Privatizing Social Sercurity

[southpaw]

Here's how we could all retire comfortably if the gov't would get out of the way. This is what 3 counties in TX did over 20 years ago.

BRIEF ANALYSIS
No. 215
For immediate release:
Monday, November 4, 1996

From the inception of Social Security in 1935, its proponents have encouraged Americans to think of it as a type of private pension plan. Now most people realize that the Social Security Trust Funds are trust funds in name only and consist of nothing more than IOUs the government owes to itself. Various polls show most Americans are skeptical that Social Security will be there when they retire.
However, employees of three Texas counties that opted out of the Social Security program more than a decade ago are earning an average 6.5 percent interest, compounded daily, on their vested personal retirement accounts.

Can a privatized Social Security system work? It already does. Let's see how.

How the Social Security System Works. Currently, employers and employees each pay 6.2 percent (a total of 12.4 percent) of an employee's income into the Old Age, Survivors and Disability (OASDI) program for retirement benefits. This does not include the 1.45 percent payroll tax employers and employees each pay to fund Medicare's Hospital Insurance program.

In general, individuals must contribute for a minimum of 40 quarters (10 years) to receive Social Security retirement benefits, or 20 quarters to receive disability benefits. In return for these contributions, individuals generally can expect:

* A monthly check after retirement, with the average check being $697 in December 1994.

* A monthly check for a qualified disability until the recipient returns to work or reaches retirement age.

In addition, a surviving spouse receives a monthly benefit equal to 100 percent of the deceased spouse's basic benefit and surviving children under the age of 18 each receive an amount equal to three-fourths of the deceased parent's benefit.

Social Security's Financial Crisis. Social Security is a pay-as-you-go system under which taxes collected from current workers are used to pay current retirees. That was sustainable in the past. For example, in 1950 there were 16 workers providing benefits for each retiree. However, today the ratio has dropped to 3.3 workers for each retiree, and by the year 2030 the ratio will be less than 2 to 1.

The demographic changes and the pro-gram's expansion have driven the Social Security tax rate up from 2 percent (1 percent each from employer and employee) initially to 12.4 percent today, and the maximum wage subject to taxation has risen from $3,000 to $62,700. As a result, the ratio of benefits to taxes for today's workers has dropped significantly. The Social Security Administration estimates that those born in 1877 (and retiring in 1942) got an average of 36.5 percent real rate of return on their Social Security contributions, while those born in 1950 will receive on average just a 2.2 percent return, and those born in 1975 will get a 1.8 percent return. Future workers will get an even worse deal.

Everyone recognizes that this trend is unsustainable. According to the latest report from the Board of Trustees of the Social Security Trust Funds:

* Social Security tax revenues will be insufficient to pay current benefits as early as the year 2012.

* By the year 2029, Social Security outlays will have completely exhausted the trust funds, and current revenues will fall short of expenditures by about 2 percent of gross domestic product (GDP) annually.

* In order to make the payments without cutting benefits, the Trustees estimate that payroll taxes will have to rise from the current 12.4 percent to 18.8 percent.

A Private Retirement Plan That Works. The initial Social Security Act permitted municipal governments to opt out of the system - a loophole that Congress closed in 1983. In 1981, employees of Galveston County, Texas, chose by a vote of 78 percent to 22 percent to leave Social Security for a private alternative. Brazoria and Matagorda counties soon followed, swelling the private plan to more than 5,000 participants today. In the private plan, contributions are similar to those for Social Security but returns are quite different.

* Initially, employees and their employer were each required to contribute 6.13 percent of income; recently, the counties increased their contribution to 7.65 percent - for a total contribution of 13.78 percent.

* Of that 13.78 percent, 9.737 percent goes to the employee's individual retirement account, which pays a 6.5 percent average interest rate, compounded daily.

* The remainder pays for disability and life insurance premiums to cover the employee in case of an accident or death.

* Workers continue to pay their Medicare payroll taxes and to receive Medicare benefits upon retirement.

But while the cost of the private program, known as the Alternate Plan, is virtually the same to the employee and employer as Social Security, the benefits are far greater. According to First Financial Benefits, Inc., which created and administers the plans:

* A person retiring today at age 65 with 40 years of deposits and an annual salary of $20,000 would retire with $383,032 in a personal account.

* Someone with a $30,000 salary for 40 years would retire with $573,782.

* And a person with a $50,000 salary for 40 years would retire with $956,303.

A personal retirement account this size provides a much larger postretirement income than does Social Security. Moreover, retirees under the Alternate Plan have a number of options not available to retirees under Social Security. For example, those with the Alternate Plan can choose among several annuities or take their money in a lump sum. As the figure shows, under one option:

* A retired $20,000-per-year worker with the personal retirement account would receive $2,740 each month at current interest rates, while Social Security benefits would be about $775 per month.

* A $50,000 per year worker would receive $6,843 from the private plan, compared to $1,302 from Social Security.

In addition, the employer's contribution pays for much more generous benefits than those provided by Social Security.

* The life insurance benefit is three times the worker's salary (with a minimum benefit of $50,000 and a maximum of $150,000); Social Security, by contrast, pays a one-time death benefit of $255 to a surviving spouse.

