Vast Borrowing Seen in Altering Social Security

[zimv20]

link (http://nytimes.com/2004/11/28/politics/28secure.html?hp&ex=1101618000&en=1bdc610919a043f6&ei=5094&partner=homepage)


WASHINGTON, Nov. 27 - The White House and Republicans in Congress are all but certain to embrace large-scale government borrowing to help finance President Bush's plan to create personal investment accounts in Social Security, according to administration officials, members of Congress and independent analysts.

The White House says it has made no decisions about how to pay for establishing the accounts, and among Republicans on Capitol Hill there are divergent opinions about how much borrowing would be prudent at a time when the government is running large budget deficits. Many Democrats say that the costs associated with setting up personal accounts just make Social Security's financial problems worse, and that the United States can scarcely afford to add to its rapidly growing national debt.

But proponents of Mr. Bush's effort to make investment accounts the centerpiece of an overhaul of the retirement system said there were no realistic alternatives to some increases in borrowing, a requirement the White House is beginning to acknowledge.

"The administration hasn't settled on any particular Social Security reform plan," Joshua B. Bolten, the director of the White House's Office of Management and Budget, said in an e-mail message in response to questions about overhauling the system.

"The president does support personal accounts, which need not add over all to the cost of the program but could in the short run require additional borrowing to finance the transition," Mr. Bolten said. "I believe there's a strong case that this approach not only makes sense as a matter of savings policy, but is also fiscally prudent."

Proponents say the necessary amount of borrowing could vary widely, from hundreds of billions to trillions of dollars over a decade, depending on how much money people are permitted to contribute to the accounts and whether the changes to Social Security include benefit cuts and tax increases.

Borrowing by the government could be necessary to establish the personal accounts because of the way Social Security pays for benefits. Under the current system, the payroll tax levied on workers goes to benefits for people who are already retired. Personal accounts would be paid for out of the same pool of money; they would allow workers to divert a portion of their payroll taxes into accounts invested in mutual funds or other investments.

The money going into the accounts would therefore no longer be available to pay benefits to current retirees. The shortfall would have to be made up somehow to preserve benefits for people who are already retired during the transition from one system to the other, and by nearly all estimates there is no way to make it up without relying at least in part on government borrowing.

(more)

you know, in all the arguments about the potential increase of gains seen w/ personal accounts, i've yet to year a proponent talk about the risks. yeah, SS returns are low, but so is the beta.

when i comes to those later years funds, i like low beta. it frees me up to take on a higher beta in my own investments.

[kuyu]

when i comes to those later years funds, i like low beta. it frees me up to take on a higher beta in my own investments.

I like the ability to choose for myself.

I was unwillingly enrolled in a terrible investment plan which will net very little gain, and yet I HAVE to continue pumping money into it. Worse yet, if a company ran their 401k like the government ran SS, the CFO would be in prison (or the company would bankrupt itself).

If a portion (2.5%) is allowed for personal investing, the private sector will pick up the tab if they get a rake (1% of the 2.5%). Let the government collect the SS, and send monthly checks to the various investment firms. The firms can sort the money out accordingly. Make it optional for anyone under, say 30, and have registration online only. Web pages are cheap.

All the individual has to do is choose an investment house, choose the pre-ready SS account at said firm, put the account number on the SS website, and before you know it, they're independantly wealthy. As a plus, the government's long term liablilities are dramatically reduced. Win. Win.

[Xtremehkr]

So, ok. To jump past the obvious, what measures are going to be taken when the national debt reaches a crisis level?

Because at this point it seems obvoius, so rather than point out every marker along the way, let's assume that the governmental budget is headed for a crises. What is going to happen?

Will people support massive budget cuts in social services or do we tax the rich to the point where they are middle class?

At some point something will have to be done.

I forsee a lot more stories along the lines of this one, but rather than make repetitive "this is going to be bad" posts I would rather speculate on how this problem will eventually be solved.

The conductor is no longer in charge of the train folks, we are headed for serious national debt.

The line will eventually end in the train crashing, what will be done?

[zimv20]

All the individual has to do is choose an investment house, choose the pre-ready SS account at said firm, put the account number on the SS website, and before you know it, they're independantly wealthy.
if all it takes is 2.5%, why doesn't everyone do that now and become independently wealthy?

[Xtremehkr]

Given the number of intelligent people here who don't support Bush, and the intelligent people who do...

let's have some speculation on what the end result of all of this debt is going to be.

If Bush were to have his way, why in his belief (and those who support him) is this a good or bad way to run a country.

I would really like to hear from those who believe in this system.

Describe how it is going to be and how it will be so much better. Better yet, describe how it is going to get us out of the mess we are currently getting ourselves into.

[IJ Reilly]

I'm not unalterably opposed to partial privatization schemes, at least not in principle, but as yet nobody has demonstrated how it would work in real-world numbers. The overriding concern is the financing gap which Social Security already faces and which would be widened by diverting funds to private accounts. I don't want to hear about how it's "better" for individuals to invest their own money (believe me, I already do). I want to know how people who have already invested thousands into the Social Security system over the course of their lifetimes are going to get the benefits they are entitled to when they are due. Any privatization scheme that can't address this issue directly is DOA and so far I haven't heard any that do.

[Ugg]

I like the ability to choose for myself.

I was unwillingly enrolled in a terrible investment plan which will net very little gain, and yet I HAVE to continue pumping money into it. Worse yet, if a company ran their 401k like the government ran SS, the CFO would be in prison (or the company would bankrupt itself).

If a portion (2.5%) is allowed for personal investing, the private sector will pick up the tab if they get a rake (1% of the 2.5%). Let the government collect the SS, and send monthly checks to the various investment firms. The firms can sort the money out accordingly. Make it optional for anyone under, say 30, and have registration online only. Web pages are cheap.

All the individual has to do is choose an investment house, choose the pre-ready SS account at said firm, put the account number on the SS website, and before you know it, they're independantly wealthy. As a plus, the government's long term liablilities are dramatically reduced. Win. Win.

It's wonderful that you want to choose for yourself but you also realize that failure will be yours alone. There has been no discussion whatsoever about how to deal with failed funds or how to limit investment to secure, if there is such a thing, stocks and bonds.

401ks are known for their hefty administrative fees and many have very poor management. Take a look, you'll be shocked.

The biggest problem with private accounts will be the rules that regulate it. Should you be able to invest in foreign companies? How do you define foreign companies? Stanley Inc. incorporated in the Bahamas a few years ago and it was a boon to stockholders yet the US Govt. lost untold billions in current and future tax revenue. Should the govt. be in a position to reward companies that move jobs and revenue overseas?

Who is going to guarantee these funds? Enron and Worldcom come to mind. Are the feds going to insure your funds? If not then what happens if they fail and you are left with nothing upon retirement? Oops, back on the poor line and we'll have another FDR dishing out billions if not trillions of dollars of federal benefits to cover the butts of all those CEOs who were solely interested in personal enrichment.

Your belief in the power of the market belies reality and by creating forced private stock and investment funds the US would be granting a massive guaranteed subsidy to private business in the US. I think that by the terms of the WTO there is a good chance that it would be found to be illegal in the long run.

It's not going to work and you know it. It's just wishful thinking on the part of all the investment companies and private businesses looking for federal handouts.

[wordmunger]

Here's an (admittedly biased) fact sheet (http://www.cepr.net/publications/facts_social_security.pdf) about social security privatization. The biggest problem with these individual accounts is going to be the inequity that results. The poor will be saddled with smaller private nest eggs; the poor will be the most likely to mismanage the private accounts; the poor will be most in need of the private accounts; the poor will be most impacted by the scaling back of the "guaranteed" portion of Social Security.

Thus the program that is reponsible for the most significant scaling back of poverty in US history will be turned into an investment vehicle for the rich, at the expense of the poor.

[mactastic]

But at least you'd be free to choose whether you want to be rich or not!

[Ugg]

Here's an (admittedly biased) fact sheet (http://www.cepr.net/publications/facts_social_security.pdf) about social security privatization. The biggest problem with these individual accounts is going to be the inequity that results. The poor will be saddled with smaller private nest eggs; the poor will be the most likely to mismanage the private accounts; the poor will be most in need of the private accounts; the poor will be most impacted by the scaling back of the "guaranteed" portion of Social Security.

