Harry Reid Declares Social Security “Off The Table”

The most successful social program in the history of the world is Social Security. Unfortunately it appears that it’s become the official position of the Republican Party to privatize and dismantle Social Security. They’re using scare tactics, saying the program’s in crisis and on the verge of bankruptcy. That is a myth and it’s not true. …

As long as I’m the majority leader, I’m going to do everything that’s within my legislative powers to prevent privatizing or eliminating Social Security. Simply say it’s off the table.

Allahpundit notes Harry Reid’s false statement regarding Social Security viability and cites last year’s Social Security Administration report to debunk Harry Reid.

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084. The projected exhaustion date for the combined OASI and DI Trust Funds is unchanged from last year’s report.

The long-run financial challenges facing Social Security and those that remain for Medicare should be addressed soon. If action is taken sooner rather than later, more options will be available and more time will be available to phase in changes so that those affected have adequate time to prepare.

Note in particular Reid’s blase attitude in the clip about Social Security being fully funded for the next 40 years. In fact, it’s only 26 years until the trust fund goes bust, but have a look at the first table here in Heritage’s essential rundown of how entitlements affect federal spending from last July. (If you can spare the time, scroll through their entire series of graphs, paying special attention to “Social Security and Medicare Are Crowing Out Other Spending.”) For two years running, the annual deficit has exceeded the sum total of all discretionary spending. Meaning, if we eliminated everything from the budget, defense included, aside from entitlements and interest on the debt, we’d still be in the red at the end of the year. And yet, to this guy, Social Security’s “off the table.” We’re finished.

But look at the Reid quote from above. “The most successful social program in the history of the world is Social Security.” Really? And since Social Security is a failure and a financial boondoggle of a Ponzi Scheme, that means all other social programs in the history of the world have been even more dismal failures. Again, directly from the Social Security Administration, we have clear information about the quickly growing burden on the workforce that is the Social Security Ponzi Scheme.

In 1940, 159.4 people worked for each 1 person gaining Social Security benefits. A mere 5 years later, that ratio had already plummeted to 41.9:1, a roughly three-quarter drop in just 5 years. In 1950, the ratio was 16.5:1, or slightly more than 1/10th the 1940 ratio. By 1965, the ratio had dropped all the way down to 4.0:1, or 1/40th of the 1940 ratio. This is how Ponzi schemes work. Those who get in at the start get their money back and then some, while those who get in at the end lose everything. Social Security is unsustainable and a dismal failure.

“They’re using scare tactics, saying the program’s in crisis and on the verge of bankruptcy. That is a myth and it’s not true.” There have been “fixes” to Social Security in the past, but when the “fixes” amount to tax increases and delayed benefits just to get the same benefit except years after the expected benefits were planned, the whole system is a broken failure. From Seniors World Chronicle (January, 2008):

The trends can only be guesstimated, and that inherent uncertainty is cited by blithe spirits as reason not to do anything about Social Security. Worrywarts, meanwhile, argue that the distance of the looming bankruptcy is all the more reason to make changes calmly now. Both arguments have merit, but it’s the former that is almost certain to prevail. Previous Social Security fixes came only when the checks were about to bounce, and that dire moment is decades off.

Such a funding crisis was just months away in 1983 when a bipartisan gang led by Senators Bob Dole and Daniel Patrick Moynihan cracked heads and persuaded Congress to move up some already planned payroll-tax hikes and shove back the full retirement age to 67 for future generations. Since then, Social Security has run a surplus. From an actuarial standpoint, this mostly solved the problem of funding the boomers’ retirement. It also meant that the boomers will, as a group, put more into Social Security than they get out. (That’s true of all age cohorts born since 1937; it’s the Social Security recipients born before then who have, as a group, made out like bandits.)

The catch is that the surplus was invested in U.S. government bonds, to be cashed in later to keep the by-then-elderly boomers afloat. These bonds are simply claims on future U.S. taxpayers, and they’re coming due. The Social Security surplus peaked in 2000, at 0.91% of GDP. It has held steady for the past couple of years but is expected to start shrinking fast in 2011. By 2017, Social Security should begin to run a deficit, one that’s projected to grow sharply through the mid-2030s.

The crisis projected for 2041 is that the bond stash will run out. The semicrisis set for 2011 is that Social Security will quickly go from the big boost to federal finances that it has been for the past 25 years to a big drag (a drag greatly exacerbated by the cost of paying for Medicare for the boomers, which is another story).

Again, look at what the Social Security Administration said just last year.

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. [the crisis Seniors World Chronicle noted above] The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.

