Oct. 22 (Bloomberg) -- President George W. Bush said Republicans can hold their congressional majority by focusing on national security and the economy, and that he will return to overhauling Social Security as a top domestic priority for his last two years in office.
He thinks that being a War President gives him "political capital" and that then he gets to spend it. The sap doesn't understand that you don't spend capital, you invest it. That's what makes capital different from money. This president doesn't even get the basics of capitalism. No wonder he wants to abolish Social Security. He doesn't realize that it saved capitalism, because he doesn't understand capitalism.
Could Bush secretly be a Communist? No, I think he's just a little dense. After all, even intelligent Communists understand the difference between capital and money. They've read Das Kapital.
11 comments:
It's funny you should have a Social Security post focusing on investing versus spending. Because that's exactly what's wrong with Social Security. If Social Security actually invested money instead of spending it (like the Ponzi scheme it is), Social Security might not be such a monumental waste of money.
Investing the Social Security Fund? Are you advocating Socialism? I'm not, at least I'm not advocating, and have never advocated, that the government should take over companies, even by buying them. Most people would call that Socialism.
Ponzi schemes fail because they are voluntary and eventually run out of suckers. Social Security is not voluntary, it is supported by taxes. It was sold to people as a savings plan, and the payout is based on the payin, but it really amounts to a tax we pay to support the old people, especially now that the Social Security Fund is being raided to reduce the deficit. I don't mind paying for the "greatest generation." They deserve a lot more than they get. I just hope the younger generation thinks mine is worth paying for when I'm ready to retire.
In the meantime, I suggest you try to get a realistic picture of what Social Security is and is not, and what investing the Social Security Fund in ownership of companies would mean. You haven't really thought this through. You're just spouting conservative cliches.
I'm going to ignore your rant on Socialism. I assume you're just saying that to be dramatic, not serious.
At least we agree on one thing. I don't mind paying for the "greatest generation", either. Social Security robbed them of valuable dollars that could have been invested in their retirement. You're also right in that they deserve a lot more than they got. If their Old Age Insurance dollars had been invested in nothing more complicated than an S&P 500 index fund, every one of them would be better off.
I know exactly what Social Security is. It's a rip off. As one who's in the process of being ripped off, I'm upset about it. But when I think of all those people who have been completely ripped off (i.e. current retirees), I get livid. They deserve better, but Social Security isn't the answer. It's the problem.
You're smart not to take the bait about Socialism, but now I'm confused. Just what do you advocate?
In your original comment you seemed to be calling for investing the Social Security Fund in the stock market. This is a common proposal, which carries risks as well as benefits, and which is part of many private pension schemes. It also basically means government ownership of private companies, which is one reason why many people oppose it for Social Security, even though they find it a good idea for other pension systems.
Now you seem to be saying that Social Security is just a "rip off" and it should be abolished. Don't you want to replace it with anything? Of course people need other savings for retirement. Social Security was intended as only a floor to keep old people from starving in the streets and the parks, which was happening in the Great Depression. Social Security was part of the solution that saved freedom and capitalism from revolution or fascism. If that's a rip off I'll gladly pay it. I owe my country a lot more for my freedom and our general prosperity than Social Security taxes will ever amount to, and if I have to pay my life, fortune and sacred honor I will. What do you think American freedom and prosperity are worth? What reforms to Social Security would you propose, or would you just abolish it and go back to the bad old days?
Ah, you've seen right through me. I do want to abolish Social Security. But it's not because I hate old people and the disabled. It's because there are better, cheaper ways of providing for them. Let's run the numbers.
I'll start with disability insurance, because it's the easiest. One commonly cited quote for disability insurance is $1150 annual premium for $3500 monthly benefit. Extrapolating those numbers, you should be able to provide 100% income replacement for 1150/(12*3500)=2.74% of income. Check.
For retirement, I'll work through the scenario for a minimum wage worker. I'll take his FICA dollars, less 2.74% for disability insurance, and put it in an S&P 500 index fund. I'll assume the after-inflation return is 7.9%. The current retirement age is 67, so I'll use 67-18=49 for the number of working years.
Annual FICA amount = $5.15 * 2080 * (15.3% - 2.74%) = $1345.63
Retirement Savings = $1345.63 * (exp(49 * 7.9%) - 1) / 7.9% = $800K
That money will earn $800K*(exp(7.9%)-1)=$66K of interest every year, which is about 600% income replacement. To be extra safe, restrict withdrawals to half of the interest earned. That's still 300% income replacement.
You can reverse this computation to find out how much you need to contribute for 100% income replacement. Without going in to the details, it comes to 2.04%. Again, to be extra safe, double it to 4.08%. After you add in the 2.74% for disability insurance, you're only up to 6.82%, which is less than half of FICA.
