deficit.
This is the most important issue to keep in mind, because:
Social Security is the only program in the government with a surplus.
That's right. It's the only program paying for itself, and making money on top of that. The estimates that in X year we'll have Y payouts, in some quoted cases, seem to ignore the background. If I make, say, $100K a year, and save $50K every year (ha, ha), ignoring interest after four years I'll have $200K in the bank. In that fifth year, let's say I spend $100K. On the face of it, in that one year, I am operating with a negative $100K budget. But I'm actually at a $100K positive, because I had $200K saved up. And the year after that, I can spend another $100K and not go into the red. If you add in interest, the length of time I can ride on my savings goes up substantially as my savings principle goes up. This is why some of the reports on Social Security emphasize that the point of zero-balance is farther off in the future than some scaremongers will tell you (like the classic "we'll be in the red by 2010!", or my favorite, Bush's platform from 1979, which insisted we'd be in the red by 1985.)
The problem is that there are many factors we can't estimate, which is why the CBO has three ranges for its estimates: good, medium, and bad. Over the past twenty years, comparing their forecasts to actual results, it appears their actuaries and economists have consistently had a pretty dire 'medium'; in fact, the 'good' has often come closer to the actual results. But that's what economists and actuaries often do - by being as pessimistic as possible, they're braced for the worst and get all happy when it doesn't happen. The drawback is that politicians (and us regular folks) don't often get the variances in forecasts, and some wacky assumptions can happen on our part, since we don't understand the reasoning without a lot of explanation.
Okay, so the SSA has a surplus, and the Fed Govt has a deficit. Big surplus, big deficit. I mentioned before that there's confusion about the connection between SSA (Trust Fund side) and Account Deficit (Fed Govt side), and whether one can use the money the other one has. The answer is yes...and no. You pay $5 to the SSA. The SSA then purchases a $5 Federal Trust Fund Bond from the Govt. The Govt now has this cash to use. When the SSA says it wants to cash in that bond, the Fed Govt must pay $5 in cash back, with interest.
There's a lot of noise being made about how the SSA "doesn't really have any money". Technically, this is true; it holds a bunch of pieces of paper that say "the Fed Govt promises to pay X amt plus interest when this paper is cashed in." It's called an IOU. But--and this is the key detail--the Fed Govt's IOUs are the strongest, most stable, and most reliable in the world. Everyday people buy Treasury Bonds right along with foreign governments and investors, and it's because everyone knows that if you buy a Treasury Bond, that IOU is as good as gold. You don't have the cash in hand, but you've got something that's good on its face. So the argument about there being no money in the Trust Fund relies on people suddenly seeing our Govt's Treasury Bonds--long a standard of reliability--as essentially worthless. And once people have assumed there's no "real money" in the Trust Funds, then the next step can happen.
This is where the proposed changes get really interesting, in terms of what hasn't been said really loudly, but it's there in the OMB papers, in Cheney's comments, in Bush's comments - and in the criticism from fiscally conservative Repubs. When we talk about Govt debt, this includes a lot of different kinds of debt. Some of it's floating, and some of it's in the form of interest. It's not money we owe at this moment - no one's about to say, 'pay up!' on the total sum - but it's potential debt. At some point, it'll be owed.
Bush's plan is to wipe out the debt owed to the SSA.
Right.
I'm not kidding.
By knocking off the interest owed to the SSA for those Treasury Bonds (and possibly the entire debt itself), the govt can reduce its on-the-books deficit. But what does this mean? In personal terms, if I sell you a house that's $100K, and the going interest rate is, say, 5%, then your loan (and my eventual profit) is $105,000 dollars (obviously doing that interest flat, for easier math). I will list on my books that I hold a loan - a type of equity that's balanced by the debt on your books - for $105K. If you announce that you're not going to honor that interest owed, I will have to readjust my equity down 5%; in effect, I just lost $5K. Lost it, because you ain't paying it. And if the Fed Govt does this to SSA (despite the contention that there are laws on the books preventing the Fed Govt from reneging on debt but that's a hotly contested interpretation and would require more than I'll get into here), the bottom line is that a good chunk of SSA's surplus will go bye-bye.
Which means: SSA may be solvent, and in surplus. But the current Administration is suggesting that to reduce the Fed Govt's deficit level, we gut Social Security. Hey, remember that panic about SSA being in crisis? Believe me, if the Fed Govt wipes out its debt against the SSA, the SSA will be in crisis. The joke is that it won't be because SSA isn't making money to pay its bills, but because the Fed Govt is so whacked fiscally. And in the end, the joke will be on every single American who works manual labor or minimum wage, or has a bad injury and can't work, is a kid whose parent has died, has had a spouse die, or has fallen ill and lacks health insurance. Because if you take out SSA, you're taking out retirement insurance, disability insurance, and survivor's insurance.
