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Social Security Reform in the US

onthebottom

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Looks like the vote counting has begun. Many have been made to look silly in predicting the POTUS will back down or not get what he wants. I can't help laughing every time I hear the party of "save social security first" talk about how solvent the system is. I can't understand why so many are so afraid of people managing their own money. If the President can reform Social Security it will be the domestic equivalent of brining democracy (Afghanistan and Iraq) and peace (Israel, Palestine) to the Middle East - and no, those are not done yet but work-in-progress.

OTB with fingers crossed

Anyway, an interesting article:


House Undivided
House Whip Roy Blunt talks about the odds on Social Security reform.

By NRO Staff

President Bush may still have an uphill climb in the Senate, but the prospects for passage of a Social Security bill to his liking seem to be improving in the House. Over the last two months, several House Republicans have expressed skepticism about Bush's ideas. Bill Thomas, the chairman of the committee with jurisdiction over the issue, suggested that Bush's plan would be a "dead horse" because Congress would modify it so much. Rob Simmons, a congressman from Connecticut, wondered aloud about the urgency of dealing in advance with the program's fiscal imbalance — saying that he would be dead by the time there was a problem.

But the White House swayed some congressional Republicans at their retreat last weekend. Majority Whip Roy Blunt, who is in charge of counting the votes for House Republicans, tells NRO that even the skeptics among his colleagues are moving in the president's direction. This week, Rep. Simmons released a statement that referred favorably to personal accounts (while still cautioning against drastic change).

"I'm not naively optimistic, but I'm cautiously optimistic," says Rep. Blunt. Support for reform along the lines Bush has in mind is already the "prevailing" view among House Republicans and is on its way to being the "preponderant" view.

Blunt thinks that one argument for personal accounts that will prove effective with his colleagues, and with the voters, is that they are "115 million lockboxes": "For the first time, that surplus we've been collecting for Social Security for a generation really [will] go to Social Security."

The congressman breaks with the conventional wisdom about the political risks for Republicans in enacting cuts in future benefits. "The month after we get it done" — i.e., enact a bill — "52 million Social Security checks [will] go out. They go out the next month and the next month and the next month. And they're every bit as big as they have ever been. If [we] get [a bill passed] this year, you get 12 of those checks before the next election and 36 before the next presidential election. And in between, people get statements saying here's the size of your personal account." The risk, according to Blunt, is that Republicans vote for a future benefit cut that does not pass. In that case, he says, Democrats will be able to tell seniors that Republicans tried to cut their benefits and there will be no reality check.

Interestingly, Blunt also thinks that the upside for Republicans may be a bit lower than some enthusiasts for reform believe. "It does move the country dramatically toward an ownership society," he says. "That's good for us initially and it moves us toward a temporary majority. But there's no such thing as a permanent majority, and the Democrats will have to change. A majority of them will view competitiveness, the global economy, and the place where they work differently, and they'll certainly view the government differently than [if it were still] a 1960 economy where 10 percent of Americans owned stock."

Rep. Blunt's "cautious optimism" can be split in two: The optimism is about the House, and the caution is about the Senate. Bush cannot take the House for granted, but at the end of the day Bush and the House Republican leadership are likely to be able to get a bill through it if the Senate moves first. And that's more optimism than you would get from reading some of the newspapers.
 

WoodPeckr

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DonQuixote said:
I don't have much confidence in GWBs domestic policies.
...... So, what's his political purpose in trying to change another New Deal
program? Who'se going to benefit from his proposals? Hopefully not Haliburton...
again. :eek: Don
This will really be a huge gift to the banking and finance sector that salivates at the thought of all they will be making in administrative fees, expenses, costs etc. Current Social Security adminstrative costs are around 2% or less and none of this money goes to the Bank/Finance sector of the economy. So if GWB gets his way the Bank/Finance sector will be very handsomely rewarded.....and 'their adminstrative costs' will, of course, be substantially higher than 2 %! They will be raking in billions from these personal accounts they will handle.

It's all about taking care of the Bankers nothing more.
 

langeweile

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I don't understand all the excitement about the social security. Like in Canada social security in the USA is a supplement at best. Certainly by itself it is not a whole lot to live on.
Even on a conservative base the return over 40 years is poor.Any money market fund has a higher return.
Personally i don't care either way, the bulk of my retirement will not be coming from SS.