I can't agree with you more that we need to take care of our retirees and disabled. But because of changing demographics, the current Social Security system is only able to provide small benefits at horrendous cost. If we can do more with less, don't you think we should do so?
"in an S&P 500 index fund. I'll assume the after-inflation return is 7.9%"
That's a mighty big assumption there. I don't share it. I would argue that the stock market, as a share of ownership in corporations, is over valued. Furthermore the stock market is always subject to ups and downs. The Social Security system was put in place in the 1930s when it was undervalued, and there's a reason for that connection. A lot of people had their savings in stocks, and bank accounts, and saw those savings wiped out in the Great Depression. Now, of course, we have FDIC to save the bank accounts, but what to do if inflation strikes, as it did in the 1970s? What to do if the stock bubble bursts, as it did in Japan not long ago. I think you're old enough to remember the dot com bubble. What about the current real estate bubble that is bursting even as we debate here? Frankly speaking, American fiscal and trade policies are probably leading to a massive currency correction, and not very far in the future, either.
If you want to argue in favor of investing Social Security funds I would consider it, but the three essentials of investing are diversify, diversify and diversify. This is not the board game "Life" and you don't win by sinking all your funds into the stock market and shaking the dice.
Furthermore, Social Security was never intended to be anyone's entire retirement plan. It is a floor to prevent total devastation in case your pension plan, stock investments, bonds and other savings don't pan out. Those are riskier and are designed to be so. Social Security will continue to be the tax we pay to support the old people. Those taxes may have to be raised, and we may come to be happy about illegal aliens paying them, but I'm in favor of keeping Social Security, if reforming it.
Besides, if you do invest all those taxes in the stock market, you eventually end up with government ownership of the economy. Given the track record of that, I'd prefer to keep the government doing what it does best, and leaving the ownership of the economy to the private sector. Although I do think a stronger union movement might help solve some of the problems of maldistribution of wealth.
You can make all the arguments you want, but the reality of the situation is that the after-inflation return of Vanguard's S&P 500 index fund has been 7.9% since inception (Vanguard claims even higher, but I prefer to do my own estimation). The numbers support my assumption. Do you have any numbers to support your argument?
And since you mentioned the tech bubble, I feel I should do so, as well. That 7.9% after-inflation return includes the tech bubble and the stock market crash of 1987. In fact, Yahoo's data (which I'm using) on Vanguard's fund starts right before the crash of 1987, so my estimate is probably artifically deflated as a result.
I disagree with you that diversification is the number one rule of investing. Instead, the number one rule should be to plan for the long term. Yes, the stock market has its ups and downs. The daily volatility of the stock market is very high. But over the long term, it is a rock-solid investment, crashes and bubbles included. Besides which, the S&P 500 includes 500 different companies. That's pretty diversified. If you want even more diversification, you could go with a total stock market fund.
On the other hand, I absolutely agree that Social Security shouldn't be a retirement plan. However, when you take 15.3% of people's salary, how do you expect them to be able to save for their own retirement? Most experts agree that saving 10% of your salary for retirement is a pretty good goal. How is it that Social Security takes 1.5 times that much and provides far less?
Average returns don't necessarily translate into real returns over any one individual's working life, so are irrelevant to any given individual, even accepting your figures. You dumpt all your own retirement savings into the stock market? What if a bubble bursts just before you want to retire? You have to work another few decades to wait for it to recover. I'm not buying. Never put all your nest eggs in one basket.
And you are still not clear what you want to do. You don't want to take 15% of people's salary so they can save it themselves? Most won't, especially these days. Do you advocate investing the Social Security funds in the stock market? Or do you advocate individual retirement accounts financed by compulsory contributions? I can't really discuss this with you unless you make clear what your proposal to replace or reform the Social Security system is. Only when you tell me what your proposal is can I judge the possible effects and implications of it.
What if a bubble bursts just before you want to retire? You have to work another few decades to wait for it to recover.
You're still thinking about the stock market over the short term. If you practice diligent dollar-cost-averaging during your working years, crashes and bubbles in the stock market turn out to be inconsequential. I know you don't believe this, so maybe another example will help convince you.
Quick disclaimer: My data for the S&P 500 doesn't include dividends and capital gains before 1987. As a result, I had to remove them from this computation. So the rates below will be lower than what I quoted before. That's why I say it's the average rate of appreciation instead of return.
Suppose you worked from age 18 to 65 and retired on 3/24/2000 (the height of the tech bubble). The average rate of appreciation of the S&P 500 over your working years was 6.6%.
