CSMAt 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.
-
We’re currently investigating an issue related to the forum theme and styling that is impacting page layout and visual formatting. The problem has been identified, and we are actively working on a resolution. There is no impact to user data or functionality, this is strictly a front-end display issue. We’ll post an update once the fix has been deployed. Thanks for your patience while we get this sorted.
One man's retirement math: Social Security wins
- Thread starter SViscusi
- Start date
miketheidiot
Lifer
Social security reform is a joke. They should call it social insecurity reform because thats what it will do.
dmcowen674
No Lifer
======================================
Cliff Notes - RRR FLL Rich Elite looking to screw the little people even more, No surprise here.
miketheidiot
Lifer
I would perfer social secutity to continue to exist. The only real threat to Social security is political. In the open market the story is different.
Engineer
Elite Member
Real questions...
People such as handicapped or that have a low mental capacity...what happens to them since they have no way to fund an account? (people who are on SSI now). Does SSI go away completely (I think that 80% - maybe more- of the assclowns on that program should be kicked off anyway as they don't deserve it - they are just as capable as anyone of working - so NO, I'm not looking for a socialist welfare program for everyone)
What happens if the market tanks and millions don't have enough money to live off of, mush less retire?
What about children (under 18) that have parents die early? They currently get SS until 18....do they simply get dropped?
Why would I be in favor of placing 6.2% of my income and another 6.2% of my employer's taxes into the system only to get $1000 per year into an account (max of $11,000 + next year)? Would there be some other money given back in the form of guaranteed payments or does the remaining money (above $1000) simply go in as taxes?
Not going to be a slamdunk that Bush thinks it is. The AARP is against changes...and they vote. Bush might not care about voting now, but Congress does.
OK.....enough commentary....sits back and looks for answers.
People such as handicapped or that have a low mental capacity...what happens to them since they have no way to fund an account? (people who are on SSI now). Does SSI go away completely (I think that 80% - maybe more- of the assclowns on that program should be kicked off anyway as they don't deserve it - they are just as capable as anyone of working - so NO, I'm not looking for a socialist welfare program for everyone)
What happens if the market tanks and millions don't have enough money to live off of, mush less retire?
What about children (under 18) that have parents die early? They currently get SS until 18....do they simply get dropped?
Why would I be in favor of placing 6.2% of my income and another 6.2% of my employer's taxes into the system only to get $1000 per year into an account (max of $11,000 + next year)? Would there be some other money given back in the form of guaranteed payments or does the remaining money (above $1000) simply go in as taxes?
Not going to be a slamdunk that Bush thinks it is. The AARP is against changes...and they vote. Bush might not care about voting now, but Congress does.
OK.....enough commentary....sits back and looks for answers.
0marTheZealot
Golden Member
But people don't have 50, 100 years to see a return of 12%. And past performance doesn't mean the future will perform like that.
It's like saying I haven't gotten cancer yet, so there's no chance I will get it in the future.
It's like saying I haven't gotten cancer yet, so there's no chance I will get it in the future.
zephyrprime
Diamond Member
That stanley logue is full of it. I ran the numbers myself and I get nowhere near the results he got.
spreadsheet
In my scenario, the returns from the Dow were more than three times that of Social Security over the same period. (the scenario goes from jan 1949 to dec 1993. Equal monthly payments are assumed.)
Now, I don't know exactly how much that guy paid in and exactly when he paid it in so my calculations cannot wholely refute his but Just knowing that the stock market has averaged a return of 11% while the SS fund has averaged 2% let me know immediately that this article is BS.
I believe that stanley logue intentionally ran misleading numbers by comparing the rate of return on the market to the aggregate payout of SS PLUS the SS fund rate of return. That's the only way that I see SS possibly outperforming the market. But a comparison like this is invalid for multiple reasons:
1. SS has an increasing base of people paying it. This increasing base is growing slower now than in the past so future increases in SS funding due to population growth will be less than in the past.
2. SS taxes were suddenly increased in 1983 and it's doubtful that they will be increased again in the future.
3. The SS fund is not in a lockbox and has been spent. The government will either have to cut spending in the future to pay back the SS fund (fat chance), inflate the currency to make the SS obligation less burdensome, or cut payouts.
Investing in the market is certainly risky and I would advise investing anywhere near your entire retirement fund in the market but there's something that needs to be remembered: risk of failure is still better than the certainty of failure. By the time I retire, 1/2 as many workers supporting each SS recipient. This simply means that if nothing changes, SS will pay out half as much per person by the time I retire.
spreadsheet
In my scenario, the returns from the Dow were more than three times that of Social Security over the same period. (the scenario goes from jan 1949 to dec 1993. Equal monthly payments are assumed.)