Second major issue:
Set benefits relative to price, not wage.
When Bush (in Florida transcript) referred to "the benefits will rise based upon inflation, as opposed to wage increases" - this is a tiny but important detail. Wages in the past two decades rose much faster than price, and currently the average wage index (AWI) currently outstrips the average price index (sometimes called the consumer price index) by a full percentage point (which might not seem like much, but is). The muddied part in that quote is that both the AWI and the API/CPI are measurements of inflation, so the word choice lacks for something to say "based on inflation".
Tangential but illustrative: the cap on SSA payments, which has risen at various points over the program's history. In 1935, it was something like $30K. It was revised again several times, until the last time, in 1996, to $89K. I had been under two impressions:
1. The tax is regressive, and burdens the poor more than the wealthy.
2. Increasing payroll tax was relatively arbitrary, and done to protect SSA primarily.
Turns out the reason the tax is regressive (although fully progressive in payouts) is because it was only by capping the max level income were the SSA designers able to also cap the level of benefits. Meaning, if in 1935 you made $60K - a millionaire in those days - you probably didn't qualify for SS benefits. With your amt of income, you're assumed more likely to be able to afford health insurance, life insurance, and provide some kind of inheritance for your children. If there's no cap on SSA, there's less grounds for arguing that the wealthy shouldn't tap into the program, too. And the second point is because our wages have risen. 90% of people in 1936 made less than $32K or thereabouts; in 1996, if you made $90K a year, you were in the top 10% of wage earners. So it's just an adjustment for the actual rise in wages over the past sixty-five years.
This is from the Public Policy Insitute, found while I was trying to track down the definition of the AWI, and what it measures, compared to the API. I found the following tidbit instead:
One or the other (or a combination) are viable methods, and have been used by other governmental programs across the world. Sweden, for instance, was originally pegged to the price index and recently switched to using the wage index; Australia determines one's benefits as a percentage of one's weekly income and adjusts based on the consumer price index (CPI). It's a lot of fancy economic terms in one paragraph but the real issue lurking underneath is that no matter how the cuts are rationalized, the White House has made it clear that benefits will be cut. One way or another.
You won't actually have much of a choice.
Yeah, that cracks me up, too. The proposal on the table will be to allow people to invest their money in one of three programs: a diversified folio of stocks, a combination of stocks and bonds, or bonds only. What bonds? What stocks? You won't get to say. What if the market is going gangbusters, but not in the stocks selected for the investment program? You won't be able to change your stocks. You won't have a say in what stocks are selected, or what bonds. You'll be part of a pool of folks - possibly over a hundred million folks, if the program goes through to the final point - and you'll all be investing in the same long list of stocks, bonds, or a combination of both.
But it gets better!
Let's say your FICA costs, 6.5% of your income, comes to X, and 4% of X is Z, which the program says you can invest on in one of those three options above. There are several things going on here, that have to be noted. First, the free market may have a higher average return than the numbers suggested by the White House, but with a fund this large--and minimizing risk as much as possible--the dividends will definitely be lower. Higher risk, higher payback; lower risk, lower payback. Second, the percentage you need to achieve to come out ahead is made more complex due to the 'real rate of return' being equal to APR plus inflation. As our deficit grows, so does our inflation, so to stay above the Govt's rate of return, you could potentially require your stocks/bonds to be reaching 11%, 12%, 14%... In other words, there's more math under these statements than I'm going to go into here. And third, your SS dividends are based on a complex calculation (regardless of set to wage index or price index); your income, the length of time working, all sorts of esoteric things determine the payout. SSA has pages explaining this, so I won't go into that, either.
This is the bottom line. Let's say you invest $1K annually, and get a 4% rate of return, so you know you did better than the White House's suggested base rate of 3%. You earn $100K in your private accounts. SSA has determined that your SS payout, had you remained in the traditional system, would be, say, $75,000 total. So the money waiting for you in the traditional side (the 2.5% that you didn't invest privately)? Gone, reduced by $75,000. Sure, you get the $100K, but it's not on top of the 2.5% from your FICA that had gone into the main system. That 2.5% is toast, if your private account earned more than your traditional share. SS will not pay out more than your level of set benefits; only the 1% above your investment could be considered 'profit'.