There is most definitely a looming Social Security crisis. To claim otherwise is to either be ignorant of the facts or to be a bald-faced liar. John Sexton quotes the Associated Press from this past week:

The Congressional Budget Office said Wednesday that Social Security will pay out $45 billion more in benefits this year than it will collect in payroll taxes, further straining the nation’s finances. The deficits will continue until the Social Security trust funds are eventually drained, in about 2037.

Previously, CBO said Social Security would start running permanent deficits in 2016. In the short term, Social Security is suffering from a weak economy that has payroll taxes lagging and applications for benefits rising. In the long term, Social Security will be strained by the growing number of baby boomers retiring and applying for benefits.

So, not only does the Social Security Administration show Reid and the sycophant talking heads to be liars, even the supposedly non-partisan CBO says Social Security is now and will continue to run in the red until it is completely empty in around 2037. And the end-year has been steadily moving earlier and earlier. That’s a failed system and a crisis.

“As long as I’m the majority leader, I’m going to do everything that’s within my legislative powers to prevent privatizing or eliminating Social Security. Simply say it’s off the table.” This chart showing the Dow Jones Industrial average from 1900 to present is quite clear. Any 30-year time span shows a higher average at the end than at the beginning. That means someone investing in the DJIA will get more money than he pays in. There is more than 100 years worth of evidence of it. But with Social Security, people get back less than they pay in. And even if one were to start withdrawing funds for retirement at the base of a valley, the remaining retirement funds would still be invested and growing out of the valley. So, tell me again why a partial privatization (which is what many Republicans have and are advocating) that grows a person’s money is a bad idea while government money that diminishes a person’s retirement money is a good idea.

And that long litany of people who continue with their claims that Republicans want to take Social Security away from seniors? That is an outright lie. And it’s the true scare tactic. No Republican plan has been put forth that cuts seniors or soon-to-be seniors off of Social Security. All the Republican plans have kept seniors and soon-to-be seniors on Social Security as it is now constructed. Only the younger generations would have the modified plan.

Social Security is a failure that is now running in the red and will soon be out of money. Partial privatization would have and will generate a greater return than invested. Social Security does generate a smaller return than invested. Social Security cannot survive as constituted. When will you put it on the table, Democrats?

44 Comments

  1. So, not only does the Social Security Administration show Reid and the sycophant talking heads to be liars, even the supposedly non-partisan CBO says Social Security is now and will continue to run in the red until it is completely empty in around 2037.

    Gosh, assuming nothing is done in the next…26 years, you might face a bit of a problem.

    Nothing like, say, getting rid of the income cap on contributions – which would just about save it by itself.

    Quite apart from that, there are two obvious flaws in your “logic”

    - Social security is a seperate fund from the general fund. It holds reserves as Treasury bonds because it is mandated to do so by law; if it has to redeem those bonds, the general fund will cope as if any other creditor were redeeming bonds. So when you say “we can’t pay back Social Security”, you’re saying “we can’t pay off our debts”. Which is not only a no-no according to the constitution, but factually incorrect for eny sovereign entity capable of printing legal tender who holds debt denominated in that legal tender.

    - Your “massive plummet” in ratios is, of course, an artifact of social security being implemented, not a demonstration that it is a Ponzi scheme.

    As has been shown on this blog repeatedly, PB, you’re an unemployed factory worker with a limited grasp of mathematics, public finance, or, indeed, reality. There is a vague possibility that the people who have studied it and say “there is a problem but it can be fixed” might actually know more than you.

  2. Oh, and a third point, if you’re trying for a scare tactic based on retirees to workers, how exactly does going private solve the problem?

    And a forth point – if Bush had succeeded in privitising SS in 2005 – what would have happened to those US retirement funds over the crash?

  3. NZT, if you didn’t fill your comments with hate-filled ad hominem attacks, you would have nothing to offer. You certainly have no ability to read for comprehension, no grasp of logic, no grasp of economics.

    Oh, and a third point, if you’re trying for a scare tactic based on retirees to workers

    It is not a scare tactic but rather it’s the truth. But of course, you don’t know truth from Adam.

    how exactly does going private solve the problem?

    I already covered this in my article, which you have proven you cannot read for comprehension.

    This chart showing the Dow Jones Industrial average from 1900 to present is quite clear. Any 30-year time span shows a higher average at the end than at the beginning. That means someone investing in the DJIA will get more money than he pays in. There is more than 100 years worth of evidence of it. But with Social Security, people get back less than they pay in. And even if one were to start withdrawing funds for retirement at the base of a valley, the remaining retirement funds would still be invested and growing out of the valley. So, tell me again why a partial privatization (which is what many Republicans have and are advocating) that grows a person’s money is a bad idea while government money that diminishes a person’s retirement money is a good idea.

