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The Argument We Can't Make

Neil Sinhababu tells the tale of how Bob, the much-beloved Kirkland House security guard, got taken in by a rather crude stock scam and points out, correctly, that these problems could become much more widespread under a mandatory savings system. Scams aside, the odds are quite could that a substantial number of people (it's a big country, after all) will invest their money exceedingly unwisely. Unfortunately, this is the sort of issue that it's next-to-impossible to raise in a political debate. Nobody wants to be the one to point out to the American people that exactly half of them are below average in terms of investor confidence, and that millions of people out there are more than one standard deviation below the mean. And yet it's these people we need to worry about. If everyone got above-average stock market performance -- or even if everyone got average stock market performance -- private accounts might work out very nicely provided we made provision for very low income people who might otherwise never be able to save much of anything.

December 27, 2004 | Permalink

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If everyone got above-average stock market performance -- or even if everyone got average stock market performance -- private accounts might work out very nicely...

I don't see how the private accounts could work out nicely for this particular purpose. Let's say you retired at 65 and you have, say, $2 million on your account. How much do you spend in a month? You don't know how long you are going to live, you don't know how long you spouse is going to live - at what rate do you spend? If you're 85 and your savings are gone - you're screwed, and if you eat dog food for 5 years and die at 70 - you're screwed too.

What's the chance it works out nicely?

Posted by: abb1 | Dec 27, 2004 3:46:57 PM

and points out, correctly, that these problems could become much more widespread under a mandatory savings system

Sorry, Matthew, but that "correctly" should be changed to "incorrectly".

After all, nobody but nobody is talking about a system in which "Bob" could invest in "Viragen".

On the contrary, the porposal is that "Bob" would have the opportunity to choose among a number of professionally-managed funds. Like the Federal Government's Thrift Savings Plan (go to http://www.tsp.gov/ and tell me where you could be suckered into investing in Viragen - oh, that's right, you can't) or a typical 401(k).

Another bogus left-wing "argument" (to use the term loosely) against Social Security reform. Really, with all the straw you folks are using in building these strawmen, what are all the horses going to sleep in?

Posted by: Al | Dec 27, 2004 3:48:31 PM

Among the myriad of inequities and injustices in Bush's social security ideas is the irresponsible suggestion that retirees gamble their savings in the stock market.

Some would contend that taking one's savings down to the track or the local casino....where less people are privy to insider info and the randomness of payback (all things considered)for the underinformed investor is about the same.... would be a less risky gamble.

It's a one-way ticket to poverty for those who have the least to lose. (And that's not taking into account the hugely significant fees that will be charged by administrators, investment advisers and trustees, for these accounts.)

This program is a permanent, hyper-lucrative boondoogle for the investment and related industries. Again under George Bush, the wealthy get wealthier and the rest of us get poorer. No real surprise, I suppose.

Posted by: Deborah White | Dec 27, 2004 3:52:08 PM

Al,

Where is the President's plan posted on the web so I can see the details of the investment options?

Posted by: Ted | Dec 27, 2004 4:21:50 PM

Al--
What's with the scare quotes Bob is a real person that I (and presumably several other readers of this blog that formerly shared a dorm with matt and neil) happen to know personally, and Viragen is an existent company that is a running joke at our investment firm--our managing partner/CEO got a cold call about it awhile back as well and had a dandy old time with the broker...

Posted by: David K | Dec 27, 2004 4:44:19 PM

Nobody wants to be the one to point out to the American people that exactly half of them are below average in terms of investor confidence

Actually, I suspect its rather more the case if, as is usually the case, the mean performance is what is meant with "average", rather more than half are below average. I doubt very much that investment performance is normally distributed.

Posted by: cmdicely | Dec 27, 2004 4:58:40 PM

On the contrary, the porposal is that "Bob" would have the opportunity to choose among a number of professionally-managed funds.

Since the average professionally managed fund, last I saw stats, substantially underperformed the market, I wonder why the numbers that keep getting cited as to expected returns by proponents are all based on the average returns of the broader market, and not the average realized returns after management fees of investors in professionally managed funds. (Even ignoring the problems with discussing the average returns in a system designed to replace a safety net program).

So, really, all you've done is point out yet another way in which we are being subjected to a dishonest marketting campaign.