There's a lot of talk about how private accounts would mimic 401K. I can only guess this is being said by folks who don't have 401Ks, cause there ain't much comparison. For starters, you can take out a loan against your 401K. You couldn't against your private account. You can withdraw your 401K early (while paying a penalty tax if you do it pre-retirement). You won't be able to withdraw your private account early. If you die, your total 401K is part of your will, is liquidated, and becomes part of your estate. With a private account, only the amt earned over your base amt + rate of return would go to your beneficiaries - and only if you die within a certain length of time before you begin retirement. Too early, nothing. Post-retirement point, nothing. And if you decide to keep working (or must keep working)? You get nothing. No benefits, nothing.
So, after all the dust settles, you hit retirement under the proposed plan, and then you get the real kicker: you don't even get the cash.
No, really. Instead, you'll get your SS benefits (albeit reduced) as you would have, had you stayed with the traditional plan. But if you want to cash out the amount that you made on your investment fund, you've got to purchase an annuity. That's right. How much extra you made determines how big of an annuity plan you can buy, but that's the limit of what you can do with the money. And that annuity plan then doles out your dividends. So even if, after 40 years, you've managed a good rate of return, ending with $100K in your personal account...you won't get handed a check. You'll have to use that to purchase your lifetime annuity, which will then send you checks monthly. Enjoy.
And once you've purchased that annuity...the principle cannot be given to your beneficiaries. Prior to retirement, if you die, it goes away. If you retire, and have not yet purchased an annuity, and you suddenly, mysteriously die, voila! Your kids get the entire thing. As someone mentioned on another journal, I'm seeing a rash of sudden mysterious deaths in fifteen years. (Just kidding.) My point is that it's not at all like a 401K. It's a government-controlled program in which any appearance of personal or private choice is so limited as to be an illusion.
Oh, and did I mention that above a certain income point, retirement benefits are taxed? Yeah. Hey, it's income. So your taxed money, which is earning a rate of real benefit to you at somewhere between .3% and .5% (realistically speaking) is then possibly going to be taxed again.
The intro quote paraphrases a comment by Barbara Kennelly, from last night's town meeting. She runs the National Committee to Preserve Social Security and Medicare, a nonpartisan (equal amts both parties, really) organization founded by FDR's son. According to the program as it's currently represented by White House officials and the President, you can divert a percentage of your FICA into a personal account, but there's a good chance you won't actually be much better off - especially since your benefits, thanks to other factors in the plan, will be reduced anyway. Get married, or get shot; divert your benefits or stay in traditional. Neither alternative's looking too good.
And the biggest joke of all - the sole reason I've realized I can't support the program as it is currently presented - is that this:
The offer on the table will not resolve SSA's solvency issue.
What's the fricking POINT, then?
It's called supply-side economics. I'll leave that for Part II ... once I finish ch24 and ch25. Woot.
part one: social security redux
"It's like a shotgun wedding. You can say no, but the alternatives aren't too appealing."
For those of you who like pretty pictures or are right-brained, check out Social Security Pamphlet which explains one perspective on the proposed plan and its ramifications. It's not one of my sources for what I'll say below, but I browsed it and it seems to be pretty well-written and clear. Plus, pictures!
I'm getting closer to an understanding of the situation, and what's listed in this post is a culmination of the information so far, with attempts to arrange it into some kind of working, comprehensible order. If you're in doubt about where I'm coming from, I am ultraconservative when it comes to fiscal and economic policy. If you want to argue on politicized grounds and charge me with being against Bush, take your arguments elsewhere. This isn't about being 'for' or 'against' a polical POV, but being 'for' or 'against' a proposed fiscal and economic policy.
First, a list of the current facts that form the background. It's become clear to me that understanding these issues is crucial to understanding how the SSA reforms will impact things.
Our government is currently at a deficit of $428 billion. In 2003, the government borrowed $555 billion, and in 2004, it borrowed $596 billion. Our dollar is at its weakest point ever, and we have a trade deficit of $167 billion.
Well, can't get much blunter than that. Whether or not you understand the numbers, or can grasp how big they are, this is the bottom line: we're in the hole. Big time. We've been there before in some ways, but it's not fun digging ourselves out.
In a bad economy, people want to know they're in control of something.
I think this is what Bush & co is tapping into, and I can grok that completely. It wasn't apparent at first, but after giving the whole situation some careful thought, that's what I realized. The insight was thanks to comments from several friends: that they support privatization because they want to be in charge of their own future. What's not said, but left implied, is that the future is a pretty iffy thing. Looking at the numbers above, yeah, I'd have to agree. I don't think I want to trust the govt to handle my finances, either, especially when it's doing such a horrendous job of handling its own. So this isn't really a partisan issue, either. I think, presented as "would you manage your money, or let the govt do it?" would give us a strong "me! me!" response from the majority of Americans.