Thus the program that is reponsible for the most significant scaling back of poverty in US history will be turned into an investment vehicle for the rich, at the expense of the poor.

That was a good fact sheet. Especially the crooked accounting that was used to show that private accounts would have a much higher rate of return. Anyone who thinks that investing in the stock market is anything other than a gamble is probably in the market for a chunk of the Brooklyn Bridge. Plus the fact that not everyone is going to want to or be able to retire during an upswing in the market.

You don't mention the fact that the poor are also the most likely to take bad advice as gospel. I see no way that enough safeguards can be built in to protect those who don't have the knowledge to invest wisely, which is about 90% of the population.

There is still no reliable information on the impact that several trillion dollars are going to have when pumped into the stock market. The immediate response will have to be a major depression of stock prices. Then there's the whole issue of who is granted the voting rights. If it's the investment companies then power will only be consolidated amongst fewer and fewer people.

There has been an utter failure on the part of those trumpeting private accounts to realize that the ramifications of such a massive switch would be huge and would shift the balances that currently exist in the stock markets. I'm all for a better way to SAVE for retirement but investing in the stock market should only be a small part of such a change.

[zimv20]

i'm opposed to privatization of SS, even though it'd probably net me more money in the long run (i've got a managed portfolio that regularly beats the market but has just over half the risk).

in the long run, i believe privatization would end up costing me more because of the cost on society. as mentioned, there are going to be literally millions of people who make unwise investment decisions and will rely on the state to bail them out.

let me put it another way: anyone who's good at financial planning is already saving for retirement, either w/ post-tax dollars, or w/ pre-tax dollars such as a SEP or 401k, or both.

i wonder, how many people today believe that, should 7.5% of their paycheck suddenly be returned to them, they would invest exactly that sum of money into a retirement account. i bet the number who would do that is extremely small.

not to mention, SS provides for a kind of loss of work insurance, too. would those who choose to privatize also be willing to pay out some more money to get their own workman's comp insurance? will the gov't provide that? how? if they don't, how long until a noticable percentage of the population is unable to work and have no relief? would there then be another gov't bailout?

[skunk]

I don't know what you edited for spelling, but "noticable" slipped through the net... :)

[zimv20]

I don't know what you edited for spelling, but "noticable" slipped through the net... :)
it was "privitization" (sic).

english is hard.

[skunk]

Keep trying :D

[blackfox]

Excellent discussion folks, this coming from someone who could not invest his way out of a paper bag.

Though I am admittedly ignorant of the fine points of investment possibilities and consequences, I do understand the following:

As I understand it, Government, as envisioned by the Founding Fathers was created " to never seek the highest good, only the common good." As such, it was a system which lent stability to our society.

I do not see that in Private Markets. While some, even many, may benefit from seeking a higher return, there will be those who fail and receive little. This seems like a recipe for instability and a net-loss for Society.

[zimv20]

Excellent discussion folks, this coming from someone who could not invest his way out of a paper bag.

Though I am admittedly ignorant of the fine points of investment possibilities and consequences
then get yerself to a CFP (certified financial planner). he makes suggestions, i say yes, and, as a said, i beat the market w/ about half the risk.

we meet a couple times a year to reassess my goals, my portfolio's performance, and my personal spending habits. then we adjust stuff, including how much of my money i should be spending :-)

it works out well. way better than if i'd been doing this on my own.

i'd be happy to recommend him, via PM, if you'd like. i've been using him for, what, nearly 10 years now. he is in chicago, but i suspect he's got phone-only clients.

i receive no compensation for finding him clients, btw. just a satisfied customer here.

[kuyu]

if all it takes is 2.5%, why doesn't everyone do that now and become independently wealthy?

Good question. I guess people don't understand the effect of compound interest.

The average American makes ~$30,000/year. Most people start working at 16. 2.5% of that ($750/year) for 50 years @ 9% is.... $611,312.67
@ 10% it's.... $872,931.40
@ 11% it's.... $1,251,578.36
@ 12% it's.... $1,800,013.69 (this is the market average over the last 80 years)
@ 13% it's.... $2,594,630.34
@ 14% it's.... $3,745,891.01

Save your money... ;)

[kuyu]

i wonder, how many people today believe that, should 7.5% of their paycheck suddenly be returned to them, they would invest exactly that sum of money into a retirement account. i bet the number who would do that is extremely small.

not to mention, SS provides for a kind of loss of work insurance, too. would those who choose to privatize also be willing to pay out some more money to get their own workman's comp insurance? will the gov't provide that? how? if they don't, how long until a noticable percentage of the population is unable to work and have no relief? would there then be another gov't bailout?

The plan being discussed doesn't allow you to spend the "privatized money". It's wired to a specific account which you cannot withdraw cash from. Besides, the number being discussed is 2.5%. The government still gets 12.5%.

You're right about the number of people who would do it being small, because the new system won't be mandatory. But, if you're under thirty and don't opt in.... Well, the whole shed can't be full of sharp tools.

Workman's comp is paid by the employer in addition to SS. That won't change.

I'm glad you invest. Smart move to hire a pro to do it for you though. Most people don't have time to do it themselves.

[zimv20]

Good question. I guess people don't understand the effect of compound interest.
i believe that to be true. i think most people also don't understand the effect of dollar cost averaging.

in your example:

@ 10% it's.... $872,931.40
...that's the most reasonable figure to examine. over a lifetime, the stock market doesn't average 14%.

though that's impressive figure, it's impressive by today's standards. by the time someone starting work goes to spend that money, it's not a lot. in fact, i'm not convinced that 2.5% will even keep up w/ inflation.

for people to reasonably expect that they will retire comfortably, they need to save on their own, outside of SS. whether SS is privatized or not, i don't believe that statement will change. i.e. even if the returns are better over their lifetime, the percentage being socked away is too small.

[IJ Reilly]

One important thing to know about compound interest calculations is that they are very time-dependent. Take just ten years off the investment period (40 years instead of 50, which is far more realistic), and that $750.00 per year at 12% turns into closer to $640,000.00 over the period, or less than half the number you've posted. I'm certainly not arguing against saving, but I'd point out that being that comfortable at retirement by setting aside small money over time is not quite so easy as you suggest.

[zimv20]

The plan being discussed doesn't allow you to spend the "privatized money". It's wired to a specific account which you cannot withdraw cash from. Besides, the number being discussed is 2.5%.
let's get a little deeper into this aspect. i didn't realize there was a specific plan to which you were referring. can you point me to it? i'd thought a lof of these details were very much undecided.

so, the plan to which you're referring, from what i can tell, will divert 2.5% of a participant's pre-tax salary into the financial instrument that person has picked (from whatever is being offered). i believe that's less than the FICA amount people are paying now. i put it at 7.5%, but i'm not sure that number is correct. for the moment, i shall assume it is.

the difference, obviously, is 5%. i'd assumed that's about a 5% increase people would see in their take-home pay. i'll further assume that most people would _not_ put away that 5% into retirement, but spend it, perhaps thinking the better returns on that 2.5% would make up the difference (indeed, if they even considered it at all). difficult to say if it would or not, at this point.

now i have to wonder if that's really the plan, to get people to spend that 5%. it is consumerism, after all, which seems to be helping to keep this economy afloat lately. could that be the hidden agenda?

[Ugg]

Another aspect to consider is that if this money is invested in the stock market and the market tanks which it always does eventually, the account will be set backwards. kuyu doesn't take that into account and so any suggestion that everyone will be millionaires by the time they retire is little more than a shell game. Sure, if you choose the "right" stocks or funds but what if you don't? That hard earned money then has less worth than toilet paper. There's no investment scheme ever devised that has guaranteed a return nor guaranteed the investor the return of their initial investment. To provide a guarantee like that would be prohibitively expensive and would eventually, human nature being what it is, be used to shore up shaky companies and lead to further problems.

Another aspect of kuyu's fantastic savings plan is that it doesn't take into account the fees that would be charged for administering the accounts. These can range anywhere from five to fifteen percent. That of course doesn't come off the 3.5 million but off the initial investment. So if you're putting away $750 per year, you would really only be investing $712.50 to $637.50. What does that do to your fantastic savings plan kuyu? It's a significant reduction at retirement isn't it?

