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John Wayne's Holster: Fixing Social Security
John Wayne's Holster
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Sunday, February 27, 2005

Fixing Social Security

As I am sure most of you are aware, the Social Security system is in a bit of a pickle. Govt statistics project that SS will be bankrupt by 2042. The current plan being pushed by the Bush adminstration has been popularly called the "privatization plan." Will this plan work? Are there viable alternatives?

Please comment if you have suggestions or if I have made any error or misstatements. Send a link to you friends who may be interested in this topic.

The way I understand the privatization plan, it has three phases.

In the first phase, the govt will default on its debt to the SS Trust Fund. In other words, we all contributed money to pay SS benefits. The surplus was put into a trust fund to pay future benefits. The govt borrowed that money. They won't be paying it back.

In the second phase, the govt will cut SS benefits for those born after 1950 to make-up for shortcomings in current revenues. SS will essentially be converted to a pay-as-you-go system. If these changes are not implemented, taxes will have to be raised or SS will go bankrupt much sooner.

In the third phase, income earners can choose (or not) to divert 1/3 of their SS tax into their own investments. At retirement, workers will collect thier benefits, minus the amount they diverted into their private investments. In order to contine paying benefits, the govt will have to borrow money (to replace the 1/3 diverted to private investment). The taxpayer will pay back these loans. The govt claims that they can get loans for 3% interest. They also project that the average return on investments will be about 4.5%. If that is the case, that leaves us with a 1.5% return on our investment (adjusted for inflation, it may be a little more).

On the surface, it seems like a reasonable idea to me. After all, I am more inclined to trust myself with my money than I am to trust the govt with it. However, there are a few things that bother me.

1. How can the govt get away with defaulting on its debt to the SS Trust fund? Try that one with your home bank. That is our money they are defaulting on!

2. The govt will borrow money in phase three to make-up for lost revenues. Who will lend it to them? Don't forget, they defaulted on a debt in phase one! What happens if the market tanks? How will we pay back the interest then?

3. I am also concerned with all the way that companies have been manipulating the stock market. Is the market really a safe place to invest? Will some CEO skim company profits to pad his own wallet at the expense of investor dividends? Certainly the govt has done some window dressing by pretending to address this issue, but it is not enough!

4. THE MOST IMPORTANT POINT! If you break this plan down, the money we are diverting into private investments is being relaced by money the govt plans to borrow and we have to pay back. In other words, we are investing borrowed money - investing on the margin. This is precisely what happened during the roaring 20s that eventually led to the Great Depression.

Bottom line: I am inclined to favor the idea of privatization because I don't trust politicians with my money. After all, they already took money from the SS Trust Fund and are not going to pay it back (phase one). However, I do not like the plan currently being put forward by the Bush administration. I think it is too risky.

5 Comments:

At 10:21 PM, Anonymous Lance Burri said...

Hi Joe. I'm going to respond to your points in order:

1. I don't believe the government can default on those bonds. I certainly haven't heard that that's part of any plan.

2. The gov't borrows money all the time. If they can't default on the bonds, then that's no longer a problem. Also, if benefits are cut (as you suggested earlier), then we might not have to borrow any money.

3. If you invested in the Dow Jones average for 49 years (between the ages of 18 and 67), ending on the day the stock market bottomed out, October 9, 2002, you would have earned an average of 7% annual interest. The stock market is a very safe investment.

4. This point only works if you view us all as part of a collective. I don't see it that way - with a personal account, I'm investing my own money, which I earned. I didn't borrow it. The gov't isn't investing borrowed money - they're borrowing money to cover expenses (benefits) they can't cover.

I've also responded to your comment on my blog - basically, I agree that having to borrow money to cover benefits is far from ideal. However, long-term, private accounts will do more for us individually, and us as a society, than SS does now. It's therefore worth it. Plus, I don't believe any plan that cuts benefits or raises taxes will ever pass.

 
At 9:09 PM, Anonymous Joe Verica said...

Hi Lance

I find your blog pretty interesting. I've added a link to your blog on my links list.

To the points

1. The SS surplus was invested in government bonds. Currently, the govt is over $7 trillion in debt. The bonds can not be redeemed until the debt is paid off - either by tax hikes or spending cuts. I don't see that happening anytime soon.

2. Cutting benefits may help to make up some money, but I don't think it can replace all of it.

3. I agree with your example of investing in the stock market; however, that is a general scenario. What I am more concerned about is people who have investments tied up in companies that cheat the systems - the Enrons, the WorldComs, the Tycos etc. If these types of companies continue to exist (and they do), then some investors are going to get crushed.

4. I still have a problem with borrowing dilamma. Yes, it is true that YOU will be investing YOUR money which YOU earned. However, govt is planning to take out loans to cover that lost revenue that YOU(the taxpayer) are going to have to pay back. That's YOUR debt. Put the figures on an accounting sheet to see your situation more clearly. The money you invest is counter-balanced by the debt you must repay. You are investing borrowed money.

Don't get me wrong, I am in favor of privatization, I just have some problems with what is currently on the table. To the President's credit, he has agreed to consider any reasonable plan short of a tax hike.

 
At 9:34 PM, Anonymous Lance Burri said...

And don't get me wrong, either - I agree that the borrowing is bad. I simply see a plan like the President's - or better, like Rep. Paul Ryan's - as the best option.

 
At 9:41 PM, Anonymous Lance Burri said...

Oops - meant to include this and this: some info about Ryan's plan.

And thanks for the link. I'll add one to your blog, too. Since you're not from Wisconsin, you'll be listed under "foreigners." There's one guy from Minnesota and one from New Zealand there now.

 
At 9:32 PM, Anonymous Al said...

The guy's evil for saying I'm from Minnesota. I consider it a temporary condition.

Just ignore him.

 

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