We are a bootstrap culture, after all. I've owned my own business (several, in fact), from brick-front to on-site contracting. The most common thing I'd hear as a business owner was "doing what you're doing has always been my dream." In the US, working for yourself - risks and all - is considered one of the highest pinnacles of achievement. You're a self-made person. You worked your way from nothing to something. Our class structure may still exist on some levels, but running the show for yourself garners respect from every quarter (and sometimes a dose of envy, if you look at Gates and Forbes, or Rockefeller or Kennedy before them). So to tell people, in a time of economic instability, that they have a chance to control their own destiny...well, that's a damn powerful message. And I get that it would have supporters, cause I'd be totally for that, too.
Except for one thing:
Social Security isn't an investment program. It's insurance.
This seems to be where things break down. The same folks supporting privatization often follow up with the explanation that they don't see why they should have to put money into a program when they're not going to get that money back. The folks who often put in the most money - those of us in the 80th to 90th percentile of the economy - are probably going to get the least back, comparatively. And that would be serious injustice, if this were an investment program. But that's where folks get confused. SS is not a retirement program. It's an insurance program.
The real, formal title for 'social security' is Old Age, Survivor's, and Disability Insurance (OASDI). In the SSA overview pages, disability insurance (DI) is listed as a separate fund from Old Age and Survivor's Insurance (OASI). Either way, it's insurance, and when was the last time you made a payment to life insurance and thought bitterly that you'll never see half what you've paid? I haven't. I've thought about the fact that if anything happens, my beneficiaries won't be left with nothing. I see social security as a better, more solid insurance: the disability insurance through FICA is equal to a $350,000 policy, and the survivor's insurance is a $400,000 policy. We don't pay insurance while planning on becoming infirm, or losing our jobs, or dying. We pay insurance because if that does happen, we don't want to be left with nothing. And we know, paying insurance, that there's the chance we'll only see a percentage of the dividends we pay -- but we're betting on the off-chance that if the shit does hit the fan, we'll be able to call on those dividends.
When I owned the bookstore, I worked the store and took home no income. I'd alternate with my partner and work a 40-hr job, then drive to the shop and work the afternoon shift, and twelve hours on Saturday and Sunday. When I was in the shop full-time, my partner worked two jobs, often doing 12-14 hour days between two different restaurants. This was ten years ago, but for three years running, our annual gross income never topped $32K - and we were working three paying jobs between us to manage that. I laugh in the face of anyone who proclaims that as a small business owner they'll have money for health insurance, life insurance, hell, even car insurance. You might, but you'll be borrowing your ass off to get it.
For a business to succeed, every penny has to be invested back into the business, and that means you cut back on things that you see as unaffordable. We lived in a house with three fireplaces; on Mondays (the shop's one day closed), I'd drive our little hatchback to the town's printing plant where they gave away plats for free. Load up the car, drive the plats home, and chop them up in the backyard. That's how we heated our house. If we didn't have money to pay for the gas bill, could someone tell me how in the bloody hell someone could expect us to pay for retirement? Restaurants, like a lot of lower-income manual and service labor, don't provide health insurance, for the most part, and they sure as hell don't provide life insurance or death/dismemberment policies. FICA covers that, and when that's all ya got, hey, when you're living hand-to-mouth, SS is not a bad insurance policy compared to absolutely nothing.
To say, "I want to opt out of Social Security and pay for my own retirement" ignores something that I consider a fundamental aspect of being an American, and beyond that, being human/e. We may pull ourselves up by the bootstraps, but we do our best to help those in need. My father's on disability, and I know plenty of other folks who've been there, temporarily or permanently. Having been there myself, I cannot in good conscience be so selfish as to deny that this is a needed program, that helps people. I certainly cannot be so selfish as to declare that I would not participate now that I am not in danger of requiring such assistance - because the larger the pool of people participating in an insurance program, the lower (and fewer) the risks for all parties.
But people see 'privatization' and say: "Right! I want to control my own retirement," and don't think it through. I absolutely agree that we should have the right to control our own retirement. I absolutely agree that people should be educated about 401K programs, and IRAs, and the like. I absolutely agree that IRA minimums and 401K minimums should be lowered so that people with smaller incomes can still find a way to set aside $10, even $5 here and there to build up a protected nest egg. But I absolutely disagree that this should be done on the backs of those less well off than us. And I totally disagree that Social Security is some kinda retirement fund. Nothing I've read about it indicates that it works even remotely like a retirement fund, and to make it become one, we have to gut it as an effective insurance fund.