As has been suggested, the best approach is to hire a personal financial planner and diversify as much as possible. Retirement was never meant to be funded by SS only to save people from starving during their golden years. The government has no business in forcing people to save in what would eventually become little more than a massive subsidy to US business as well as cutting off the poorest of retirees from a minimal safety net.

IMHO, the best thing the US could do is to create a 401k or IRA that is simpler, has fewer fees and follows a person from job to job. Also to forbid withdrawals from them unless the person dies or is disabled and allow a stay at home spouse to "contribute" as well.

[Xtremehkr]

How is this any less of a pyramid scheme?

The difference between this plan and Social Security is it benefits the wealthy more than the poor.

Before the wealthy paid in more and got less back, now they do virtually nothing and the stock they already own increases in value. Except now it's being done privately, which is much less safe than through the government.

As long as it is a choice, go for it. I hope you know what you are doing. I have a feeling Bush is going to Harkin some more people.

[zimv20]

IMHO, the best thing the US could do is to create a 401k or IRA that is simpler, has fewer fees and follows a person from job to job. Also to forbid withdrawals from them unless the person dies or is disabled
wow, sounds a lot like social security.

[kuyu]

Just to qualify my statements, I'm about 6 months from being a financial advisor.

Yes, there are fees associated with investing. However, if fees ate up gains the way suggested above, no one would make any money.

The stock market doesn't "eventually tank". The second worst day in the market ever was a friday in october. Guess what... the market was still up for the year. People need to understand that stocks are NOT a zero sum game. It's a positive sum proposition. i.e. more winners than losers.

With 30, 40, or 50 years to invest, I challenge someone to find me thirty stocks (that have been around for at least fifteen years) in different sectors that are down since the 60's. Just name as many sectors as you can, buy the stock in that sector with the best free cash flow number relative to their revenues. Wait thirty years (as IJ said, this part is key), enjoy your mountain of wealth.

The plan I mentioned works as such (and is rumored to be Bush's favorite). The employer puts ~7.5% into FICA (same), those under thirty who choose to opt in put ~5% into FICA (different) and 2.5% into a "privatized" account. No raise, no change in bring home pay. However, by choosing to privatize you have opted to recieve 65% of the regular SS benefit because that's all you paid in.

I think that's all the questions posed.

[kuyu]

Also, just to clarify. SS isn't going to change for anyone except those of us who choose for our benefit to change.

Don't like Bush's plan? Don't opt in. It's not going to be mandatory. If I opt in and you don't, you'll get ~$400/month more than me (assuming we are the same age now). But, I'll be able to draw at bare minumum $800/month from my account that you won't have.

[pseudobrit]

But, I'll be able to draw at bare minumum $800/month from my account that you won't have.

Unless your investments turn out to be crap. Which is totally beyond your control or prediction.

[Xtremehkr]

Can you explain to me what "Zero sum Game" means and why it is applicable in every single argument someone makes from a right wing perspective?


This chance to invest some of their retirement is invariably going to lead the more greedy, steady slow growth adverse to jump on Wall Street trends and listen to those with the best sales pitch.

This could easily turn into another bubble as there are people looking forward to this I bet.

The stock can be a complete "Zero Sum Game", nothing is guaranteed by investing in the market.

[mactastic]

Zero sum means if I win you lose. Saying something isn't a zero sum game means that there is potential for either both sides to win, one to win and one to lose, or both to lose.

People use it oftentimes to say that their proposal will benefit everyone.

[skunk]

The result remains Zero: if I get +1, you get -1.
Sum = 0.

[IJ Reilly]

Also, just to clarify. SS isn't going to change for anyone except those of us who choose for our benefit to change.

This is yet to be proven; in fact, evidence to support this statement has yet to be provided in any form. If the proposed privatized segment of SSI creates a funding gap, and there's every reason to think it will, then current beneficiaries will almost certainly be facing lower payments and increased retirement ages. The way it stands now, I fully expect the goal posts to be moved down the field for those of us in the middle of the baby boom generation. Eliminating 15% of the current SSI funding stream is only going to make this situation worse for those of us who've paid in all of our lives (double share, in my case).

[zimv20]

Just to qualify my statements, I'm about 6 months from being a financial advisor.
excellent.

People need to understand that stocks are NOT a zero sum game. It's a positive sum proposition. i.e. more winners than losers.
generally, i agree, and count on that for my retirement. but that's historically. anything can happen in the future.


The plan I mentioned works as such (and is rumored to be Bush's favorite). The employer puts ~7.5% into FICA (same), those under thirty who choose to opt in put ~5% into FICA (different) and 2.5% into a "privatized" account. No raise, no change in bring home pay. However, by choosing to privatize you have opted to recieve 65% of the regular SS benefit because that's all you paid in.
thanks for the clarification.

if this is the plan, i may choose to opt in, just for the reason that, should SS tank, i assume i'd still own my own assets. and i think it's possible to earn higher returns than the market while taking on less risk.

however, i think the plan, in the large, could still spell disaster. just because i know how to take on lower risk, doesn't mean everyone will. yes, the market can be very kind to those who 1) diversify and 2) dollar cost averge. but it can be cruel to those who chase stocks and try to time the market.

that's my concern -- too many will lose their shirts and, at some point, require a gov't bailout. and those mistakes will cost _all_ of us.

[Xtremehkr]

Not being a Zero Sum Game makes it no better or worse. It is however, much better for existing stock holders whose dividends are now untaxed.

Wow, they've had this thought out for quite some time. There will be a whole class of people who may never know what taxes are. How Patriotic.

[blackfox]

There will be a whole class of people who may never know what taxes are. How Patriotic.There already is a whole class of people who do not know what taxes are. They are called the Poor. Unfortunately, it is of little solace, I'm sure. Of course, they may get more company in the coming years, you know what they say about misery...

[Ugg]

Also, just to clarify. SS isn't going to change for anyone except those of us who choose for our benefit to change.

Don't like Bush's plan? Don't opt in. It's not going to be mandatory. If I opt in and you don't, you'll get ~$400/month more than me (assuming we are the same age now). But, I'll be able to draw at bare minumum $800/month from my account that you won't have.

What plan? I've yet to see anything of substance come from the WH. Recommendations have been given to the WH but nothing has issued from there.

Your claims are mere suppositions, not based on anything concrete.

[Xtremehkr]

There already is a whole class of people who do not know what taxes are. They are called the Poor. Unfortunately, it is of little solace, I'm sure. Of course, they may get more company in the coming years, you know what they say about misery...

I don't believe that. Sorry.

[Xtremehkr]

That really does reveal a lot concerning your background and experiences though BF. In a way.

[blackfox]

That really does reveal a lot concerning your background and experiences though BF. In a way.
Felt the need to qualify, did we?

I was being ironical.

[Xtremehkr]

just an observation.

[blackfox]

just an observation.
Indeed.

Be careful, when you read between the lines, it is tempting to fill that space with whatever fits your fancy.

[kuyu]

There seems to be some confusion as to what a "zero sum game" means.

Companies are really just an equation that is always balanced.
Assets = Liabilities + Equity.
Assets are buildings, equipment, inventory, and the like.
Liabilities are just that, what the firm is liable for. This includes paying employees, loans, etc.
Firms pay for all of their assets with either debt (liability) or equity. Stock is equity.
Thus, the stock markets are a place to buy and sell equities. A share of stock is simply part ownership in that company. When a company goes up in value, the stock goes up in value. So if I own Apple and Dell, which are competitors, both stocks can go up. Just because one makes money that doesn't mean the other loses money.

That's why it's a positive sum game. Zero sum games include options, horse racing, betting a friend $5, etc. Negative sum games include poker, gambling and the like.

Because of this basic relationship, companies have ONE obligation; to increase the wealth of the owners. Apple, for example, does not exist to save the rainforest, make the best computer, provide people with jobs, or to make Steve Jobs rich. Apple exists for ONE reason: to increase the wealth of people who own Apple stock. Period.

[skunk]

How alarmingly simple! Ethics be damned.

[zimv20]

companies have ONE obligation; to increase the wealth of the owners. Apple, for example, does not exist to save the rainforest, make the best computer, provide people with jobs, or to make Steve Jobs rich. Apple exists for ONE reason: to increase the wealth of people who own Apple stock. Period.
your point is well-taken, but i think it's an exaggeration. a given corporation has a number of things it wants to accomplish. examples are:
- offering a superior product or service
- being active in the community
- being environmentally conscious
- offering competative salaries and benefits to its employees
- serving some public or higher service (like a religious outfit)
- operating well within the law
- respecting human rights & local values and culture

certainly, in a publicly-traded company, share price is weighted to the top of the list, but i don't think it's _always_ done at the expense of other considerations.

