NationStates Jolt Archive

I keep hearing Republicans praising Social Security Privatization and Democrats cursing it. So, I'd like to know what exactly it does. I know there are several different plans and that it has to do with investing some or all of the money. I am particularly curious about the options in the US and what Bush wanted to do.

Republicans have wanted to kill SS since FDR.

Turning it over to private business would be a gigantic mistake.

All we need to do is to disallow the government from taking money from it.

Frankly, I think instead we should just allow people to opt out of Social Security and get a tax refund for the money they would normally pay in to it. The difference could be made up through existing taxes, such as capital gains on the investments made as an alternative to the Social Security system.

That way, we could begin dismantling the existing system in favor of something that is better designed for the economic and technological realities of the 21st century. The current Social Security system is so anachronistic that it hardly performs the way it is supposed to; the kind of money you get for it is a pittance compared to the returns possible from investing it on your own.

I can't quite debate this yet, cause I haven't formed my opinion. Can someone explain to me the mainstream Republican plan?

Frankly, I think instead we should just allow people to opt out of Social Security and get a tax refund for the money they would normally pay in to it. The difference could be made up through existing taxes, such as capital gains on the investments made as an alternative to the Social Security system.

That way, we could begin dismantling the existing system in favor of something that is better designed for the economic and technological realities of the 21st century. The current Social Security system is so anachronistic that it hardly performs the way it is supposed to; the kind of money you get for it is a pittance compared to the returns possible from investing it on your own.

Heard this idea floated around before. I am all for it. I would rather deal with all my investments on my own.

Haven't looked at the data recently but do you know the average return on your SSI investment?

Capital gains should be abolished.

I think SSI should remain, but:

1. Allow people to opt out of it...
2. Put a block from the government dipping into SSI funds for their own general use... I'm surprised there wasn't one placed to begin with.

from my silly European perspective I don't like people freezing to death is a particularly grand idea so I generally support welfare programs

Can someone explain to me the mainstream Republican plan?

the republican plan on anything that would help the poor: "never!"

the democrats is the same really

Frankly, I think instead we should just allow people to opt out of Social Security and get a tax refund for the money they would normally pay in to it.

yes that makes perfect sense, providing poor people with the ability to live has never saved money!

oh wait I forgot I'm a time traveler from the 18th century :p (though a tax increase on those who don't want to pay would be amusing)

from my silly European perspective I don't like people freezing to death is a particularly grand idea so I generally support welfare programs

You're presenting a false dichotomy between maintaining our extant and highly inefficient Social Security and letting the poor freeze to death. Indeed, as Vetalia mentioned, a streamlined, privatized system would yield much larger rewards.

You're presenting a false dichotomy between maintaining our extant and highly inefficient Social Security and letting the poor freeze to death. Indeed, as Vetalia mentioned, a streamlined, privatized system would yield much larger rewards.

Or a streamlined, less money grubbing system would reap more rewards. Not necessary to be privatized.

*Blackwater Social Security*

You're presenting a false dichotomy between maintaining our extant and highly inefficient Social Security and letting the poor freeze to death.

yes forgive me that already happens, what is being suggested is we have that happen to an even larger slice of the population

Indeed, as Vetalia mentioned, a streamlined, privatized system would yield much larger rewards.

yes letting the private sector take care of basic needs has always worked!

yes letting the private sector take care of basic needs has always worked!

Privatization has systematically resulted in a more efficient business model, yes. Look around you: any deregulated industry perfoms better than when under the heavy yoke of the state.

yes letting the private sector take care of basic needs has always worked!

You misunderstand US Social Security. SS in the US is a specific government pension program. Hypothetically, you pay in to your "account", and then, when you retire, you draw from that account. Of course, it doesn't work that way in real life, but thats a topic for another thread.

What some people here propose is having an option to opt out, and not pay into your SS account. Presumably, you would use it to pay for your retirement.

Remember people, the need for the rich to have 'choice' and 'flexibility' outweighs the need of the poor for the basic necessities for life.

Remember people, the need for the rich to have 'choice' and 'flexibility' outweighs the need of the poor for the basic necessities for life.

Except the Social Security system doesn't provide them. A poor person will get a pittance from the program, although the taxes they pay will likely be used to pay the benefits of another person, perhaps even a wealthy person.

Look around you: any deregulated industry perfoms better than when under the heavy yoke of the state.

like mail, hospital beds (oh the joys of new labour), water and more or less everything else I wouldn't trusts McDonald's with

What some people here propose is having an option to opt out, and not pay into your SS account. Presumably, you would use it to pay for your retirement.

what I'm pointing out is that in the end this method (however bogged down) will save on the payer at the end of the day in its social effect

kind of like building and maintaining basketball courts only for the elderly/disabled

Frankly, I think instead we should just allow people to opt out of Social Security and get a tax refund for the money they would normally pay in to it. The difference could be made up through existing taxes, such as capital gains on the investments made as an alternative to the Social Security system.

That way, we could begin dismantling the existing system in favor of something that is better designed for the economic and technological realities of the 21st century. The current Social Security system is so anachronistic that it hardly performs the way it is supposed to; the kind of money you get for it is a pittance compared to the returns possible from investing it on your own.

No, then there won't be any money for it.