* Disability insurance under the Alternate Plan pays 60 percent of an individual's salary until age 65 or until the individual returns to work and is relatively easy to qualify for, while Social Security disability benefits can be very difficult to qualify for and are unavailable to young workers who have not yet worked the required amount of time.

Is the Program Safe? One of the biggest challenges to privatizing Social Security is to ensure the safety of the contributors' investments. Workers under the Alternate Plan are required to make their payroll contributions, and the money is invested in annuities with a highly rated insurance company. Though the interest rate can fluctuate from year to year, the financial institution that invests the money must pay a guaranteed interest rate for that year.

Conclusion. Employees of three Texas counties are enjoying rapid growth in their retirement incomes, better benefits than those offered by Social Security and the satisfaction of knowing that the money deposited in their accounts belongs to them and will be there when they retire. Privatizing Social Security is not a distant dream; for some Americans it is a present reality. Fairness and true social security demand that all Americans have the same opportunity.

This Brief Analysis was prepared by NCPA Vice President of Domestic Policy Merrill Matthews Jr.

[CRLionDawg]

I like the way it sounds.

My guess is though. That a new entitlement program will be created to weave a safety net under neath the private program.

[once a runner]

It does sound good, but there are couple things to keep in mind. It does say the people on this plan are earning 6.5% interest in just over a decade. In 1994 the Dow Jones was just under 4,000. Would private investors still get 6.5% today? I would certainly put my money in a plan that would guarantee that kind of rate over the long haul.

However, we've been living in a different world since 9/11. The stock market has recovered to where it was 3 years ago, but we now know it's a fragile market. I can't see anyone getting those types of rates any time soon. Those Texas counties got in at the right time. As CRLionDawg mentioned, there has to be a safety net involved.

[LionPride]

I'm averaging at least 6.5% in my 401k. Some quarters it's down, some it's up, but over the past 10 years, it's close, if not better than that. Why would privatizing social security be any different?

[southpaw]

There is no safety net now and the returns on you money invested in SS don't even keep pace with inflation. The system his archaic and needs drastic changes but anything but a whole new bureacracy that will do nothing but waste our tax dollars.

[voncap]

I am with once a runner on this one. The financial world has changed drasitically since that article was written in 1996.

I would be curious to see how those programs have faired through the market swings over the last three or four years. I would be willing to bet that the actuarial liabilities for the employers in those plans has increased, and drastically if they had a large holding in some of the notorious big losers (ie. Enron, MCI), over the last couple of years.

Rather than privatize the SS how about a simple change in the invest strategy. Most private retirement plans balance their portfolios to maximize return v. risk. The SS system does no such thing. The SS system invests completely in low risk/low return investments. A strategy of value but no way to keep up with today's changing economy. How long would any of us stay in a retirement plan, or any investment program for that matter, that only invests in low earning bonds or notes?

[Lemmy]

By Robert Kuttner, Boston Globe

PRESIDENT Bush's entire plan for Social Security privatization rests on the premise that the system is in severe crisis. But a careful look at the numbers suggests that the financial crisis is largely a myth.

For years, the Social Security Trustees have used very conservative assumptions about future rates of economic growth, productivity growth, and growth of the labor force. These assumptions, in turn, affect the projected payroll tax collections that will fund Social Security payouts.

Five years ago, in the late 1990s, they estimated the long-term economic growth rate at just 1.7 percent. The reality has been well over 3 percent.

Most economists now believe the economy can do a lot better than 1.7 percent annual growth. In its 1997 report, the trustees projected that the system would no longer be able to meet all its obligations by 2029. Just six years later in 2003, based on their acknowledgement of stronger economic growth, the trustees moved the crisis date back to 2042. So if the system can gain 13 years of life in six years, there's not much of a crisis.



But that's just the beginning. In June, the bipartisan Congressional Budget office used more realistic assumptions about economic growth. CBO puts the first shortfall year at 2052, not 2042, and it projects Social Security's 75-year shortfall at only about four-10ths of one percent of gross domestic product. Currently, that's about $40 billion a year, or one-fifth of the revenues that the Bush administration gave up in tax cuts for the wealthy.

Simply restoring pre-Bush tax rates on the richest one percent of Americans could bring the Social Security system into balance indefinitely, without reducing promised payouts by one penny.

The administration uses far rosier assumptions than the Social Security trustees in claiming high returns for its proposed private accounts. The administration assumes that individual portfolios will appreciate at 6 or 7 percent a year.

But if the economy is only growing at 1.7 percent a year, there is no way the stock market will achieve those results. Conversely, if we apply the Bush administration's rosy assumptions to the present Social Security system, there is no crisis at all.

The administration has also been throwing around a particularly hysterical statistic -- that Social Security faces $10 trillion to $11 trillion in "unfunded liabilities."

That figure is nothing but the total long-term payout that the government expects to pay retirees. But we don't calculate the rest of the budget that way. The Pentagon, for instance, spends about $400 billion a year. The Pentagon's 75-year "unfunded liability," at that rate, is $30 trillion.