[Ugg]

Because of this basic relationship, companies have ONE obligation; to increase the wealth of the owners. Apple, for example, does not exist to save the rainforest, make the best computer, provide people with jobs, or to make Steve Jobs rich. Apple exists for ONE reason: to increase the wealth of people who own Apple stock. Period.

False, if Apple weren't concerned about what their customers want they wouldn't have issued stock in the first place. Also, your flavor of economics reduces everything to a balance sheet, a mistake that too many economists have made. Since economics can't be reduced to photons and microns and since economics is a study of human interaction, any economist that fails to account for the human impact will fail. Therefore, Apple's employees are the most important people they have after the customers and if they fail to satisfy them, their stock will have less worth than toilet paper. Apple is a good case in point because Steve is power hungry and it is that hunger that drives companies to excel and their stock to rise.

Anyone who ignores human emotions and needs in economics is ignoring the fact that it is a study of humans and does so at their own peril. Stock markets are driven by rumor, innuendo, human error and greed. Not necessarily in any particular order of course. It has been proven time and time again that a company's social policies increase its workers' productivity and better its relationships with customers. Isn't that the driving force behind a company's stock?

[kuyu]

Ugg and Zim,

You're both right. Companies do all of the things you mentioned. But, they do so because consumers demand it. Firms are happy to be eco-friendly when they get more customers for doing so.

I didn't say that economics is all numbers. The economy is a dynamic, real time, aggregate force that shapes our world. But, companies have to stay goal oriented. The goal of a corporation is to make money. If generously compensating employees, being customer oriented, eco-friendly, and active in the community will help the company reach this goal, they do so.

The best way to ensure "proper" corporate behavior is not to trust that some elected official will huff and puff on TV until the CEO gets slapped on the wrist for stealing $80 million bucks. When we choose to buy goods and services from firms with higher prices, but who we feel act "ethically", then their competitors will change as well.

[pseudobrit]

Companies do all of the things you mentioned. But, they do so because consumers demand it. Firms are happy to be eco-friendly when they get more customers for doing so.

I disagree. I've worked several jobs where the company recycles (more than it must by law) simply because the CEO deems it a responsible action for the community.

Consumers generally don't care what happens to the environment when a product they'll buy is produced unless it's:
A) in their backyard, or
B) so horrible it becomes a national scandal

so there's no incentive to be responsible beyond the two reasons I listed above.

Why do some companies do it then?

Because some companies are headed and managed by men and women with integrity and don't sell out; they won't allow the inherent sociopathic nature of the corporation to usurp the humanity involved.

The big corporations who screw everyone over as much as necessary to turn the biggest profit simply have lost the required amount of people (in the required positions) with integrity, so the inhuman nature of the corporation rules the day.

[mactastic]

I think Kuyu's right on the underpinnings of business. Businesses exist for the sole reason of making a profit. No profit, no business (unless you're an airline of course. :p )

The rest of you are also correct that there is more to business for some than that, but the minimum requirement is simply profit. There is no need to go further unless either the market demands it or the head of the company feels a moral obligation. You can be in business with profit and no morals, you can't be in business with no profit and all the morals in the world.

The trick is to leverage that profit motive to get companies to put out products that are more environmentally freindly, to treat their employees better etc. A company that pays well and treats employees good can attract more applicants and therefore stands a better chance of hiring and retaining better and brighter workers. And through informing people we can get them to demand more eco-friendly products and create a larger market for those items.

But profit is paramount.

[IJ Reilly]

I hope nobody minds if I try to drag this thread back on topic. I issued a challenge (at least twice, IIRC) to any of the advocates for privatizing a portion of Social Security to tell me how the funding gap such a scheme would create can be addressed. So far, nobody has taken up that challenge. Am I to conclude that those who favor this plan are talking through their collective hats?

[skunk]

Wrong end, I think.

[IJ Reilly]

Wrong end, I think.

Shush now, you silly foreign person. ;) I really do want an answer.

[skunk]

I'll get my coat... :o

[zimv20]

Businesses exist for the sole reason of making a profit. No profit, no business (unless you're an airline of course. :p )
...or a non-profit...

[mactastic]

Even non-profits have to at least break even, no?

[zimv20]

Even non-profits have to at least break even, no?
not really. and come to think of it, for-profit corps don't either. some exist for tax-writeoff purposes. at least for a while.

[Ugg]

not really. and come to think of it, for-profit corps don't either. some exist for tax-writeoff purposes. at least for a while.

It's a who came first kind of question, the chicken or the egg. Obviously, when businesses start up there is little profitability for awhile meaning stock investments in new companies are faith-based. How many years did it take amazon.com to turn a profit? Would amazon.com have succeeded had it launched during the current economic slowdown? Very, very doubtful.

With technology changing so quickly and shenanigans at fed. institutions like the FDA, the risk in any cutting edge stock can be huge. Is profitability a good thing if it is based on lies, Enron, the drug scandals, worldcom, Stanley, etc?

The old school airlines are another fascinating subject about profitability. During deregulation, something I'm sure kuyu would agree was a good thing, the airlines were quick to offer early retirement to tens of thousands of employees. Now, their pension plans are about to implode. So, short term efforts to profitability can be disastrous in the long term. Could anyone have foreseen this 20 years ago? What would the shareholders have said if the airlines hadn't gone this route? The airlines might have failed and that might have been for the best over the long haul. So, companies always have to walk a fine line between short term investor payback and long term stability. Anyone who says that a company exists solely to offer it's owners a return on their investment is taking an extremely narrow view and certainly wouldn't be anyone I would go to for advice. Sorry, kuyu....

[kuyu]

Ugg, that's fine if you don't want advice. Honestly, my feelings and views about corporations and capitalism extend far beyond the scope of this forum. However, because most people only read the short threads, I make broad statements.

Basically, what I'm saying is this: If we want firms to act in the ways which we deem acceptable, we should buy our goods and services from such companies. When Ugg boycotts my advice because I am too narrow minded, that's capitalism at it's finest. However, if anyone else needs help turning a narrow minded profit, I'm here to help. :)

[zimv20]

if anyone else needs help turning a narrow minded profit, I'm here to help. :)
:-)

once upon a time, i tried to find mutual funds that didn't invest in tobacco. these days, i just wanna make some returns.

[blackfox]

To further help this thread careen off on a tangent (sorry IJ), it is interesting to speculate on the Future of Corporate priorities, responsibilities and ethics.

Fifty-one of the World's largest economies are Corporations, not States and as such are comparable projections of political power. In many ways, they are analgous to the Feudal domains that evolved into Nation States. In many ways they are the vanguard of a new Darwinian organization of Politics.

Presently, as many Corporations are involved in the forefront of Globalization while a majority of the world's people are still rooted geographically, Corporations are free to leave behind the social or economic wreckage they create by closing/moving a factory here to open a cheaper-to-operate factory there.

Still, ultimately, as global middle-classes develop and coalesce, Corporations might well become more responsible and accountable to this global community and less amoral in their contributions to politics and Culture.

Simply put, is not Politics about Power? Who has it and who does not? In many cases the power of the State is weakening while the power of the Corporation is strengthening. The talk about Social Security's existence in 50 years assumes that we will still have a functional Government that is relevant to and engaged by the Public. If it is not, then people will likely turn to other more relevant centers of power, which may end up being Corporate in nature. The solutions offered under these circumstances to the same problems are unknown.

Still, in a part of the world where accumulation of material goods gives producers vast power over individual lives and also makes said lives more complex (leaving less time for communal matters/civics) and communities become defined more by economics than geography, it seems that some sort of Corporate Oligarchy is inevitable.

OT? certainly. Interesting? I think so...fwiw

[zimv20]

Fifty-one of the World's largest economies are Corporations, not States
where did you find that? i need that info.

[blackfox]

where did you find that? i need that info.