Posted by: cmdicely | Dec 27, 2004 5:01:46 PM

abb1, if you get 4% real annual returns on a $2 million endowment, then you'll have $80,000 to live on in perpetuity. I'd say that's not too bad, barring medical catastrophy.

Posted by: Julian Elson | Dec 27, 2004 5:02:41 PM

Ted - President hasn't put out his plan yet. Of course, the lack of an actual plan hasn't stopped the likes of Matthew from arguing against it anyway. So I won't let the lack of a plan stop me from arguing for it!

David K - then my apologies to "Bob", er Bob. Doesn't change the fact the Matthew's argument (can I put scare quotes on that?) is a complete strawman.

Posted by: Al | Dec 27, 2004 5:08:15 PM

Let's say you retired at 65 and you have, say, $2 million on your account. How much do you spend in a month? You don't know how long you are going to live, you don't know how long you spouse is going to live - at what rate do you spend? If you're 85 and your savings are gone - you're screwed, and if you eat dog food for 5 years and die at 70 - you're screwed too.

Could we all at least use arguments that have some bearing on reality. NOBODY is seriously proposing that we get rid of guaranteed social insurance in favor of forced savings. The miquetoast plan that we're soon going to see unveiled merely contemplates a REDUCTION, not an ELIMINATION, of the guaranteed social insurance component. From what I've read this reduction, even for brand-new entrants into the workforce, is likely to still provide, upon retirement, something like 2/3 of the guaranteed cash benefit promised by current status quo projections (in addition, of course, to 45 years' worth of saving 2% of wages).

I'm not saying that arguments cannot be made against even this relatively modest reduction in the guaranteed benefit. Good argument can be made, and are being made, in favor of the status quo. But let's at least argue about reality, ok?

I think if a private accounts plan is enacted, it should allow basically no investment options. The government should invest your money for you in safe indexes, preferably with no fees involved, on a schedule whereby the mix of indexes is dicated by proximity to retirement. I agree that people will eff up if left to their own devices.

One intersting plan (the version I think I'd favor, for what it's worth) involves a significant increase in the retirment age (it would move well into the 70s IIRC). I forget whose plan this is, but I read about it via one of A. Sullivan's guest bloggers. Anyway, long story short, if I remember correctly, the retirment age increase is sufficiently radical that it not only saves boatloads of money and essentially overcomes any demographic doubts about Social Security, it allows for the diversion of two points or so (similar to Bush's plan) of wages into bequeathable private accounts. The elegance of the plan is, because one is still entitled to a generous "status quo" guaranteed pension (one just starts receiving it a lot later than under current rules), ABB1's legitimate concerns about "long life risk" are largely eliminated (just as with the status quo) so, the private account is meant to only support you for the 8 or 10 years you need before your full boat Social Security pension kicks in. And, of course, you have (just like today) the option to continue to work (even if only part time) if you wish. I would combine such a plan with a folding of payroll taxes into the income tax or consumption taxes.

Don't supppose this version will see the light of day, but, I think it's an idea that would work.

Posted by: P.B. Almeida | Dec 27, 2004 5:12:15 PM

The goal of the No Child Left Behind program is to insure that all children are above average.

Posted by: Daryl McCullough | Dec 27, 2004 5:16:17 PM

If the FICA tax was lowered to rates actually needed to fund SS on a pay as you go basis, the public would pretty quickly find out that SS is really a rather cheap program. Of course, that massive loss of Federal revenue from lowering FICA would have to be picked up by income tax payers. I dare say the public would prefer to hand that bill to high end payers rather than pay it themselves, so it's no wonder a large chunk of the Federal operating budget is provided by wage earning FICA payers disguised as SS. Congress can spend the country into oblivion with wage earners' money paid as FICA taxes while lightening the bill for their patrons, the income tax paying rich.

Posted by: rlb | Dec 27, 2004 5:23:57 PM

"The government should invest your money for you..."

And that is called a private account? And is supposed to encourage self-reliance? :)

Even proponents of privatization are caught by the contradictions inherent in the idea.

Posted by: David Sucher | Dec 27, 2004 5:24:25 PM

P.B.--
The President HIMSELF told us that he wants to shift SSI from a defined benefit plan to a defined contribution plan. That has exactly one meaning: TOTAL privatization-- making all SSI contributions and beneifts "private".