Now, I don't know exactly how much that guy paid in and exactly when he paid it in so my calculations cannot wholely refute his but Just knowing that the stock market has averaged a return of 11% while the SS fund has averaged 2% let me know immediately that this article is BS.
I believe that stanley logue intentionally ran misleading numbers by comparing the rate of return on the market to the aggregate payout of SS PLUS the SS fund rate of return. That's the only way that I see SS possibly outperforming the market. But a comparison like this is invalid for multiple reasons:
1. SS has an increasing base of people paying it. This increasing base is growing slower now than in the past so future increases in SS funding due to population growth will be less than in the past.
2. SS taxes were suddenly increased in 1983 and it's doubtful that they will be increased again in the future.
3. The SS fund is not in a lockbox and has been spent. The government will either have to cut spending in the future to pay back the SS fund (fat chance), inflate the currency to make the SS obligation less burdensome, or cut payouts.
Investing in the market is certainly risky and I would advise investing anywhere near your entire retirement fund in the market but there's something that needs to be remembered: risk of failure is still better than the certainty of failure. By the time I retire, 1/2 as many workers supporting each SS recipient. This simply means that if nothing changes, SS will pay out half as much per person by the time I retire.
Actually they have close to 50 years. age 20 to age 65 is 45 years.
Most people start working at 18 and SS retirment is now 67, which makes that 49 years.
I beleive every 10 years period of stocks sees a positive gain.
But if you want to keep a broken ponzi scheme for retirement....
Bowfinger
Lifer
Did you read the article? Logue did NOT use equal monthly paymentents, for perfectly valid and reasonable reasons. He acknowledges that timing makes the difference. That is the point.
You have fallen for the latest Bush deception, that fixing Social Security is somehow synonomous with privatizing it. The two are wholly unrelated. As it stands, Bush privatization scheme does nothing to fix Social Security's long-term solvency. In fact -- as is S.O.P. for Bush's programs -- it actually makes the problem worse.
This has nothing to do with privatization.
Nor does this.
Nor does this. (By the way, inflating the currency and cutting payouts are really the same thing in this context.)
That's a non sequitur. Social Security does not represent a "certainty of failure". Indeed, with proper funding, it represents a near-certainty of success. Privatization, on the other hand, faces both the risk of the market and the long-term risk of the current SS funding shortfall.
Actually, no it doesn't, since the current system is running a surplus. The Social Security surplus is the only reason Bush's budget deficit is "only" half-a-trillion dollars. It also assumes no changes in benefits eligibility and in funding. Neither assumption is realistic. Bush's privatization scheme is a scam, a boon to his wealthy Wall Street supporters, and a smoke screen to hide the simple fact he is not willing to tackle the hard decisions necessary to ensure Social Security's long-term self-sufficiency.
Private accounts are not going to work if the government decides what you get to invest in, because when everyone starts drawing money, the value of the fund will fall because they will have to sell lots of stock. Supply and demand.
If the government doesn't decide, some people are going to invest wisely, and the government will have to bail them out anyways.
If the government doesn't decide, some people are going to invest wisely, and the government will have to bail them out anyways.
one flaw in his calculations
He only calculated until his retirement in 1994. If someone retires they take money out gradually, they don't cash out at once. He needed to calculate the gains to the present. He didn't because right around 1994 is when the big run up started and he wanted to show SS beating the stock market. Second he used the DJIA which is an index of only 30 stocks. A better index would be the SP500 which is usually used as a benchmark for the market.
He only calculated until his retirement in 1994. If someone retires they take money out gradually, they don't cash out at once. He needed to calculate the gains to the present. He didn't because right around 1994 is when the big run up started and he wanted to show SS beating the stock market. Second he used the DJIA which is an index of only 30 stocks. A better index would be the SP500 which is usually used as a benchmark for the market.
DragonMasterAlex
Banned
What, like it doesn't already?
Jason
DragonMasterAlex
Banned
Given that the stock market has dropped by 50% over the last 5-6 years, I seriously doubt that there are a whole lot of people who think it can go nowhere but up. To even *consider* such a thought is an admission of complete idiocy, and for those people I more than happily advocate letting them starve.
Jason
the dow is flirting with it's all time highs, SP is down around 20% from all time high and NASDAQ is down 50%. This assumes you put money in at the very top. If you had been putting money in for a long time then you would still be sitting on a lot of gains that would outperfrom SS.
Darkhawk28
Diamond Member
Social Security isn't an investment, it's insurance.