I actually read it a while back, I am trying to find the reference used. A quick Google search uncovered this, however, which is probably the same reference.

http://www.corporations.org/system/top100.html

fwiw

[blackfox]

Krugman chimes in with another insightful op-ed:

The National Association of Securities Dealers," The Wall Street Journal reports, "is investigating whether some brokerage houses are inappropriately pushing individuals to borrow large sums on their houses to invest in the stock market." Can we persuade the association to investigate would-be privatizers of Social Security?

For it is now apparent that the Bush administration's privatization proposal will amount to the same thing: borrow trillions, put the money in the stock market and hope.

Privatization would begin by diverting payroll taxes, which pay for current Social Security benefits, into personal investment accounts. The government, already deep in deficit, would have to borrow to make up the shortfall.

This would sharply increase the government's debt. Never mind, privatization advocates say: in the long run, they claim, people would make so much on personal accounts that the government could save money by cutting retirees' benefits. Financial markets won't believe this claim, as I'll explain in a minute, but let's temporarily grant the point.

Even so, if personal investment accounts were invested in Treasury bonds, this whole process would accomplish precisely nothing. The interest workers would receive on their accounts would exactly match the interest the government would have to pay on its additional debt. To compensate for the initial borrowing, the government would have to cut future benefits so much that workers would gain nothing at all.

How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees? By assuming that workers would invest most of their accounts in stocks, that these investments would make a lot of money and that, in effect, the government, not the workers, would reap most of those gains, because as personal accounts grew, the government could cut benefits.

We can argue at length about whether the high stock returns such schemes assume are realistic (they aren't), but let's cut to the chase: in essence, such schemes involve having the government borrow heavily and put the money in the stock market. That's because the government would, in effect, confiscate workers' gains in their personal accounts by cutting those workers' benefits.

Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it? But the details make it considerably worse.

First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government's fiscal health than the mere promise that government could save money by cutting benefits in the distant future.

After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren't immutable: in the past, Congress has changed things like the retirement age and the tax treatment of benefits. If a privatization plan passed in 2005 called for steep benefit cuts in 2045, what are the odds that those cuts would really happen?

Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street's point of view that's a benefit, not a cost.

There is, by the way, a precedent for Bush-style privatization. One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts - a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina's economic crisis.

If Mr. Bush were to say in plain English that his plan to solve our fiscal problems is to borrow trillions, put the money into stocks and hope for the best, everyone would denounce that plan as the height of irresponsibility. The fact that this plan has an elaborate disguise, one that would add considerably to its costs, makes it worse.

And maybe the fact that serious financial experts, the sort qualified to be Treasury secretary, understand all this is the reason why John Snow has just been reappointed.

Hard to argue with the obvious logic presented. I found this part particularily interesting:
... The interest workers would receive on their accounts would exactly match the interest the government would have to pay on its additional debt. To compensate for the initial borrowing, the government would have to cut future benefits so much that workers would gain nothing at all.
I also found the comparison to Argentina very compelling.

FWIW

[skunk]

I actually read it a while back, I am trying to find the reference used. A quick Google search uncovered this, however, which is probably the same reference.

http://www.corporations.org/system/top100.html

fwiw
Interesting. Only one UK firm in there, too. (Shell is 60/40 Dutch/British).

[mactastic]

Read this. I'll tell you who wrote it later.
Take it from a not-so-old former congressman who knows: Proud young Americans, you are in for a con job from Washington that you can't even imagine.

Your government has already borrowed almost $8 trillion that it can't pay back. Guess who will have to write the check? That's right. You.

Expect massive tax hikes in your future, and wicked cuts in national defense, education, environmental enforcement, police protection and medical care for the poor and elderly.

Oh, you say the poor should pay for their health care just like you? Fine.

Wait till you have to crawl over 3-year-old kids dying on the front steps of the emergency room where you are taking your kids and then you will be asking yourself if it was really wise for this generation of politicians to spend money as responsibly as pot heads in an open-all-night grocery store.

And guess what these politicians who have already straddled you with an $8 trillion debt plan to do as soon as Congress gets back in session?

No, guess. Really. You'll love this.

They plan to plunge America into debt by $2 trillion more dollars!

You see, they've got this really cool plan to privatize parts of Social Security that usually make [redacted for your own good] giddy. We start talking about the invisible hand and the power of market forces.

Only problem is that this plan to get government off our backs costs a cool $2 trillion in transition fees.

And— let me see if you are following me here— who pays for that?

That's right. YOU!

But that's not the biggest problem with this $2 trillion Social Security plan. What bothers me the most is the fact that everybody in Washington knows that allowing Americans to invest parts of their Social Security payments in the stock market will produce some winners. But capitalism also always produces losers, and we all know that there will be millions of Americans who will make stupid investments in the coming years. (See Enron, etoys, Pets.com, Worldcom)

So what will happen when they retire and start complaining to their local congressman and TV camera crews about how they're about to be thrown out in the streets because of the dumb investments they made with their Social Security payments years ago?

Congress will pass the "Save Our Stupid Seniors Investment Relief Act of 2025," thereby guaranteeing that all Americans will have all Social Security payments restored in full.

That will require that you take your third job in the Chinese high tech factory just so you can pay even more taxes to Washington.

It's a bright future, brought to you by a gang in Washington who really couldn't care less about what happens to the world they pass on to their children and grandchildren.

How do I know this? Because I was in Congress long enough to learn that you judge politicians by their actions, not their words.

[skunk]

I'd be fascinated to know. Is he or she still alive after that?

[blackfox]

mac, my guess is Gingrich, but I really don't have a clue.

I am interested to know. Great contribution, regardless of Author.

[IJ Reilly]

I'm going to take a wild guess: Warren Rudman (retired Republican Senator, deficit hawk from way back, and still very outspoken).

[kuyu]

Hard to argue with the obvious logic presented. I found this part particularily interesting:

FWIW

That's if you buy t-bills. I see the guys point. It's a good argument, but I disagree with his statement that "We can argue at length about whether the high stock returns such schemes assume are realistic (they aren't)". What does he mean by high-returns??? Is 10% high? That's what the market has averaged for 80+ years(after inflation). I'd say that's pretty realistic.

People will undoubtedly make stupid decisions with their money. But, if you're 25 today, I can promise you a 10% average for the next forty years.
Here's how:
1) Get out the fortune 500 list.
2) Throw 50 darts at the list.
3) Write the name and industry for each company you hit with a dart on paper.
4) Pick your favorite stock(s) from each industry.
5) Buy ~30 of those stocks in as many industries as possible.
6) Wait.
7) Wait.
8) Look at portfolio, rebalance if needed.
9) Rinse and repeat for 40 years.
10) Put the money into fixed income securities @ 5%
11) Enjoy the $968.17/month.
:)

How's this for comprimise. Let me keep half of my FICA (3.75%) and Uncle Sam can keep the other 3.75% and never pay me SS, ever. I'd opt into this tomorrow if I could.

[zimv20]

kuyu -

if you were issued a credit card w/ a fixed 8% interest and a $100,000 limit, how much would you borrow from the CC to invest in the stock market the way you described?

[kuyu]

kuyu -

if you were issued a credit card w/ a fixed 8% interest and a $100,000 limit, how much would you borrow from the CC to invest in the stock market the way you described?

None, the difference wouldn't offset inflation. Besides, the leverage effect would make every investment inherently riskier, and the risk-return relationship wouldn't justify the borrowing.

However, most brokerage houses do allow most positions to be bought on margin. They charge interest on the funds, and have very tight regulations regarding the amounts. The most you can borrow is your current balance, and you must stay above 30% at most brokers or you are subject to a margin call. The leverage effect of this is huge. It magnifies gains and losses, so it's pretty risky. But, the risk-reward relationship moves in tandem in this example, so it's worth it for some investors.

[pseudobrit]

Here's how:
1) Get out the fortune 500 list.
2) Throw 50 darts at the list.

Sounds like gambling to me.

Know any companies that were on the F500 in years past that have fallen from grace?

I'd like to propose my own system of gambling:

1) Take out your entire SS "investment" each month
2) Go to Vegas or AC.
3) Play Blackjack; it's the only game to have positive odds
4) You're a ****ing millionaire!
5) Retire
6) x100,000,000 people

[skunk]

And when the casinos go under?? :rolleyes:

[mactastic]

Oh and before I forget and leave for the weekend, the article I posted earlier was written, not by any liberal out to get the President, but by none other than Joe Scarborough. (http://www.msnbc.msn.com/id/6667506/)

The GOP is facing a lot of dissention amongst the ranks that will begin to show after the new year.