Itnteresting to point out, that any member of the federal govrment, has a far better retirement package, than any SS ever will be. The same goes for health care.
I think there should be a voluntary option, and it should be on the same level as any federal employee receives.
 

onthebottom

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I'd much rather manage my money (and that's what it is) than have Washington manage it for me. I don't know anyone that thinks they'd be worse off under this plan. Pecker tin-foil-hat aside, I can see a rational discussion about the cost of transition but not on the ultimate goal. Democrats, as usual, are stirring the fear and conspiracy pot, Republicans are being a bit hysterical about SS imploding as well. This could be a lasting beneficial structural change, if Bush can get it done he'll be long remembered for it - he may be stubborn enough to get it done.

OTB
 
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I find it interesting that several years ago Canada was toying with the idea of private accounts for health care and the like - until the stock market tanked. Enthusiasm for those plans dissolved pretty quickly.
 

islandboy

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There are good aspects in theory about an increasedwonership society. But as we have seen with IRA's risk pools of 1 (one) can be disasterous when fly by nights investment advisors place people is scams or unsuitable investments. As well the top SS brackets return will decrease from about 40+ % of the maximum SS wage to about 20% of that wage. The effect is that todays profligacy will again be pushed onto future generations - and poorer generations at that. The real way to deal with the problem is to immediately put in better of cost of living controls, raise the retirement age, and consider decreased benefit levels for the
well to do via an income test. Then, after doing this, talk about some sort of partial privatization via SS manged invesetment options. Right now if the funds are privately managed you are looking at a bonanza in fees for brokers accompanied by higher overhead than if the SS simply provided diffferent types of mass broad basket pools that people could elect and switch between. With such a system there could be a shared risk system underwritten by the balance of SS.
 

langeweile

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Drunken Master said:
I find it interesting that several years ago Canada was toying with the idea of private accounts for health care and the like - until the stock market tanked. Enthusiasm for those plans dissolved pretty quickly.
was that before the Dow hit 10000 or after?
 

onthebottom

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bbking said:
"I'd rather invest my own money" When are you guys going to give up this independence line. A proper pool of funds the size of the Social Security surplus will outperform an individual investment plan everytime. Just the size alone will lower costs and gain a more favourable price from the market.

What still don't get is the horrendus cost of the Bush plan - that alone should make you take pause OTB. Besides no where in Bush's overall economic plan is a plan to reduce the debt - just a commitment to reduce the deficit in 4 and half years, something both of us think the US economey can take care of on it's own in that time frame. I can't think of a better way to signal the US intention to get serious about it's debt than to do what I proposed.


bbk
If governments acted rationally then you'd have a point, but they don't. The temptation to screw with Social Security benefits (they should be called returns) and surpluses is too great for mere politicians to avoid. What return on investment is implied with my Social Security payments? What happens to my money if I die (like my father did) at 64? It's my money, and I'd rather invest it myself - I'm willing to pay a little more in administrative costs to keep Ted Kennedy's hands off my money.

OTB
 

onthebottom

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bbking said:
One other thing you forgot OTB is clawbacks - does Teddy Kennedy realy need his social security check? Does Bill Gates?


bbk
No, but it's their money (as opposed to a welfare program) and thus they have it coming. You can propose means testing if you want but I think there are many (myself included) that will have a hard time with that. I look forward to the Democrats saying they want to limit benefits to those with high net worth - that would finish the party! LOL

OTB
 

red

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onthebottom said:
I'd much rather manage my money (and that's what it is) than have Washington manage it for me. I don't know anyone that thinks they'd be worse off under this plan.

OTB
how many poor people do you talk with on a regular basis. they won't know what to do with the funds nor will they have access to good advice or have the time to properly educate themselves about where to invest. Alot of people lost their retirement nest egg in the dotcom crash and when companies like enron vaporized - those memories will make the individuals cautious. Bush may have his bill pass- but thats a far cry from the reforming social security.
 

langeweile

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red said:
how many poor people do you talk with on a regular basis. they won't know what to do with the funds nor will they have access to good advice or have the time to properly educate themselves about where to invest. Alot of people lost their retirement nest egg in the dotcom crash and when companies like enron vaporized - those memories will make the individuals cautious. Bush may have his bill pass- but thats a far cry from the reforming social security.
That is why the proposed program is VOLUNTARY, Why is this important piece of little info never mentioned????
 

red

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langeweile said:
That is why the proposed program is VOLUNTARY, Why is this important piece of little info never mentioned????

yes. I understand that. I was responding to a point that OTB made that everyone he talked to, thought it was a good idea.