DragonMasterAlex
Banned
The question really is, did YOU read the article? The article does NOT state whether Logue used equal monthly payments or not, nor does it state ANY reasons why he would or would not have done so, much less whether those reasons are "valid and reasonable." Christ you assume a LOT! Oh, and incidentally it's "payments", not "paymentents".
OK, and where have the full and complete details of Bush's "Plans" been laid out? Can you provide a link for us, please? I'm more than sure it's POSSIBLE that Bush's plan could be full of crap, but as far as I'm aware there has been NO release of anything even NEAR complete details, certainly not enough to reach any kind of conclusion on ANY results, whether they make the system better, worse or the same. Again, you ASSUME an awful lot!
Nobody said it did.
Nobody said it did.
Nobody said it did! From the way you talk you make it quite evident: You're against the latest "buzz" words, which at the moment are "Privatization", "Social Security Reform" and "Bush." While there are certainly good reasons for being for or against any of those, you don't seem to actually care about those REASONS as much as you do about just being *against* the buzz words.
A certainty of success, eh? Tell it to the millions of people who scratch by every month on nearly nothing. Tell it to the people who are lucky if they can afford rent, food and maybe to keep the TV on as entertainment while they wait to die. Social Security is ANYTHING but a guarantee of success. If you want to count Social Security as a guarantee of anything, you can have this: It's a guarantee of retirement POVERTY.
If you want to know what SHOULD be done, it's the complete TERMINATION of Social Security for everyone but those who literally are physically INCAPABLE of earning a living. If you're still healthy enough to get your ass out of bed every day, get a damn job. The bad idea was when the WWII generation decided to fund their retirements on the backs of their children and grandchildren. The Hard Decisions entail putting a top to programs that the Federal Government has no authority to run in the first place, and good luck finding a Democrat or Republican to do that!
Greatest Generation indeed. Bah!
Jason
Engineer
Elite Member
Regardless....two things I've read on the privitazation plan that, if hold true, sucks...
Borrowing 2 Trillion - fvck that. Raise the caps or the tax to cover it until it's gone.
Allowing only $1,000 per year per person into an account and still taking out the full amount (both employee and employer).
Oh, and if I were a betting man, I would guess that the company tax (additional 6.2% given by the company) will be given back to the company. Heaven forbid it go to your private account.
Borrowing 2 Trillion - fvck that. Raise the caps or the tax to cover it until it's gone.
Allowing only $1,000 per year per person into an account and still taking out the full amount (both employee and employer).
Oh, and if I were a betting man, I would guess that the company tax (additional 6.2% given by the company) will be given back to the company. Heaven forbid it go to your private account.
DragonMasterAlex
Banned
And maybe that's true, but my point is just this: At this stage, we have NOTHING solid, it's all speculation from every group, organization and individual across the whole damn country. As far as I know, not ONE solid piece of info on this alleged "reform" has been leaked. It's simply WAY too early to go off half cocked and assume a bunch of consequences, and that's *all* I'm saying.
Jason
Jason
Darkhawk28
Diamond Member
Let's hope we don't get the solid piece of info AFTER the bill's been passed.
DragonMasterAlex
Banned
TOTALLY agreed 🙂
Jason
Then what is the point? I mean if we are going to pick and choose the worst dates for the stock market and compare them to the SS scam. Then I am sure anybody can spin the numbers to look bad.
Simple fact is over the long run you will make more money and be less burdensome on the tax payer if you invest in the stock market.
I havent heard anybody prove this except say people will be on the streets with no heat and food. Typical fear mongering. We have several choices with this.
A. Privatetize it.
B. Turn it into a welfare state. This means you have to qualify for it.
C. Leave it alone and between 20-50 years from now the country collapses under its weight.
It doesnt get proper funding and it is only getting worse. Time to wake up and smell the coffee.
And it is the only reason why Clinton ran a surplus also.
Raiding the SS fund is nothing more than a scam. They tell you one thing and do another. Do you like supporting scams? If I tried this in the private sector I would be in jail for fraud.
Eh? The Stock market closed at near it highest point ever a couple of weeks ago. The overpriced NASDAQ on the other hand took a tumble.
DragonMasterAlex
Banned
You're right, it's improving greatly of late. I refer, of course, to the tumble we took recently (again, the past 5-6 years) when the "'tech" bubble burst.
Jason
TRENDING THREADS
-
Discussion Zen 5 Speculation (EPYC Turin and Strix Point/Granite Ridge - Ryzen 9000)- Started by DisEnchantment
- Replies: 25K
-
Discussion Intel Meteor, Arrow, Lunar & Panther Lakes + WCL Discussion Threads
- Started by Tigerick
- Replies: 25K
-
-
-
