But one thing: In your proposed allocation, the 25% bonds would be US Treasuries. That would still be vulnerable to the attack that it is merely the gov.'t lending itself money. So why not high-quality corporate notes, or at least foreign gov.'t debt?
Is there some drawback to investing thus?
~Maru
Erik Reuter wrote:
* Doug Pensinger ([EMAIL PROTECTED]) wrote:
1. How far would the tweaks I mentioned (and whatever other practical
steps can be taken) do towards actually fixing the system as it now
exists?
See below.
2. What is the advantage of having the Feds involved _at all_ in
individual retirement savings that are not SS?
I don't think there is any. I would minimize it if I could. But some people think there should be forced savings (in excess of the insurance against poverty aspect). In that case, a fully-funded, privatized system is superior to a pay-as-you-go system with a trust fund of ambiguous economic signifigance.
3. Why can't we take whatever excess money there is _now_ in the
system (including money that the Fed owes SS) and invest it in some
secure way in order to insure SS's solvency?
There IS no excess money. The present value of projected future SS receipts together with the trust fund balance is LESS than the present value of future scheduled SS benefits. Over the next 75 years, the deficit is about $3 to $4 trillion. If we don't artificially cut off the deficits after 75 years, the total deficit is over $7 trillion.
In order to answer your first question, I need to give you some background on my ideas and assumptions, probably more than you expected. First of all, I have a rough idea of a long-term goal for humanity: everyone able to do (almost) anything they want to do and no one needs to take anything from anyone else in order to do as they wish. One example of a civilization like I have in mind is "The Culture" from the series of books by Iain Banks.
Obviously, we are not there yet. In the meantime, we have to allocate limited resources as efficiently as possible to grow our civilization towards long-term goals. But I (and I think most people) don't want old, disabled, or unfortunate people starving in the streets, so while providing incentives for maximum efficiency, there also needs to be a safety net. Incidentally, providing a safety net is not necessarily an efficiency hit since a good safety net should encourage healthy risk-taking (in the interest of progress) that otherwise would not have occurred.
But an adequate safety net that does not provide disincentives to work productively is not easy to create. Historically, it seems that you usually end up with a horrendously complex system with lots of special circumstances and exceptions that result in a number of disincentives for people to work efficiently or invest productively. For example, if we have someone who could be working productively but does not because of the safety net, then this is a disincentive that lowers efficiency. One way this happens in practice is when welfare or benefits are contingent on something, such as other income or having a job. If you lose your safety-net payments because you saved heavily yourself or because you took a job, then you have a disincentive to save or work.
Since complex bureaucracy almost always results in wasted (i.e., unproductive) effort, disincentives, and unintended consequences, I favor simplicity. The most basic system I can think of is to provide everyone who meets simple criteria (age, disability) with a minimum amount of support in some manner (cash, vouchers, direct food and shelter: various ways are possible). The key is to choose the support level -- it should be affordable (resources ARE limited), it should be humane, but it should be far from luxurious so that incentive to work (or save) is preserved for those who are able.
Now I'll finally get to Social Security. But first I want to highly recommend the book _The Coming Generational Storm: What You Need to Know about America's Economic Future_, by Laurence Kotlikoff and Scott Burns. It is a popular account (it only has a couple very simple formulas in it, like A+B= +D) that is praised by Economics Nobel Laureates George Akerlof, James Buchanan, and Paul Samuelson. It criticizes policy mistakes of Democrats ("Mind you, the Democrats are well aware of Social Security's structural problems. They've thought about them carefully for a very long time and have come up with the perfect solution: do nothing.") and Republicans alike ("although the payroll tax rate rose every couple of years between 1950 and 1990, the biggest increases occurred under Republican presidents...Eisenhower 3%...Nixon 2.7%....Reagan 1.4%..."). The book covers the aging problem, generational accounting, Medicare, and yes, Social Security.
Social Security has a lot of problems. It is horrendously complex. Quoting _tCGS_:
"The Social Security Handbook, which is supposed to clarify Social Security's 2528 separate rules for paying taxes and receiving benefits, runs for hundreds of pages. But talk to the benefit experts at Social Security's administrative offices in Baltimore, and they'' just shake their heads about the accuracy of that document. For certain questions, there may be only one old hand still knocking about Social Security's massive administration buliding who knows the answer....
The net results is that we have a black box handing out Social Security benefits with very limited human oversight. A few years back, the box was discovered to be making a big error in calculating survivor benefits. From one day to the next, the government realized it had underpaid beneficiaries (many of whom had already died) over a billion dollars..."
