Social Security official: Promises can't be met

The Uunion Leader ^ | 12/26/05 | Shawne K. Wickham

[Matchett-PI]

You may be interested in reading the article my friend John had published in Barrons magazine at the end of November. If you know of others that might like to read it, please ping them:

http://online.barrons.com/article_email/SB113296322149106958-lMyQjAxMDE1MzIyODkyNjgzWj.html
MONDAY, NOVEMBER 28, 2005 JOHN P. MEEHAN is co-founder and emeritus chairman at ICC Capital Management in Orlando.

Investment for Social Security
By JOHN P. MEEHAN

SOCIAL SECURITY REFORM HAS DISAPPEARED with the president's plunging approval ratings in the polls. What happened? Well, the president and his advisers delivered the wrong message and shrugged off criticism without counterattacking.

President Bush promised to reduce existing benefits in exchange for the uncertainty of future returns from private investments. That looked like a bad bet. The public saw that, and they and their elected representatives rejected it soundly.

Then the White House did nothing to reassure seniors and soon-to-be seniors. There was no counterattack to the partisan scare tactics that shocked and frightened older voters -- the threat that "your present benefits will be curtailed."

Also, the message wasn't focused. It was a strategic blunder not to set at the outset a complete and exact plan that could be argued on the merits.

What has been missing are three imperative, definitive features: a clear, vigorous assertion and incontrovertible proof of the power of stock returns and their surprising lack of embedded risk; inviolable private ownership of retirement assets; and government guarantee of a financial safety net for disability and dependents of workers dying in the prime of life.

If only some visionary member of the president's Social Security commission had said, "What if there were no existing program? What would we design as a brand new system for maximum retirement benefits for all workers and their families, at little or no cost to the government, starting next year?"

The first step would be to identify those investments with the highest returns and the fewest risks. The return part is easy. Stocks are the clear-cut answer. Risk is trickier, but manageable.

Although corporate pension funds rely on them, there's a widespread political opinion that stocks are too risky for pensions, especially pensions sponsored by the exemplar of fiscal probity, the U.S. Congress.

In stock investing, risk is the possibility that prices will be lower, sometimes a lot lower, than they were when shares were purchases. This is most devastating when it comes when the owner wishes to sell and cash out. The other side of that coin is that stocks may be higher, a lot higher, and cashing out at the time of retirement can mean wealth, possibly great wealth.

Investors also face volatility, which shakes them with alternative paroxysms of exuberance and despair. This is not what most people want at a time when they enter the tranquil years of their retirement. Yet time itself soothes this beast. The longer it is confronted, the tamer it becomes. In every 40-year period since 1870, a broadly diversified portfolio of stocks has returned at least 233% of stock-invested pension money at retirement age.

Results like this make it easy to legislate a government guarantee for a minimum benefits level, based on 130 years of U.S. financial history. Even in 1974 (a seriously bad year for the stock market), a retiring worker would have had a stock portfolio worth $421 after a total cumulative investment of $40, yielding a return of more than 900%.

This year's median wage-earner made $33,748. Over the next 40 years, taxes for retirement at 12.4% of wages will total $100,000, assuming 3% wage inflation. At the end, those deposits would generate a private account worth an estimated $4 million, in constant dollars. The account can then be converted to an annuity or allowed to continue intact with an annual selected percent-benefit distribution.

The government will be able to act as guarantor of investment performance (or outsource the job to the private sector), based on the statistical probabilities inherent in the experience to date since 1870. A floor and ceiling can be set -- say, 25% and 1,500% returns, respectively. The guarantee would make good on any returns below the floor. Any return above the ceiling would go to Uncle Sam as the collector of premiums, to build reserves. Beyond a certain level of reserves, refunds should be distributed to all workers participating in the plan, or the floor or ceiling levels could be adjusted, or funds might be used to meet other safety-net needs -- related to early disability or to premature deaths of plan participants, survived by dependents.

If this program had been operating in the U.S. since 1910, the floor would never have been reached. The ceiling has been exceeded 40% of the time. Those are superb odds for the government.

The burden should be on the opposition to prove why Social Security benefits shouldn't be the personal, private property of each U.S. worker. The president said in his May 2001 Rose Garden announcement, "Personal savings accounts will transform Social Security from a government IOU into personal property and real assets; property that workers will own in their own names and that they can pass along to their children. Ownership, independence, access to wealth should not be the privilege of a few. They're the hope of every American, and we must make them the foundation of Social Security."

What he didn't say and should have said is, "Here is the complete set of plans on how to do it." That would have let partisans address specifics and not left them free to make up their own disasters.

Those interested in redistributing income should consider private ownership an essential feature of a government-legislated pension plan. It would establish one of the biggest social wealth-redistribution plans in the United States, since the institution of the federal income tax. The lower workers are on the socio-economic scale, the greater the relative financial benefits that accrue to them and their families.

With such private accounts, longevity doesn't matter. You can live as long as you like without endangering your benefits. Guaranteed, they belong to you, and after you, to your family, with no strings attached.

The old system should be allowed to run out completely, paying all promises on the books now. Borrow if necessary to complete the process. In the new plan, safety-net benefits related to premature disability or early death and dependents should be funded by ad hoc borrowing in the credit markets until sufficient reserves and actuarial experience accrue. Until then, a moderate premium charge may be levied to build reserves and amortize related debt. Safety-net benefits may be set at some fixed multiple of median wages or average annual consumer spending.

