If we had invested social security in the stock market in 1950, then our social security system would be as healthy as that of The Netherlands who did just that.
Looking at the up and down curve of S&P500 over the past 8-10 years, and realizing that actual investment would be dollar cost averaging - rather than one lump sum at the 1999-2000 peak. It might not be so bad.
The article speaks of a "Lost Decade" for the stock market.
I can imagine a number of other areas where this has been a lost decade -- global warming, peace in the middle east, universal health care, just to name a few.
This is the true "Bush Legacy". It'll take us a decade just to get back to where we were.
A case can be made for investing the current Social Security surplus in the stock market or more reasonably in a broad range in asset classes perhaps mirroring CalPers or the current federal Thrift Savings Plan. It would be my choice, for reasons of social utility I would prefer the funds to be invested in Municipal and School bonds, but those are details.
But this does not translate into an argument for private accounts which have a defined start point and a more or less defined end point and so are put at risk by portfolio timing in ways a more universal dollar cost averaging approach would not.
Since advocates of privatization are always and everywhere more concerned with advocating private accounts over a state run retirement system on fundamentally ideological grounds rather than with any real focus on solvency the argument of stocks vs treasuries is really just a side show.
Diversification? Absolutely (although not into derivatives). Private Accounts? Absolutely not. None of them pencil out for mid to lower income workers. Not Posen and not LMS, they just don't. And until I see one that does have at least the result that current Intermediate Cost projects for Social Security as is then I am not buying.
Any 20 year period, period, including those periods that include the great depression of the thirties, will beat the return on Social Security hands down!
Real estate is similarly a long-term investment. We could also give an example of buying expensive homes in DC or Vegas and then cry "You see! Real estate SUCKS!" when the reality is that over any 20 year period, real estate offers good returns.
It's the deliberate misleading of the reader that I really hate.
"if you start at one endpoint of 0 and another endpoint of 0. dollar cost averaging would still net you basically 0, right?"
Um, NO.
First, you should start at 100 and end at 100. The 0, 0 case is clearly uninteresting.
In the 100, 100 case, it depends. If the market went UP and then back down, you are worse off using dollar cost averaging. If the market went down, and then up (as in the case from 1999-2008) then you are better off.
It would be bad. It is legislation that caused all this mess. When the "lawmakers" legislated against allowing Medicare to negotiate prices, they effectively created a monopoly and the unfettered fleecing of Social Security. Just as with the mortgage crisis and the conspiracy to cover up the mass fraud that caused it. Just as with the gang rape of American women in Iraq and the conspiracy to cover it up. Just as with the numerous and suspicious electrocutions of troops in Iraq and the conspiracy to cover it up. The corporations rob us and Congress makes it possible. We have wolves robbing the hen house and the chicken hawk over seeing it.
Saying that the money should not have been invested in the capital markets is like saying we shouldn't have market exposure to IRAs and 401(k)s. SS is an investment with a long time horizon. By not investing some or all SS contributions into capital markets, you are in effect saying you don't believe in our market economy.
Actually if we had dumped SS into the stock market for about 5 years it would have gone up and made rich people who already owned the stocks RICHER because they were selling the stuff to average joe schmo's who wouldn't have a clue about what they were buying. Then they would end up upside down on their retirement just like they all are with their homes. This reminds me of the current manufacturing situation we are in. We produce nothing so the work we do has inflated, invisible value to it. Just like stocks. They have no true inherent value so things that still are tangible and are of value, real estate and commodities, will continue to grow in value.
Thanks for protecting Social Security for us Dean. Keep up the good work.
Afrothentics: If we instantly privatized SS then the government is running a gigantic deficit. This implies tax increases or decreased spending. So, whattaya' going to do?
The system looters (privatizers) desire to gut the system, cut benefits, and keep FICA taxes high to fund their extravagant social programs for the rich and buy military toys.
The system looters (privatizers) desire to gut the system, cut benefits, and keep FICA taxes high to fund their extravagant social programs for the rich and buy military toys.
This commenter has the bunker mentality of "us against them". And the last part of his comment shows that he is probably a hippie wannabe pissed off at being born 40 years too late.
I like "military toys". It keeps the bad guys as bay and without them, we would not be the US of A anymore.
If we had piled social security money into the stock market, then we wouldn't view the bailout of Bear Stearns as the corporate welfare which it is. Instead, we'd see the bailout as the federal government saving social security from the inherent risk of the stock market.
I think Dean's point is that the push to put S.S. money into the stock market always seems to come after a big upward market run, and near a peak, the worst possible time.
In 1979, for example, there was no big push to put S.S. money in the stock market.
"Um, NO.
First, you should start at 100 and end at 100. The 0, 0 case is clearly uninteresting.
In the 100, 100 case, it depends. If the market went UP and then back down, you are worse off using dollar cost averaging. If the market went down, and then up (as in the case from 1999-2008) then you are better off.
The proof is left as an exercise for the reader."
Yes, you're right, the value is path dependent.
Let's take a closer at the graph. If you click on the graph, a larger picture shows up. The graph shows region above and below 10,000 with more time spent below 10,000. However, the final value ends up being below 10,000. It's not so obvious to me how much of a gain you would get with dollar cost averaging for the period noted in the graph.
Today the WaPo says US "debts & obligations" = 45 trillion dollars. I'm pretty sure they're including 75 years of predicted SS shortfall + future Medicare/Medicaid shortfall, since world GDP in 06 was only 53 trillion.
Seems stunningly dishonest.
Maybe Dean could take a look?
Why can't SS just be viewed as a Treasury bond fund, so then individuals' other retirement savings (401(k)s, IRAs, etc.) could be weighted more heavily in stocks ?
People who can't afford to fund IRAs & 401(k)s shouldn't be risking their money in the stock market !
"People who can't afford to fund IRAs & 401(k)s shouldn't be risking their money in the stock market!"
