Just thinking…

Red Depends Babies - Adam, you’ve outdone yourself with that quip.

Adam,

Yes, I’d say that pretty much sums it up. You do understand the plan.

dan, one big difference betwen the current plan and the proposed plan is the large slice of our money — your and mine— which will be going to line the pockets of Wall Street financiers as their “fees” for investing our money in one of the very limited set of “choices” we will be faced with.

I’d start with Vegas and then move on to Wall Street. At least in Vegas they’re honest about what you’re doing with your money.

@ Thompson: The “Trust Fund” is gov’t bonds. So we already have what you’re thinking about.

@ dan: Basically, the plan that Bush has put on the table is that the gov’t advances you a loan, at 3% interest (to be paid back by reducing your defined benefits from SS) and you invest it. We’ll set aside, for the moment, the fact that NO FINANCIAL ADVISER ANYWHERE would ever advise you to borrow money and invest it. I’ll also leave out some of the big macroeconomic issues, like how the logic of the plan is self-contradictory, and the trillions in debt that would be incurred to start it up would have a good chance of sending us into an Argentina-style crash before we ever saw any benefits.

Here are the three most obvious problems with the piratization privatization plan:

1. The “higher returns” of index funds are only apparent if you average over time, and the details of when you get your best returns matter. A lot. If you start investing a few years before a crash, so your first few years are way-negative, but you make up for it later, then you’re fine. But if you have to retire just before or just after a crash, you’re screwed, because at that point you’re trying to withdraw money to live on — and because of the scaled-down size of your principal, you have to consume too much of it, and there’s not enough principal left to reap any benefits when the market starts going up again.

2. There are fees. The experience of the British in this regard has been that between 1 and 1.5 points of returns get eaten by the fees. (The entire Wall-Street Self Defense series is worth a look.) So you don’t have to beat 3% — you actually have to beat 4 or 4.5%.

3. Stocks ain’t what they used to be. In the 20th Century, we had abnormally high returns, because 1929 scared people so badly that they gave a huge risk premium to stocks and favored “lower-risk” investments. Now that the risk premium has been recognized, it’s been eliminated; people bid up the price of the stocks. Shoveling more money into the market will just drive up the price even further, which directly means driving down the yield (the “interest” that you earn through dividends and capital gains — it’s the return divided by the price of owning the stock).

You can tell this has already happened by the Price-to-Earning ratios. Historically, P/E was about 13, and yield was about 7% (0.07 == 1/13). Currently P/E is more like 20-25, and we would expect yield to be around 4% to 5%. So you’re at serious risk of not making the 4% to 4.5% you need in order to benefit at all under the Bush plan.

I’m all for a compulsory IRA — we already have all of the tax structure in place for that, and it wouldn’t require an expensive new bureaucracy and new places where the financiers could slip in fees and expenses. Australia’s had a mandatory savings system for a decade, with no ill effects detected. But carve-out plans, that basically kill SS to finance an investment system are a BAD idea. Investing is never a sure thing, and unless you have a LOT of money to start with, it’s not a substitute for having a secure job and a guaranteed-benefit pension like Social Security.

While I’m listing problems with privatization:

SS saves a lot of money because it only has to plan for the average retirement. If you plan for the average retirement, and then you live to be 105, you’ll run out of money long before you die. If you want enough savings to last til the 90th percentile of the age distribution, you’ll need to save twice as much money as the average person needs. And you’ll still have a 10% chance of being broke before you die.

And, lastly, there is, in fact, no crisis in SS’s current funding. (I’m linking the final post in a series. If you don’t understand it, try clicking back through the links a bit. Basically, his point is that if you look at the annual reports from the SS trustees, the date at which the Trust Fund is supposed to be exhausted moves outwards faster than one year per year; the estimates of how much economic growth would be needed to make SS run forever have generally been lower than actual growth; and the estimates of how much of a tax hike, today, would be needed to make SS run forever have been going down, instead of up, as you’d expect if there really was a funding shortfall.)