Also, for all that 401Ks are being tossed about as a similar, existing program, 401K is not guaranteed (although it is a 'guaranteed contribution' as opposed to SS, or pensions, which are a 'guaranteed benefit', but I won't go into that here). I know people who lost their 401Ks, held by their company, when the companies went under. Enron employees are the best known, but there were plenty of dot-coms and telecoms whose debt wiped out all holdings and left the employees with nothing. The vicissitudes of the market cannot always be controlled, which is the entire point of a government-run social insurance program. If you lose your retirement fund through market or risk, if your house burns down and your equity is reduced to zero, if your spouse falls ill and your money goes to pay for what health insurance won't...the govt's social insurance will still be there. Won't be a great deal, but it'll be more than nothing.
Now, I'm going to look at the program that's presented, now that it's clear that privatization is 'personal retirement fund' and in direct contradiction to 'shared insurance program.' The quote below is from a White House transcript of Bush's presentation in Florida. Read it, and you'll see why I'm not going to quote Bush nearly as much as the economists and acutaries looking at the program's concrete details, as outlined by White House officials:
Because the -- all which is on the table begins to address the big cost drivers. For example, how benefits are calculate, for example, is on the table; whether or not benefits rise based upon wage increases or price increases. There's a series of parts of the formula that are being considered. And when you couple that, those different cost drivers, affecting those -- changing those with personal accounts, the idea is to get what has been promised more likely to be -- or closer delivered to what has been promised.Really, I know the guy's not an economist, but that explanation makes sense to me only because I've been researching this issue and paying attention to it for several weeks now. I joke about people who can't even spell stock market, but if those comments (and he's like that through the entire speech, for the most part)...well, I have to shake my head and pity the folks trying to make heads or tails of it. I'll come back to this in a bit, though, because there is an important detail in there.
Does that make any sense to you? It's kind of muddled. Look, there's a series of things that cause the -- like, for example, benefits are calculated based upon the increase of wages, as opposed to the increase of prices. Some have suggested that we calculate -- the benefits will rise based upon inflation, as opposed to wage increases. There is a reform that would help solve the red if that were put into effect. In other words, how fast benefits grow, how fast the promised benefits grow, if those -- if that growth is affected, it will help on the red.
For an alternate point of view, I recommend looking at reports from the Congressional Budget Office (CBO), such as the Feb 3rd Testimony on the Future of Social Security [pdf d/l], which doesn't present a solution so much as outline in clear detail the full extent of the influences on the current situation. Also take a look at Detailed Projections for the Old-Age, Survivors, and Disability Insurance Trust Funds Through 2015 [pdf d/l] if you like numbers. The basic information on the proposed budget is available through the Office of Management and Budget (OMB) site. In case you're wondering about slant, the CBO is headed by a Bush appointee, but is nonpartisan, with both parties participating in the review process. The OMB is also a Bush appointee, and is nonpartisan in that its only job is to analyze and implement the existing budgets (okay, with a bit more, but 'budget' stuff is in its purview).
The important detail to remember is that the OMB is an accountants' division, and the CBO is run by economists. The two often have radically differing viewpoints on the same subject, because each interprets 'money' in different ways, and takes slightly different issues into consideration. I won't explain those differences here, but I'm just saying it in case you do go track down the info and wonder how two different 'experts' can come up with different results.
So, now that we understand all that, where do we stand?
We are operating under a massive deficit.
This is the most important issue to keep in mind, because:
Social Security is the only program in the government with a surplus.
That's right. It's the only program paying for itself, and making money on top of that. The estimates that in X year we'll have Y payouts, in some quoted cases, seem to ignore the background. If I make, say, $100K a year, and save $50K every year (ha, ha), ignoring interest after four years I'll have $200K in the bank. In that fifth year, let's say I spend $100K. On the face of it, in that one year, I am operating with a negative $100K budget. But I'm actually at a $100K positive, because I had $200K saved up. And the year after that, I can spend another $100K and not go into the red. If you add in interest, the length of time I can ride on my savings goes up substantially as my savings principle goes up. This is why some of the reports on Social Security emphasize that the point of zero-balance is farther off in the future than some scaremongers will tell you (like the classic "we'll be in the red by 2010!", or my favorite, Bush's platform from 1979, which insisted we'd be in the red by 1985.)
The problem is that there are many factors we can't estimate, which is why the CBO has three ranges for its estimates: good, medium, and bad. Over the past twenty years, comparing their forecasts to actual results, it appears their actuaries and economists have consistently had a pretty dire 'medium'; in fact, the 'good' has often come closer to the actual results. But that's what economists and actuaries often do - by being as pessimistic as possible, they're braced for the worst and get all happy when it doesn't happen. The drawback is that politicians (and us regular folks) don't often get the variances in forecasts, and some wacky assumptions can happen on our part, since we don't understand the reasoning without a lot of explanation.
