Just because this is an awful time to discuss these questions does not mean they shouldn't be discussed. The longer we wait, the more acute our fairness dilemma grows. We can't deal with it unless public opinion is engaged and changed, but public opinion won't be engaged and changed unless political leaders discard their self-serving hypocrisies. The old deserve dignity, but the young deserve hope. The passive acceptance of the status quo is the path of least resistance - and a formula for national decline.
I’ve been thinking about Samuelson’s piece, and I’ll share some of my thoughts with you all. (Quick! Run for the hills!).
Before any attempt is made to fiddle with Social Security, the program MUST be excised from the General Fund so that we may keep its books as a stand-alone program. Since the Hahvahd grads can’t seem to keep it all straight, the feds should hire a $12 an hour bookkeeper from the Midwest named Betty or Pearl to keep the ledgers.
Next, touch a match to all the legislation and regulations controlling Social Security. Simplify to one or two pages of concise, understandable text.
Now that we have a stand-alone program, with its own dedicated bank account, a competent bookkeeper, and simple, understandable rules, we can go to work.
Whatever we do with Social Security, we have to bridge the gap between those who are currently retired or about to retire, and the workforce at large. We could call upon the wealthier Social Security recipients to voluntarily turn their “entitlement” back to the fund zealously guarded by Betty, the bookkeeper from Peoria. We could also call upon well-off recipients to donate a percentage of their “entitlement” to the fund. Conservatives will do it out of a sense of responsibility to the next generation; progressives will do it to impress their neighbors and satisfy their own deep-seated need to Help Humanity. Either way, the coffers will be ringing with coin. If it’s not enough to insure solvency for the foreseeable future, start cutting back “benefits” until it is.
Now that there is breathing room, we can FIX the system. I’m all for privatizing, and getting the government OUT as much as possible. Every working American should have a retirement account at their local bank. Instead of sending the current 12.4% of an employee’s earnings to the gov’t, the employer can deposit it in the employee’s retirement account. It’s a relatively simple fix, and easy to implement.
What about the people who won’t/don’t work? Withhold 12.4% from their welfare or disability check, and deposit it in their retirement account. If we don’t fix the tax code, the gov’t could also withhold 12.4% from yearly gov’t handouts such Earned Income Credit, depositing all that scratch in the individual’s account.
This plan would give every American financial worth, and with worth comes self-esteem. It seems to me that self-esteem and financial worth are a recipe for a resurgent, vibrant America.
What ideas do you all have for fixing Social Security? Do you think it IS fixable? Must we flay the evil Boomers and stake them to an anthill, or can we devise a smart transitional system that will keep the pain to a minimum for all?
My thoughts are that once we have a grip on the financial gluttony of Social Security, it might give us a few core building blocks for tackling Medicare.
ReplyDeleteI'm also thinking that we need to finish cleaning house in Washington for any sensible plan to succeed.
FYI: I'm still having computer/internet issues. The modem and router will be taking a short holiday to the phone company in a few minutes, and I'll use the down-time to continue sorting my jumbled-up files.
ReplyDeleteFun! :)
That was fast. The phone company techie reprogrammed our modem and router, and now my 'puter seems to be faster. No broken pages...yet. I'm cautiously optimistic.
ReplyDeleteI like this - but one tweak I'd make is this: I think that, like medicare, Social Security could have a yearly opt-in/out period.
ReplyDeleteI think that if people understand the benefit they "paid" for will be there in the future should they need it, they are more likely to forgo the benefit when times are good. I think that more people would be willing to opt out if they know it is not a final Jeopardy answer. While it would technically allow more people to claim the benefit than a one-time decision model, I think in the long run it will save more money.
And make a HUGE deal out of it, too. Societal pressure/stigma is the strongest (dis)incentive there is; much stronger than laws.
I don't mean "like medicare" totally, btw. I mean the open enrollment thingie.
ReplyDeleteI'm stream-of-consciousness posting again.
Canada completely overhauled the Canada Pension Plan (CPP)system about 13 years ago. Prior to the reforms, the money that was paid into the plan went into general revenue and there was no funding basis for the benefits it promised.