One must keep in mind that the Bush Social Security Piratization Plan is being proposed by the gang that excels in stabbing the opposition but cannot govern. What they do is smash things. As examples, take the surplus (and they sure did); employment (fast food jobs classed as manufacturing); War on Terror (dropped for Iraq, and Where’s Osama) and Iraq itself (everything’s going swimmingly).

So the Bush League wants to pile on the debt, stacked tall against what they’ve done already, to fund these new accounts. Nobody gets hurt in the new plan because deficits don’t matter to the new conservatives. All goes into the markets; the Japanese and Chinese wake up to their funding of these and other games via Treasury purchases. They run for the exits; dollar crashes as do the markets; hello 1929 again. With continuing fat, non-negotiated account management fees….there’s not much left.

But I supose I’m just a worrrying, freedom- hating Red Depends Baby liberal.

JB:

Don’t worry: listen to enough rhetoric and you’ll be reduced to a gibbering baby who needs those Red Depends just to keep from making a mess on the carpet. Then you won’t have enough of a coherent thought to even worry!

Sorry, forgot to tell dan to get bent.

GUARANTEED BENEFITS, danny. That’s the difference, if we’re talking about the investor, not the brokers. Andrea Mitchell and her husband are not credible sources these days. HELLO!

Oh, good grief. Compulsory investment. In investments dictated by the government. Does anyone really think that Halliburton won’t be at the top of the list, followed by the rest of Bush’s cronies? And given that ANY investment has a potential(ly catastrophic) downside, what happens to those who lose their life savings, say with an Enron-like investment? We either let ‘em starve and freeze (hell, they should have been more savvy, anyway!), or set up a government program that taxes current workers to support retirees; you know, sort of like Social Security?!

Thanks Auros. A very concise analysis.

@ JB: If the personal investments did return enough — higher than 4.5% — you could cut benefits by more than the amount that had been diverted. And if economic growth was not slowed down by more than the 1.5% difference between the bonds (3%) and the stocks, by something like 30 trillion in deficits over forty years (the amount of time before you start getting enough benefit from the investment scheme that you can cut benefits far enough to end up in the black) this could, in theory, help out our long term situation.

It’s still regressive and has moral-hazard issues (what do you do about the people whose investments go down the drain?) but it’s just barely a plausible theory.

Nonetheless, the arguments against, which I’ve listed above, make a hell of a lot more sense under any sane economic theory.

@ Jerry: I still don’t see any problem with putting a floor on how much you invest in an IRA, Roth IRA, or 401k plan. While those are somewhat limited by the gov’t, there’s still some variety and the vast majority of them do seem to be reasonably well run. The Wall-Street Self-Defense series that I linked to above gives a fair assessment of typical index funds.

I guess that I don’t get it either.

Because some time far down the line, SS won’t have enough money, we will have to borrow money and raise taxes to get it fixed.

To prevent that, we borrow 1-2 Trillion to cover my mother and divert new money into accounts for those working now.

I’m missing something. How is borrowing money now better than borrowing money later? Aren’t we paying interest for a much longer period?

How can shouldering the interest on 2 Trillion bucks for the next 40 years put us ahead?

Oh well, what would you expect here in Bizzaro Land?

While I don’t fully understand the accounting, I do feel that I have some understanding for the “accountant” (aka Whopper). He comes from a strain of “conservatism” that really is ideologically “feudal corpo-capitalism”. He/they will say one thing, but mean something entirely different. I truly believe that he and his podnahs aren’t interested in the common folk. They would like to keep us in line by telling us to not engage in “class warfare”, when in reality, that is precisely what they are undertaking. They hated Social Security when it was first proposed (and hated FDR with passion, as a “class traitor”, when FDR proposed SS). Social Security was instituted, in part, in order to prevent outright civil war. The feudalists didn’t see it that way — they thought the scheme was a cowardly way to deal with the masses (I believe that they would have preferred the war, which they thought they could have won, after which they could institute the feudalism that they intrinsically desire). The Bushies et alia, are narrow-minded and short-sighted, and they have the ideology that Social Security needs to be destroyed. The immediate proposal is their calculated first step on the elimination of the entire program.

