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The Social Security discussion

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I just happened to overhear the roundtable on This Week on ABC.

David Brooks has no idea what an average human’s life is like. I say this because of his justifications for uncreating Social Security: that it’s a “New Deal” program, and most people can afford to fund their own retirement.

How many of you can fund your own retirement? Myopia of the elites is a problem with everyone’s elite.

And George Will said (in a way which leaves me unclear whether he shares the position or is merely reporting it) that the argument for this uncreation will be that it helps poor folks save, gives them a vested interest in the economy and is a good idea even if Social Security is not going broke.

I think we should reconsider the urgency with which this is being pursued.

First, let’s look at the official figures on when, barring any change, Social Security is projected to become insolvent.

The maximum projected trust fund ratios for the OASI, DI, and combined funds appear in table II.D1. The year in which the maximum projected trust fund ratio is attained and the year in which the assets are projected to be exhausted are shown as well.

Table II.D1.–Projected Maximum Trust Fund Ratios Achieved and
Trust Fund Exhaustion Dates Under the Intermediate Assumptions
Maximum trust fund ratio (percent) 500 226 448
  Year attained 2015 2006 2015
Year of trust fund exhaustion 2044 2029 2042

Some 38 years before it all comes to a head.

Now, we know trying to project that far out is like trying to calculate where the tornado caused by the flap of a butterfly’s wing in China will manifest. Still, precision isn’t necessary to see that at some point there will be a problem. How one chooses to resolve the problem depends on how one sees its nature, and the evidence of that will be the actions you take…not the message you send.

For myself, I feel the problem is how do we insure we all survive retirement? NOT how do we increase the investor class or how to we get more moderates to vote Republican. Diverting money from the Social Security fund fails on its face to solve the problem I am concerned with. The argument that market returns are greater than that which Social Security gets is true when you look at aggregated funds, but this plan specifically disaggregates those funds.

Greater returns require greater risk; that goes without saying. Any competent financial advisor knows you should limit your risk when investing for retirement. But Republicans are suggesting the very opposite…and since MOST companies fail, MOST investments will not beat the market.

Equity Index funds pay off
Why Most Stock Investors are Losers
The Courage of Misguided Convictions: The Trading Behavior of Individual Investors
The Common Stock Investment Performance of Individual Investors

Most investors will NOT become wealthy because most investors do not now. And when the market pendulum swings the other way a great number of investors will be in trouble.

The best solution I can come up with for the problem I’d like to see solved is a means tested pay as you go approach. (And ferchrissakes, don’t call it “paygo.” I swear, between acronyms and neologisms, in 100 years archaeologists will have quite a spirited debate over whether we actually speak English or if it’s just a trade language.) Back in February the NY Times noted

Since 1983, American workers have been paying more into Social Security than it has paid out in benefits, about $1.8 trillion more so far. This year Americans will pay about 50 percent more in Social Security taxes than the government will pay out in benefits.

Those taxes were imposed at the urging of Mr. Greenspan, who was chairman of a bipartisan commission that in 1983 said that one way to make sure Social Security remains solvent once the baby boomers reached retirement age was to tax them in advance.

On Mr. Greenspan’s recommendation Social Security was converted from a pay-as-you-go system to one in which taxes are collected in advance. After Congress adopted the plan, Mr. Greenspan rose to become chairman of the Federal Reserve.

Those funds were used for day-to-day expenses. In other words, we always had a pay-as-you-go system.

In June 2001, Paul H. O’Neill, President Bush’s first Treasury secretary, said all that Americans expecting benefits have is “someone else’s promise” that the paper held by the Social Security Trust Fund will be redeemed with taxes paid later by others.

It was promised the funds would secure our retirement but not action, no commitment…just a message sent. It’s much like the way the “equal” part of “separate but equal” was dealt with.

If those funds had not been tapped we would not be having this discussion. And no single thing will undo the damage.

David Brooks is right about one thing: those who can fund their own retirement, should. And the National Center for Public Policy has some thoughts on how to improve 401(K)s that is a good starting point to helping more folks do that. But any Social Security plan that requires a 401(K) of any significance to reach a living retirement income will come up short for a vast segment of society.

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  • Eric Olsen

    P6, very fine post and I pretty much agree with you: some sure things need to remain sure things despite the temptation to “improve them” by making them less certain.