Okay, so the SSA has a surplus, and the Fed Govt has a deficit. Big surplus, big deficit. I mentioned before that there's confusion about the connection between SSA (Trust Fund side) and Account Deficit (Fed Govt side), and whether one can use the money the other one has. The answer is yes...and no. You pay $5 to the SSA. The SSA then purchases a $5 Federal Trust Fund Bond from the Govt. The Govt now has this cash to use. When the SSA says it wants to cash in that bond, the Fed Govt must pay $5 in cash back, with interest.
There's a lot of noise being made about how the SSA "doesn't really have any money". Technically, this is true; it holds a bunch of pieces of paper that say "the Fed Govt promises to pay X amt plus interest when this paper is cashed in." It's called an IOU. But--and this is the key detail--the Fed Govt's IOUs are the strongest, most stable, and most reliable in the world. Everyday people buy Treasury Bonds right along with foreign governments and investors, and it's because everyone knows that if you buy a Treasury Bond, that IOU is as good as gold. You don't have the cash in hand, but you've got something that's good on its face. So the argument about there being no money in the Trust Fund relies on people suddenly seeing our Govt's Treasury Bonds--long a standard of reliability--as essentially worthless. And once people have assumed there's no "real money" in the Trust Funds, then the next step can happen.
This is where the proposed changes get really interesting, in terms of what hasn't been said really loudly, but it's there in the OMB papers, in Cheney's comments, in Bush's comments - and in the criticism from fiscally conservative Repubs. When we talk about Govt debt, this includes a lot of different kinds of debt. Some of it's floating, and some of it's in the form of interest. It's not money we owe at this moment - no one's about to say, 'pay up!' on the total sum - but it's potential debt. At some point, it'll be owed.
Bush's plan is to wipe out the debt owed to the SSA.
Right.
I'm not kidding.
By knocking off the interest owed to the SSA for those Treasury Bonds (and possibly the entire debt itself), the govt can reduce its on-the-books deficit. But what does this mean? In personal terms, if I sell you a house that's $100K, and the going interest rate is, say, 5%, then your loan (and my eventual profit) is $105,000 dollars (obviously doing that interest flat, for easier math). I will list on my books that I hold a loan - a type of equity that's balanced by the debt on your books - for $105K. If you announce that you're not going to honor that interest owed, I will have to readjust my equity down 5%; in effect, I just lost $5K. Lost it, because you ain't paying it. And if the Fed Govt does this to SSA (despite the contention that there are laws on the books preventing the Fed Govt from reneging on debt but that's a hotly contested interpretation and would require more than I'll get into here), the bottom line is that a good chunk of SSA's surplus will go bye-bye.
Which means: SSA may be solvent, and in surplus. But the current Administration is suggesting that to reduce the Fed Govt's deficit level, we gut Social Security. Hey, remember that panic about SSA being in crisis? Believe me, if the Fed Govt wipes out its debt against the SSA, the SSA will be in crisis. The joke is that it won't be because SSA isn't making money to pay its bills, but because the Fed Govt is so whacked fiscally. And in the end, the joke will be on every single American who works manual labor or minimum wage, or has a bad injury and can't work, is a kid whose parent has died, has had a spouse die, or has fallen ill and lacks health insurance. Because if you take out SSA, you're taking out retirement insurance, disability insurance, and survivor's insurance.
Second major issue:
Set benefits relative to price, not wage.
When Bush (in Florida transcript) referred to "the benefits will rise based upon inflation, as opposed to wage increases" - this is a tiny but important detail. Wages in the past two decades rose much faster than price, and currently the average wage index (AWI) currently outstrips the average price index (sometimes called the consumer price index) by a full percentage point (which might not seem like much, but is). The muddied part in that quote is that both the AWI and the API/CPI are measurements of inflation, so the word choice lacks for something to say "based on inflation".
Tangential but illustrative: the cap on SSA payments, which has risen at various points over the program's history. In 1935, it was something like $30K. It was revised again several times, until the last time, in 1996, to $89K. I had been under two impressions:
1. The tax is regressive, and burdens the poor more than the wealthy.
2. Increasing payroll tax was relatively arbitrary, and done to protect SSA primarily.
Turns out the reason the tax is regressive (although fully progressive in payouts) is because it was only by capping the max level income were the SSA designers able to also cap the level of benefits. Meaning, if in 1935 you made $60K - a millionaire in those days - you probably didn't qualify for SS benefits. With your amt of income, you're assumed more likely to be able to afford health insurance, life insurance, and provide some kind of inheritance for your children. If there's no cap on SSA, there's less grounds for arguing that the wealthy shouldn't tap into the program, too. And the second point is because our wages have risen. 90% of people in 1936 made less than $32K or thereabouts; in 1996, if you made $90K a year, you were in the top 10% of wage earners. So it's just an adjustment for the actual rise in wages over the past sixty-five years.
