Social Security Roulette
posted by Bob Clasen from a Newsweek column by George Will
In [Harry] Reid's televised "response" to the president's State of the Union address . . . he disparaged the idea of voluntary personal retirement accounts funded by portions of individuals' Social Security taxes as "Social Security roulette." This is the crux of the Democrats' argument against Bush's plan: Equities markets are terribly risky — indeed, are as irrational and risky as roulette. Think about that.
Roulette is a game without any element of skill. By comparing the investment of some Social Security funds in stocks and bonds to gambling on roulette, Reid is saying that the risks and rewards of America's capital markets, which are the foundation of the nation's economic rationality and prosperity, are as random as the caroms of the ball in a roulette wheel. This, from a national leader, is amazing. . . .
After saying that the 4 percentage points of Social Security taxes could be invested only in a few broadly diversified stock and bond funds, Bush pointedly said to the assembled representatives and senators: "Personal retirement accounts should be familiar to federal employees, because you already have something similar, called the Thrift Savings Plan, which lets workers deposit a portion of their paychecks into any of five different broadly based investment funds." Touché.
Begun in 1987, the Thrift Savings Plan, which as of December 2004 had assets of $152 billion, is a retirement-savings plan open to all civilian federal employees, including senators, and all members of the uniformed services.
They can invest as much as 14 percent of their salaries in one of five retirement funds. Consider the rate of return of C Fund, one of the five. It is a common-stock fund, so it should represent the risks that Reid thinks should terrify Americans:
In only four of 17 years has the rate of return been negative. But in 11 years the rate has been greater than 10 percent, in eight years it has been greater than 20 percent, in four years it has been greater than 30 percent. The compound annual rate of return for the last 10 years has been 12 percent, and the return over the 17 years has been 12.1 percent.
Reid participates in the plan, but opposes allowing all Americans the comparable opportunity that Bush is proposing. But if the numbers just cited are the result of roulette, the legislators should let the rest of us into the game in which they are prospering.
____________________
Compare that two the current rate of return of less than 2% under the current system.
http://www.msnbc.msn.com/id/6919700/site/newsweek/page/2/
In [Harry] Reid's televised "response" to the president's State of the Union address . . . he disparaged the idea of voluntary personal retirement accounts funded by portions of individuals' Social Security taxes as "Social Security roulette." This is the crux of the Democrats' argument against Bush's plan: Equities markets are terribly risky — indeed, are as irrational and risky as roulette. Think about that.
Roulette is a game without any element of skill. By comparing the investment of some Social Security funds in stocks and bonds to gambling on roulette, Reid is saying that the risks and rewards of America's capital markets, which are the foundation of the nation's economic rationality and prosperity, are as random as the caroms of the ball in a roulette wheel. This, from a national leader, is amazing. . . .
After saying that the 4 percentage points of Social Security taxes could be invested only in a few broadly diversified stock and bond funds, Bush pointedly said to the assembled representatives and senators: "Personal retirement accounts should be familiar to federal employees, because you already have something similar, called the Thrift Savings Plan, which lets workers deposit a portion of their paychecks into any of five different broadly based investment funds." Touché.
Begun in 1987, the Thrift Savings Plan, which as of December 2004 had assets of $152 billion, is a retirement-savings plan open to all civilian federal employees, including senators, and all members of the uniformed services.
They can invest as much as 14 percent of their salaries in one of five retirement funds. Consider the rate of return of C Fund, one of the five. It is a common-stock fund, so it should represent the risks that Reid thinks should terrify Americans:
In only four of 17 years has the rate of return been negative. But in 11 years the rate has been greater than 10 percent, in eight years it has been greater than 20 percent, in four years it has been greater than 30 percent. The compound annual rate of return for the last 10 years has been 12 percent, and the return over the 17 years has been 12.1 percent.
Reid participates in the plan, but opposes allowing all Americans the comparable opportunity that Bush is proposing. But if the numbers just cited are the result of roulette, the legislators should let the rest of us into the game in which they are prospering.
____________________
Compare that two the current rate of return of less than 2% under the current system.
http://www.msnbc.msn.com/id/6919700/site/newsweek/page/2/
Comments
Since I really don't understand how the President's plan works, I think I need to do some homework before I make an intelligent defense of the Democratic position, if there even is one.
However, first, the only way I can see the private accounts working is to either phase out the old system or to raise taxes from some source, or reduce benefits.
Now, as I understand it your social security is presently based upon 1) working for 40 quarters, and I believe your payment is based upon some average of the contributions you made. I really should read the stuff they send every year.
If they private account scheme works, I am all for it, as our Congress just spends the surplus to balance the budget and the most you get out of it is a joint and survivor annuity. Nothing goes to your heirs. However, how is the math going to work.
CAVEAT....MY MATH HAS NOT BE CHECKED BY A COMPETENT PERSON AND I WILL REVIEW THIS WHEN MY HEAD CLEARS.
Let's assume a person a 70 has a life expectancy of 15 years (this is guess). Let's assume this person wants to fund an annuity to pay himself/herself $2,000 per month for life. Since the private accounts are not a life annuity (i.e. there may be a residual value that can be passed on) how big a front end fund would you need to pay $2000 per month for 15 years. Let's assume an interest rate of 5% and the fund will be exhausted in 15 years.
By my calculation, you would need an account balance of $252,910 at age 70. Ok now start drawing at age 65. All other things being equal, you need a beginning fund of $303,050(this is because now you are drawing from the account for 20 years instead of 15. I realize this is crude, but now let's see you get there.
Let's say a person starts work at 25 and retires at 65. They have 40 working years to contribute to their account. How much do you have to pay in ratably over 40 years, assuming 5% growth to get $303,050 at age 65.
I get $2383 per year. Ok Let's say you make $60,000 per year. 2383/60000 = just about 4%% of your earning would have to go into this account. Now if the 4% comes out of the 12% presently fund the current receipiants and the budget, there will be an immediate shortfall in revenues for social security.
What happens to someone say 40 years old. They only have 25 years to accumulate money in the private account. To fund the same $2000 per month payment, they would have to contribute over $6,106 per month. This isn't going to happen. So let's say they only contribute the same $2383 per year for 25 years.
Their balance would only be $118,258. Thus what will they get from their private account. Think they could expect about $780 per month. Now does than mean 40 year olds will get regular social security of about 1,220 per month and have and "expected" $780 coming from their private account.
Now one final test, let's change the interest assumption to 8% and 3%.
The 8% senario would produce the following. The fund at age 65 would only have to be $239,109 to pay 2000 per month for 20 years. This would only require a private account contribution of $812 per year for 40 years instead of $2300+ per year.
Now assume the rate of growth is only 3%. The fund needed to be built by age 65 would be $360,621. The required contribution every year would be $4,673 per year.
As you can see, if the target benefit is 2000 per month, the actuarial assumptions will vastly skew the amount needed to be diverted into the private accounts to fund the same benefit. A high interest assumption will make this system look great. But a low interest assumption (ie very conservative growth over persons life, would make the cost very high. And for those who don't work 40 years in this system will mean they receive very little from their private accounts and they will either need the old system for a substantial portion of their income, or EAT CAT FOOD.