Social Security, part 3
More about the fake "crisis" today. Plenty of reputable folks agree that Social Security is not in crisis, aside from that posed by the administration.
Furthermore, Social Security as it stands can outperform the market.
However, there is a positive side to the plan, for a select group of people - the fees paid to brokers and money managers could run into the billions.
According to the Social Security trustees report, the standard basis for analyzing Social Security, the program can pay all benefits through the year 2042, with no changes whatsoever.
Furthermore, Social Security as it stands can outperform the market.
However, there is a positive side to the plan, for a select group of people - the fees paid to brokers and money managers could run into the billions.
According to the Social Security trustees report, the standard basis for analyzing Social Security, the program can pay all benefits through the year 2042, with no changes whatsoever.
posted by Management at 4:45 PM
9 Comments:
Fake Crisis?
Posted by jesselee
Thursday, December 16, 2004 at 10:19 PM
It now seems to be a common theme in the blogosphere that Democrats just won't get it together and call Bush on the fact that there is no real crisis in Social Security. Tonight Sam Rosenfeld says of Reid and Pelosi's statement:
What's missing, above all else, is a strong and clear claim that this is a phony crisis -- something trumped up by the GOP.
Are we reading the same statement?
Social Security benefits have been paid on time and in full every single month for almost 70 years. According to Congress' official nonpartisan scorekeeper, the Social Security Trust Fund will be solvent for almost 50 years, and even after that it will continue to pay 80 percent of benefits. Social Security faces real challenges, but is not in crisis.
And this is not the first time. Rep. Robert Matsui of California is not only the current chair of the DCCC, he is the ranking member on the Ways and Means subcommittee on Social Security. That makes him the chief authority out of the Dems in the House. In an op-ed in Roll Call, he wrote:
Social Security is not facing an immediate financial crisis.
Previous to that he stated publicly:
Social Security is not in crisis, and the financial challenges facing the system are manageable.
And finally, I might add on a much smaller scale, our video on Social Security also hits on these issues. Working to get the party message out, I understand that everybody can't catch everything every Democrat says. But when people blast the Dems for not standing up for X or Y, when both X and Y can be found in the very link they point to, it's a tad frustrating.
Update: I owe Sam an apology, as he was certainly the tiny straw that broke my silly camel's back. He also adds a very courteous and noble update to his post where a lesser man might have taken a shot back at me. Good man.
Update II: From today's WaPo...
"Social Security faces real challenges, but is not in crisis," they said in a joint statement. "As we work together to address these challenges, the last thing we should do is cut its funding and make the problem worse."
As pretty much all the sensible articles on Social Security have made clear, to the extent that we have a problem, it is not a Social Security problem, but an accumulated national debt problem. And this isn't just a looking at one side or the other of the coin issue, but a category difference.
There are various ways to illustrate this point. But the following, I think, is the best.
The United States has a bit over $7 trillion in accumulated national debt. You can say that's been built up over the history of the country. But overwhelmingly it was borrowed over what happens to be the span of my lifetime -- the last thirty-five years -- and especially over the last twenty-five years.
After 1980 we started borrowing money big-time to finance our deficits -- in large part because of tax cuts on high-income earners. However you want to slice it, we started spending substantially more than we were taking in in tax revenue.
So where'd we borrow the money?
This is from memory, so I may have the numbers a bit off. But I believe about $4 trillion of that debt was borrowed on the open market -- individual Americans have them in their investment portfolios, or pension funds hold them, or the Chinese, Japanese and the Saudis and others have them in bonds.
But about $3 trillion of those dollars we needed to fund the 1980s and 1990s deficits we managed to borrow closer to home. We borrowed it from the Social Security (and a few other government) trust fund(s).
Almost the entirety of President Bush's Social Security phase-out plan comes down to a simple proposition: finding out how not to pay it back.
Now, admittedly, this is an approach that the president is rather familiar with from his own business career at various failed energy companies. But it is, in so many words, a straight up con -- one of vast scale, and one which virtually no one in the media ever frames in just these terms.
