Vast Borrowing Seen in Altering Social Security

Discussion in 'Politics, Religion, Social Issues' started by zimv20, Nov 27, 2004.

  1. zimv20 macrumors 601

    zimv20

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    #1
    link

    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.
     
  2. kuyu macrumors 6502a

    kuyu

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    #2
    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.
     
  3. Xtremehkr macrumors 68000

    Xtremehkr

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    #3
    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?
     
  4. zimv20 thread starter macrumors 601

    zimv20

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    #4
    if all it takes is 2.5%, why doesn't everyone do that now and become independently wealthy?
     
  5. Xtremehkr macrumors 68000

    Xtremehkr

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    #5
    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.
     
  6. IJ Reilly macrumors P6

    IJ Reilly

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    #6
    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.
     
  7. Ugg macrumors 68000

    Ugg

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    #7
    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.
     
  8. wordmunger macrumors 603

    wordmunger

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    #8
    Here's an (admittedly biased) fact sheet 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.
     
  9. mactastic macrumors 68040

    mactastic

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    #9
    But at least you'd be free to choose whether you want to be rich or not!
     
  10. Ugg macrumors 68000

    Ugg

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    #10
    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.
     
  11. zimv20 thread starter macrumors 601

    zimv20

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    #11
    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?
     
  12. skunk macrumors G4

    skunk

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    #12
    I don't know what you edited for spelling, but "noticable" slipped through the net... :)
     
  13. zimv20 thread starter macrumors 601

    zimv20

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    #13
    it was "privitization" (sic).

    english is hard.
     
  14. blackfox macrumors 65816

    blackfox

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    #15
    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.
     
  15. zimv20 thread starter macrumors 601

    zimv20

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    #16
    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.
     
  16. kuyu macrumors 6502a

    kuyu

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    #17
    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... ;)
     
  17. kuyu macrumors 6502a

    kuyu

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    #18
    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.
     
  18. zimv20 thread starter macrumors 601

    zimv20

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    #19
    i believe that to be true. i think most people also don't understand the effect of dollar cost averaging.

    in your example:
    ...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.
     
  19. IJ Reilly macrumors P6

    IJ Reilly

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    #20
    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.
     
  20. zimv20 thread starter macrumors 601

    zimv20

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    #21
    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?
     
  21. Ugg macrumors 68000

    Ugg

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    #22
    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.
     
  22. Xtremehkr macrumors 68000

    Xtremehkr

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    #23
    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.
     
  23. zimv20 thread starter macrumors 601

    zimv20

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    #24
    wow, sounds a lot like social security.
     
  24. kuyu macrumors 6502a

    kuyu

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    #25
    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.
     

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