Talk about an ignorant statement. You honestly think a 24 year old should be invested 100% in t-bills? The reason the poor fall behind is because they are the least diversified and risk averse investors in their early years. Over levered on real estate and all your retirement savings parked in SS is a recipe for falling behind a risky diversified portfolio when ones time horizon is measured in decades.
Passing by small issues such as starting-point bias and the fact that 9 years doesn't a decade make, it may be noted that the stock market is up over the past 9 years by 39.5% (NYSE COMPOSITE INDEX) and 26.5% (DOW JONES INDUSTRIAL AVERAGE). And that's without counting dividends.
El Viajero
"This commenter has the bunker mentality of "us against them".
This is exactly the mentality of the rich: they are "us" and the rest of us is "them". Why do you think they've perverted the tax and subsidies system so completely to their advantage?
Take the time to educate yourself with FACTS. Read a little bit: try "Free Lunch" or "Perfectly Legal" as starters.
If you still favor your actual belief system after that, then I will be forced to agree with Churchill when he quipped that "Common sense is the least common of the senses".
sts wrote, At least with the Stock Market/Corporate Debt Market you at least get a claim on the wealthy.
That's not really true.
The crux of the issue you're alluding to isn't whether the securities are private (stocks, corporate bonds) or public (Treasuries). The crux is whether people who pay into SS have a "property interest" in the contributions.
Just as we who pay into the system can be screwed even if the government honors the SS debt---all it has to do is keep rolling the debt over and never paying it out as benefits---the government can do the same thing with stocks. It could just cut benefits and never cash the stocks out, which would an indirect subsidy to those who own stocks. (Because selling stocks increases the supply of them and thus decreases the value.)
If people who paid in had a property interest, however, the only way the government could screw them even if it held Treasuries would be a true default, which would affect all holders of Treasuries, or an implicit default by monetizing the debt.
Of course, you're probably right that if the government held private instruments, it would make it more difficult to pull the shenanigans the right-wingers want it to pull.
El Viajero wrote, This commenter has the bunker mentality of "us against them".
You're trotting out the age-old rationale for continuing evil and oppression.
Suppose tomorrow land value was taxed at 100% (a good thing, IMHO), which on average would really screw the wealthy. I'd wager you'd be among the first to evince the mentality you're now belittling.
El Viajero wrote, Any 20 year period, period, including those periods that include the great depression of the thirties, will beat the return on Social Security hands down! Real estate is similarly a long-term investment. ... It's the deliberate misleading of the reader that I really hate.
First, Social Security is not an "investment," whether we like it or not. The big obstacle to Social Security offering good notional returns for a given "investor" is the so-called implicit debt.
Second, for the US economy as a whole, it most likely wouldn't benefit us at all for Social Security to be invested in stocks. As William Bernstein puts it, In short, the aggregate national investment return will be approximately the same no matter what the overall stock/bond mix of the capital markets. To the extent that debt tends to decrease agency conflicts, a small nod may go to an increase in the overall debt/equity ratio. If everybody issues/invests in stocks, then stock returns must fall to the aggregate return rate. Which may actually already have happened. If all of the nation’s pension funds and newly-privatized social security accounts shifted to stocks, they most decidedly would not obtain the historical 7%-8% real return.
In other words, you're against big government, except when you're in favor of it.
It keeps the bad guys as bay and without them...
Almost certainly false. Some military is necessary, but having a military far larger than is needed for defense alone, as we do, invites overseas adventurism and attacks from "the bad guys." Not to mention the temptation to use that military in ways which makes us one of them.
Under the current system the govt classifies the SS surplus as revenues under the "unified" budget and uses them to fund the Bush tax cuts.
If the surplus had been invested in a diversified portfolio of debt and equity, domestic and foreign the surplus could never have been classified as revenue, would not have funded the Bush tax cuts and would not be called "worthless" by the Prez. himself.
IMO the plutocrats would have had less motive and opportunity to embark on their crusade against SS....afterall what are they going to do, hold up shares of GE and say they are worthless?
I for one, would question the outcome of investing Social Security funds in the stock market or investing those funds with a private investment entity for two reasons.
First, returns on Social Security are guaranteed year over year by the United States Government and are not subject to wild valuation swings (as we are now experiencing) as they are in the stock market.
More importantly, even though stock values have risen historically over a longer period of time that does not necessarily mean investors will realize or be guaranteed the full amount of stock market returns after expenses are paid out of the investment fund.
The historical "gold standard" for the results of wholesale privatization of retirement funding is the South American country of Chile from 1973 to 1989. The differences from what retired Chilean workers received and what Social Security pays to retired American workers is nothing less than staggering and has guaranteed (repeat guaranteed) a much better quality of life for retired workers in America than retired workers in Chile over this same period of time.
We hear the same promise being made today that workers would be much better off financially by investing in a private "market driven" retirement system such as the one Chile experienced with catastrophic results for workers that participated in the privatized retirement savings program.
Chile just revised its pension plans because it was unable to deal with the needs of poorer Chileans. Instead the revised plan backs a mixed system, re-introducing direct government investment for lower income Chileans.
From "Chile's private pension system adds public payouts for poor" By Eduardo Gallardo | The Associated Press | International Herald Tribune | March 10, 2008
SANTIAGO: Chile is undertaking its biggest overhaul ever of its pioneering private pension system, adding sweeping public payouts for the low-income elderly.
The new $2 billion-a-year program will expand public pensions to groups left out by private pensions - the poor and self-employed, homewives, street vendors and farmers who saved little for retirement - granting about a quarter of the nation's work force public pensions by 2012.
The program, to be signed into law Tuesday, is the most ambitious pension plan for the poor in the region, according to David Titelman, a social security expert at the United Nations Economic Commission for Latin America and the Caribbean.
The so-called Solidarity Pensions of President Michelle Bachelet will supplement, not scrap, the current private pensions, while salaried employees continue paying in to private funds in a combination of state subsidy and free market.
a good rule of thumb - keep social security out of the hands of financial industry
by the way
whose money and whose credit was used to fuel the recent series of speculation frenzies (dot.com, enron, sub-prime mortgage, commodity market (oil, grain, gold, etc)) speculation frenzies
Liberal wrote: "No, the poor fall behind because they have no savings to invest."
