Posted on 02/06/2005 10:37:48 AM PST by ejdrapes
A few weeks ago, I tried to explain the logic of Bush-style Social Security privatization: It is, in effect, as if your financial adviser told you that you wouldn't have enough money when you retire -- but you shouldn't save more. Instead, you should borrow a lot of money, buy stocks and hope for capital gains. Before President Bush's big speech, a background briefing by a "senior administration official" (which can be found at www.nytimes.com/opinion) made it clear that the plan calls for exactly the "borrow, speculate and hope" strategy I described -- not just for the system as a whole, but for each individual. Here's the money quote: "In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent rate of return" -- after inflation -- "which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent rate of return." Translation: If you put part of your payroll taxes into a personal account, your future benefits will be reduced by an amount equivalent to the amount you would have had to repay if you had borrowed the money at a real interest rate of 3 percent. Peter Orszag of the Brookings Institution got it exactly right: "It's not a nest egg. It's a loan." For years, privatizers -- including Bush -- have claimed that people would do better with private accounts than with traditional Social Security even if they played it safe and invested in U.S. government bonds (which yield 3 percent after inflation). But the official at the briefing made it clear that his boss was fibbing: If you invested your private account in government bonds, you would face benefit cuts equal in value to your investment, so you would be no better off than under the current system. The only way to get ahead would be to invest in risky assets like stocks, and hope for higher yields. But if the investment went wrong, and you earned less than 3 percent after inflation, your benefit cuts would leave you poorer than if you had never opened that private account. So people are expected to take a loan from the government and use it to buy stocks, and if that turns out to have been a mistake -- well, too bad. Experts usually tell people to plan for their retirement by investing in a mix of stocks and bonds. They disapprove strongly of speculation on margin: borrowing to buy stocks. Yet Bush wants tens of millions of Americans to do exactly that. Meanwhile, what does any of this have to do with the ostensible purpose of the whole thing: saving Social Security? Here's the senior official again: "In a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of Social Security." The government would have to borrow huge sums up front to create the personal accounts -- $4.5 trillion in the first two decades -- but it would supposedly make up for all that borrowing with offsetting cuts in account holders' benefits, many decades later. Color me skeptical: Will retirees with private accounts that performed badly really be forced to repay their loans in full? Even if they are, private accounts will at best have a "net neutral effect" -- that is, they will do nothing to improve Social Security's finances. Bush says the system faces a crisis; what does he propose to do about it? The answer, presumably, is that his plan will also involve major benefit cuts over and above those associated with private accounts. And it's true that you can improve Social Security's finances with privatization, as long as you also slash benefits -- just as you can kill a flock of sheep with witchcraft, provided you also feed them arsenic. (Thanks, M. Voltaire.) Do you believe that we should replace America's most successful government program with a system in which workers engage in speculation that no financial adviser would recommend? Do you believe that we should do this even though it will do nothing to improve the program's finances? If so, George W. Bush has a deal for you.Privatizing Social Security too risky
True...They completely ignore the fact that this has worked in Chile for over 25 years, and also has worked in Galveston Texas. They also ignore the ridiculous 1% return on the investment that SS currently returns. Another thing they fail to mention is that if investments were so risky 401 pension plans wouldn't be based on them. Also, the fact that nobody will be forced to do this isn't mentioned.
I am not asking for anything from the government. Did you not read what I said? I am taking care of it myself. I said that I am not expecting SS to do much to take care of me in my retirement. It will be minimal. My investments and my pension will be what will support me, and my late husband and I EARNED that money ourselves!!!! However, he and I paid into SS for years as well!
Calm down. I wasn't talking directly to you. I was making a general statement about government. I didn't mean to offend you.
As a former Federal employee, I miss my TSP. But the key to remember is that it's a 401k, voluntary and supplemental program, with an employer match.
With some reduction of the payroll tax for those under, say, 45, (full disclosure: I am in my early 30s), a system modeled after TSP could be very, very beneficial for all concerned.
ok. You were the last post when I wrote mine.
Safe things don't grow very well.
As a former Federal employee, I miss my TSP. But the key to remember is that it's a 401k, voluntary and supplemental program, with an employer match.
With some reduction of the payroll tax for those under, say, 45, (full disclosure: I am in my early 30s), a system modeled after TSP could be very, very beneficial for all concerned.
I am a Federal employee who participates in the TSP. I won't be eligible for Social Security, because, under the old (pre-1984) Civil Service Retirement System, I haven't paid anything into Social Security for the last 27 years. I'm not the least bit concerned about missing out on Social Security. I have a much better deal between my pension, and the TSP. I don't mean that in an arrogant way. I only say that because I feel Americans other than Federal employees should also have a chance to participate in a plan like the TSP, instead of relying strictly on the traditional form of Social Security.
Well, mine did.
So far. Good luck.
Krugman is a menace to society, especially if you are young.
You are such a pessimist. I have a very good stock broker. Why do the barking if you have a perfectly good guard dog? Besides, at my age, I don't have time to take a lot of risks.
Because you made a statement that can't be true. You said you had a very safe portfolio that grew quite well. Only a portfolio with risk in it can grow "quite well". I am not a pessimist. I am not making a judgement one way or the other about your stock broker. I llke the loyalty you place in him.
Oh, well, thank you. Well, the other company is not as safe as the Hartford. American Funds or something like that. So it is growing faster. He recommended that. He said he has all of his money in that one. Or something like that. It is all Greek to me. :) Glad you aren't judging me. At 55 I just can't take a lot of risks, although I would like to, but then I would end up out on the street with a tin cup in my hand. :(
btt
There is NO rate of return at all. Because there is no investment at all.
If they want to push the phony rate of return up, all they have to do is promise to pay higher. The whole thing is a scam, so why not just say they will pay a 100% return? Or 1000%?
I can issue myself a bond with a 100% rate on it, and put it in my other pocket and,,,POOF,,,I'm rich!
American Funds is a great company. They have dozens of different funds. Some are very risky, some are less so.
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