Before discussing that aspect of the question, consider a hypothetical. Let's say there'd not been a Social Security -- President Bush's dreamworld. We'd still have had the same deficits. The difference would be that we'd have had to borrow from private borrowers in the US and abroad.
Think we'd just be able to decide not to pay them back? Not likely. The Joneses and the Smiths with their 401ks probably wouldn't like that. And the Japanese and Saudis probably wouldn't like it much either. Of course, defaulting on our entire national debt would also certainly trigger a seismic international financial crisis. So you can probably figure that no one would be a huge fan of it.
So why does the president figure he can get away without making good on the debt to the folks who pay Social Security taxes, who are overwhelmingly low and middle-income wage earners (since no one pays Social Security tax on investment income or wage and salary income over about $85,000 a year)?
Isn't it obvious? Because he thinks they're an easy mark.
If anything, the fact that a sizeable portion of our huge national debt is owed (in the aggregate) to ourselves would seem to be a good thing since it gives us in extremis at least some flexibility on repayment. But to the president this is a reason to abolish Social Security so the money doesn't have to be paid back at all.
As I said at the beginning of this post, the challenges we face over the next several decades aren't really Social Security problems but national indebtedness problems, though the issues are clearly related.
One obvious and immediate way to relieve long-term pressures on Social Security financing is to reduce the national debt ... by ending our habit of running huge annual deficits or even better by paying down some of our accumulated debt (there are complicated macro-economic questions related to this second point; but in general it's correct.)
But what has President Bush done? He's presided over the biggest fiscal turnaround in American history, taking the country from modest annual surpluses to the biggest deficits -- at least in non-adjusted dollar terms -- in American history. And that's only one reason why you can make a decent argument that President Bush has done more than any other president and perhaps any other single American ever to endanger Social Security's future.
Across the board, it's just one big scam.
The guy who's the biggest threat to Social Security says he wants to 'save' it by abolishing the program and replacing it with private accounts.
Brad DeLong Is Driven Into Shrill Unholy Madness
This is one of those days when I cannot believe that the Republicans--and the tame lapdogs in the press who print their words without surrounding them with, in bold and red, "LIAR!! LIAR!!"--are simply ignorant or deluded, but must be mendacious and malevolent.
The chart below shows the Gale-Orszag baseline for the federal government: current policies, with a fix of the AMT so that it does not replace the general tax system, and with the extension of those tax provisions currently scheduled to expire:
The U.S. government's fiscal problems are not in the Social Security system. The U.S. government's fiscal problems are in the General Fund. And these fiscal problems are dire indeed.
"Ah," some Republican will say, "but the Social Security system's finances get much worse after 2014." That is indeed true. But the General Fund's problems get worse too--and get worse at a much faster rate: the Bush tax cuts, Medicare, and Medicaid guarantee that.
So why dink around claiming that the most important fiscal-policy thing to do right now is to "fix Social Security"? When the General Fund has problems five times as big happening five times faster?
As I said, this is one of those days when I see the Republican Party as something that has no business existing on the face of the earth.
ON BUSH'S TERMS. As the President’s grand Solutions In Search of Problems Summit wraps up today with a panel on Social Security reform, Harry Reid and Nancy Pelosi have issued a joint statement on the issue that, one supposes, sets the terms for the Democratic position in Congress, just as the Campaign for America's Future begins framing the issue for liberal interest groups. “Battle,” though, is not quite the word that comes to mind reading this:
The President's economic summit should have been an opportunity to begin an honest discussion about strengthening and improving Social Security, and we have been encouraged to hear that the President would like to work on a bipartisan basis.
Don’t worry, the whole thing’s not all like that. There’s a strong positive affirmation of the historical success of Social Security, and a series of guidelines for any reform plans the Democrats could consider -- no reduction in funding, no benefit cuts, no large-scale borrowing -- that pretty much invalidates anything the president might possibly propose. (Significantly, though, they say nothing explicitly one way or the other about the idea of private accounts.)