Last time I checked the poor are coerced into plugging away about 13% of their income into what is essentially T-bills. Find me one 40 year period (you can be as biased as you want picking a peak to trough) where T-bills beat the S&P 500.
Are there any studies to turn to that point towards the possible connection between the move away from--I guess they call it--Bretton Woods approach towards the "Deregulation" "free market"(sic) approach that has been the rage the past two (3???) decades??
last time I checked T bills didn't pay your heirs an annuity if you died. nor do they pay you an annuity if you become disabled. Nor do they pay you a bonus if you retire a lot poorer than you expected. Nor are they guaranteed against inflation. nor do they pay benefits if you outlive your savings.
when SS was started, they took 1% from your pay (whatever it was the day before)
and 1% from your boss.
i am aware that nine new york economists say... that the bosses share is "really" your money. your problem would be getting the boss to pay it to you if social security wasn't guiding his hand.
so it might be more honest to think of it as "6%" of your pay.
"last time I checked T bills didn't pay your heirs an annuity if you died."
Last time I checked, T-bills are a liquid market for which the bonds can be sold and proceeds put into an annuity fund.
"nor do they pay you an annuity if you become disabled."
Purchase additional workers comp if you are that risk averse.
"Nor do they pay you a bonus if you retire a lot poorer than you expected."
Spoken like a true socialist. Again, you can purchase insurance.
"Nor are they guaranteed against inflation."
TIPS
"nor do they pay benefits if you outlive your savings."
If you are financially illiterate get a financial advisor.
Making people invest in SS strips us of our freedoms and makes as much sense as forcing everyone (including people in South Dakota) to purcahse hurricane insurance for their homes.
Anonymous:
"so it might be more honest to think of it as "6%" of your pay."
You don't think the employer figures in the 6% he is forced to pay into SS before offering you that base salary that is 6% below your economic value to the firm?
My favorite part of the Chilean pension reform story was that the military, while imposing private pensions on others, kept the state funded pension system for themselves.
Social Security takes away no one's freedom. In fact, it gives financial security to a whole class of elderly people. Social Security makes far more sense than throwing elderly people into abject poverty.
Social Security is also far, far more an efficient means of paying for retirement than individual accounts or the fees from privatization.
"Social Security is also far, far more an efficient means of paying for retirement than individual accounts or the fees from privatization."
More ignorant statements. First off the greatest mistake anyone makes saving for retirement is not investing aggressively when one has a 40 year time horizon. A 22 year old parking 13% of their income in T-Bills is the most insane decision anyone can make. Go pick up any finance book and educate yourself. And about the "fees" take a look at these "aggregious" fees... https://personal.vanguard.com/us/funds/vanguard/byname?View=EF&Sc=0
First, you spout off that Social Security "strips us of our freedoms", which is a load of horse shit. NO ONE is any LESS free because of Social Security. But, Social Security certainly makes a hell of a lot of elderly people MORE free and secure.
Social Security is more than just an investment in T-Bills. You also get the equivalent of worker's comp. You get a return protected from inflation, similar to TIPS. Further, it all occurs automatically, which greatly simplifies the process and guarantees that everyone is covered. And, you get this without the mountain of fees and inefficiencies associated with 300 million people buying worker's comp, TIPS, or utilizing private investment accounts.
Privatizing Social Security would mean untold profits for corporations and their grossly overpaid CEOs, while reducing benefits for the public. Privatization would be corporate welfare of the absolute worst kind.
Social Security is an insurance, if wingnuts want retirement accounts, they can pay for one. As far as insurances go, Social Security is one of the cheapest, most reliable and most effective ones we've ever had! And the corporate raiders and their surrogates really just need to STFU about SSI being a retirement fund! It's an insurance already!
Jay, you need to spend that money of yours to buy a clue!
1) It is too generous to ascribe the motivation for privatizing SS to ideology. There are several other selfish reasons, especially that it would be an instant windfall for those who already own stocks. Note that corporate executives, who control enormous amounts of money which is not their own, typically get major compensation from stock options.
2) That 6.5% or 13% or whatever is not all going into the trust fund - most of it is paying the benefits to current retirees such as your parents or grandparents. And when you retire, most of your benefits will be paid by people who are working at that time.
3) Figuring out what happens when everyone's money goes into the stock market is not the same as calculating what would happen to an individual investor. Studies have shown that there would be serious distortions of the market, depending on how much is diverted. You can't just keep throwing massive amounts into any market and expect to get the same returns.
4) If the rate of return on the trust fund is not sufficient, going to the stock market is not the only option. What the government pays is arbitrary. It was thought at the time of SS founding that treasuries would be a fair way to do it (was this revised by the Greenspan changes?), but the rate of interest could be anything. How about TIPS instead of constant-rates, with say a 2% real rate of return?
5) When SS was founded, confidence in the stock market was low, and most people had much more trust in the government than the market. The DJIA did not recover its 1929 high until the 50's. Privatizing SS did not really become credible until the bull market of the 90's, and to a large extent the idea of privatizing is a manifestation of bubble mentality.
I highly recommend you look up the definition of "freedom". If I could opt out of social security I would agree that social security does not strip us of our freedoms, but as it stands my employer gets fined/thrown in jail, I get fined/thrown in jail if they/I fail to sit idle as the government steals a percentage of the return on my labor.
How about this one. Keep SS, but if someone wants to voluntarily opt out (and pay fees in the range of 0.15% per year to invest in an asset that historically has returned 8-9%ish per year over 40 year periods) of the program by say age 21, let them do that. You don't pay payroll taxes, you don't get benefits.
Also if you want to keep SS around the government should be forced to use accrual based accounting. Not the current scheme which would make the Arthur Anderson accounts auditing Enron salivate.
Jay, why are you such a moron? SSI is an Insurance, and if you don't want to have any insurance that's required of you, then please leave a civil society, and move to Somalia where there's no government, and no taxes. You haven't given up your freedoms, you vote and your government represents you. Remember we fought a revolution specifically for that purpose!