ReplyDeleteAll that changed when an independent actuary was appointed and a long term funding model for the plan based on demographics, economic assumptions and projected investment returns was implemented. The actuary reported that based on the then current state of the Plan, promised benefits were not achievable. The contributions rates were increased substantially and an independent investment board was appointed. I personally remember feeling the pinch when the premium increases first happened. But, it was worth it. We now have a Plan that is independently administered and invested and that is sufficiently funded to meet it's future obligations.
"Social Security could have a yearly opt-in/out period."
ReplyDeleteWell, I'm not sure how the US system works but you can't have people opting in and out of insured/underwritten systems every year. No plan is built to accommodate anti-selection.
Opting in/out once is acceptable, anything other than that and your plan is doomed.
On this subject I would recommend looking at some of the works and articles of Lawrence Kotlikoff.
ReplyDeleteI've run across a disturbing but clarifying point with regards to retirement savings - namely, that "saving for retirement" is something of an impossibility, or an illusion, and that all decisions around what your "savings" will buy you thirty years in the future are in some sense political.
What every mechanism for "retirement savings" entails is the amassing of some claims on the future economy. Because, think about it: virtually everything you will be consuming thirty years from now does not now exist. It will be part of the GNP for 2040.
So what your thirty years of compounded "savings" - be it in Treasury Bonds via Social Security, or mutual funds held by your 401K, or your professionally managed Canadian government pension fund - even gold bars buried in the back yard - all these schemes simply project some buying power into the year 2040; what they will buy depends largely on what is available to purchase in 2040, and at what price.
For paper claims in government pensions, it's simple - the government can guarantee a certain quantity of dollars will be paid to you. But it can't guarantee what those dollars will buy. See, e.g., Zimbabwe.
But interestingly, gold is really no more powerful here - if the economy of 2040 looks like that of 1840 due to economic collapse, then the gold will buy you some food, but not much in the way of health care. Some heat, maybe - no AC. But if the economy of 2040 is fantastically productive due to the explosion of nano-tech and clean nuclear power, then the gold might not buy you much either - but you might not need much! Because everything will be so plentiful and cheap.
It's just very, very hard to figure - as hard as predicting the future.
That thrift is rewarded is necessary - otherwise dissipation is swift. We need some of this.
But the ideal of a simple, just and reliable mechanism to save for our retirement may be just that - an ideal, and perhaps an impossible one.
In fact, I'd say, just as a conjecture: Simple, Just, Reliable... pick any two...
AFW, I don't see how an "opt in/out" would be feasible. Everyone would have to be "in" for the plan to work, otherwise the prudent citizens will end up supporting the bums until they're 95 (kinda like now).
ReplyDeleteFay, the Canadian system sounds very interesting! Does Canada have a massive "baby boomer" generation like the US? Are all citizens covered by your system, or just people who opt in? If so, who pays the bills of the geezers who opted out? How are the contributions collected? I'm really curious. And nosy!
Lewy, you do have a point. Some things we just have to take on faith. If the money's no good, we're screwed anyway.
ReplyDeleteProbably the best thing we can all do for our retirement is to have a rural home paid for, a woodstove for heat, a garden, and chickens scratching in the front yard. Everything else is icing on the cake.
I need at least one more cup of coffee before I tackle the writings of Kotlikoff. :)
My stream of consciousness is obviously less than inspired. :)
ReplyDeleteI would think that in a transition system, everyone would pay in, but people could opt in/out of receiving benefits on what they have paid. What I meant by the opt in/out period is that there might have been quite a few people in 2007 who were financially able to opt out of their social security who are unable to do so in 2010. If that makes sense.
And it may not be financially feasible at all. Just an idea.
Oh, okay. I'm following you now...a yearly opt in/out for benefits, while still coughing up the full contribution. Interesting idea!
ReplyDeleteThe trouble being, of course, that many who have worked low-pay jobs for most or all of their lives, have zero option for retirement planning other than Social Security.
ReplyDeleteReducing their benefits below the already unlivable amount, despite the fact that they've paid, in good faith, all that was asked of them, is not only unfair, as Samuelson notes, but a recipe for seniors actually back to eating dog food, and/or determining if the house is heated or medicine copays are made.