What’s missing, above all else, is a strong and clear claim that this is a phony crisis -- something trumped up by the GOP. If the White House manages to win the argument that a real Social Security crisis exists, it seems likely that Democratic piddling over the details isn’t going to make any difference. Once there's agreement that something needs to be done to address a crisis, it'll be done on the president's terms. (As a colleague pointed out to me, does that remind you of any other high-profile policy debate in this country's recent history?)
UPDATE: The Stakeholder calls me to task for seeming to overlook the fact that Reid and Pelosi do, in fact, say explicitly that Social Security is not in crisis in their statement. This was a pretty silly ommission on my part, and I stand corrected. I hadn't really intended my post to add to the usual piling on in the liberal blogosphere about the spineless Democratic leadership, but that's how it seems to have come across. The Stakeholder's post features plenty of recent statements from Dems stressing that Social Security isn't in crisis, and one should take a look at those comments before doing too much carping about the clueless Dems -- I think it's obvious the party is having some early trouble getting this message out loud and clear, but that's different from not delivering the message at all. It's the easiest thing in the world to bemoan the lameness of the congressional Dems and assume that it's obvious what they ought to be doing to take on Bush. The party certainly can be quite lame, but the carping comes cheap and is often wrong to boot. Read the post.
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SOCIAL SECURITY DOOM MONGERING....As we all know — because President Bush told us yesterday — Social Security "is headed towards bankruptcy down the road." Specifically, according the Social Security trustees, the point at which full benefits can no longer be paid out comes 38 years from now in the year 2042. This prediction is based on a complex model that takes into account future economic performance, population growth, demographic changes, and so forth.
But anyone who's been listening to the Social Security doom mongers for a while knows that there's a problem with this prediction — and since a picture is worth a thousand words I commissioned the chart on the right from the crack Political Animal graphics team. It shows the last decade's worth of Social Security predictions, and it turns out that back in 1994 the Social Security trustees were predicting that doomsday was....
35 years away.
That's right: even though ten years have passed, doomsday is now farther away than it was in 1994. As every year goes by, the doomsday schedule moves out another year too. Why? Because the doomsday predictions are extremely sensitive to the economic assumptions behind them, and if those assumptions are off by a little bit, so are the predictions.
In other words, Social Security doom mongering has a pretty checkered past — which means that perhaps the current doom mongering isn't quite on target either. In fact, maybe Social Security is in perfectly good shape and doesn't need "rescuing." The most prudent course might be to wait a few years and find out.
A better fix than privatizing Social Security
By Edith U. Fierst
WASHINGTON – The president's determination to partially privatize Social Security stems from ideological reasons. But in fact the projected Social Security deficit is small enough - 1.89 percent of payroll, under the Social Security trustees' intermediate assumptions (neither optimistic nor pessimistic) - that a major revision to the system is not necessary. The deficit can be remedied with a few discrete changes in the program, all of which are surprisingly easy to understand and accept.
The first is to raise the earned income on which the Social Security payroll tax is assessed and benefits are paid. At present, the maximum is $87,900 a year, subject to annual indexing to wage growth. But it could be raised gradually over several years to 90 percent of covered earnings of individuals, from its current level of about 85 percent, and indexed thereafter. If that were done, the additional payroll tax paid by the 6 percent of those who earn more than $87,900 would reduce the long-range deficit by 0.61 percent of payroll.
A second proposal is to keep the tax on estates worth $3.5 million and more and dedicate the proceeds to Social Security. At present, the tax applies to estates valued at a minimum of $1.5 million. In 2009 the exemption rises to $3.5 million and the following year the estate tax is scheduled to end. Dedicating the tax on estates worth $3.5 million and over, and retaining it, would reduce the long-range deficit by another 0.6 percent of payroll.
A third change would be to bring all newly hired public employees under mandatory coverage of Social Security, thereby reducing the long-range deficit by about 0.22 percent of payroll. About 6.7 million state and local government employees are currently exempt - virtually the only workers not covered by America's retirement system. Instead these employees are covered by plans operated by their employers. For long-term employees, the benefits of state and local government plans are often greater than those paid by Social Security. But these plans, unlike Social Security, are not portable, so employees who change jobs or employers may lose their coverage. If they become disabled before acquiring substitute coverage, they may be without disability benefits. Furthermore, the dependents of public employees exempt from Social Security, even employees fully covered by state and local government plans, are unlikely to be protected by disability, spouse, or survivor benefits.