With respect to it being voluntary- ok- so the reforms will only help those (assuming they invest wisely) that invest their money. what happens to the rest of them. reduced benefits. will the reduction be greater if 10% of the richest individuals take out their share? Has any analysis of this been done?
 

langeweile

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red said:
yes. I understand that. I was responding to a point that OTB made that everyone he talked to, thought it was a good idea.

With respect to it being voluntary- ok- so the reforms will only help those (assuming they invest wisely) that invest their money. what happens to the rest of them. reduced benefits. will the reduction be greater if 10% of the richest individuals take out their share? Has any analysis of this been done?
Certainly the alternative can't be higher taxes(we are paying too much already).
The USA is just facing the same problems that most European nations face today. A population that is getting older and not enough young people to pay in to the system.
Even with the extremely high tax rates in Europe, most goverment sponsored pension plans are on the verge of bankruptcy.
I hope the powers to be will learn from that.
 

red

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langeweile said:
Certainly the alternative can't be higher taxes(we are paying too much already).
The USA is just facing the same problems that most European nations face today. A population that is getting older and not enough young people to pay in to the system.
Even with the extremely high tax rates in Europe, most goverment sponsored pension plans are on the verge of bankruptcy.
I hope the powers to be will learn from that.

the alternative could be higher taxes. I always thought most businessmen would agree that there is no free lunch, but there is recently in alot of US conservative thinking that there is a free lunch. The Social Security premium would not be raised sufficiently to bankrupt the country. taxes have declined sharply in the US over the last twenty years. so a small increase over the next fifty to deal with this doesn't seem out of line to me
 

islandboy

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One of the things driving tax reduction - in addition to lining pockets - is that there is a genuine worry about corporations moving either headquarters to countries with better tax situations or moving portions of their business to countries which will give them better tax agreements on the aspect of production located there.

We talk about deficits about which we talk alot but ignore tax competiviness and tax agreements These agreements permit a corporation to establish how much a fininished products taxable value is due to production and/or intellectualy value is imparted as a result of contributions from each of the countries in which the corporation does business. How do judge taxable profits when you have to account for the contribution of design in one country, production in another, and marketing, for example, in a third.

Now, you ask, how does that impact Social Security and privatization? Well the implications are endless. Where the taxes are paid affects available cash to finance the transition. If a headquarters changes for tax purposes, there comes the possiblity that the listing exchange may follow (this is also affected by Sarbaines Oxly reporting requirements). In turn this affects the quality and number of companies in which a private account can be invested.
Poor coordination of tax agreements between counties with competing interest will also affect 1) where the work is done - sic employement in the first place, and 2) failiure to tax income anywhere as things fall between the seams. Does this sound extreme? Perhaps. But markets have always had and will always have an element of risk. We are entering a new world of corporate and market competition. This change in the international landscape needs to shake out before we tie retirement to them as well. Every time you add an element of risk the penalty for failure increases exponentially. This SS plan is just to big, to bold, to risky, and I do not like taking the risky way when there are safer alternatives. (One thing I did not previously mention if that if we are also interested in increasing money availble for capitalization, you could slightly, safely, expand the investment options of the SS administration itself and permit voluntary but subsidized contributions, on an inverted sliding scale like the old negative income tax idea, to the SS administration)
 

onthebottom

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red said:
yes. I understand that. I was responding to a point that OTB made that everyone he talked to, thought it was a good idea.

With respect to it being voluntary- ok- so the reforms will only help those (assuming they invest wisely) that invest their money. what happens to the rest of them. reduced benefits. will the reduction be greater if 10% of the richest individuals take out their share? Has any analysis of this been done?
Red,

The proposal is to allow people to invest in defined investment accounts, one being a mutual fund of bonds/equities, one being more aggressive, one being US Treasuries (there is no safer investment on the planet than UST) and one designed for low risk for people about to retire. So, 4 defined investments in a volunteer system - what is all the hysteria about?