I agree with the commenter who noted that the choices would not be Enrons or Viragens, but managed funds. This, of course, stil overlooks the fact that even so limited, Americans are by and large abysmally bad investors and get not so good returns... And lest we forget, overall market performance has been... not so good...

Social Security MAY ultimately be unsustainable as a fiscal matter (especially with contributions kicking out around $90K, but no means testing AT ALL for benefits), a problem made worse attaching it to Medicare (which really IS a fiscal time bomb).

And the President means to fundamentally "fix" the problem-- by putting everyone on a self-funded "defined contribution" account, and paying for the transition from the current "pay as you go" by borrowing two trillion dollars from the Chinese. This, boys and girls, is what he has made quite clear he intends to do. He has said so. We can debate its pros and cons thusly. But at least, let's all acknowledge that he DOES INDEED mean to end any "social security" part of social security, and leave it at that.

Posted by: the talking dog | Dec 27, 2004 5:31:42 PM

Even proponents of privatization are caught by the contradictions inherent in the idea.

There's nothing contradictory about this, David, if you're honest, like me. I favor forced savings. There, I admitted it.

Of course, that doesn't mean I oppose purely private savings and investing. Any sane person thinks saving and investing money is desireable, and engages in these activities from time to time. Indeed, far more than overhaul of Social Security, I'd like to see a radical overhaul of the tax code, with an eye toward elminating the barriers to savings and the bias favoring consumption.

But that's another story. In the interim, I play with the hand I'm dealt, and for now, that means getting behind alternatives to the monstrosity of our massive, un-means tested transfer plan financed by increasing joblessness and downward pressure on wages. Simply keeping what we have now but financing it differently (jettisoning the FICA tax, in other words) would alone be a big improvement.

Posted by: P.B. Almeida | Dec 27, 2004 5:37:12 PM

The President HIMSELF told us that he wants to shift SSI from a defined benefit plan to a defined contribution plan. That has exactly one meaning: TOTAL privatization-- making all SSI contributions and beneifts "private".

Dog: one can argue that a "shift" toward a defined contribution plan can mean, among other things, moving in that direction, while still keeping some part of a defined benefit plan in place. I seriously doubt anybody is going to propose (at least in the near future) junking the guaranteed social insurance component entirely. I could be wrong. We shall soon find out.

Posted by: P.B. Almeida | Dec 27, 2004 5:40:57 PM

To PB Almeida - Bush said a few days ago that he wants to change Social Security from a "defined benefit" program to a "defined contribution" program. That means that the President is "seriously proposing" that we replace a social insurance program with a forced savings program. Perhaps you still believe that he "mispeaks" when he says what he means. I don't; I think he's deadly serious, and if it means that old people starve he really does not care. These people are callous and selfish and it is impossible to underestimate their capacity for cruelty.
Al wants to pretend we're having a debate over the best way to provide for retirement. We're not. We are responding to the contention that the current system is bankrupt and we HAVE to fix it. That statement is a lie. There is no need to touch the present system now or for several decades to come, and there's no reason for any Democrat to start debating how best to "fix" it. If Democrats engage in that debate Social Security will be destroyed, because the President and the Republican majorities in both houses of Congress want to destroy it. So once there's enough momentum to pass any bill to "reform" Social Security, it will quickly become a bill to repeal Social Security.
The time has come to stop bending over backwards to be reasonable to our adversaries and to draw a line in the sand.

Posted by: jr | Dec 27, 2004 5:44:05 PM

Von

I keep trying to follow this argument by von at ObsWi, but I think I am resistant or something. He seems to think that putting this new capital into the market will increase risk taking and volatility, and that this is a good thing.

I know economists are lousy at predicting irrational markets, tho I suspect some Republicans are better at it. Even if most of the new SS money goes into solid secure indices, that will free up the hedge players and speculators to gamble. Now I suppose it means an increase in venture capital, but I also really think it means the biggest bubble in history, as the little folk follow the market up with not their SS money, but every other cent they have hanging around or can get thru a mortgage.

Posted by: bob mcmanus | Dec 27, 2004 5:47:04 PM

The President HIMSELF told us that he wants to shift SSI from a defined benefit plan to a defined contribution plan.

SSI [Supplemental Security Income] is not the same thing as "Social Security".