If coverage were to be broadened to include newly hired public employees, the governments involved would need time and possibly financial help to phase in the new coverage. Delicate negotiations between these governments and public-employee unions might be required, but the example of how smoothly newly hired federal employees were brought under mandatory coverage and a revamped federal retirement system in 1984 would be a good model.
The final change would be to adopt the more accurate formula for cost-of-living increases designed by the Bureau of Labor Statistics and in use by many programs. Using that formula would reduce the long-range deficit by 0.3 percent of payroll.
Delaying retirement age seems like a common-sense solution, but it would be a mistake. Many people retire early for good reason, such as physically demanding work, family responsibilities, or poor health. Social Security permits anyone to retire at age 62 with a reduction in benefits. The reduction for those who retire at 62 in 2004 is 24.17 percent of benefits. That reduction will go up to 30 percent for those who retire at 62 when the normal retirement age rises to 67 in 2027. Typically, early retirees have slim resources other than Social Security, so if the normal retirement age were raised further, the resulting reduction in benefits could be impoverishing.
Under the intermediate assumptions of the Social Security trustees, these recommended changes would save more than three-quarters of the projected deficit - which in any event won't threaten payments before 2042. If the lower deficits estimated by the Congressional Budget Office are right, they would wipe it out.
Guaranteed benefits after these changes would be far better than privatized accounts, full or partial, because:
• Individual accounts are inevitably insecure when the market goes down or the worker makes poor investments.
• With private accounts, but not Social Security, the retiree runs the risk of outliving benefits unless he or she purchases an annuity, usually at considerable expense.
• Administrative costs, now about 1 percent of benefits, would go up because individual accounts would have to be administered separately and commissions paid.
• Spouses, survivors, and other dependents of workers would lose their benefits if the worker decides to stop sharing with them.
Moving to privatization - even partial - would also be enormously expensive; the government would have to pay for benefits for older retirees if contributions of younger workers were to go into their own private accounts.
In short, privatization unnecessarily risks the security of Americans during retirement or disability. Guaranteed benefits under Social Security can and must be saved.
• Edith U. Fierst was a member of the Clinton administration's Social Security Advisory Council. © The Washington Post.
One man's retirement math: Social Security wins
By David R. Francis | Staff writer of The Christian Science Monitor
At the heart of President Bush's plan to sell Social Security private accounts is a simple notion: You're always better off investing your retirement money than letting the government do it.
By doing it yourself, you can stow some money in the stock market, and over the long run will get a better return on that investment than today's Social Security system offers.
The idea is broadly accepted. That's why the administration's plan to partially privatize the system sounds appealing to many. But that better return won't always happen.
Just ask Stanley Logue of San Diego.
For 45 years, the defense-industry analyst paid into the system until his retirement in 1994. But with all the recent hoopla over reform, Mr. Logue, a Massachusetts Institute of Technology graduate, decided to go back and check his own records. Would he have done better investing his money than the bureaucrats at the Social Security Administration?
He recorded all the payroll taxes he paid into the system (including the matching amount from his employer), tracked down the return the Social Security Trust Fund earned for each of the 45 years, and then compared the result with what he would have gotten had he been able to invest the same amount of payroll tax money over the same period in the Dow Jones Industrial Average (including dividends).
To his surprise, the Social Security investment won out: $261,372 versus $255,499, a difference of $5,873.
It's an astonishing finding. The DJIA represents blue-chip stocks. Social Security invests in US Treasury bonds. Over long periods of time, stocks have consistently outperformed bonds. So, you would think that Logue's theoretical stock investments from 1950 to 1994 would have surely outpaced the return on government bonds.
The fact that they didn't illustrates one of the hard truths about stock investing: Timing matters.
Although Logue started pouring money into Social Security in the 1950s and early 1960s, some of the best years for stocks, he hadn't accumulated a lot of money.
So the gains of his theoretical stock portfolio would have been limited.