[skunk]

Can I say who it was now?

[mactastic]

Sure Skunk, go right ahead!

To me, this just really defined how difficult it will be for Bush to pursue his bastardized version of conservatism over the next 4 years. He has to placate the social conservatives who really like the nanny-state idea as long as the nanny is telling others how to live their lives, as well as the fiscal conservatives who are feeling betrayed by the Bush agenda, along with the deficit hawks and defense hawks who have priorities other than those of the Bush administration.

And they are the ones facing reelection, not Bush.

[skunk]

Oh! :(

[zimv20]

None, the difference wouldn't offset inflation. Besides, the leverage effect would make every investment inherently riskier, and the risk-return relationship wouldn't justify the borrowing.

exactly. per krugman's comments, i feel what bush is proposing -- borrowing in order to invest in stocks -- is akin to my CC scenario.

you're right to identify the risks. and as i've been saying for a while now, whenever this privatization scheme is brought up, people only talk about the potential rewards, and never about the risk.

any idea why that may be?

[pseudobrit]

people only talk about the potential rewards, and never about the risk.

any idea why that may be?

I've never seen an article about someone not winning the lottery.

Sounds like a job for The Onion.

[kuyu]

Sounds like gambling to me.

Know any companies that were on the F500 in years past that have fallen from grace?

I'd like to propose my own system of gambling:


I can assure you that it's not gambling. Again, the market is a Positive Sum Game. Gambling is a negative sum game.

The risk of any stock is measured as that stocks standard deviation in relation to the standard deviation of the market as a whole. This risk is called "beta". By definition, the stock market has a beta of 1. Stocks with a beta greater than one are riskier than the market, and stocks with a beta less than one....

However, the principle of diversification is based on the fact that the weighted risk of a portfolio of stocks is a parabola. Thus, the risk-return of any particular stock is on or around this curve. The beautiful part is that, as the number of stocks contained in the portfolio rises, the minimum risk of the portfolio falls. This fact, coupled with the "eggs in one basket" logic, means that a portfolio of stocks in different sectors is generally less risky than the least risky investment therein.

Therefore, if you buy 30 quality stocks in as many sectors as possible, your overall risk is less than the risk of your least risky investment. If one of your companies tanks... you have 29 others to pick up the slack! The cheap advice is 40% AA bonds, 50% dividend paying blue chips, 10% tech and speculative stocks. As you get older, move money from the specs to bonds and blue chips. If your portfolio is reweighted every few years, you should have enough to live off of the coupon payments.

I challenge anyone to find one person who stayed diversified for 30 years and lost money. You won't find anyone, because investing in stocks is a positive sum game. I win, you win. Undiversified investors lose tons of money, but now everyone at macrumors political thread knows how to avoid that. :)

[blackfox]

Kuyu,

As mentioned previously, I am hardly a genius when it comes to Investment. I am curious as to how a large stock market crash (such as '29) affected people invested in a similar way to that you describe.

It is not out of the question to believe the market is impervious to another such instance, in fact the general fragilty of the markets, all interconnected and interdependent, seems vaguely ominous.

Novel developments such as the continued growth and economic strength of China and other East Asian Economies, could make the NYSE secondary in the World, the effects of which are unknown.

Basically, I wonder about the stability of the markets as the 21st Century progresses and the 20th Century catches up with us. I admit, this is pure conjecture, I am just interested in worst-case-scenarios to even out my assessments.

Besides, potential benefits aside, what is so wrong with SS as it is? A modest increase in payroll tax would continue to allow SS to function fine until the 22nd Century. It would seem to me that if wages had kept better pace over the last three decades, that would've helped matters too.

meh. I am going out to invest in beer. I'll try to diversify my holdings and hope my bubble doesn't burst.

[zimv20]

As mentioned previously, I am hardly a genius when it comes to Investment. I am curious as to how a large stock market crash (such as '29) affected people invested in a similar way to that you describe.

basically, not at all. same thing w/ '87. kuyu's right -- if you diversify, dollar cost average, stay in long term, and basically don't panic, the stock market is very safe and quite lucrative.

unless you strike it rich somehow, it's really the only way to retire, coupled w/ paying off a house.

that said, everyone should be doing these things anyway. no one should count on SS to take care of them in retirement, it's only a piece of the puzzle. imo, SS is there for those who don't have the discipline, right mindset and knowledge to invest properly. it ain't gonna make their retirement comfortable, but it's better than nothing.


Besides, potential benefits aside, what is so wrong with SS as it is? A modest increase in payroll tax would continue to allow SS to function fine until the 22nd Century.
imo, the bush administration doesn't want people to know that, it'd rather hold them in fear of its imminent demise. who wins if bush gets his way? wall street, the investment firms, probably people like me who'll make money off the bad investment decisions of millions of new investors.

until i have to pay all that back for the inevitable bailout, anyway...

[Desertrat]

zim, the borrowing is not to buy stocks. The borrowing is to pay out the SS checks, covering the short-term shortfall which results from the diversion of FICA monies into the private accounts.

Some comments from this morning's NYT:

http://www.nytimes.com/2004/12/11/opinion/11brooks.html?oref=login&th

Separately, thinking about security/corruption/human error, I guess I'd set the system up so that no money went into stocks of corporations which traded in derivatives. Guessing wrong on derivatives is what started the whole Enron debacle.

One thing to remember is that the ever-increasing snoopiness on the part of dot-gov is that the business world is subject to the scrutiny as well. While the new money-laundering laws would have had zero affect on those involved in flying into the WTC, they do impact all businesses. Bought a car, lately? Opened a new bank account? That stuff is just on the personal level. Add all that to the SEC's powers...

'Rat

[zimv20]

zim, the borrowing is not to buy stocks. The borrowing is to pay out the SS checks, covering the short-term shortfall which results from the diversion of FICA monies into the private accounts.
if i borrow money from my mom to pay down my CC from which i took a cash advance to buy stocks, then, yes, i borrowed the money to buy stocks.

regarding brooks' op/ed piece, i read it last night. he lost me (as in "disconnect", not "confused") almost immediately. brooks is an odd guy -- i respect him when i see him on talkshows, but i hate his written pieces.

[pseudobrit]

if i borrow money from my mom to pay down my CC from which i took a cash advance to buy stocks, then, yes, i borrowed the money to buy stocks.

But as long as it's one step removed, it doesn't look like it.

I guess another analogy I'd use would be if I bought a new Mac in February and paid cash, then when I come up short with the rent that month, I use a credit card to get a cash advance and pay the landlord.

[Desertrat]

Okay, a re-phrasing: The borrowing won't be dollar-for-dollar. The amounts coming into the privatization will vary with time; the payouts will also vary. And, this is a relatively long-term deal, so the only way to predict on a year-to-year basis is the old proverbial "actuarial statistics". Heck, a serious flu epidemic would reduce the payouts; a recession would reduce the income to both regular SS and the privatized portion. Who the heck knows?

I don't remember if it were Strategic Investment or The Daily Reckoning (and there's a lot of overlap of personnel), but the comment was made that the US is one of the relatively few without a privatized system. It also commented that the Argentine system is self-sustaining.

I Know the Texas State Teachers' Retirement Fund has been quite profitable over the last decades, and it's an investment sytem with stocks and bonds. The payout has risen from 1.5% per year of service to 2.2% or a tad more.

'Rat

[kuyu]

This whole thing is going to come down to a net present value calculation. The goverment gets to use the risk free rate for discounting purposes, and taxes are an inflow for them.

Thus, even with massive borrowing now, the long run gains (even discounted to present value) far outway the costs. Imagine, an administration that's actually trying to make life better for people 50 years from now. While Bush is hated by half the country now, the history books in 100 years will remember him as a champion of the people because of this and major tax reform.

Bottom line, this plan makes mathematical sense. The numbers add up. It's hard to argue with mathematics. The congressional opposition to this thing is not based on genuine concern that it will hurt American's. No, the opposition knows that it will work. They are scared to death that when the public understands that this is a huge boost to all classes, and a republican enacted it, their already weakend party will go the way of the whigs. Thus, the deficit scare tactics.