This is from the Public Policy Insitute, found while I was trying to track down the definition of the AWI, and what it measures, compared to the API. I found the following tidbit instead:
Indexing the Social Security initial benefit to wage inflation causes the dollar value of initial benefits to rise commensurate with wage growth across the generations. The wage index is one measure of rising living standards, and using the wage index ensures that Social Security’s initial benefit keeps pace with rising living standards. In this way, wage indexation allows workers to participate in the productivity growth in the economy that occurred during their careers, and to which they contributed.It goes on to say that in actual practice, the two measurements would probably differ only minimally - that is, setting to the price index would lower benefits but minimally. The average price index and the average wage index don't rise steadily; they both rise and fall due to shifts in the economy.
[...]
Although rising standards of living might be expected to induce changes in the number and variety of items in the market basket purchased by workers, initial benefits would not be adjusted to reflect such changes. Yet, living standards can change dramatically over time. In 1935, for example, a large share of households did not have indoor plumbing. 12 Thirty years ago, personal computers did not figure prominently in American homes. If today’s Social Security benefit had been linked to a market basket [price index] from decades ago, current beneficiaries would not be able to enjoy many of today’s conveniences and necessities.
One or the other (or a combination) are viable methods, and have been used by other governmental programs across the world. Sweden, for instance, was originally pegged to the price index and recently switched to using the wage index; Australia determines one's benefits as a percentage of one's weekly income and adjusts based on the consumer price index (CPI). It's a lot of fancy economic terms in one paragraph but the real issue lurking underneath is that no matter how the cuts are rationalized, the White House has made it clear that benefits will be cut. One way or another.
You won't actually have much of a choice.
Yeah, that cracks me up, too. The proposal on the table will be to allow people to invest their money in one of three programs: a diversified folio of stocks, a combination of stocks and bonds, or bonds only. What bonds? What stocks? You won't get to say. What if the market is going gangbusters, but not in the stocks selected for the investment program? You won't be able to change your stocks. You won't have a say in what stocks are selected, or what bonds. You'll be part of a pool of folks - possibly over a hundred million folks, if the program goes through to the final point - and you'll all be investing in the same long list of stocks, bonds, or a combination of both.
But it gets better!
Let's say your FICA costs, 6.5% of your income, comes to X, and 4% of X is Z, which the program says you can invest on in one of those three options above. There are several things going on here, that have to be noted. First, the free market may have a higher average return than the numbers suggested by the White House, but with a fund this large--and minimizing risk as much as possible--the dividends will definitely be lower. Higher risk, higher payback; lower risk, lower payback. Second, the percentage you need to achieve to come out ahead is made more complex due to the 'real rate of return' being equal to APR plus inflation. As our deficit grows, so does our inflation, so to stay above the Govt's rate of return, you could potentially require your stocks/bonds to be reaching 11%, 12%, 14%... In other words, there's more math under these statements than I'm going to go into here. And third, your SS dividends are based on a complex calculation (regardless of set to wage index or price index); your income, the length of time working, all sorts of esoteric things determine the payout. SSA has pages explaining this, so I won't go into that, either.
This is the bottom line. Let's say you invest $1K annually, and get a 4% rate of return, so you know you did better than the White House's suggested base rate of 3%. You earn $100K in your private accounts. SSA has determined that your SS payout, had you remained in the traditional system, would be, say, $75,000 total. So the money waiting for you in the traditional side (the 2.5% that you didn't invest privately)? Gone, reduced by $75,000. Sure, you get the $100K, but it's not on top of the 2.5% from your FICA that had gone into the main system. That 2.5% is toast, if your private account earned more than your traditional share. SS will not pay out more than your level of set benefits; only the 1% above your investment could be considered 'profit'.
There's a lot of talk about how private accounts would mimic 401K. I can only guess this is being said by folks who don't have 401Ks, cause there ain't much comparison. For starters, you can take out a loan against your 401K. You couldn't against your private account. You can withdraw your 401K early (while paying a penalty tax if you do it pre-retirement). You won't be able to withdraw your private account early. If you die, your total 401K is part of your will, is liquidated, and becomes part of your estate. With a private account, only the amt earned over your base amt + rate of return would go to your beneficiaries - and only if you die within a certain length of time before you begin retirement. Too early, nothing. Post-retirement point, nothing. And if you decide to keep working (or must keep working)? You get nothing. No benefits, nothing.