But libertarian morons like yourself are always whining about giving up your freedoms, while ignoring that you live in a civil society so you have responsibilities to that society! Do you give up your freedoms when you have to pay memberships to a country club? This is no difference, you are in fact paying your membership dues to live in a civil society. If you're unfit for living in one, then by all means seek alternative living arrangements and do our country a favor by not trying to undermine our civilized values!
skeptonomist, what you describe is normal for any insurance fund. The problem is that idiots like jay can't wrap around their pea brains that requiring an insurance fund, whether it's workman's comp, medicare or SSI is no different than requiring your car be insured. The difference is that private insurance is in fact more expensive, less inclusive and poorly run by comparison.
wtf, I think the problem is not so much that people like Jay have pea brains, but that economic thinking can be highly irrational. Many otherwise intelligent people have subscribed to the idea that SS is in "crisis".
The SS situation is actually not very complex, but it is a little subtle, like double-entry bookkeeping. Why do people who have no trouble with things like bookkeeping fail to grasp the fundamentals of SS? Probably because of ideological bias, propaganda and mass psychology. The "science" of economics needs to recognize that economic outlook and economic decision-making are not rational.
Also, while I think wtf is right about the moral obligations of SS being similar to insurance, SS is not the same as insurance - it is a means of providing minimum support to old and disabled people, which incidentally prevents them from dropping out of the economy. Most SS money (payroll taxes) is spent immediately in the private economy, not on insidious government programs.
When most people lived on farms, the elderly were kept in the home and supported by the younger workers in the family. These younger workers did not all move away to take jobs in some distant city. SS is basically a program to immediately redistribute current workers' income to the elderly, which became necessary as generations were separated by the move off farms in the 19th and early 20th centuries.
The current trust fund, in which SS taxes are "invested", is a concoction of Ronald Reagan and Alan Greenspan, and is only a minor part of SS.
skeptonomist, SSI is an inusrance, just like your car insurance or workers comp. You could also call those schemes redistribution of wealth, but really, isn't that what every insurance is? It's a scheme to reduce costs based on risk. If you live past 65, the insurance kicks in, if you don't, then the money you've paid in is lost. It's the same as losing a job or wrecking a car... The subtleties of what an insurance is are lost on most people...
I don't pretend to have financial knowledge. I do know something about Social Security. I am reasonably convinced that if there were a private solution to the problem of retirement for ALL workers, the privatization proponents would not have to lie.
Or resort to preposterous statements like yours.
Unfortunately you seem to be one of those people who know everything there is to know with perfect knowledge. And what you don't know doesn't exist. So I don't think I will be coming to you for financial advice.
More than half of us workers rely on ss for half or more of their retirement income.
for 1/3, it's 90-100% of income.
Before SS, the elderly were the poorest group in the us, & were the majority residents of poor farms. Which disappeared after the new deal, though bush is trying to bring them back.
Personally, I think there's something seriously wrong with any economic system where more than half the population has essentially nothing at retirement.
The people pushing the anti-SS meme seem to be either fools or thieves.
Jay wrote, I highly recommend you look up the definition of "freedom". If I could opt out of social security I would agree that social security does not strip us of our freedoms, but as it stands my employer gets fined/thrown in jail, I get fined/thrown in jail if they/I fail to sit idle as the government steals a percentage of the return on my labor.
Fair enough. Wonder if you're upset about landowners stealing, on average, a much greater fraction of your wages. [1], [2]
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COMMENTS (60)
You rock, Dean. Turn the volume up on this.
Posted by: Aaron J. Sussman | March 26, 2008 10:36 AM
If we had invested social security in the stock market in 1950, then our social security system would be as healthy as that of The Netherlands who did just that.
Posted by: Afrothetics | March 26, 2008 12:48 PM
Are you implying this is worse than investing in tax cuts for the wealthy?
At least with the Stock Market/Corporate Debt Market you at least get a claim on the wealthy.
Under the current system you get a series WSJ editorials clamoring to keep the gravy-train (i.e., SS surplus) going.
Posted by: sts | March 26, 2008 1:29 PM
Looking at the up and down curve of S&P500 over the past 8-10 years, and realizing that actual investment would be dollar cost averaging - rather than one lump sum at the 1999-2000 peak. It might not be so bad.
Posted by: catclub | March 26, 2008 1:37 PM
if you start at one endpoint of 0 and another endpoint of 0. dollar cost averaging would still net you basically 0, right?
Posted by: Anonymous | March 26, 2008 2:05 PM
The article speaks of a "Lost Decade" for the stock market.
I can imagine a number of other areas where this has been a lost decade -- global warming, peace in the middle east, universal health care, just to name a few.
This is the true "Bush Legacy". It'll take us a decade just to get back to where we were.
Posted by: leo | March 26, 2008 2:11 PM
A case can be made for investing the current Social Security surplus in the stock market or more reasonably in a broad range in asset classes perhaps mirroring CalPers or the current federal Thrift Savings Plan. It would be my choice, for reasons of social utility I would prefer the funds to be invested in Municipal and School bonds, but those are details.
But this does not translate into an argument for private accounts which have a defined start point and a more or less defined end point and so are put at risk by portfolio timing in ways a more universal dollar cost averaging approach would not.
Since advocates of privatization are always and everywhere more concerned with advocating private accounts over a state run retirement system on fundamentally ideological grounds rather than with any real focus on solvency the argument of stocks vs treasuries is really just a side show.
Diversification? Absolutely (although not into derivatives). Private Accounts? Absolutely not. None of them pencil out for mid to lower income workers. Not Posen and not LMS, they just don't. And until I see one that does have at least the result that current Intermediate Cost projects for Social Security as is then I am not buying.
Posted by: Bruce Webb | March 26, 2008 2:21 PM
Any 20 year period, period, including those periods that include the great depression of the thirties, will beat the return on Social Security hands down!