But the worst problem is the pay-as-you-go method of finance. This seems to appeal to the American culture of buy today, pay tomorrow, but it is even worse than that: it is actually buy today, pay never. Leave the bill for someone else to pay. When SS taxes and benefit levels are simultaneously increased, young people get to pay the taxes and old people receive the benefits. Membership in the AARP stands at 35 million people 50 and older who vote in large numbers, so the political pressure will always be there to raise benefits (and payroll taxes). The politicians will be glad to do it, since they are not accountable and will be long gone by the time the problem they created blows up. For example, the Diamond-Orszag proposal would raise payroll rates from 12.4% to a projected 15% by 2075 and add a 3% tax on payroll earnings over the cap -- this would result in SS receipts increasing from 4.9% of GDP today to about 6.6% of GDP in 2080. Any financial policy that that demands an increasing fraction of GDP is obviously unsustainable. Look at the history of SS, combined with the Diamond-Orszag plan:
---------------- SS
Year Receipts % of GDP ================
1940 0.5 1950 0.7 1960 2.0 1970 3.2 1980 4.1 1990 4.9 2000 4.9 2010 5.1
2020 5.4 2030 5.6
2040 5.8
2050 6.0
2060 6.2
2070 6.4
2080 6.6
----------------
Obviously, this is not a sustainable path. But as long as we are on a pay-as-you-go system, the political pressure is there to keep the progression going, passing the bill to each successive generation.
So, here are the criteria that are needed in a reformed SS system:
1. Must be affordable, simple, and sustainable: no passing the bill to the next generation
2. Provides a humane floor -- don't want to have elderly, survivors, and disabled starving in the street
3. Preserve incentives for individuals to save and the nation to invest
4. Any savings should be invested -- we need to raise the national savings rate in a way that produces more productive investment
So, there are the assumptions that I am making. My conclusion is that the best system should be fully-funded, not pay-as-you-go, otherwise you will certainly fail condition 1. Also, minimizing the amount of the benefits will help to meet condition 1.
Considering condition 2., the current system seems to provide an acceptable level, so I would propose fixing the current benefit level and only indexing it to cost of living for all future retires with no wage adjustment (currently SS is indexed to wages before age 62, and inflation after retirement). Also, I would not calculate initial benefits based on earnings, but rather based on the minimum wage regardless of a person's earnings, so everyone would get the same amount. Raising the minimum wage would also raise the floor, so raises in excess of cost of living would occur in a considered way (can we afford it?) rather than automatically.
Number 3. is partially met by having the benefit paid as a floor that is the same for everyone. Most people will want to save so they can have a more comfortable retirement. In addition, I would end the payroll tax and replace it with a national sales tax. Yes, a sales tax is regressive, but so is the payroll tax it would replace. But the sales tax is a consumption tax, so it helps encourage savings, which we desperately need to do, and it may also help create jobs since eliminating the payroll tax makes labor less expensive. Also, the sales tax could actually go down, percentage wise, as the decades pass and the real GDP grows. (If the sales tax idea is too big a change for people, the system would work with payroll taxes combined with government contributions for low income earners)
Condition 4. is where privatization comes in -- individual but not individually controlled accounts. National sales tax revenues would be contributed by the government into accounts earmarked for each citizen. The accounts would be invested in a very low risk, very broad set of index funds and bonds. Incidentally, many people know that stocks have averaged a higher return than bonds over the years, and that a portfolio made of 100% stocks is much more risky than a portfolio made of 100% bonds. But it is a much less known fact that, if you measure risk as standard deviation, then portfolios with about 15% stocks and 85% bonds had both LOWER risk and higher returns than a 100% bond portfolio in virtually every historical period. I can't find a good return/risk graph with US stocks and Treasuries on the web (although here is a close substitute http://www.efficientfrontier.com/ef/797/expected.htm ), but I highly recommend William Bernstein's book _The Intelligent Asset Allocator_ to read more about this subject.
I would choose an allocation with only slightly higher risk than 100% bonds, but much higher return: about 25% stock and 75% bonds. Most of the bond portion could be "invested" in Treasuries but the bonds should be real market-trading bonds. The equity portion could be invested in a low-cost, global index fund run by a government agency created for the purpose, or contracted out to third parties. (I like Bernstein's idea of hiring Gus Sauter to run the agency -- for a few basis points a year Sauter, or someone like him, and a small staff could easily invest the money without any conflicts of interest since the allocation would be decided by the market capitalization of the companies in the global index)
The national sales tax should be adjusted so that there is a very low probability that the savings accounts will not be able to provide the required floor level. Since each account is individually earmarked, the government is forced to adjust for changing demographics, and legal methods could be devised to make it nearly impossible for the government to "borrow" from the accounts to fund current spending. In the unlikely event that there is not enough in the accounts to provide the floor, then the government would be required to make up the difference out of general revenues (perhaps a separate account could be established for this purpose, and also to pay for survivors and disabled). The changes could be phased in a little at a time rather than all at once, or some parts implemented and others not. By the way, the system I described borrows heavily from Kotlikoff's idea of PSS accounts.
Since the system I described is designed to encourage people to save for their own retirement, it may be desirable to provide further incentives for people to save (outside of the "floor" accounts). I would like to see either an expansion of the Roth IRA, or even better, eliminating taxes on capital gains and dividends and replacing the revenues with a higher sales tax (and also sending everyone a quarterly tax refund check paid from sales tax revenues to make the system less regressive) but I digress...that's enough for now!
-- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
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