Notice that all published opposition echos "deficit, deficit, borrowing, deficit". No discussion of long run gains. No discussion of massive tax inflows because of money participants will have. No discussion of the time value of money. No discussion of the backdoor tax that is SS. No discussion of the impending tax reform's effect on this plan. "deficit, borrowing, deficit, borrowing"

This is partisan politics at its worst. The opposition does so against our best interest as a nation and as people. I hate to quote O'reilly, but guess "who's NOT looking for you"?

[pseudobrit]

Bottom line, this plan makes mathematical sense. The numbers add up. It's hard to argue with mathematics. The congressional opposition to this thing is not based on genuine concern that it will hurt American's. No, the opposition knows that it will work. They are scared to death that when the public understands that this is a huge boost to all classes, and a republican enacted it, their already weakend party will go the way of the whigs. Thus, the deficit scare tactics.

Not everyone in the Republican Party is agreeing with the plan though, so your Limbaughesque theory of a Democratic oppose-'cause-we-can't-support-them strategy is debunked.

[zimv20]

Bottom line, this plan makes mathematical sense. The numbers add up.
i don't think they do. still, no one is considering the risk -- that's where the break-down is.

i'll assert this:

1) for this plan to work, americans will have to practice a certain level of investment discipline.

2) if 1) were possible, americans wouldn't have to rely on SS for their retirement in the first place.

[pseudobrit]

Bottom line, this plan makes mathematical sense.

So does Communism.

[IJ Reilly]

Notice that all published opposition echos "deficit, deficit, borrowing, deficit". No discussion of long run gains. No discussion of massive tax inflows because of money participants will have. No discussion of the time value of money. No discussion of the backdoor tax that is SS. No discussion of the impending tax reform's effect on this plan. "deficit, borrowing, deficit, borrowing"

This is partisan politics at its worst. The opposition does so against our best interest as a nation and as people. I hate to quote O'reilly, but guess "who's NOT looking for you"?

Once again, please show me how the funding gap privatization will enlarge substantially will be bridged without reducing benefits for people who've been paying into Social Security and without adding it to the federal deficit, and you might just have another believer on your hands. I've issued this challenge at least three times, but none of the advocates of this plan have taken it up. Maybe this is something you should try before you accuse anyone else of "partisan politics" and of being just plain bad people for being unconvinced.

[Ugg]

Bottom line, this plan makes mathematical sense. The numbers add up. It's hard to argue with mathematics. The congressional opposition to this thing is not based on genuine concern that it will hurt American's. No, the opposition knows that it will work. They are scared to death that when the public understands that this is a huge boost to all classes, and a republican enacted it, their already weakend party will go the way of the whigs. Thus, the deficit scare tactics.


Since you're about to launch your career in financial management, you've surely studied the UK's new retirement schemes. Perhaps you could tell us the fatal flaw in their plan and why the US plan would be so radically different and better for us.

What you're spouting is propaganda for your industry pure and simple.

[Desertrat]

A tale of two risks: As I understood it, the Orange County, California, retirement system was private-sector investments. The fund manager tried playing in derivatives to increase the fund; he bet wrong--just like Enron execs--and the fund went bust.

The Texas teachers' retirement system is private-sector investment. Over the last 25 or 30 yers, the retirement pay has risen from 1.5% per year of service to 2.2% (maybe more in the last year or two; I haven't kept up) per year of service. (Based on the average pay of the final three years.)

Privatization as such is not all that much of a risk. The issue is intelligent and responsible fund management, insofar as the non-political reality of mathematics and the stock market's behavior. Any time there is a proposed decrease in the amount of money flowing into the federal pot, you're gonna have a large group of loud naysayers. The real issue for them is the power to control the flow of money to interest groups.

As far as changes in the Fortune 500, that's a given. They come and they go. No big deal. It doesn't happen in a vacuum, and anybody with half a brain can figure which stocks to sell and which to buy. Same as in buying and selling T-bonds and T-Bills, for that matter.

The caveat is not to do like Soros, moving such large amounts of capital investment that there is a negative impact on markets he's shorted.

'Rat

[IJ Reilly]

No, the real issue is covering the $1-2 trillion funding gap that will be created by privatization.

[Desertrat]

IJ, do you know, offhand, how much of FICA percentage is Social Security and how much is Medicare? I know the 15.3% total, but not the breakdown.

Folks seem to be looking at a 2.5% out of the SS share. The next numbers needed, seems to me, are the total income to SS now, and the total outgo, now. Depending on overs or unders, that would give the present surplus or deficit.

I gather that with a reduction into the SS fund of that 2.5%, present payments and short-term-future payments would necessitate this borrowing to which you refer?

It is my understanding that at present, the interest that the US government pays on its indebtedness to the SS tax-money that's borrowed into the general fund is about 3%. From what I read, many of the better investment funds have a very-long-term track record of over 5% return, decade over decade. Quite a few are at some 7%.

Form an actuarial standpoint, it seems to me that repayment of this trillion or two is as well assured as any repayment could be. And the issue still is the integrity and competence of the managers.

Our population is still increasing in its average age, right? The present trend is for ever fewer workers paying in, compared to the numbers taking out. Seems to me that the FICA tax rate can't be raised enough to cover the shortfall. With the changing jobs picture in this country as to average salaries (certainly, in terms of purchasing power) an increase in the cap on FICA taxable income wouldn't solve the problem. This particular Ponzi scheme has about run its course...

Got an extra coupla trillion lying around?

'Rat

[IJ Reilly]

The figure is 2.5% out of the 15.3% currently contributed, not 2.5% of the total contribution. I don't know the Medicare breakdown. The $1-2 trillion shortfall is a real number, which we can only be assured will be paid back because it's a government obligation.

As I've said before, I fully expect to have the retirement goal-posts moved down the field before I'm eligible to collect in 2020. With longer life-spans, this is almost to be expected, and is probably even necessary and appropriate. What I also expect if this scheme is adopted is that retirement ages will be further increased and benefits reduced. The system will not be made more secure. If anything, it will apparently be made less secure for those who are already paying into it. That's how the numbers add up, or don't, as the case may be.

[Desertrat]

Over-simpled: As I see the 15.3%, that's roughly six segments of 2.5% each. So, when I used the 2.5% as going to private investment, I meant one-sixth of the total FICA...

Anyhow, The two trillion seems like an operating capital loan. A short-term loan taken out from one's line of credit to cover running expenses, with repayment and profits and such to come from accounts receivable.

I saw somewhere in a financial discussion, today, that the SS obligations are now at some 40 trillion dollars.

There have been trial flags run up from time to time over the last six or ten years about pushing SS eligibility out in an increasing way toward 70 years. And, there have some comments about means-testing for eligibility for benefits...

The system is in deep doodoo and the present methodology won't save it.

'Rat

[IJ Reilly]

That's right, roughly one-sixth of the current FICA contribution would be diverted. I don't see any mechanism in this plan designed to pay back the $1-2 trillion shortfall this would create. The plan only saves money for the SSI system theoretically in the long run if the private accounts produce returns for the people who've got them such that their retirement benefits from traditional Social Security can be reduced by more than the 2.5% they held out for private investment. That would be the tradeoff for younger people just now entering the system, and it might even work for them assuming they invest wisely. But for those of us who've been paying in for decades, I foresee getting screwed royally. We'll get the reduced SSI pay-outs without the benefits of private SSI accounts. That $1-2 trillion gap will have to made up somewhere.

I don't know if your $40 trillion obligation figure is correct, but for purposes of argument, let's assume it is. This presumably is the system's obligation to everyone now living, working and retired. Meeting this obligation isn't a crisis if the system is being funded adequately, and at the moment, it is. The SSI fund won't begin paying out more than it collects until 2017, if memory serves, and would be able to draw down the fund for a couple of decades thereafter. A problem, yes. A crisis, no.

As nearly as I can tell, the privatization scheme currently being proposed only hastens the day when the fund goes negative and runs out of funds. A cynic would say that this is deliberate -- an effort to kill SSI to save it. I don't want to be cynic, so I want to know how the numbers are going to add up to the benefit of everybody. So far, I haven't seen it.

[zimv20]

link (http://nytimes.com/2004/12/17/opinion/17krugman.html?hp)

'nother krugman op/ed about SS privatization...


Buying Into Failure

As the Bush administration tries to persuade America to convert Social Security into a giant 401(k), we can learn a lot from other countries that have already gone down that road.