You simply cannot shut it off for those who are at or near retirement, and have no other way to live.
DWT, we must have a transition that protects our low-income/middle-income workers. MUST. It's a tremendous burden for millions of people to pay 6.2% on 100% of their income, a burden that is not borne by higher earners (the cap is $106,800).
ReplyDelete"Does Canada have a massive "baby boomer" generation like the US? Are all citizens covered by your system, or just people who opt in? If so, who pays the bills of the geezers who opted out? How are the contributions collected? I'm really curious. And nosy! "
ReplyDeleteYes, we have the baby boomer gen. That's one of the reasons the CPP was overhauled.
There are two systems in Canada, one funded by employees/employers and one funded out of general tax revenue. The one funded by employee/employer contributions covers two plans: Unemployment Insurance and CPP, you don't get either of those benefits if you haven't contributed. The one paid for by general tax revenues includes a universal old age security pension and a guaranteed income supplement which is means tested.
The CPP (which is mainly) a retirement plan although it does have some ancillary benefits for widowed spouses, orphans and permanent disability. Employees pay 4.95% of income to a maximum income of around $48,000 pa (adjusted every year to the annual wage)and the employer pays a matching amount. The normal retirement age for a retirement pension is 65 but you can elect to take an actuarilly adjusted pension at age 60, you can also defer receiving your pension and receive more between age 65 and 70.
The current maximum CPP pension at age 65 is $11,500 pa (you have to have contributed the maximum throughout your career to receive the maximum amount). This amount is indexed every year.
The old age security pension (maximum amount $6,300 pa indexed quarterly)is payable to everyone at age 65 provided they meet minimum residency requirements. Ten years is the minimum and 40 years is the maximum. So someone with 10 years residency at age 65 would get 25% of $6,300, 20 years would get 50% etc. There is a claw back of old age security for pensioners whose annual income exceeds around $85,000.
Unemployment Insurance is a payroll tax that is paid by both the employee and the employer. Not sure what the rates are but the employer pays more than the employee.
There is no opting in/out of any programs they are compulsory.
"virtually everything you will be consuming thirty years from now does not now exist. It will be part of the GNP for 2040."
ReplyDeleteSorry, but I don'y buy into this at all. Surely the same could be said for those people who are retired now and who saved for their retirement 30 years ago.
"I would think that in a transition system, everyone would pay in, but people could opt in/out of receiving benefits on what they have paid. What I meant by the opt in/out period is that there might have been quite a few people in 2007 who were financially able to opt out of their social security who are unable to do so in 2010."
ReplyDeleteI'm not sure if that is feasible on a funding basis. If you have people opting out of receiving benefits then a fully funded plan would end up in a surplus position which means that contributors are paying too much. I'm not an actuary but I think that scenario would be pretty difficult to account for. It's not like dying where there are mortality tables that account for drop outs due to death.
Some more comments re the Canadian system. In addition to the government run plans/benefits we also, of course, have private employer pension plans and tax deferred retirement savings plans. We do not have any inheritance taxes but our sales and income taxes are, I believe, higher than most US States.
ReplyDeleteFay - thanks for the information on the Canadian system.
ReplyDeleteFYI, there's a Canadian pension blogger named Leo Kolivakis - he blogs on all things pension, often from a Canadian perspective.
With respect to the issue of a person, currently retired, saving thirty years ago - yes, you "could say the same thing" - and I would.
Virtually everything that person consumed in 2010 was made in 2010, not 1980. (OK, maybe not "virtually everything", but the majority - and not much was made in 1980 or before).
My point is that "money" is not something that can be "stockpiled"... money in the scale of retirement savings for a whole population can only be invested. And investment entails risk - even government bonds entail risk - and the decisions about what to invest in (at that scale) are political decisions.
The world was an uncertain place in 1980. Luckily for the 40 somethings of 1980, things worked out - e.g. Reagan raised the FICA tax so SS wouldn't go broke, and managed to create the conditions for the collapse of the Soviet Union without getting us nuked. (Reasonable people across the political spectrum would have given odds of "slim to none" on that one in 1980). And the Social Security fund itself was the beneficiary of a thirty year bull market in Treasury bonds - another vastly uncertain proposition in 1980.