Real estate is similarly a long-term investment. We could also give an example of buying expensive homes in DC or Vegas and then cry "You see! Real estate SUCKS!" when the reality is that over any 20 year period, real estate offers good returns.
It's the deliberate misleading of the reader that I really hate.
Posted by: El Viajero | March 26, 2008 2:36 PM
"if you start at one endpoint of 0 and another endpoint of 0. dollar cost averaging would still net you basically 0, right?"
Um, NO.
First, you should start at 100 and end at 100. The 0, 0 case is clearly uninteresting.
In the 100, 100 case, it depends. If the market went UP and then back down, you are worse off using dollar cost averaging. If the market went down, and then up (as in the case from 1999-2008) then you are better off.
The proof is left as an exercise for the reader.
Posted by: catclub | March 26, 2008 2:37 PM
It would be bad. It is legislation that caused all this mess. When the "lawmakers" legislated against allowing Medicare to negotiate prices, they effectively created a monopoly and the unfettered fleecing of Social Security. Just as with the mortgage crisis and the conspiracy to cover up the mass fraud that caused it. Just as with the gang rape of American women in Iraq and the conspiracy to cover it up. Just as with the numerous and suspicious electrocutions of troops in Iraq and the conspiracy to cover it up. The corporations rob us and Congress makes it possible. We have wolves robbing the hen house and the chicken hawk over seeing it.
Posted by: southerncapricorn | March 26, 2008 2:53 PM
Why, that would totally rock!!!
Can you imagine what fun Wall Street could have had with all that money?
Yeah, sure, there might have been negative consequences for Social Security and those depending on it, but, man, what parties there could have been!!!
Posted by: El Cid | March 26, 2008 2:55 PM
I definitely know less about economics than Mr. Baker, but I asked this very question myself back in early March.
http://thefirstannualkrogblog.blogspot.com/2008/03/that-wouldve-worked-out-well.html
My analysis is probably not perfect, but if this really happen, it would be a very interesting time right now.
Oh, and so nobody thinks otherwise, I posted that link in concurrence with Mr. Baker's thoughts, nothing else.
Posted by: M. Krogmann | March 26, 2008 3:07 PM
Saying that the money should not have been invested in the capital markets is like saying we shouldn't have market exposure to IRAs and 401(k)s. SS is an investment with a long time horizon. By not investing some or all SS contributions into capital markets, you are in effect saying you don't believe in our market economy.
Posted by: bk | March 26, 2008 3:09 PM
:MMMMMM???
When my wife's husband died, not me of course!, the stock market was going to pony up the funds to help raise 2 teen aged daughters?
Posted by: dilbert dogbert | March 26, 2008 3:13 PM
Actually if we had dumped SS into the stock market for about 5 years it would have gone up and made rich people who already owned the stocks RICHER because they were selling the stuff to average joe schmo's who wouldn't have a clue about what they were buying. Then they would end up upside down on their retirement just like they all are with their homes. This reminds me of the current manufacturing situation we are in. We produce nothing so the work we do has inflated, invisible value to it. Just like stocks. They have no true inherent value so things that still are tangible and are of value, real estate and commodities, will continue to grow in value.
Thanks for protecting Social Security for us Dean. Keep up the good work.
Posted by: EP3 | March 26, 2008 3:41 PM
Afrothentics: If we instantly privatized SS then the government is running a gigantic deficit. This implies tax increases or decreased spending. So, whattaya' going to do?
The system looters (privatizers) desire to gut the system, cut benefits, and keep FICA taxes high to fund their extravagant social programs for the rich and buy military toys.
Posted by: bobbyp | March 26, 2008 5:34 PM
The system looters (privatizers) desire to gut the system, cut benefits, and keep FICA taxes high to fund their extravagant social programs for the rich and buy military toys.
This commenter has the bunker mentality of "us against them". And the last part of his comment shows that he is probably a hippie wannabe pissed off at being born 40 years too late.
I like "military toys". It keeps the bad guys as bay and without them, we would not be the US of A anymore.
Posted by: El Viajero | March 26, 2008 6:03 PM
If we had piled social security money into the stock market, then we wouldn't view the bailout of Bear Stearns as the corporate welfare which it is. Instead, we'd see the bailout as the federal government saving social security from the inherent risk of the stock market.
Posted by: Chris V | March 26, 2008 6:17 PM
Works for us
Posted by: Canadian | March 26, 2008 6:33 PM
I think Dean's point is that the push to put S.S. money into the stock market always seems to come after a big upward market run, and near a peak, the worst possible time.
In 1979, for example, there was no big push to put S.S. money in the stock market.
Posted by: Derek | March 26, 2008 6:44 PM
"Um, NO.
First, you should start at 100 and end at 100. The 0, 0 case is clearly uninteresting.
In the 100, 100 case, it depends. If the market went UP and then back down, you are worse off using dollar cost averaging. If the market went down, and then up (as in the case from 1999-2008) then you are better off.
The proof is left as an exercise for the reader."
Yes, you're right, the value is path dependent.
Let's take a closer at the graph. If you click on the graph, a larger picture shows up. The graph shows region above and below 10,000 with more time spent below 10,000. However, the final value ends up being below 10,000. It's not so obvious to me how much of a gain you would get with dollar cost averaging for the period noted in the graph.
Anyone up for some number crunching?
Posted by: Anonymous | March 26, 2008 7:02 PM
Today the WaPo says US "debts & obligations" = 45 trillion dollars. I'm pretty sure they're including 75 years of predicted SS shortfall + future Medicare/Medicaid shortfall, since world GDP in 06 was only 53 trillion.
Seems stunningly dishonest.
Maybe Dean could take a look?
http://www.washingtonpost.com/wp-dyn/content/article/2005/05/17/AR2005051701238_pf.html
Posted by: hb | March 26, 2008 7:31 PM
Why can't SS just be viewed as a Treasury bond fund, so then individuals' other retirement savings (401(k)s, IRAs, etc.) could be weighted more heavily in stocks ?
People who can't afford to fund IRAs & 401(k)s shouldn't be risking their money in the stock market !