So, after all the dust settles, you hit retirement under the proposed plan, and then you get the real kicker: you don't even get the cash.
No, really. Instead, you'll get your SS benefits (albeit reduced) as you would have, had you stayed with the traditional plan. But if you want to cash out the amount that you made on your investment fund, you've got to purchase an annuity. That's right. How much extra you made determines how big of an annuity plan you can buy, but that's the limit of what you can do with the money. And that annuity plan then doles out your dividends. So even if, after 40 years, you've managed a good rate of return, ending with $100K in your personal account...you won't get handed a check. You'll have to use that to purchase your lifetime annuity, which will then send you checks monthly. Enjoy.
And once you've purchased that annuity...the principle cannot be given to your beneficiaries. Prior to retirement, if you die, it goes away. If you retire, and have not yet purchased an annuity, and you suddenly, mysteriously die, voila! Your kids get the entire thing. As someone mentioned on another journal, I'm seeing a rash of sudden mysterious deaths in fifteen years. (Just kidding.) My point is that it's not at all like a 401K. It's a government-controlled program in which any appearance of personal or private choice is so limited as to be an illusion.
Oh, and did I mention that above a certain income point, retirement benefits are taxed? Yeah. Hey, it's income. So your taxed money, which is earning a rate of real benefit to you at somewhere between .3% and .5% (realistically speaking) is then possibly going to be taxed again.
The intro quote paraphrases a comment by Barbara Kennelly, from last night's town meeting. She runs the National Committee to Preserve Social Security and Medicare, a nonpartisan (equal amts both parties, really) organization founded by FDR's son. According to the program as it's currently represented by White House officials and the President, you can divert a percentage of your FICA into a personal account, but there's a good chance you won't actually be much better off - especially since your benefits, thanks to other factors in the plan, will be reduced anyway. Get married, or get shot; divert your benefits or stay in traditional. Neither alternative's looking too good.
And the biggest joke of all - the sole reason I've realized I can't support the program as it is currently presented - is that this:
The offer on the table will not resolve SSA's solvency issue.
What's the fricking POINT, then?
It's called supply-side economics. I'll leave that for Part II ... once I finish ch24 and ch25. Woot.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 9 Feb 2005 12:09 am (UTC)All I know is that I'm not trusting the govt with my retirement plan. I set 10 percent aside, and hopefully that will be enough.
My grandfather was an EXCELLENT investor, and I wish things were like that now. I always worry about the economy collapsing between now and 2050 (I doubt I'll retire before I'm 70).
no subject
Date: 9 Feb 2005 12:16 am (UTC)I do think it would be a major plus to educate the country more thoroughly on the importance of savings, and making savings plans more affordable. Currently the minimum of an IRA is $1K, and for a long stretch in my working life, $100 was out of the question. $1000 was a princely sum. IRAs are great, but not if they're unaffordable for the majority of Americans.
no subject
Date: 9 Feb 2005 12:18 am (UTC)no subject
Date: 9 Feb 2005 12:21 am (UTC)no subject
Date: 9 Feb 2005 12:26 am (UTC)no subject
Date: 9 Feb 2005 12:16 am (UTC)These days, the two points of view are sadly synonomous. Wither Goldwater, eh?
no subject
Date: 9 Feb 2005 12:23 am (UTC)But then again, that was before Repubs fell in love with supply-side economics and went bonkers. I guess if being fiscally and economically conservative makes me a raving liberal, then, uh, whatever. The idea of such fiscal irresponsibility as Reagan's (and now Bush Jr's) plans, do certainly make me want to rave. And froth at the mouth. And bash my head against something...
no subject
Date: 9 Feb 2005 12:28 am (UTC)no subject
Date: 11 Feb 2005 11:38 pm (UTC)no subject
Date: 11 Feb 2005 11:58 pm (UTC)But without those tables and the finer detail, it's leaving a great deal open. Not the least of which is that under Social Security, the page simply said, "SSA will be reformed with personal accounts" or some such. No budget presentation at all--so it's very hard to pin things down.
I don't know if the second post will cheer you up or make you froth at the mouth--or just confuse you completely. If it does any of the three, let me know. Haven't gotten too many responses on it, but I think people are intimidated by economics, and don't see what impact it could possibly have on their personal lives. After all, most economists are just talking heads on some television news show. ;D