    Money invested in the DJIA grows while SocSec money shrinks. It really is as simple as that.

    And a forth point – if Bush had succeeded in privitising SS in 2005 – what would have happened to those US retirement funds over the crash?

    Your “fourth point” just shows more of your logic fallacy. First, the DJIA in 2005 never reached 11,000 while today it is bordering on 13,000, an increase of roughly 15 percent. Second, when a person retires, that person does not take all the money out of the stock market and shove it in a mattress. Only small portions come out at a time, with the remainder continuing to grow. Again, any 30-year DJIA window shows the value higher at the end of the window than at the beginning while SocSec money gives a negative return on investment.

    Your “massive plummet” in ratios is, of course, an artifact of social security being implemented, not a demonstration that it is a Ponzi scheme.

    That is patently false.

    Gosh, assuming nothing is done in the next…26 years, you might face a bit of a problem.

    Nothing like, say, getting rid of the income cap on contributions – which would just about save it by itself.

    No, that would just kick the can further down the road, as has already been proven by the “fix” of 1983. And, like I already said, and you would understand if you could read for comprehension:

    There have been “fixes” to Social Security in the past, but when the “fixes” amount to tax increases and delayed benefits just to get the same benefit except years after the expected benefits were planned, the whole system is a broken failure.

    You really need to learn to read for comprehension.

    Social security is a seperate fund from the general fund. It holds reserves as Treasury bonds because it is mandated to do so by law; if it has to redeem those bonds, the general fund will cope as if any other creditor were redeeming bonds.

    We’re running a 1.5 trillion dollar deficit. And now Social Security is drawing down that “separate fund” and will continue to do so in ever larger amounts until that “separate fund” is empty. So, how exactly is a budget that is already borrowing 40 cents on every dollar of spending going to cover an even larger debt load?

    Which is not only a no-no according to the constitution, but factually incorrect for eny sovereign entity capable of printing legal tender who holds debt denominated in that legal tender.

    Those who forget history (Weimar Republic) are doomed to repeat it (Zimbabwe). You cannot inflate your way out of debt without impoverishing your whole country. And that’s exactly what quantitative easing will do.

    Get rid of your hate-filled ad hominem attacks. Get rid of your fallacious talking points. Learn how to read for comprehension. Learn a little economic theory instead of spouting your platitudes. And for criminy sake, learn World History.

  4. Let’s all imagine our retirement in a world where our retirement funds were all privatized prior to the banks gambling all our money away in 2008…

    Your threats of Social Security having to be adjusted decades from now, probably long after my death, fail to terrify me. You guys only have fear and hatred, and you can’t even do fear right anymore?

  5. Right again, Nangleator. And excellent points, PiaToR.

    The Right has been waging this battle ever since Social Security was introduced by FDR, and they have lost the battle, and will continue to lose on this issue. Moreover, as PiaToR points out, the longer term viability of this safety net is easily addressed.

    So Harry Reid is correct – Social Security is off the table, as it must be!

  6. Harry Reid likes to see himself on TV making declarations, it makes him feel relevant, instead of like an old fool standing in the way of progress.

  7. Seems like “progress” to ropelight is to cut needy people out of their safety net. Harry Reid is with the majority of Americans on this safety net issue, and ropelight, as usual, is on the wrong side. I wonder why?

  8. Speaking of Ponzi schemes and safety nets, did anyone know that the three branches of government are now, (according to Chucky Schumer), the House, the Senate, and the President?

    Everyone knows that in this context “the President” signifies the Executive Branch of our government. Talk about making a mountain out of a molehill, this is it!

  9. Harry Reid likes to see himself on TV making declarations, it makes him feel relevant, instead of like an old fool standing in the way of progress.

    You, ropelight, and those like you, consist of those who stand in the way of progress. Please give me three examples of the progress that you stand for, ropelight. I honestly don’t think you comprehend the meaning of the word when used in a political context.

    Progress to me, for example, is to take the necessary steps to assure that every American receives the basic right to health care. You are happy having 50 million Americans remain uninsured. This is latter is not progress, ropelight, yet that is an example of a policy that you and your party support, isn’t it?

  10. Everyone knows that in this context “the President” signifies the Executive Branch of our government. Talk about making a mountain out of a molehill, this is it!

    Very good, Perry. You’ve proven you don’t know the 3 branches of the government. Or do you think the Senate represents the Judicial branch or something?