Posted by: H-Bob | March 26, 2008 7:31 PM
H-Bob:
"People who can't afford to fund IRAs & 401(k)s shouldn't be risking their money in the stock market!"
Talk about an ignorant statement. You honestly think a 24 year old should be invested 100% in t-bills? The reason the poor fall behind is because they are the least diversified and risk averse investors in their early years. Over levered on real estate and all your retirement savings parked in SS is a recipe for falling behind a risky diversified portfolio when ones time horizon is measured in decades.
Posted by: Jay | March 27, 2008 12:34 AM
Passing by small issues such as starting-point bias and the fact that 9 years doesn't a decade make, it may be noted that the stock market is up over the past 9 years by 39.5% (NYSE COMPOSITE INDEX) and 26.5% (DOW JONES INDUSTRIAL AVERAGE). And that's without counting dividends.
Posted by: Ellen1910 | March 27, 2008 2:47 AM
El Viajero
"This commenter has the bunker mentality of "us against them".
This is exactly the mentality of the rich: they are "us" and the rest of us is "them". Why do you think they've perverted the tax and subsidies system so completely to their advantage?
Take the time to educate yourself with FACTS. Read a little bit: try "Free Lunch" or "Perfectly Legal" as starters.
If you still favor your actual belief system after that, then I will be forced to agree with Churchill when he quipped that "Common sense is the least common of the senses".
Posted by: Francois | March 27, 2008 3:07 AM
it may be noted that the stock market is up over the past 9 years by 39.5%
whoa, a whopping 3.8% a year, that should convince everyone that social security should be invested, pronto.
And that's without counting dividends.
nor inflation.
Posted by: Derek | March 27, 2008 4:01 AM
sts wrote, At least with the Stock Market/Corporate Debt Market you at least get a claim on the wealthy.
That's not really true.
The crux of the issue you're alluding to isn't whether the securities are private (stocks, corporate bonds) or public (Treasuries). The crux is whether people who pay into SS have a "property interest" in the contributions.
Just as we who pay into the system can be screwed even if the government honors the SS debt---all it has to do is keep rolling the debt over and never paying it out as benefits---the government can do the same thing with stocks. It could just cut benefits and never cash the stocks out, which would an indirect subsidy to those who own stocks. (Because selling stocks increases the supply of them and thus decreases the value.)
If people who paid in had a property interest, however, the only way the government could screw them even if it held Treasuries would be a true default, which would affect all holders of Treasuries, or an implicit default by monetizing the debt.
Of course, you're probably right that if the government held private instruments, it would make it more difficult to pull the shenanigans the right-wingers want it to pull.
Posted by: liberal | March 27, 2008 6:00 AM
Jay wrote, The reason the poor fall behind is because they are the least diversified and risk averse investors in their early years.
No, the poor fall behind because they have no savings to invest.
Posted by: liberal | March 27, 2008 6:02 AM
El Viajero wrote, This commenter has the bunker mentality of "us against them".
You're trotting out the age-old rationale for continuing evil and oppression.
Suppose tomorrow land value was taxed at 100% (a good thing, IMHO), which on average would really screw the wealthy. I'd wager you'd be among the first to evince the mentality you're now belittling.
Posted by: Anonymous | March 27, 2008 6:05 AM
El Viajero wrote, Any 20 year period, period, including those periods that include the great depression of the thirties, will beat the return on Social Security hands down! Real estate is similarly a long-term investment. ... It's the deliberate misleading of the reader that I really hate.
First, Social Security is not an "investment," whether we like it or not. The big obstacle to Social Security offering good notional returns for a given "investor" is the so-called implicit debt.
Second, for the US economy as a whole, it most likely wouldn't benefit us at all for Social Security to be invested in stocks. As William Bernstein puts it, In short, the aggregate national investment return will be approximately the same no matter what the overall stock/bond mix of the capital markets. To the extent that debt tends to decrease agency conflicts, a small nod may go to an increase in the overall debt/equity ratio. If everybody issues/invests in stocks, then stock returns must fall to the aggregate return rate. Which may actually already have happened. If all of the nation’s pension funds and newly-privatized social security accounts shifted to stocks, they most decidedly would not obtain the historical 7%-8% real return.
Posted by: liberal | March 27, 2008 6:12 AM
El Viajero wrote, I like "military toys".
In other words, you're against big government, except when you're in favor of it.
It keeps the bad guys as bay and without them...
Almost certainly false. Some military is necessary, but having a military far larger than is needed for defense alone, as we do, invites overseas adventurism and attacks from "the bad guys." Not to mention the temptation to use that military in ways which makes us one of them.
Posted by: liberal | March 27, 2008 6:15 AM
Liberal, The point I am making is as follows:
Under the current system the govt classifies the SS surplus as revenues under the "unified" budget and uses them to fund the Bush tax cuts.
If the surplus had been invested in a diversified portfolio of debt and equity, domestic and foreign the surplus could never have been classified as revenue, would not have funded the Bush tax cuts and would not be called "worthless" by the Prez. himself.
IMO the plutocrats would have had less motive and opportunity to embark on their crusade against SS....afterall what are they going to do, hold up shares of GE and say they are worthless?
Posted by: sts | March 27, 2008 9:23 AM
I for one, would question the outcome of investing Social Security funds in the stock market or investing those funds with a private investment entity for two reasons.
First, returns on Social Security are guaranteed year over year by the United States Government and are not subject to wild valuation swings (as we are now experiencing) as they are in the stock market.
More importantly, even though stock values have risen historically over a longer period of time that does not necessarily mean investors will realize or be guaranteed the full amount of stock market returns after expenses are paid out of the investment fund.
The historical "gold standard" for the results of wholesale privatization of retirement funding is the South American country of Chile from 1973 to 1989. The differences from what retired Chilean workers received and what Social Security pays to retired American workers is nothing less than staggering and has guaranteed (repeat guaranteed) a much better quality of life for retired workers in America than retired workers in Chile over this same period of time.