By the time he had substantial sums, the market swooned for long periods. From 1965 to 1982, for instance, the DJIA made no progress. Logue retired before the real run-up in stocks in the latter half of the late 1990s.
So the real lesson from his analysis is that any pension plan based on stock investments carries extra risks.
Advocates of privatization point out - correctly - that Logue's analysis compares theoretical stock returns with what the Social Security Trust Fund earned - not what he himself would get from the system.
From that perspective, the investment approach looks better, they argue. Over the long run, a typical worker can expect to earn 4.6 percent a year (after administrative costs) on a diversified portfolio of stocks and bonds and only about 2 percent or less from Social Security, according to federal estimates reported by Michael Tanner of the Cato Institute, long a proponent of privatization. Hypothetically, someone earning $30,000 annually would at the end of a 40-year career receive nearly twice as much under the investment approach ($344,000) than with Social Security ($185,000).
Who's right: Logue or Mr. Tanner?
The debate hinges considerably on what people want their retirement system to be. Social Security has always been an insurance program. It was never intended as an investment scheme. So everyone - retirees, the disabled, widows, and orphans - receive guaranteed monthly income. The "return" on their Social Security contributions depends largely on how long they live. Those in their 90s have enjoyed superb returns. Those who don't live as long benefit less.
Private accounts, by contrast, involve far more variability, both sides agree. Individuals who enter and exit the market at the right times would undoubtedly do better under privatization.
But under Britain's privatized pension system, so many retirees are doing so poorly at this moment that a commission warned this fall that widespread poverty among the elderly may be returning, which could require massive new government spending.
Presumably, President Bush's plan would offer the choice to meld insurance and private investment: much less guaranteed income in return for the opportunity - and risk - of earning more in the markets.
"Because financial asset returns are volatile, benefits under a personal account system would fluctuate," notes Bill Dudley, an economist at Goldman, Sachs & Co., a New York investment bank. "On a risk-adjusted basis, the privatized account ... becomes much less compelling."
There are other problems with private accounts. Administration expenses of the present Social Security system are minuscule compared with the size of the benefits provided. The Bush administration so far has provided no details on its private accounts plan. But if these are handled by Wall Street, the fees could be sizable, dissipating some of the return from investing in stocks. Logue takes no account of such expenses in his analysis.
Further, administrative costs and difficulties for private business could be large as companies, big and small, try to deduct the right amount from a payroll and put it into a private account in a timely fashion.
A study by the Congressional Research Service (CRS) notes some complexities: 650,000 employers go out of business or start new businesses each year. More than 4 million employers have 10 or fewer employees, often having record-keeping problems and errors. About 12 million to 15 million individuals are self-employed and presumably would have to send money directly to a private account.
So the complexities of change are substantial. If the extra return from privatization is not very advantageous, "why even consider changes that all agree would be very disruptive?" asks Logue.
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chicagotribune.com >> Business
Investment pros see bonanza
Social Security proposal would add billions to investments and fees
By Ameet Sachdev and Lorene Yue, Tribune staff reporters. Tribune correspondent Mark Silva contributed to this report
Published January 9, 2005
The prospect of 100 million Americans each having $1,000 of their Social Security contributions to invest every year has investment professionals salivating at the potential financial bonanza.
About $100 billion a year would be freed up for stocks, bonds and other investments under a tentative plan President Bush has floated to fix the Social Security retirement system by creating private investment accounts.
The fees paid to brokers and money managers could run into the billions.
President Bush is expected to unveil the plan in late February, with administration officials eyeing investment accounts that would hold two-thirds of workers' annual payroll taxes.
Though the White House has cautioned that Bush had not decided on a specific plan, the administration is leaning toward letting workers divert 4 percent of their wages, up to $1,000 to $1,300 a year, into personal accounts. The remainder of the workers' payroll taxes would continue going into the system.
"The potential for investment firms has to be mouthwatering," said Michael Falk, chief investment officer with Chicago-based ProManage LLC, which helps workers manage their employer-sponsored 401(k) accounts. "We're talking about billions of dollars."