  11. And I made an error. I inaccurately remembered a current DJIA of approaching 13,000 when it is approaching 12,000, which is still above the levels ever seen in 2005.

  12. Perry asked me for three examples of the progress. Easy enough. Here they are: much lower taxes; a sharp limit on the size and scope of government; and the abolition of public employee unions.

  13. After TARP it’s fair to say that the stock market already gets to gamble with my money whether I have a say in it or not. Unlike the banksters, however, I won’t be getting a taxpayer funded, multi-million dollar bonus (because it would have been socialism not to give it to them, remember?) in the event that Goldman Sachs once again “innovates” us into financial armageddon.

    “they who have put out the people’s eyes, reproach them of their blindness”

  14. And, Perry, health care is not a basic right. It has never in the history of the US been a right, and if the US is to survive, it will never become a right. You cannot have a basic right that forces someone else to do something for you. Unless, of course, you believe you have a right to be a slave-holder.

  15. Perry asked me for three examples of the progress. Easy enough. Here they are: much lower taxes; a sharp limit on the size and scope of government; and the abolition of public employee unions.

    OK ropelight, I respect that, although I don’t necessarily agree with their practicality re taxes and government size, or their necessity re public employee unions.

  16. And, Perry, health care is not a basic right. It has never in the history of the US been a right, and if the US is to survive, it will never become a right. You cannot have a basic right that forces someone else to do something for you. Unless, of course, you believe you have a right to be a slave-holder.

    John, our doctors take the Hippocratic Oath, correct? Isn’t that recognition that health care is a natural right, a right acknowledged by civilized people the world over? How can we turn down a person needing care who cannot afford to pay? I could not, can you?

  17. John, our doctors take the Hippocratic Oath, correct?

    In pure form it requires they preform no abortions. [You of course do say you are personally opposed to the practice of abortion, while refusing to say on what grounds you base that opposition.] And that they do no harm. Apparently you view the killing of others by medical practitioners as doing no harm.

    Isn’t that recognition that health care is a natural right,

    No. It was a commitment to the practices and standards of the cult of Aesculapius; and now to the modern standards of medical treatment.

    By the way, have you become a natural rights proponent?

    ” … a right acknowledged by civilized people the world over? ”

    No. It is a commitment by persons wishing to be affiliated as medical doctors (as opposed to Chiropractors, Osteopaths, Homeopaths, and Aroma therapists, Crystal clinkers, and Marxists) to a standard of disease treatment; not, a self-evident truth that the public delivery of euthanasia and abortion services should be paid for by anyone unfortunate to live within arm’s reach of your fiscal grasp.

    “How can we turn down a person needing care who cannot afford to pay? I could not, can you?”

    Yeah, Maoist species-beings and Nazis especially.

  18. DNW said it pretty well, but I’d add a bit more.

    How can we turn down a person needing care who cannot afford to pay? I could not, can you?

    Since that isn’t happening and wasn’t happening prior to the unconstitutional ObamaCare fiasco, that is a non-starter. False alternative fallacy. Red herring fallacy.

  19. Since that isn’t happening and wasn’t happening prior to the unconstitutional ObamaCare fiasco, that is a non-starter.

    Since stories from people who had just that happen have been posted, you are a liar.

    Again.

  20. Money invested in the DJIA grows while SocSec money shrinks. It really is as simple as that.

    *sigh* Again, a wingnut misses the difference between money and wealth.

    Complaining about the mismatch between workers and retirees is a claim that society won’t produce enough wealth. Pointing at investment returns and assuming they will remain the same is an argument about money.

    You fail again, PB.

  21. Since you are incapable of reading for comprehension, logic, or rational thought, I’ll break it down very clearly (as if I hadn’t multiple times already).

    Person A invests a certain percentage of his income in the DJIA every week he works until he retires at 65.
    Person A has more money in his investment at 65 than he put in during his working life.
    Person A begins drawing money out of his investment to live on while retired.
    The rest of the money in Person A’s investment continues to generate more money.

    Person B pays the same percentage of his income to a government retirement plan, called Social Security every week he works until he retires at 65.
    Person B receives less money in Social Security disbursements than he paid in.

  22. Person A invests a certain percentage of his income in the DJIA every week he works until he retires at 65.
    Person A has more money in his investment at 65 than he put in during his working life.

    Thank you for demonstrating your incompetence yet again, PB.

    The argument is that a society produces wealth (note, *not* money) with X workers, and distributes that to X+Y people, where Y are the non-working members of society. When the ratio of X : (X+Y) decreases, the country has problems.

