Corporate Security
I am no lover of economics. Money, the making of money, the saving of money, and the investing of money bores me to no end. I know that it would be beneficial for me to make a decent attempt at understanding economics because it would solve at least half of my money issues, but I just can’t focus on it. I have money ADD.
This being said, I am wondering if I understand the hullabaloo behind social security reform. First off, I understand that some simple small hikes in the payroll tax, especially to the affluent (over $100,000 a year), would solve this problem over the long term, which is what all this reform is aimed at, right? Secondly, it seems to me that privatizing (nor personalizing, not empowering…privatizing) any large amount of funds carries with it some risk. This eliminates the security in social security. Thirdly, am I to understand that these funds for our social whatever-you-want-to-call-it will be invested in government approved (directed?) sources? Doesn’t this mean that companies such as those who work in defense, or Halliburton, or countless others that benefit from government business will probably get the nod for investment? Isn’t this the big government that the Republicans always whine about? Isn’t this the government helping huge corporations with the money from citizens? Is a gun going to be held to our heads to invest in corporations if we want some manner of monetary security after retirement age? Call me ignorant, but this is how I see things transpiring.
My understanding is private accounts will be less like stocks and more like savings accounts that are tax sheltered? Some banks are already offering them.
The thing about Bush pushing this approach is it is severly limiting creative solutions to the Soc’ Sec’ problem right off the batt. It’s not even a sure fire deal. A lot of economists predict that it won’t even come close to solving our immediate needs and instead will take decades to build enough to help.
Tony’s mister bank, maybe he can spread a little republican sunshine on the whole situation?
That’s quite a burden, Randy! I do plan to look into this more later, but it’s five o’clock so I’m going home.
Briefly though, as far as I know, social security isn’t immediately endangered, so this plan is based on the fact that there is some time before the situation is dire. It basically sounds like an IRA to me, which DOES require time to pay dividends. An Individual Retirement Account allows you to invest money, tax free, until you’re 59 1/2 years old. If you make a withdrawl before then, you’re heavily taxed. So it’s not really a bad idea. The only difference is that right now, having an IRA (or something like it) is wise. Whereas if the government decides to more or less eliminate social security in favor of these accounts, it will go from wise to NECESSARY. Is that a bad thing? Maybe not. After all, people who live only on social security will tell you that they wished they’d saved more when they were working, because social security doesn’t pay too much. And I think some people don’t save money like they should when they’re younger because they overestimate what their social security benefits will be. It might be less “secure” to privatize, but I for one would not feel very secure if I were relying solely on the government to support me in my twilight years.
Again, I want to read more about the state of social security, so I’ll probably have more to say tomorrow.
Ok. Let’s hope someone notices this comment in the “recent comments” list. Since Bush is supposed to detail his ss reform plan in his State of the Union address, let’s see what he’s up against.
Firstly, the ss problem is not the result of a previous mismanagement of funds. It’s simply the result of demographic changes. The program is set up as a pay-as-you-go system. The taxes collected to fund the program are immediately paid out to current beneficiaries. The surplus is used to fund other things not related to ss. This has always been the case and there has never been a “lockbox” for surplus funds.
So if the number of beneficiaries vastly outnumber those who a paying into the system – the current labor force – the program quickly become insolvent. This will occur in the next 15 years or so. Now, the surplus funds which are spent by the government are technically borrowed, not simply “stolen”. There exist IOUs to keep track of these “loans”. Once the government stops being able to collect enough taxes to maintain the pay-as-you-go setup, they ss program will begin to call in the IOUs to continue to meet the needs of the beneficiaries.
Sounds okay except that the government does not save the money it has borrowed, as I mentioned above, for this purpose. The surplus is immediately spent on other programs. So if the government is to make good on the IOUs to the ss program, it would have to 1) cut funding elsewhere or 2) increase taxes. Cas mentioned the possibility of “small simple hikes” in payroll taxes for the affluent as a means of compensating for the deficit. Well, the actuarial evidence tells us the the government will end up about $9 trillion short when it comes to paying out benefits under the current system, a figure that dwarfs the national debt as a whole. FICA taxes would have to be increased to 30-40% for every worker in the nation to make up the difference. Again, that’s just FICA, which would be in addition to the other taxes already collected from every paycheck. That’s more like a climb to the top of Mt. Everest than a small, simple hike. If you were ready to blame the future ss deficit on the President for spending $200 billion on the war in Iraq, note that $200 billion is about 2% of $9 trillion.
IF the ss program was paid back all of the IOUs in full, they would run out sometime around 2040, and the system would then be completely bankrupt.
So that, in a nutshell, is the social security crisis.
It would be possible to ease the problem slightly by penalizing more heavily for taking the early retirement. Currently, a person can begin collecting ss at 62, but less than they could collect if they retired at 65. Also, those who continue to work after 65 receive credit for continuing to pay into the system longer than they have to. By discouraging early retirement and promoting “late” retirement, the deficit would be reduced.
A slight gradual reduction in the amount of the benefit payments – currently approx. 42% of what the recipient earned during their working years – would help too, without much ill effect.
The Bush proposal will include individual investment accounts with a small number of low-risk, diversified investment options, just like a 401(k) plan. Everyone who owned one of these accounts would have the wonders of compounded interest working for them, which obviously is a goog thing. But for this plan to work, it will take time – many years – for the accounts to grow. And the question becomes “what about current or soon-to-be retirees?” We’ll see what the Prez has to say on that topic…
But the overall point is that the sooner the individual accounts are set up the sooner the interest can begin compounding, helping to allieviate the problem. In other words, the deficit worsens daily, so if we’re not doing anything to fix the problem, we’re continuously falling deeper into the hole.
5000 word limit? Obliterated!!
“…am I to understand that these funds for our social whatever-you-want-to-call-it will be invested in government approved (directed?) sources? Doesn’t this mean that companies such as those who work in defense, or Halliburton, or countless others that benefit from government business will probably get the nod for investment? Isn’t this the big government that the Republicans always whine about? Isn’t this the government helping huge corporations with the money from citizens? Is a gun going to be held to our heads to invest in corporations if we want some manner of monetary security after retirement age?”
I think these are very valid questions, Cas. But as you can see, the government is already spending the entire ss surplus as it sees fit year in and year out. If you already disagree with certain examples of government spending, as I know you do, the new proposal wouldn’t change much in that regard. Hey, at least this way you’d be earning interest on your investment. Furthermore, in order to make the accounts profitable, the investment options, as I said, would have to be diverse and basically risk-free, meaning that not all of the money could be spent on the sinister and uncertain ventures of whichever administration was in power. Just some of it.
What would happen if nothing were done about the ss crisis? To continue to make good on ss payouts, the government would have to slash funding elsewhere. After non-essential programs were gutted, the government would ultimately default on foreign debts, resulting in higher and higher interest rates on future loans from foreign lenders, if we could borrow at all. That cost would be passed on to American citizens in the form of higher taxes and interest rates. Eventually, the economy would collapse.
socialsecurityreform.com has a lot of info on this subject, including a page listing the very detailed and very boring proposals of the last few years from dems and reps alike. all of the ones i read involved some variation on the individual investment account concept.
this stuff probably sounds a bit troubling. i wouldn’t be too concerned, though – after all, ol’ George has a plan to keep us all safe! joking aside, this isn’t really the fault of any one politician or party, as i see it. the system was doomed to fail from day one as soon as the average age of the population exceeded a certain number.
Yeesh! That’s long!
I just read through the answers you provided and certain things make sense. I have to come back to this later and re-read it to fully take it in. Bank speak might as well be Yiddish to me.