Posted by: cmdicely | Dec 27, 2004 6:16:45 PM

I think can be addressed this way --

If you switch from Social Security, with a guaranteed return, to individual investments, then a certain portion of the population is going to lose enough of their money that they don't have enough to live on. In your proposed plan, will you:

a. Ensure that those people have enough to live on, thereby subsidizing risk and encouraging smart investors to make riskier investments (since they generally have higher returns) or,

b. Declare it to be their own fault, and let them starve.

Posted by: Redshift | Dec 27, 2004 6:16:48 PM

Von is 100% correct. I heard the President, at a recent news conference, state clearly that he is proposing to convert social security from a defined benefit to a defined contribution plan.

I wrote at length on this topic here at Yglesis' site recently. This idea is a travesty, designed to transfer all risk to retirees and away from the government. And once balances are transferred to "private" accounts, they will be subject to all sorts of fees that can take up to 20 or 30% or even more of account balances. And that's before market fluctuations!

Social security is in no imminent funding trouble at all. If Bush truly wanted to remedy a possible funding shortfall 30 years from now, and to begin to mend our ecomony, he could take one of two simple actions (that require NO transition fees) :

1. Rollback the huge tax breaks Bush has given to the very wealthiest taxpayers; OR

2. FICA payroll taxes are now withheld only on the first $87,000 of salaries. That means that the employees who earn $500,000 and $87,500 respectively currently pay the same amount of annual FICA taxes. Raise the salary cap for FICA withholding to $150,000 and the "problem" is entirely solved!

(When Bush says he will not raise FICA taxes, he means that he will not raise the salary cap for FICA withholdings to make the system fairer for people who make less.)

Both of these solutions are win/win plans for retirees and for the US ecomony. Under this and so many other Bush plans, the wealthy get much wealthier, and the rest of us are kicked to the curb.

Posted by: Deborah White | Dec 27, 2004 6:47:49 PM

By the way, this is from the liberal Center for Economic and Policy Research (http://www.cepr.net/publications/facts_social_security.htm):

The proposal that President Bush is using as the basis for his plan phases in cuts over time. A worker who is 45 today can expect to see a cut in guaranteed benefits of around 15 percent. A worker who is age 35 can expect to see a cut in the guaranteed benefit of approximately 25 percent. A 15 year old who is just entering the work force can expect a benefit cut of close to 40 percent.

Thus, even a highly vocal critic of Bush's private accounts plan agrees that the plan doesn't not envision an elimination, but merely a reduction, in the guaranteed social insurance portion of Social Security. Indeed, according the the CEPR, my earlier statement about new workforce entrants still getting something like 2/3 of what the status quo would give them was basically sound (I was off by at most six percentage points).

True, we haven't seen the details emerge in Congress yet. And, for the record, I'm not so much a fan of Bush's purported plan (to say the least) as an opponent of the status quo. But again, we're not talking about getting rid of guaranteed social insurance. We're talking about curbing its growth and using the difference as forced savings. You've misunderestimated the president's intentions based on a single quote.

Posted by: P.B. Almeida | Dec 27, 2004 7:20:17 PM

America is like Lake Wobegone -- all of the children are above average.

Posted by: MTraven | Dec 27, 2004 7:36:22 PM

P.B. - curbing its growth, hmmm, sounds an awful lot like the Medicaid?(Medicare? I can't remember) discussions in the 90's, when they weren't cutting funding they were reducing the rate of growth. Cutting.

Also, your comments indicate a level of trust in what Bush says that I don't agree with. We won't reach agreement here. It is like the tax cuts that roll back in ten years. Bush says he only wants to reduce it. Once you reduce a government program, Americans don't like increasing it. Thus, it will become easier to reduce the program more. Investments not returning enough, that just means we need to invest more in private accounts.

Posted by: Rambuncle | Dec 27, 2004 8:20:33 PM

curbing its growth, hmmm, sounds an awful lot like the Medicaid?(Medicare? I can't remember) discussions in the 90's, when they weren't cutting funding they were reducing the rate of growth. Cutting.

Rambuncle: I don't think any real world projections envision a cut in Social Security spending. In real terms, the dollars we spend on this program will continue to grow, even if it is possible to curb (slow down) the growth in the program's share of the economy. Although I vaguely recall something about what you mention vis a vis Medicaid/Medicare, I would note that spending on those programs, too, has continued to expand lustily.

Posted by: P.B. Almeida | Dec 27, 2004 8:38:32 PM

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