    This is the argument you yourself made:

    In 1940, 159.4 people worked for each 1 person gaining Social Security benefits. A mere 5 years later, that ratio had already plummeted to 41.9:1, a roughly three-quarter drop in just 5 years. In 1950, the ratio was 16.5:1, or slightly more than 1/10th the 1940 ratio. By 1965, the ratio had dropped all the way down to 4.0:1, or 1/40th of the 1940 ratio. This is how Ponzi schemes work. Those who get in at the start get their money back and then some, while those who get in at the end lose everything. Social Security is unsustainable and a dismal failure.

    Money is a claim on wealth produced by a society. It doesn’t matter to the argument above whether that money is the result on payouts in private investments, a government Social Security system, or direct transfers. According to the argument, if the ratio of people working to total people in the society decreases, the country has problems.

    Now, let me illustrate this by taking it to extremes. Let us imagine everyone spends an entire lifetime scrimping and saving, and investing it all in the market. One day, they all retire in order to live off their investments, leaving only one person actually working in the country of 300 million.

    According to you, this will be fine. They have private investments! They are getting returns! they will be getting higher returns than lousy Social Security!

    According to me, there’s a problem. The money those investments might give them is totally different from the wealth produced by the country.

    If everyone in society gets nominally “higher returns” via market investment then, when large numbers of them retire, those returns *will* be worth less in reality – inflation will eat away their value, the markets will crash, and/or workers will get paid more.

    Shouldn’t you be standing on an unemployment line somewhere instead of displaying your ignorance on the internet yet again?

  23. You’re an idiot, NZT, as your idiotic “illustration in the extreme” example shows. That is an argumentum ad absurdum fallacy; therefore, there is no need to debate your fallacious argument. The fact remains that an investment in DJIA has shown to always increase over a 30-year time frame while SocSec has shown to return less than paid in. It’s a fact you cannot get around. So each individual benefits from DJIA investment and each individual is harmed by SocSec.

  24. You’re an idiot, NZT, as your idiotic “illustration in the extreme” example shows. That is an argumentum ad absurdum fallacy; therefore, there is no need to debate your fallacious argument.

    Incorrect – it is a demonstration of your inability to grasp the difference between money and wealth.

    The major point is this:

    The money those investments might give them is totally different from the wealth produced by the country.

    If everyone in society gets nominally “higher returns” via market investment then, when large numbers of them retire, those returns *will* be worth less in reality – inflation will eat away their value, the markets will crash, and/or workers will get paid more.

    Everyone can see that you are either AFRAID or UNABLE to address this point, PB. You’re not fooling anyone by blustering that “there is no need to debate your fallacious argument”.

    Then again, most wingnuts are cowards anyway.

  25. NZT, even your esoterics are flawed. But that’s not the point. The point is you’re off point.

    Social Security is a failed Ponzi scheme which is paying out more than it is drawing in, and will continue to do so until it runs dry, bankrupting the government in the process. Social Security recipients receive less than they paid in. Those who invest in DJIA, over any 30-year time frame, will receive more than they paid in. Retirees prefer to receive more than they paid instead of less than they paid. Retirees absolutely prefer to receive more than they paid instead of the none of what they paid that is coming in short order.

    About your argumentum ad absurdum fallacy you like to use so regularly: it is just more evidence on the heaping pile of evidence that you have neither the capacity nor the desire to debate anything in good faith. If you wanted a true good faith debate on a subject (which you have proven you don’t), you would learn to rid yourself of your fallacious talking points.

  26. To repeat:

    The major point is this:

    The money those investments might give them is totally different from the wealth produced by the country.

    If everyone in society gets nominally “higher returns” via market investment then, when large numbers of them retire, those returns *will* be worth less in reality – inflation will eat away their value, the markets will crash, and/or workers will get paid more.

    At this point, I’m leaning towards the “too stupid” rtaher than “too dishonest” explanation for your inability to grasp this.

  27. No, NZT, the point is as I made it to start the thread, not as the mumbo-jumbo you want to change it to since you cannot win the point as I made it to start the thread.

    Your “if/then” garbage is wholly irrelevant. The fact that Social Security pays out less in absolute dollars than the person paid in compared to the fact that DJIA pays out more in absolute dollars than the person paid in is just that: a fact you cannot get around unless you completely change the subject to something else you still do not understand.