Now suppose you worked from age 18 to 65 and retired on 10/9/2002 (the bottom of the tech bubble). The average rate of appreciation on the S&P 500 over that period of time was 6.9%.
No, that is not a typo. The average rate of appreciation was actually higher for the 47-year period ending at the bottom of the tech bubble. More importantly, the difference was only 0.3%. So while the tech bubble may have been hyped as this colossal event in the stock market, it really wasn't a very big deal.
Another way to demonstrate how... temoporary these crashes and bubbles are is to look at a complete graph of the Dow. The crash of '29 is almost indistinguisable. The crash of '87 (which was twice as bad as the crash of '29) only shows up as a little blip. And in 20 years or so, the tech bubble will also be little more than a blip in the history of the stock market.
And you are still not clear what you want to do
Fair enough.
1) Establish personal retirement accounts, owned by the workers. Everyone contributes 4.1% (maybe round up to 5%) of their earnings to the accounts. The money gets invested in a broad base index fund. I've been quoting the S&P 500 simply because I have a lot more data on it. But a total stock market fund is probably a better choice. Another 2.74% of earnings goes to disability insurance.
2) Establish a comprehensive welfare system. Everyone qualifies for the program, not just seniors. It works very simply. You take the poverty line for the family, subtract their income plus 4% of their savings and give them the difference. Most importantly, the program is funded by the progressive income tax instead of the regressive payroll tax (which is eliminated).
3) End all the tax-deferred and tax-free vehicles (401k, 403b, 529, IRA, etc.). Use the windfall to pay back what everyone has paid in to Social Security. And by everyone, I mean everyone, not just seniors. The payouts will be based on how much you paid in plus a healthy amount of interest. The interest will ensure that those who have been in the system longer (i.e. seniors) get more out.
Obviously, there will be many people who, after getting their payout from step 3, will not have enough money to survive. They'll be immediately referred to the welfare program. Equally obviously, income taxes will have to be raised to pay for the welfare program. Even so, the net result is a tax reduction because of the elimination of the payroll tax.
1. Social Security is supposed to be that, Social Security, not an individual's investment plan. Suppose I didn't work from 18 to 65 (who does anymore?). Suppose I retired some other time? Suppose I don't want to invest in the S&P? The US government is going to invest my personal retirement account for me? Uh, uh. I don't think so, and neither will too many Americans. You are confusing Social Security with personal retirement savings, and trying to sell a particular stock plan. Please forget it. Most people won't buy it, and it sure shouldn't be forced on them by the government. Just talk of putting the huge Social Security fund into a particular investment would create hell in the stock market, and you still haven't gotten into the question of government ownership of more and more corporations.
2. You want to invest everyone in a one-size-fits-all "broad base index fund" and do away with the tax free retirement accounts they've been putting aside to pay for it? Whatever happened to freedom of choice? I support tax incentives to get people to save for retirement. Too many of them mistakenly believe that Social Security is supposed to be their comprehensive pension plan. More personal responsibility for retirement would be a good idea, but your plan leaves us with less. Welfare is not popular, either, and the mistaken idea that Social Security is NOT welfare is the only thing saving it. Your plan is as politically impossible as it is economically unsound and philosophically unjustified.
You are confusing Social Security with personal retirement savings
No, that's precisely the point. I want to SEPARATE them. If Social Security were just a social safety net, the wealthy would not collect it. Nor would it be paid for with a regressive tax. It would be paid for with a progressive tax and only given to people who need it. It would cost a LOT less. Furthermore, if we had mandatory personal retirement savings, the need for Social Security would be greatly decreased.
and you still haven't gotten into the question of government ownership
Yes, I did. You either missed it or chose to ignore it. If you reread my previous comment, you'll see that I explicity said that personal accounts should be owned by the workers.
Whatever happened to freedom of choice?
You have all the freedom of choice you want with the rest of your money. How is my idea any different that Social Security with respect to freedom of choice? Do I have any freedom to choose what happens with my Social Security dollars? In fact, under my plan, the overall tax rate is reduced, so people have greater freedom in deciding what to do with the money saved.
More personal responsibility for retirement would be a good idea, but your plan leaves us with less.
How so? If everyone is forced to save for their own retirement, how is that less personal responsibility for retirement? I suppose you could make the agrument that forcing people to do something is different than having them accept the responsibility. But the net outcome is the same.
Your plan is as politically impossible as it is economically unsound and philosophically unjustified.
Well, I agree that it's politically impossible. Most good ideas are. But as for economically unsound... I'd like to see you back that up with facts and figures instead of just rhetoric. I challenge you to work through a plausible scenario under my plan and demonstrate someone who comes out worse off than under Social Security. Please be certain to state all your assumptions.
Post a Comment