We hear the same promise being made today that workers would be much better off financially by investing in a private "market driven" retirement system such as the one Chile experienced with catastrophic results for workers that participated in the privatized retirement savings program.
From the BLOGGER formally known as Mark.
Posted by: MarkJ | March 27, 2008 10:06 AM
Chile just revised its pension plans because it was unable to deal with the needs of poorer Chileans. Instead the revised plan backs a mixed system, re-introducing direct government investment for lower income Chileans.
Posted by: El Cid | March 27, 2008 11:50 AM
a good rule of thumb - keep social security out of the hands of financial industry
by the way
whose money and whose credit was used to fuel the recent series of speculation frenzies (dot.com, enron, sub-prime mortgage, commodity market (oil, grain, gold, etc)) speculation frenzies
Posted by: Anonymous | March 27, 2008 12:06 PM
Liberal wrote: "No, the poor fall behind because they have no savings to invest."
Last time I checked the poor are coerced into plugging away about 13% of their income into what is essentially T-bills. Find me one 40 year period (you can be as biased as you want picking a peak to trough) where T-bills beat the S&P 500.
Posted by: Jay | March 27, 2008 12:25 PM
Are there any studies to turn to that point towards the possible connection between the move away from--I guess they call it--Bretton Woods approach towards the "Deregulation" "free market"(sic) approach that has been the rage the past two (3???) decades??
Posted by: Jim Nichols | March 27, 2008 12:46 PM
Jay
last time I checked T bills didn't pay your heirs an annuity if you died. nor do they pay you an annuity if you become disabled. Nor do they pay you a bonus if you retire a lot poorer than you expected. Nor are they guaranteed against inflation. nor do they pay benefits if you outlive your savings.
Posted by: coberly | March 27, 2008 3:11 PM
as for that "13%"
when SS was started, they took 1% from your pay (whatever it was the day before)
and 1% from your boss.
i am aware that nine new york economists say... that the bosses share is "really" your money. your problem would be getting the boss to pay it to you if social security wasn't guiding his hand.
so it might be more honest to think of it as "6%" of your pay.
Posted by: Anonymous | March 27, 2008 3:15 PM
"last time I checked T bills didn't pay your heirs an annuity if you died."
Last time I checked, T-bills are a liquid market for which the bonds can be sold and proceeds put into an annuity fund.
"nor do they pay you an annuity if you become disabled."
Purchase additional workers comp if you are that risk averse.
"Nor do they pay you a bonus if you retire a lot poorer than you expected."
Spoken like a true socialist. Again, you can purchase insurance.
"Nor are they guaranteed against inflation."
TIPS
"nor do they pay benefits if you outlive your savings."
If you are financially illiterate get a financial advisor.
Making people invest in SS strips us of our freedoms and makes as much sense as forcing everyone (including people in South Dakota) to purcahse hurricane insurance for their homes.
Posted by: Jay | March 27, 2008 4:00 PM
Anonymous:
"so it might be more honest to think of it as "6%" of your pay."
You don't think the employer figures in the 6% he is forced to pay into SS before offering you that base salary that is 6% below your economic value to the firm?
Posted by: Jay | March 27, 2008 4:08 PM
My favorite part of the Chilean pension reform story was that the military, while imposing private pensions on others, kept the state funded pension system for themselves.
Posted by: PeonInChief | March 27, 2008 4:54 PM
Social Security takes away no one's freedom. In fact, it gives financial security to a whole class of elderly people. Social Security makes far more sense than throwing elderly people into abject poverty.
Social Security is also far, far more an efficient means of paying for retirement than individual accounts or the fees from privatization.
Posted by: Chris V | March 27, 2008 6:00 PM
"Social Security is also far, far more an efficient means of paying for retirement than individual accounts or the fees from privatization."
More ignorant statements. First off the greatest mistake anyone makes saving for retirement is not investing aggressively when one has a 40 year time horizon. A 22 year old parking 13% of their income in T-Bills is the most insane decision anyone can make. Go pick up any finance book and educate yourself. And about the "fees" take a look at these "aggregious" fees...
https://personal.vanguard.com/us/funds/vanguard/byname?View=EF&Sc=0
Posted by: Jay | March 27, 2008 6:33 PM
No sir, you are ignorant.
First, you spout off that Social Security "strips us of our freedoms", which is a load of horse shit. NO ONE is any LESS free because of Social Security. But, Social Security certainly makes a hell of a lot of elderly people MORE free and secure.
Social Security is more than just an investment in T-Bills. You also get the equivalent of worker's comp. You get a return protected from inflation, similar to TIPS. Further, it all occurs automatically, which greatly simplifies the process and guarantees that everyone is covered. And, you get this without the mountain of fees and inefficiencies associated with 300 million people buying worker's comp, TIPS, or utilizing private investment accounts.
Privatizing Social Security would mean untold profits for corporations and their grossly overpaid CEOs, while reducing benefits for the public. Privatization would be corporate welfare of the absolute worst kind.
Posted by: Chris V | March 27, 2008 7:20 PM
Social Security is an insurance, if wingnuts want retirement accounts, they can pay for one. As far as insurances go, Social Security is one of the cheapest, most reliable and most effective ones we've ever had! And the corporate raiders and their surrogates really just need to STFU about SSI being a retirement fund! It's an insurance already!
Jay, you need to spend that money of yours to buy a clue!
Posted by: wtf | March 27, 2008 9:28 PM
1) It is too generous to ascribe the motivation for privatizing SS to ideology. There are several other selfish reasons, especially that it would be an instant windfall for those who already own stocks. Note that corporate executives, who control enormous amounts of money which is not their own, typically get major compensation from stock options.
2) That 6.5% or 13% or whatever is not all going into the trust fund - most of it is paying the benefits to current retirees such as your parents or grandparents. And when you retire, most of your benefits will be paid by people who are working at that time.
3) Figuring out what happens when everyone's money goes into the stock market is not the same as calculating what would happen to an individual investor. Studies have shown that there would be serious distortions of the market, depending on how much is diverted. You can't just keep throwing massive amounts into any market and expect to get the same returns.