I am contually amazed that people get lost in so many details, and argue all the fine points, and then cannot see the bigger picture.

In formal logic, one is supposed to ignore who the person is who makes an argument, and just look at the argument in itself. However, formal logic is of extremely limited use in everyday life. In everyday life, it is most rational and wise to look first at the person who is making the arguments (especially in cases that are very complex).

I say, look first at George Bush and his colleagues, and try to assess their natures and their interests. Are he/they genuine humanitarians? Do they have real visions for a better world? Or are they marginally competent, scheming, wealthy businessmen, embued with rigid religious and economic ideology?

Almost everybody’s arguments seem to start with the assumption that Bush means anything that he says. I feel that the only time that he isn’t lying is when his lips aren’t moving.

P.S. While you’re arguing the particulars, also try to take into account the people workers who get disabled early in their careers, and their surivivors/dependents.

Fishmael and Bob,

Damned appropriate commentaries. It helps to read folk who essentially have a clue.

Thanks

I do have to agree with Mike Z’s statement of Fishmael’s premise, a quite valid premise which overshadows any constricted system of formal logic employed by the Bushies, which Bush-logic Paul Krugman readily dismantles.

What I think I agree with most strongly in Fishmael’s posting is that unless one grasps the big picture in this “great calamity” facing New Deal social security, simply becoming mired in the debate over details cedes victory to Bush and Company. However, I do favor bold enunciation of all the signigicant ways in which Team Bush is full of shit regarding social security, but only a compelling discussion of who they really are and what their actual motives are helps in understanding why such nonsense is being promoted so vigorously by people who really should know better. Here the intentional fallacy isn’t really fallacious. But they have the microphone, and they know it. Where is there any chance for a meaningful logical debate in prime time? I do hope the mainstream press actually highlights some logical analysis in effective ways, but I’m not holding my breath.

A damn shame …

http://hosted.ap.org/dynamic/stories/B/BUSH_BUDGET?SITE=VANOV&SECTION= HOME

What about the option of not investing?
If the money is given back to the individual then let’s face it, it will be like most people with their tax refund: Will they invest or at least save it? Not likely. They’ll just buy more ’stuff’.
Investing? What’s that?
Retirement? Who cares? I’ll worry about that later…by the way….check out my new thingamajig I bought at Big Box Retailer.
Wish I’d bought some of their stock.
Doh!

“Co-eds that can’t possibly be real chicks”

Yes, the lack of feathers is a dead giveaway.

Squidpool,

Money isnt a thing you own, like your computer. It’s a medium of exchange with zero intrinsic value, and absolutely meaningless as private property, unless when it takes a wheelbarrow full to buy a loaf of bread, it’s cold and you want to set fire to it and warm yourself.

Without a society, money isn’t, and without a healthy society with a healthy public component, money isn’t a healthy medium of exchange (or the electronic data that is replacing it). Why do you think crises tend to up the value of gold? And wealthy people take their assets and flee?

Privatized social security is an oxymoron. The only way you can have that “privately” is either be part of a minimalist community or be rich and able to flee. Society is ultimately not privatizeable, nor is fundamental security for the society as a whole.

On the other hand, privacy rights, which are under assault by the same folks who want to eliminate all public programs for assurance of the wellbeing of all Americans, are essential for a healthy public as modern humans have come to understand the healthy life.

And remember, your prescription is not allowable regarding public infrastructure, the military, or a host of initiatives to foster expanded consumption of fossil fuels. If you are going to hold to your premise, you have to think it through.
I guess the reactionary lies about social security are working so well because they are such big lies.