Information about other countries' experience with privatization isn't hard to find. For example, the Century Foundation, at www.tcf.org, provides a wide range of links.

Yet, aside from giving the Cato Institute and other organizations promoting Social Security privatization the space to present upbeat tales from Chile, the U.S. news media have provided their readers and viewers with little information about international experience. In particular, the public hasn't been let in on two open secrets:

Privatization dissipates a large fraction of workers' contributions on fees to investment companies.

It leaves many retirees in poverty.

Decades of conservative marketing have convinced Americans that government programs always create bloated bureaucracies, while the private sector is always lean and efficient. But when it comes to retirement security, the opposite is true. More than 99 percent of Social Security's revenues go toward benefits, and less than 1 percent for overhead. In Chile's system, management fees are around 20 times as high. And that's a typical number for privatized systems.

These fees cut sharply into the returns individuals can expect on their accounts. In Britain, which has had a privatized system since the days of Margaret Thatcher, alarm over the large fees charged by some investment companies eventually led government regulators to impose a "charge cap." Even so, fees continue to take a large bite out of British retirement savings.

A reasonable prediction for the real rate of return on personal accounts in the U.S. is 4 percent or less. If we introduce a system with British-level management fees, net returns to workers will be reduced by more than a quarter. Add in deep cuts in guaranteed benefits and a big increase in risk, and we're looking at a "reform" that hurts everyone except the investment industry.

Advocates insist that a privatized U.S. system can keep expenses much lower. It's true that costs will be low if investments are restricted to low-overhead index funds - that is, if government officials, not individuals, make the investment decisions. But if that's how the system works, the suggestions that workers will have control over their own money - two years ago, Cato renamed its Project on Social Security Privatization by replacing "privatization" with "choice" - are false advertising.

And if there are rules restricting workers to low-expense investments, investment industry lobbyists will try to get those rules overturned.

For the record, I don't think giving financial corporations a huge windfall is the main motive for privatization; it's mostly an ideological thing. But that windfall is a major reason Wall Street wants privatization, and everyone else should be very suspicious.

Then there's the issue of poverty among the elderly.

Privatizers who laud the Chilean system never mention that it has yet to deliver on its promise to reduce government spending. More than 20 years after the system was created, the government is still pouring in money. Why? Because, as a Federal Reserve study puts it, the Chilean government must "provide subsidies for workers failing to accumulate enough capital to provide a minimum pension." In other words, privatization would have condemned many retirees to dire poverty, and the government stepped back in to save them.

The same thing is happening in Britain. Its Pensions Commission warns that those who think Mrs. Thatcher's privatization solved the pension problem are living in a "fool's paradise." A lot of additional government spending will be required to avoid the return of widespread poverty among the elderly - a problem that Britain, like the U.S., thought it had solved.

Britain's experience is directly relevant to the Bush administration's plans. If current hints are an indication, the final plan will probably claim to save money in the future by reducing guaranteed Social Security benefits. These savings will be an illusion: 20 years from now, an American version of Britain's commission will warn that big additional government spending is needed to avert a looming surge in poverty among retirees.

So the Bush administration wants to scrap a retirement system that works, and can be made financially sound for generations to come with modest reforms. Instead, it wants to buy into failure, emulating systems that, when tried elsewhere, have neither saved money nor protected the elderly from poverty.

[IJ Reilly]

Also, a good discussion about this on the NewsHour:

http://www.pbs.org/newshour/bb/social_security/july-dec04/fix_12-16.html

From everything I've seen and heard, Social Security is not in need of a radical overhaul, and those who are advocating for one, certainly have not made a persuasive case for it.

[kuyu]

DEFICIT ANSWER: I said this before, but I believe it was overlooked. If I'm allowed to keep half (~3.75%) of my FICA, I will continue to pay the other 3.75% in to SS. Also, I will totally opt out of any SS benefits at any time. If this is the deal we're offered, I'll take it in a heartbeat. Also, the government will get my 12%/year with no liability to ever pay me anything.

My only caveat is this. The money, non-deductable in the year in which I add it to my account, must be allowed to grow without capital gains taxes being exercised. If and when I pull the money out, tax it as income.

I'll put more into SS than I will ever get out just to buy the right to keep my 4%.

To fund this little project... Bonds. Sell coupon paying muni's at the product of the one less the average marginal tax rate. If the capital raised from the issue is not spent, then there will be a nice little cushion there to cover the annuities and the inevitable cash shortfalls. Also, the break even point on this system, assuming static income, is around 30 years old. There's the cutoff point. With dynamic income, the cutoff is higher, but the safe play is to go with 30.

Yes, bonds are debt. However, all assets are juxtaposed to either debt or equity. Our government doesn't sell equity (that would an interesting IPO). In time, as the debt is retired, the liabilities of the government will fall.

The dollar is falling. Our little currency-monopoly party is about to come to an end. We have a choice to make. We either sit around and wait for the government to pay us our $1,000/month, or we take control of OUR economy and hedge ourselves against the impending decline in value. Luckily, we are about to receive the right (not the obligation) to do so.

[IJ Reilly]

I'm sorry, I don't understand this explanation. I've asked a very simple question, and I think it deserves a straight-forward answer. The $1-2 trillion dollar shortfall. How is it going to be covered?

[kuyu]

How's this. Using my opt-in private/opt-out public

300,000,000 Americans. Roughly 25% are eligible. If one in ten ops in, that's ~$3,500/year/person in SS coming in with no payout necessary, ever. The total... $26.5 billion/year in claimless revenue. The first wave of people who opt in will pay ~1 trillion dollars into SS and never take it out.

Sell 30 year bonds to cover the difference from the first wave. After that, the thing is self-sufficient forever. Also, those who opt in will get about 30-50% more each month than those who do not.

If you can average 60K/year for you lifetime, you'll be a millionare. Also, you'll add ~$271,000 in extra SS to cover people who don't opt in. Sounds more than fair to me.

[kuyu]

Oh yeah...

You would have to average less than $13,200/year for your entire life for this plan to be a bad idea for you. Basically, poor people get more money than they could have saved. Anyone who makes over $14,000/year ceases getting ripped off. The government dramatically reduces long-term debt. Future tax rate can be very low because of the huge sums of money people have.

Positives:
Everyone is as good or better off than they are now.
Long term government debt is not an issue any longer.
SS is self-sufficient.
Excess spending causes prolonged economic boom beginning in 2040.
Government issues bonds to cover shortfall, recieves way more in extra SS money than the interest on the debt. Surplus begins to accumulate in first year.

Negatives:
???

[blackfox]

An excerpt from WashPost article to add to the mix (of discussion):

... Bush warned the conference yesterday that in 2018, the Social Security system will begin paying out more in benefits than it receives in Social Security taxes. By 2042, the system will be able to pay beneficiaries no more than 75 percent of their promised benefits.

"Once that line in the red has been crossed, the shortfalls will grow larger with each passing year," he continued.

But those projections are based on a dire view of the nation's economic future, one in which the growth in economic productivity crashes from the 3.4 percent rate of last year to 1.6 percent from 2012 on. Economic growth is anticipated to be cut nearly in half from historic trends, to 1.8 percent between 2015 and 2080.

But projections about the fate of Social Security have been sensitive to changes in actual economic performance. Higher-then-expected economic and productivity growth have pushed back Social Security's anticipated demise from 2029 -- as predicted in 1994 -- to the 2042 date forecast by Social Security's board of trustees.

"Under the trustees' projections, growth is going to slow to half the pace we've been growing for 150 years," Glassman said in an interview. "That might be, but I don't know why I should believe that."

"There still are problems," Glassman added, "but it's not the fiscal doomsday that people imagine."

Other economists believe an economic slowdown is inevitable, as the number of retirees begins to surpass the number of workers. But in that case, stock market gains may also slow considerably from the market's historical 7.8 percent annual rate of return. Also, any proposal to divert some Social Security taxes into private investment accounts would rely on stock market gains to make up for cuts in defined benefits.

The Center for Economic and Policy Research, which ardently opposes Bush's Social Security proposals, has concluded that stock gains under the trustees' economic projections would be 4.2 percent, a yield low enough to throw all of the White House's projected benefit gains into doubt. ...

fwiw.

http://www.washingtonpost.com/wp-dyn/articles/A5829-2004Dec16.html

[IJ Reilly]

Negatives:
???

Deficit financing.