President Bush didn't think big enough. The pittance of Social Security tax he would have allowed citizens to set aside for stock investing was inappropriate. Up to 100% (less a minor premium for safety-net reserves) should be permitted. Why restrict the freedom of choice of the owners by limiting the amount they can allocate to equities? Especially when the odds are so favorable for everybody, and the retirement benefits are guaranteed for all participants.

[LaineyDee]

he used a crisis to ram through permanent programs that people would most likely not have voted for under more normal conditions.

So he WAS a card-carrying socialist commie.... I couldn't remember the specifics...but I thank you for your input. :)

[LibertarianInExile]

Oh, BELIEVE me, I know. Why do you think I'm self-exiled? Better to live outside the U.S. and get to keep your money than pour it down the rat hole that is the U.S. government.

[inquest]

One book I'd recommend when you get the chance, is Washington Goes to War, by David Brinkley. It's not an all-out polemic against FDR, but it has a bunch of interesting tidbits nonetheless. Even though, as the title suggests, it mostly pertains to how Washington was transformed during WWII, it also provides a bunch of insights into how the Roosevelt administration worked generally.

[LaineyDee]

Thanks....I believe I saw that book when looking for something to write a report in my Gov't class. It sure sounds familiar. I'll check it out when I get over the shock of reading the volumes required for psych this semester. :)

[joe fonebone]

when i was younger, my girlfriends dad was disabled, and collecting s.s. disability....she got her tuition paid, books paid, and even got a little spending money from s.s. ( and the promptly bought a brand new car with that ).

[MarkL]

Exactly. They've used the SS as a slush fund for years. The chickens are coming home to roost.....and they're trying to blame it on the American people who contribute... versus the ones who utilize it most... and don't.

Yet another reason that if something's illegal in the private sector, it should be illegal for the government to do it as well!

The pyramid scheme known as social security is one example. Another is the way that the pols steal money that's supposed to go into one thing, and divert it into another. That would put a CEO in jail. And the list goes on and on.

Mark

[MarkL]

I DO have enough money saved/invested not to have to rely on the government, but I have children and grandchildren and they deserve some return on the money that is being taken from them. However, while not required, my SS is a nice offset for my golfing habit.

There are a lot of people who are going to be shocked that their plans (which include social security) will be woefully inadaquet for their retirement...

For example, "The American Dream" (TM) has been to buy a house and pay it off while working, and then retire to it. The problem is that between property taxes and insurance, you will NEVER be able to stop making payments on the house! In just 15 years, the escrow portion of my mortgage payments has trippled! Even though I've refinanced a lower balance at a lower interest rate, my monthly payments have steadily increased over the life of the loan! If the increases continue at that rate, I'll still be making $500 a month payments, just for taxes and insurance, once the house is paid off!

That's going to catch a lot of people by surprise

Mark

[MarkL]

I had a look at the American Social Security system a while back and I've got to admit I was shocked at the scale of the problem/debt you guys are looking at.

It's a pyramid scheme that's been hoisted on the American public. It's something that's illegal in the public sector, because it's simply an investment scheme that's a scam. It can only continue for as long as "fresh blood" is brought into the scam.

Mark

[DugwayDuke]

"That's how America got into the fix that will see the Social Security trust fund run out in 36 years unless something is done, according to James B. Lockhart III, deputy commissioner of the Social Security Administration."

This 'problem' can be fixed without pain and rather simply. All Congress has to do is pass a law that quadruples the balances in the trust fund. Just multipy the current balance by four times then the 'trust fund' will have sufficient assets to cover all obligations. And if Congress would like to increase benefits, well, just double the 'trust fund balances' again. See, no problem.

[MarkL]

Why do they keep talking about a Social security Trust fund. There is no such animal.

Because they know if they keep talking about it, people will believe it. If the public were to really find out about the "creative accounting" that goes on in Washington, and realize that if they were to try that sort of nonsense, that they'd wind up in jail, they might try to put a stop to it... Or maybe not. After all, a new season of "American Idol" is about to start.

Mark

[MarkL]

Just a little ditty to contemplate the next time a politician requests you to be complacent when paying your "fair share".

No kidding... When I think about what I could have done investing that 15% of my income that's been tossed down the rat-hole of social security and medicare in just the last 5 years!

Mark

[sono]

The Democrats biggest failure thus far is their focus on Iraq as their entire agenda. Early this year, W invited them to come up with alternative plans. The Democrats declined, failing to realize that 'I Hate Bush' is NOT a program. No wonder a jackass is the party symbol. Thus far, they have NOT come up with any coherent policy alternatives for immigration, energy, social security or health insurance. Voters in '06 will remember.

[phoenix0468]

/sarc Someone /sarc once said kill all the lawyers, well I say line the accountants up right behind them. LOL.

[phoenix0468]

"We're not at the point yet where people feel something has to be done."

These people you refer to does not include me. I have been a opponent to both SS and Income Tax since I very easily realized that both were unconstitutional. That was sometime in the fifth grade. Unfortunately, there are too many sheeple runing the world and they are too afraid to undo somethings that are 1) unnecessary and 2) downright wrong.

[phoenix0468]

Let's hope.

[Bushman2]

This settles it...I'm getting mine and going to the equator.
I'll eat bananas dirnk coconut milk and get me two fig leaves so I'll have a change of clothes and let the RATS have it.

[phoenix0468]

Save a cabana for me brother.