The financial industry has long championed the partial privatization of Social Security. Besides the self-serving reasons, proponents argue that the accounts would introduce more Americans to the virtues of retirement savings.
Individuals might be encouraged to save more through individual retirement accounts or 401(k) plans.
Bush favors these accounts because they would expand his concept of an "ownership society" and also give younger workers the chance to earn a better return on their money.
An example: Promised benefits currently work out to about a 2 percent annual return on payroll taxes. Although investing in stocks and bonds comes with added risk, the same funds in a balanced portfolio might earn 5 percent.
The president has refrained from spelling out the specifics of any overhaul plan, instead attempting to "educate" the public about the looming budgetary crisis in a system projected to start paying out more in benefits for retirees than it collects in payroll taxes by 2018.
Partial solution
Still, the White House acknowledges that creation of personal savings accounts is not the entire solution to the crisis facing Social Security in coming decades.
In a private memo circulated to Republican allies on Monday, an administration official argues that guaranteed government benefits to future retirees must be cut substantially.
"We simply cannot solve the Social Security problem with personal retirement accounts alone," said Peter Wehner, Bush's director of strategic initiatives. "If the goal is permanent solvency and sustainability--as we believe it should be--then personal retirement accounts, for all their virtues, are insufficient to that task."
Public disclosure of the memo on Thursday sparked a firestorm of criticism from Democrats.
"When it comes to cutting Social Security benefits, this White House is wearing two faces," said Senate Minority Leader Harry Reid (D-Nev.). "In public, the president says he will protect Social Security benefits. But in secret memos to right-wing supporters, his advisors are revealing a very different plan."
White House spokesman Scott McClellan says this memo should not be taken as any conclusive reading of where the Bush administration is headed with Social Security.
"Personal savings accounts are part of a comprehensive solution," McClellan said Thursday.
The memo only adds to the formidable challenge Bush will face in winning approval of his controversial plan. AARP, whose 35 million members are age 50 and older, has launched a $5 million advertising campaign to oppose Bush's proposal. The group contends the accounts amount to gambling with retirement savings.
"The idea of diverting money out of Social Security is inherently problematic," said John Rother, policy director for AARP. "Any plan that takes money out of Social Security will make Social Security's problems worse."
In this politically charged environment, major financial companies are concerned about being painted as greedy. They are reluctant to speak out, let alone publicly endorse private accounts. When asked about private accounts, several companies, including American Express Financial Advisors, Edward Jones & Co. and Charles Schwab & Co., declined to comment.
"We are not out there lobbying in favor of mutual funds being a vehicle of investment for Social Security funds," said Paul Schott Stevens, president of the Investment Company Institute, the lobbying arm for the mutual fund industry.
Campaign contributions
But behind the scenes, investment firms and other pro-privatization business groups have reportedly met with White House and Congressional leaders. Many executives also raised millions of dollars in campaign contributions to Bush and other Republican leaders.
Meanwhile, industry groups have tried to downplay the potential financial boon to Wall Street.
The Securities Industry Association recently noted that the management fees that investment firms could charge would likely be lower than the costs of low-cost mutual funds. The group even tabulated that the potential fees generated over the next 75 years would make up a tiny fraction of the $3.3 trillion in revenues Wall Street firms are projected to earn over the same period.
To be sure, the administration has offered few details on how these accounts will be designed and administered. The most widely discussed proposal calls for any worker under 55 to divert 4 percentage points of their 6.2 percentage points in payroll taxes into private accounts. The federal 12.4 percent payroll tax is split between workers and employers.
At first, individuals would be limited to conservative investments, such as stock-indexed mutual funds. As accounts grow, say to $5,000 or $10,000, investors would have more choice, but still be steered to safe investments. As Bush says, nobody will be taking their payroll taxes to the racetrack.
Even with the chance to manage bigger accounts, some investment advisers are skeptical of the potential windfall.
"I don't think it's a boon at all [to independent advisers]; quite honestly, I think it's a headache," said Mark Bell, president of Mark Bell Advisory Services Inc. in Chicago. "I think it's the mutual fund companies and the brokerage firms that stand to gain."
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