The reason that we don't calculate budget that way, of course, is that we know government will keep collecting tax revenues and use them to pay its obligations.

Why haven't you read more about this?

First, the Bush administration casts the Social Security shortfall in the most dire terms possible, to build support for its privatization scheme. In reality, that scheme will make the modest shortfall far worse, by requiring the government to go another $2 trillion into debt. But whether to privatize, and how to make up a small shortfall, are two entirely distinct questions.

Second, some Wall Street leaders and academic economists, who share a dislike of social insurance, also paint a bleak picture of the system bankrupting itself and the country.

All this feeds into media assumptions. Indeed, the typical media account of the privatization debate and simply takes the premise of a system in deep crisis as if it were fact.

Finally, many well-meaning Democrats who the defend the Social Security system want to be absolutely that its funding is rock solid. So Democrats, as well as Republicans, talk of its shortfall and offer different ways to make up the gap. Unfortunately, that tends to play into Republican hands.

Republicans are counting on younger voters to support privatization. Polls show that the young have been so swayed by the talk of endless crisis that many young workers doubt whether they'll ever get anything back from the current system. To them, getting some money in the form of private accounts is at least half a loaf.

In the coming debate, defenders of Social Security need to educate the public on just how solid the existing system is and just how exaggerated is its supposed crisis. If they fail to do that, and get bogged down in a debate about how to "fix" a system that isn't really broken, the privatizers will win, and Social Security will be needlessly pillaged.

[southpaw]

They have been on their own for 23 years. If you read the article since 1981 these TX counties have been happily and blissfully independent the behemoth US SS system. Look at the numbers, they will retire with 5 times the money we are supposed to get from SS. More like 10 times the number until I'm ready to retire. The garbage of the "tech boom" in the late 90's that caused the higher rates of return just doesn't add up.

Why do you think Congress closed up the loop hole so quickly after the TX counties opted out?

Too bad Bedford County PA officals didn't find this loophole for us to opt out. lol!

[southpaw]

I guess the article Lemmy posted is to be taken unbiased. Remember is from the Boston "hammer and sickle".

[southpaw]

Privatizing Social Security
Thomas Sowell (archive)

September 28, 2004 | printer friendly version Print | email to a friend Send

Would you sign a contract that enabled the other party to change the terms of that contract at will, while you could neither stop him nor make any changes of your own? Probably not. Yet that is exactly what happens when you pay money into Social Security.

No matter what you were promised or at what age you were supposed to get it, the government can always pass a new law that changes all of that. But you still have to pay into the system.

A private annuity plan run by an insurance company is legally required to pay you what was promised, when it was promised, and to maintain assets sufficient to redeem its promises.

One of the few issues on which Senator John Kerry has taken a stand and not changed it (yet) is Social Security. He has said: "I will not privatize Social Security."

This has long been the position of liberal Democrats, and John Kerry's voting record in the Senate makes him one of the very few Senators more liberal than Ted Kennedy. That is the ranking given by Americans for Democratic Action, a leading liberal organization that ought to know.

Why are liberals against letting people put part of their Social Security payments into private investments?

Risk is one of their arguments. Al Gore incessantly repeated the phrase "a risky scheme" during the 2000 election campaign and risk still seems to be the big objection to letting people put their own money where they want.

Some liberals may actually believe that politicians know what is best for you better than you know yourself. That is, after all, the philosophy behind many other government programs.

Another reason for liberal opposition to private investment of Social Security payments is that it deprives them of control of billions of dollars that they have been spending from the Social Security trust fund for years. They can buy a lot of votes with all sorts of giveaway programs, financed by money taken from Social Security.

As for the risk of making private investments, that might be a real concern if people were putting their money into commodity speculation or other volatile markets. Most people have better sense and privatization could limit where Social Security premiums could be invested.

Although the stock market bounces up and down from day to day, people are not investing today in order to retire next week. They begin paying Social Security premiums when they first get a job and they retire decades later.

Stocks are far less risky in the long run than they are in the short run because the ups and downs balance out over a long period of time. It is virtually impossible to find any 40-year period in which the stock market has not paid a higher rate of return on your money than you get from Social Security.

There are some mutual funds that simply buy a mixture of the stocks that make up the Dow Jones average (or Standard & Poor's), so that their clients will have the kind of return on their investments that the stock market as a whole has. They don't make a killing but they don't get killed either.

How did Social Security get into its present mess in the first place? Because politicians made it the "risky scheme" that they now claim privatization would be.

The same political expediency which caused Social Security to be called "insurance," in order to get public support, guaranteed that it would be nothing of the sort. Unlike an insurance company, Social Security has never had enough money to pay for all the pensions it promised.

Instead, Social Security has been run like a pyramid scheme, where the first people to pay in get money back from the second wave of people who pay in, and the second wave get money back from the third wave, etc. This is so risky that pyramid schemes are illegal -- except when the government does it.

They have gotten away with this thus far because the first generation covered by Social Security was an unusually small generation that was followed by the unusually large "baby boomer" generation. But when the baby boomers retire, the pyramid scheme will no longer bring in enough money to pay for their pensions.

Nothing is more risky than depending on politicians.