4) If the rate of return on the trust fund is not sufficient, going to the stock market is not the only option. What the government pays is arbitrary. It was thought at the time of SS founding that treasuries would be a fair way to do it (was this revised by the Greenspan changes?), but the rate of interest could be anything. How about TIPS instead of constant-rates, with say a 2% real rate of return?
5) When SS was founded, confidence in the stock market was low, and most people had much more trust in the government than the market. The DJIA did not recover its 1929 high until the 50's. Privatizing SS did not really become credible until the bull market of the 90's, and to a large extent the idea of privatizing is a manifestation of bubble mentality.
Posted by: skeptonomist | March 27, 2008 10:06 PM
I highly recommend you look up the definition of "freedom". If I could opt out of social security I would agree that social security does not strip us of our freedoms, but as it stands my employer gets fined/thrown in jail, I get fined/thrown in jail if they/I fail to sit idle as the government steals a percentage of the return on my labor.
How about this one. Keep SS, but if someone wants to voluntarily opt out (and pay fees in the range of 0.15% per year to invest in an asset that historically has returned 8-9%ish per year over 40 year periods) of the program by say age 21, let them do that. You don't pay payroll taxes, you don't get benefits.
Posted by: Jay | March 27, 2008 10:12 PM
Also if you want to keep SS around the government should be forced to use accrual based accounting. Not the current scheme which would make the Arthur Anderson accounts auditing Enron salivate.
Posted by: Jay | March 27, 2008 10:16 PM
Jay, why are you such a moron? SSI is an Insurance, and if you don't want to have any insurance that's required of you, then please leave a civil society, and move to Somalia where there's no government, and no taxes. You haven't given up your freedoms, you vote and your government represents you. Remember we fought a revolution specifically for that purpose!
But libertarian morons like yourself are always whining about giving up your freedoms, while ignoring that you live in a civil society so you have responsibilities to that society! Do you give up your freedoms when you have to pay memberships to a country club? This is no difference, you are in fact paying your membership dues to live in a civil society. If you're unfit for living in one, then by all means seek alternative living arrangements and do our country a favor by not trying to undermine our civilized values!
Posted by: wtf | March 28, 2008 12:36 AM
skeptonomist, what you describe is normal for any insurance fund. The problem is that idiots like jay can't wrap around their pea brains that requiring an insurance fund, whether it's workman's comp, medicare or SSI is no different than requiring your car be insured. The difference is that private insurance is in fact more expensive, less inclusive and poorly run by comparison.
Posted by: wtf | March 28, 2008 12:39 AM
wtf, I think the problem is not so much that people like Jay have pea brains, but that economic thinking can be highly irrational. Many otherwise intelligent people have subscribed to the idea that SS is in "crisis".
The SS situation is actually not very complex, but it is a little subtle, like double-entry bookkeeping. Why do people who have no trouble with things like bookkeeping fail to grasp the fundamentals of SS? Probably because of ideological bias, propaganda and mass psychology. The "science" of economics needs to recognize that economic outlook and economic decision-making are not rational.
Posted by: skeptonomist | March 28, 2008 10:11 AM
Also, while I think wtf is right about the moral obligations of SS being similar to insurance, SS is not the same as insurance - it is a means of providing minimum support to old and disabled people, which incidentally prevents them from dropping out of the economy. Most SS money (payroll taxes) is spent immediately in the private economy, not on insidious government programs.
When most people lived on farms, the elderly were kept in the home and supported by the younger workers in the family. These younger workers did not all move away to take jobs in some distant city. SS is basically a program to immediately redistribute current workers' income to the elderly, which became necessary as generations were separated by the move off farms in the 19th and early 20th centuries.
The current trust fund, in which SS taxes are "invested", is a concoction of Ronald Reagan and Alan Greenspan, and is only a minor part of SS.
Posted by: skeptonomist | March 28, 2008 10:38 AM
skeptonomist, SSI is an inusrance, just like your car insurance or workers comp. You could also call those schemes redistribution of wealth, but really, isn't that what every insurance is? It's a scheme to reduce costs based on risk. If you live past 65, the insurance kicks in, if you don't, then the money you've paid in is lost. It's the same as losing a job or wrecking a car... The subtleties of what an insurance is are lost on most people...
Posted by: wtf | March 28, 2008 12:56 PM
Jay
I don't pretend to have financial knowledge. I do know something about Social Security. I am reasonably convinced that if there were a private solution to the problem of retirement for ALL workers, the privatization proponents would not have to lie.
Or resort to preposterous statements like yours.
Unfortunately you seem to be one of those people who know everything there is to know with perfect knowledge. And what you don't know doesn't exist. So I don't think I will be coming to you for financial advice.
Posted by: Anonymous | March 28, 2008 9:51 PM
More than half of us workers rely on ss for half or more of their retirement income.
for 1/3, it's 90-100% of income.
Before SS, the elderly were the poorest group in the us, & were the majority residents of poor farms. Which disappeared after the new deal, though bush is trying to bring them back.
Posted by: hb | March 29, 2008 4:07 AM
Personally, I think there's something seriously wrong with any economic system where more than half the population has essentially nothing at retirement.
The people pushing the anti-SS meme seem to be either fools or thieves.
Posted by: hb | March 29, 2008 4:16 AM
Jay wrote, I highly recommend you look up the definition of "freedom". If I could opt out of social security I would agree that social security does not strip us of our freedoms, but as it stands my employer gets fined/thrown in jail, I get fined/thrown in jail if they/I fail to sit idle as the government steals a percentage of the return on my labor.
Fair enough. Wonder if you're upset about landowners stealing, on average, a much greater fraction of your wages. [1], [2]
Posted by: liberal | March 30, 2008 7:07 PM
Note "lost decade", thus is the nature of statistics and mathematical probability.
To think that the only return our citizens should ever get is the lowest available and is only fundable by government debt seems criminal to me.
But I'm just an economist
Posted by: Thomas | March 31, 2008 10:07 PM