Things look perilous right now - as they did in 1980. It will be wonderful if our investments now show the same great returns in 2040 - I hope they do. I just wonder how wise it is to count on it...
Consider that the "assets" which Social Security hold are in fact Treasury bonds - government debt. How is government debt funded? Through tax receipts (and, yeah, more debt). So you start out trying to create a plan which pays out through "return on investments" instead of general tax funding, and really all that is done is to create a layer of indirection.
And that indirection is all the more transparent when the actual benefit has COLA. There is no strict coupling between the funding and the benefits paid out. So the payout is once again political, not (entirely) based on the "savings" of the people who paid in.
My point is that if people support the idea that a retirement system should be based on savings and investment (which I do agree with) and also that retired people should be guaranteed a certain minimum purchasing power many decades in the future (which I also agree with), these two ideas aren't strictly compatible - on the one hand you're talking about defined contribution, and on the other hand a defined benefit.
Which can be finessed - with the recognition that at least part of the solution is a political choice to spend annual tax money on current pension obligations, outside the scope of savings and investment.
Defined benefit plans are a lovely idea - but the risk they entail cannot be hedged effectively with any manageable contribution scheme in the real world. In the private space, companies go bankrupt - and your pension is at risk if it is underfunded. If the company is GM... well we saw how that turned out - in some cases, bondholders were screwed even though the bonds themselves were held by pension funds! One political class (UAW members) were favored over others.
Again, my point is that defined benefit plans are essentially political - this can be obfuscated but never erased. They cannot be guaranteed by investment and savings. I do support a level of defined benefits for the reasons Dances mentions.
But I think what lady red was getting at is that retirement systems should be based on savings and investment as much as possible - and that entails the retirees and future retirees accepting some of the risk. There are financial techniques available to reduce risk, but it can never be eliminated, simply because the future (namely the future of the economy) is uncertain.
lady red, I read your post again and I really do like this:
ReplyDeleteThis plan would give every American financial worth, and with worth comes self-esteem. It seems to me that self-esteem and financial worth are a recipe for a resurgent, vibrant America.
I agree, and this should be a goal - there is a sense of helplessness and capture which comes with the Social Security statements we all get... nice little pension you've got here... maybe... shame if something happened to it... now run along and vote... correctly, m'k?
However, when you say Every working American should have a retirement account at their local bank, I have to raise the caution flag...
It may be elitist to say but a) people generally just don't know enough about investment to make this work and b) even your friendly local bank is a shark when it comes to financial services.
I say that last part with some regret - I have family and friends who were/are part of the pension management business, both for individuals and institutions - but the industry as a whole is in desperate need of reform.
This is where the ideas that Laurence Kotlikoff has are essential and deserving of a wider reading.
With that I spare you all a ten thousand word rant... ;)
Thank you, Fay and lewy, for the excellent responses. It becomes increasingly clear to me that the problems with a social government pension (and the proposed solutions for solvency) are complicated and multi-faceted, but not insurmountable. The Canadian model appears to function at a more realistic level than its American counterpart, and our northern cousins are smart enough to tweak their system when presented with the looming specter of mass boomer retirement.
ReplyDeleteLewy, I see your point about banks holding the retirement nestegg. I wonder though; if we do privatize Social Security, who CAN we entrust with the fiduciary responsibility for our nation's individual pensions? Who, or what entity, can be trusted long-term with that much moola?
Also, I want to go on the record and say that I love your long rants. They're always very interesting and thought-provoking, and I hope you never stop. I love everyone's long rants! It good to air out the ol' brain cells once and awhile.
"Things look perilous right now - as they did in 1980. It will be wonderful if our investments now show the same great returns in 2040 - I hope they do. I just wonder how wise it is to count on it..."
ReplyDeleteHow can you not count on it? Like you said, the situation 30 years ago is basically the same as the situation is predicted to be 30 years ahead.
To think otherwise is to give-up. I'm a glass half-full person. I was lucky enough to be employed for 24 years with a company that had a defined benefit plan. When I left I took the cash value of the pension and invested it. That amount was invested and in addition to my other savings will allow me to retire at age 60 in 2012.