  28. No, NZT, the point is as I made it to start the thread

    “In 1940, 159.4 people worked for each 1 person gaining Social Security benefits. A mere 5 years later, that ratio had already plummeted to 41.9:1, a roughly three-quarter drop in just 5 years. In 1950, the ratio was 16.5:1, or slightly more than 1/10th the 1940 ratio. By 1965, the ratio had dropped all the way down to 4.0:1, or 1/40th of the 1940 ratio. This is how Ponzi schemes work. Those who get in at the start get their money back and then some, while those who get in at the end lose everything. Social Security is unsustainable and a dismal failure.”

    The fact that Social Security pays out less in absolute dollars than the person paid in compared to the fact that DJIA pays out more in absolute dollars than the person paid in is just that: a fact you cannot get around unless you completely change the subject to something else you still do not understand.

    You live in a world without inflation, is that it?

  29. The fact that Social Security pays out less in absolute dollars than the person paid in compared to the fact that DJIA pays out more in absolute dollars than the person paid in is just that: a fact you cannot get around unless you completely change the subject to something else you still do not understand. (quoting me)

    You live in a world without inflation, is that it?

    Were you born that dense or did you have to work at it? Put down your hookah already.

    Person A invests 5000 dollars and gets back 6000 dollars (which are now worth 4000 dollars).
    Person B is taxed 5000 dollars and gets back 4000 dollars (which are now worth 2700 dollars).
    Which person is better off? Be honest, if you are even capable of honesty, NZT (and I have yet to see any evidence at all that you are capable).

  30. Person A invests 5000 dollars and gets back 6000 dollars (which are now worth 4000 dollars).
    Person B is taxed 5000 dollars and gets back 4000 dollars (which are now worth 2700 dollars).

    In Person A’s world, everybody is doing the same. More money is chasing the same amount of wealth. Money is worth less.

  31. Privatizing Social Security: Still a dumb idea

    Why is privatizing Social Security such a turkey? Because retirees shouldn’t have to depend on the market’s vagaries for survival money. More than half of married couples over 65 and 72% of singles get more than half their income from Social Security, according to the Social Security Administration. For 20% of 65-and-up couples and 41% of singles, Social Security is 90% or more of their income. That isn’t projected to change.

    Using personal accounts to replace Social Security’s guaranteed benefit would subject people to two separate risks. First, there’s investment risk: Most people have no idea how to invest well — study after study shows that mutual fund buyers tend to buy high and sell low. But even if you manage to invest well, you run into the second risk, largely unrecognized, that interest rates will be low when you retire.

    Let me show you how this works, using numbers from Vanguard. Let’s say you had $200,000 — a not insignificant sum — in the Vanguard Target Retirement 2010 fund as of Sept. 30, 2007. That was a few days before stocks peaked.

    Let’s say that month you turned 66, Social Security’s current retirement age, and decided to use your $200,000 to buy a lifetime annuity from one of Vanguard’s insurance company partners. (I’m using the 2010 fund because there’s no 2007 fund; they’re offered only in five-year increments.)

    Your annuity: for a single person, $1,048 a month, adjusted annually for inflation the way Social Security is. A married couple getting a joint-and-two-thirds annuity — just as with Social Security, a surviving spouse collects two-thirds of what the couple gets — would have received $881 a month.

    If you turned 66 in February 2009, near the market bottom, your account would be down 29%. Your annuity — $793 and $692 — would be down 23%-24%.

    But even in a decent market, you’re vulnerable. Let’s say you turned 66 on Sept. 30 of this year. Even though stocks are still down from three years ago, bonds, now more than half the fund, have done well. You’d actually be up a tad: $201,602. But your annuity would be 10% less than in 2007: $939 for a single, $792 for a couple. That’s because interest rates are down from 2007 levels. Companies offering annuities would earn less on your money than three years ago, so they offer you less. “The timing of annuitization is a big issue,” says John Ameriks, who oversees Vanguard’s investment counseling and research operations.

    Of course, you could retire during a period of high stock prices and high interest rates. And if you had a private account and died before you retired, your heirs would inherit your money, as opposed to getting nothing from Social Security.

    But Social Security isn’t supposed to be a gambling program, or a wealth-building program. It’s an intergenerational social insurance program, in which we make sure our parents don’t have to depend on food banks and homeless shelters when they get old, and we hope our kids do the same for us. Change that into an investment program, and higher-income people will have an advantage over lower-income types because they won’t need immediate retirement income and can wait out markets. By contrast, regular Social Security favors lower-income people — as it should.

    So you see, private accounts aren’t just a turkey. They’re a mega-turkey. Happy holidays.