Try and argue EVERYONE wouldn't be better off with 4% of their money going into UST for 20-30 years.

OTB
 

onthebottom

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For those who know what a Balance Sheet is and can see beyond the hype on both sides of this issue:



Trading Up

Would you pay $2,000 today, to save $10,000 in 15 years’ time? That question lies at the heart of the debate about financing Social Security reform.

President Bush’s plan to create personal investment accounts for every worker has run into a snag over “transition costs.” A transition cost is the price you have to pay to get from point A to point B. Establishing personal accounts will require about $2 trillion in government borrowing over the next 15 years, but once the accounts are in place, the government saves about $10 trillion in future obligations. Any private business with large pension obligations would approve such a refinancing plan in a heartbeat. The debt restructuring would substantially improve the firm’s balance sheet, and the stock price would rise to reflect the improved long-term finances — despite the reduction in the firm’s current cash flow.

Why doesn’t Congress make this rational financial decision? Part of the answer is that government isn’t run like a business. In fact, Uncle Sam doesn’t use a balance sheet at all. This means that when the feds make promises to pay in the future — as with impending Social Security and Medicare obligations to baby boomers — those payments might as well be invisible to policymakers: They never show up in the accounting books.

Fortunately, Dr. John Templeton, the Pennsylvania-based philanthropist and public-policy entrepreneur, has devised a disarmingly simple method to blow through this government-accounting smokescreen. The Templeton Curve depicts two financial futures for Social Security. The first is the “do nothing” scenario in which we pretend the program is in fine shape and that only minor tinkering is required when baby boomers retire. If we choose that option, the program runs surpluses for another dozen years or so but hits the fiscal quicksand in 2018, after which it sinks deeper into debt each succeeding year.

The second option would be to create large personal investment accounts now, borrow to pay for them, and then let future workers draw their retirement incomes from these personal accounts, rather than conventional Social Security. In a previous National Review box (Dec. 13, 2004), we explained why workers would be substantially better off financially under this option. But the Templeton Curve shows why the government also comes out way ahead. Yes, it’s true that the investment-account option, as proposed by Sen. John Sununu and Rep. Paul Ryan, requires lots of immediate borrowing, but then those debts turn into surpluses, which increase every year afterward. Starting in 2015, the returns from these accounts will begin to cancel out Social Security’s benefit requirements. By 2040, nearly 40 percent of future obligations will be wiped clean, that figure rising to two-thirds by 2050.

The two paths produce diametrically different financial futures: The do-nothing approach yields deficits forever, while the personal-investment option produces surpluses forever. A tough choice?

The Templeton Curve teaches us that the short-term costs of Social Security reform are trivial relative to the long-term gain. The sooner we adopt the personal investment accounts, the better off our children’s and grandchildren’s financial future will be.

— STEPHEN MOORE

For the Curve: http://www.prweb.com/prfiles/2005/01/10/196263/Templeton_Curves_for_PR_Web.JPG

OTB
 

red

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onthebottom said:
Red,

The proposal is to allow people to invest in defined investment accounts, one being a mutual fund of bonds/equities, one being more aggressive, one being US Treasuries (there is no safer investment on the planet than UST) and one designed for low risk for people about to retire. So, 4 defined investments in a volunteer system - what is all the hysteria about?

Try and argue EVERYONE wouldn't be better off with 4% of their money going into UST for 20-30 years.

OTB
what does the social security administration do with the money now? don't they lend it to the treasury?
 

islandboy

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OTB
You present a do nothing v a private account senario.

Something needs to be done.

With the Private Account senario it is true that we pay more now to pay less later - IF everthing else remains equal.

If the proposed types of investments are what passes and are cleared, I ask why can't the SS administraton itself make those same investments for a fraction of the overhead- sic mangement costs. If you let SS manage its money, it can diversify beyond the Amercian ecomonmy - - the IMF has an international porfolio, manages its money well, and has a great return.

The reason we do not go this far is that there are profits internally to be make by investment brokers (and I bet you are one) and a gamble on the internal economy to bail the deficits out via these private accounts.

Again the bets are to great, the real money goes to the wealthy while the poor average Joe gets less, and the risks are more than a prudent person should be asked to bear.
 
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