So, I don't have a defined benefit pension, I have a bunch of cash. Except that, oh yes, my Canada Pension Plan (CPP) is defined benefit so I know how much I will receive from that every month until I die.
And, if I choose to purchase an annuity with my "bunch of cash" I will also have a defined benefit pension for the rest of my life.
We have a much more rigoursly regulated pension system in Canada than you do in the US, both public and private that allows me to be more optimistic I guess.
lady red, thanks for your kind comments.
ReplyDeleteYou ask: I wonder though; if we do privatize Social Security, who CAN we entrust with the fiduciary responsibility for our nation's individual pensions? Who, or what entity, can be trusted long-term with that much moola?
This is where Kotlikoff's ideas come in. Basically he's arguing for an investment fund run like a public utility.
Stripped to the essence, it goes like this:
- you reduce risk through diversification - so you need to invest in basically everything.
- you can't "outperform the market" when you basically are the market. (It's the Lake Wobegon "all our children are above average" problem). So you invest in "everything" proportionally (there's a long explanation for what I mean by this - look up "asset allocation" and "market weighting").
- you've heard the rule: buy low, sell high. In order to do this mechanically, you re-balance the portfolio at regular intervals: you sell some of what went up, and buy some of what went down. The thinking here is that things will trend back towards their long term averages.
Doing all this with several trillion in retirement savings is a non-trivial operation. Kotlikoff would like to see a fund like this operate as a kind of public utility. I think that would be a fine idea.
Oh. But there's another problem. Or two.
- If we sell a bunch of our Treasury bonds held in the Social Security fund, we may end up crashing the bond market, and the dollar. Any move out of Treasuries would have to be slow - think supertanker pulling a U-turn...
- any sensible investment strategy would have to invest overseas. There are political implications for this as well.
Cheers! It's drinking season!
Fay - although I'll allow as to being kinda gloomy from time to time, I'm not arguing against optimism in general here - I'm just bringing up the concept of uncertainty about the future to illustrate the problems of defined benefits in general.
ReplyDeleteGuaranteeing benefits can result in a bad viscous circle:
- economy slows...
- lowering tax receipts...
- which raises the deficit (since benefits can't be cut - they're guaranteed)
- which raises interest rates in the bond market
- which slows the economy...
What's different this time? Never before have so few guaranteed so much to so many.
What could go wrong? Forget (for a moment) the usual stuff we like to worry about: nukes/terrorism/politics/war/pandemic/etc. What do we know for sure?
Median ages are higher now than 30 years ago. They will be higher still in another 30 years. Fewer workers will be carrying more pensioners. This is true all over the developed world, as well as in China. Trends could change but they can only change so fast. It takes 18 years start to finish to produce another breeding female.
On the other hand, here's a case for optimism (of a kind): thirty years ago, the thought of China, Russia, India and Brazil (the BRIC countries) being responsible for a huge chunk of world GDP would have been optimistic. Countries can change, and they can in turn be changed via wealth creation and development. There are (according to some) more countries on the cusp. Maybe prudent investment there will be a great opportunity. (Someday. Not quite ripe, some of those places, IMHO...)
I've taken a look at annuities. I'm not so sanguine. Basically, if they make money for the issuing companies, those companies take risks. No amount of regulation can change this - it's like the financial equivalent of the second law of thermodynamics. There's no free lunch, no perpetual motion, and there's no riskless return.
So the issuing company takes risks, and therefore it can fail. So the risk is either returned to you, or if it's a "systemically important" (too big to fail) bank, to the government. So you're right back to an essentially political guarantee.
Further - the annuity can guarantee a certain dollar payout, but what will those dollars buy? This is a political issue, because money printing and inflation are political. Annuities can be indexed to inflation, but even the composition of the CPI index is a political decision. Social Security has not had COLA in like two years IIRC - is it really the case that food and gas are no more expensive than a year ago?
You may have more faith in the Canadian political system than the American - I can certainly see where that is a perfectly reasonable position! But in the end, it's still faith in a political system.
And again, my main point in this admittedly tendentious strand is to illustrate the limits of our ability to achieve "future financial security" through investment and savings alone - politics inevitably enters into the calculations.