    And

    Let’s try to quantify this, albeit roughly. Under the current system, a couple earning a household income of $100,000-$150,000 per year would get slightly more than $3,000 every month in Social Security benefits. And their benefits would be inflation-adjusted every year. Suppose the couple were to invest for retirement in the private markets. With an income of that size, the couple would be able to save about $500,000. As Allan Sloan calculated in Fortune, a couple retiring at age 66 at the end of 2007, having accumulated $500,000 in a private savings account, would have been able to purchase an annuity delivering $3,000 per month until the death of the longest living of the two. In other words, that couple would get an annuity worth about the same amount as their Social Security benefits. A couple retiring at the end of 2008, by contrast, would have been able to purchase an annuity delivering only $2,000 per month—a 33 percent loss.

    In other words, if Social Security were in private accounts, the payout you’d receive would be more correlated to the timing of your retirement than to anything else. With a privatized system, those retiring in 2007 would have been reasonably pleased—though they still wouldn’t have made a windfall compared with normal Social Security benefits—while those retiring now would be devastated, receiving vastly smaller retirement payments.
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    If insurance against catastrophic economic loss and deprivation in one’s retirement years is the underlying purpose of Social Security, we cannot permit the dramatic cyclical nature of market returns to place at risk a substantial portion of people’s retirement accounts. The very purpose of the Social Security system is to have a guaranteed return, not one subject to the risk of a volatile market. Indeed, it is inconceivable that we would tolerate retirees descending into poverty after a cataclysmic market collapse such as what we have just seen. Suppose we had privatized Social Security before the recent declines: In order to prevent mass poverty among the elderly, we would have been obligated to re-create traditional Social Security to redress the failure of the privatized system.

    Furthermore, as Paul Krugman has pointed out, the would-be privatizers make incredible—even impossible—assumptions about the likely performance of the market to justify their claim that private accounts would outdo the current system. According to Krugman, their worldview would require the price-earnings ratio in the market to be around 70 to 1 by midcentury. That would make the market at the height of the last bubble look grossly undervalued. Their performance numbers simply do not work.

    Supporters of privatization also use the backdrop of impending Social Security bankruptcy as an argument for privatization. That, too, is a canard. Wherever one comes out on the urgency of Social Security’s financing problem—and there is fair debate about it—privatization would undoubtedly make the problem worse, not better. Social Security is, as we all know, a Ponzi scheme that would make Bernie Madoff proud. Today’s contributions by workers pay for today’s payouts to recipients, with some being saved in a trust fund that, given changing demographics, will be exhausted several decades from now. If we were to create private accounts for current contributions, invest those accounts in the market, and thus withhold those dollars from the system for current payouts, the shock to the system would be enormous. Where would the money come from to pay current recipients? We would incur a “transition cost” to privatization, as it is politely called, in the trillions of dollars—money that would have to be borrowed in the market to cover the lost cash flow into the Social Security system.

    And that fact makes clear the fallacy of the next argument often proffered by privatization supporters: They claim that the flow of dollars into the private accounts and then into the equity markets will stimulate the economy. The problem is that for every dollar put into the market through a private account, the government would have to borrow a dollar in the market to cover existing payouts. Thus the supposed benefit is entirely eliminated, as the net impact on the capital available for investment is zero.

  32. Yup, you proved you weren’t even capable of giving an honest answer to that straight-forward question.

    You have proved, yet again, that you are too stupid to grasp the difference between money and wealth.

    And lastly – The Definitive Case Against Privatizing Social Security:

    The major flaw in this main stream dialogue is what is called a ‘fallacy of composition.’ The typical textbook example of a fallacy of composition is the football game where you can see better if you stand up, and then conclude that everyone would see better if everyone stood up.

    Wrong! If everyone stands up no one can see better, and everyone is standing up rather than sitting down. So all are worse off. They all are looking at what is called the micro level for the individual Social Security participants rather than looking at the macro level which includes the entire population.

    To understand what’s fundamentally wrong at the macro (big picture, top down) level, you first have to understand that participating in Social Security is functionally the same as buying a government bond. Let me explain.
    [...]
    Warren: “OK, I’ll get to the investment aspect later, but let me continue. Under your privatization proposal, the government would reduce Social Security payments and the employees would put that money into the stock market.”

    Steve: “Yes, about $100 per month, and only into approved, high quality stocks.”

    Warren: “OK, and the US Treasury would have to issue and sell additional securities to cover the reduced revenues.”

    Steve: “Yes, and it would also be reducing Social Security payments down the road.”

    Warren: “Right. So to continue with my point, the employees buying the stock buy them from someone else, so all the stocks do is change hands. No new money goes into the economy.”

    Steve: “Right”

    Warren: “And the people who sold the stock then have the money from the sale which is the money that buys the government bonds.”

    Steve: “Yes, you can think of it that way.”

    Warren: “So what’s happened is the employees stopped buying into Social Security, which we agree was functionally the same as buying a government bond, and instead bought stocks. And other people sold their stocks and bought the newly issued government bonds. So looking at it from the macro level, all that happened is some stocks changed hands, and some bonds changed hands. Total stocks outstanding and total bonds outstanding, if you count Social Security as a bond, remained about the same. And so this should have no influence on the economy, or total savings, or anything else apart from generating transactions costs?”

    Come on, PB – are you starting to see the problem? Are you really that stupid?

    You are in the position of someone insisting that because one person in an audience can get a better view by standing rather than sitting (your Person A vs Person B example above), EVERYONE will be better off if they ALL stood rather than sat. Nope. Some will be unlucky, and be too short (= unluckiness in timing as above). And everyone will get more tired (= transaction costs as above). And teh audience will have turned into a crowd (=SS is an intergenerational social insurance program, not a means of wealth generation).

    Are you really so goddamned stupid that you can’t follow that?

  33. Yup, you proved you weren’t even capable of giving an honest answer to that straight-forward question.

    Fine – I’ll answer. The question is not straight forward because your premises are fundamentally wrong.

    Where you stated:

    Person A invests 5000 dollars and gets back 6000 dollars (which are now worth 4000 dollars).
    Person B is taxed 5000 dollars and gets back 4000 dollars (which are now worth 2700 dollars).

    What you should have said is that:

    Person A invests 5000 dollars and gets back 6000 dollars (which are now worth 2700 dollars), and pays 1% of that in transaction fees.
    Person B is taxed 5000 dollars and gets back 4000 dollars (which are now worth 2700 dollars).

    Since we are considering worlds where EVERYONE is following the same strategies, meaning the policies have MACROECONOMIC consequences.

    Your question is flawed because you are ignorant.

  34. Two can play this game. From a paper in the St. Louis Federal Reserve Review. The authors took into account market ups and downs.

    Three different retirement ages and
    four possible earnings levels are considered for two private investments—6-month CDs or the
    S&P 500. On average, the results suggest less than 5 percent of current retirees would receive a
    higher monthly benefit with Social Security. Several Social Security reform proposals are described.

    http://research.stlouisfed.org/publications/review/05/03/part1/GarrettRhine.pdf

    As far as your inflation scenario goes which produces greater wealth for a society, investment into private enterprise or investment into government.

  35. As far as your inflation scenario goes which produces greater, wealth for a society, investment into private enterprise or investment into government.? [punctuated for clarity - pH]

    jcw, I think PiaToR already answered your question, here!

    Did you read it?

  36. Yes, Perry, I did read it hence the “two can play this game comment”.

    Maybe it’s a game to you, jcw, but to me this is serious business that impacts younger people when they become senior citizens. You do not seem to give a s**t!

  37. Perry, let me try again. To answer your question “Did you read it?”, the answer is yes, which is why I linked to another report which reaches a different conclusion than the Pho links.

    As far as your “you do not seem to give a s**t” comment, I have a parent on social security that my sister and I have to help out financially. She was an average to above average wage earner in her working life. She worked over 35 years. The report I linked to concludes that she would probably have been better off financially if her investments had been in private accounts as opposed to social security.

    Now, the question I asked still stands and feel free to weigh in on it. I’ll even modify it a little to zero in on something we can discuss. Where does retirement money being invested create the most wealth for society, money invested in private funds or money invested in government funds? This is not a trap. I have my own opinions about this but am interested in others.

  38. As far as your inflation scenario goes which produces greater wealth for a society, investment into private enterprise or investment into government.

    As has been discussed in the extracts, it doesn’t result in more investment in private enterprise:

    “So what’s happened is the employees stopped buying into Social Security, which we agree was functionally the same as buying a government bond, and instead bought stocks. And other people sold their stocks and bought the newly issued government bonds. So looking at it from the macro level, all that happened is some stocks changed hands, and some bonds changed hands. Total stocks outstanding and total bonds outstanding, if you count Social Security as a bond, remained about the same. And so this should have no influence on the economy, or total savings, or anything else apart from generating transactions costs?”

    But note that bit about transaction costs. That’s a way of saying that money will be transferred from the people saving – i.e. ordinary Americans – to Wall Street. Which is why there is a push to privatize Social Security.

    NZT, go get an education and then come back.

    Spanked you again, PB.

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