Privatization is the worst thing to do to it. Why do people think that everyone will invest for their own retirement? It doesn't happen now and it isn't ever going to happen.

Republicans have wanted to kill SS since FDR.

Turning it over to private business would be a gigantic mistake.

All we need to do is to disallow the government from taking money from it.

This is not necessarily true. After FDR, when future Democrats ruined SS, Republicans wanted to kill it. All the promises FDR made with SS, Democrats seemingly ignored and pretty much recreated it over the years. Primarily, FDR knew that it was a temporary fix for the predicament that the US was in. However, as with most things of the case (SS, the Iraq War, socialism,etc...), what looks good and fixes things at the moment typically gets warped and twisted by its supporters into something that rarely fixes anything.

No, then there won't be any money for it.

Privatization is the worst thing to do to it. Why do people think that everyone will invest for their own retirement? It doesn't happen now and it isn't ever going to happen.

That's my point. By allowing the people who want to invest privately to do so, it will provide funds to cover retirement funds for those who are unable to (I would restrict Social Security to low-income people to maximize the benefits from the program).

There would be plenty of money for this public pension system, likely far more than is provided under the current system. It would come from capital gains taxes instead of income. That way, people who want to invest can opt out of SS taxes and the funding will come from taxes paid on their other investments instead. This would likely significantly increase the solvency of the SS fund due to the fact that the stock market returns an (average) 12% per year over the long run; this means most years are going to see a lot more revenue paid in than the amount that would have been possible with taxes.

If the stock market performs poorly, bonds will perform better along with commodities, resulting in a steady stream of income in some form or another.

Frankly, I think instead we should just allow people to opt out of Social Security and get a tax refund for the money they would normally pay in to it.

And who will pay for current retirees?

And who will pay for current retirees?

will have to come out of the general budget. You can't cut them off. A revamp would have to include this.

I think some kind of portable pension of forced savings(privitized pensions) combined with some kind of income floor for retirees is better than what we have now, but I'm not sure how we can get here from there. We won't be able to let people opt out of current SS taxes because the government wont let current retirrees get zero benefits, taxes now pay for benefits now. To aid the transition we may need to means test current benefits, tax them at the rate of the income tax, and put up a diet COLA.

One thing I'd like is to get rid of the payroll taxes that fund SS and instead let the funds come out of the general budget.

That's my point. By allowing the people who want to invest privately to do so, it will provide funds to cover retirement funds for those who are unable to (I would restrict Social Security to low-income people to maximize the benefits from the program).

There would be plenty of money for this public pension system, likely far more than is provided under the current system. It would come from capital gains taxes instead of income. That way, people who want to invest can opt out of SS taxes and the funding will come from taxes paid on their other investments instead. This would likely significantly increase the solvency of the SS fund due to the fact that the stock market returns an (average) 12% per year over the long run; this means most years are going to see a lot more revenue paid in than the amount that would have been possible with taxes.

If the stock market performs poorly, bonds will perform better along with commodities, resulting in a steady stream of income in some form or another.

Oh wait. I think I see what you mean. Rich people should get taxed on their investments and THAT goes to SS?

like mail, hospital beds (oh the joys of new labour), water and more or less everything else I wouldn't trusts McDonald's with

Don't forget the trains!

Privatization has systematically resulted in a more efficient business model, yes. Look around you: any deregulated industry perfoms better than when under the heavy yoke of the state.

Example: the airline industry. Oh, wait...

I rather like the Australian system (http://en.wikipedia.org/wiki/Superannuation_in_Australia). They make you pay something into a retirement (or superannuation) account, and your employer contributes too. The superannuation funds then work the markets to earn returns. And once you retire, you get the money back over time.

And for those few who end up below a certain minimum, there's welfare money in addition.

Similar to Social Security, except it's your money, and you decide how much there is. Superannuation gets taxed a lot less, and occasionally there are especially big breaks for lump sum additions into your fund.

Just one example of how over the last 20 years or so Australian governments have been very good at listening to advice from smart people in setting up institutions.

You're presenting a false dichotomy between maintaining our extant and highly inefficient Social Security and letting the poor freeze to death. Indeed, as Vetalia mentioned, a streamlined, privatized system would yield much larger rewards.But with larger risks.

But with larger risks.
Not really. If you do it right, investing in financial markets isn't inherently more risky than investing anywhere else. I wouldn't trust Average Joe to know enough to do it right, but Average Joe's retirement fund would.

In the current system, the private individual only faces less risk because there are others who bear it instead.

Just to say I've no real idea what I'm talking about, but I'd just ask out of ignorant curiosity if such vast quantities of money being invested in the suggested manners would have an affect on the aforementioned markets.

Knowing what you're talking about CAN be fun! Enjoy:

http://www.ssa.gov/

I'm starting to learn more about social security since my mother is coming up to her retirement and is getting ready to apply for her benefits.

SS is not a social welfare program. A person's benefit is determined by the wages they earned while working (I think it's the high average over the 10 or so years before applying for it, or the highest wage earned during that time, or something like that). So a person who had low-paying jobs will get little, while a person who had a higher paying job will get more.

At its beginning, SS was a voluntary program that individuals could opt out of. At some point, it was made mandatory. At around the same time, the government starting pilfering funds out of it to pad the general budget. Go figure -- politicians were allowed to get their hands on someone else's money and immediately started spending it. :rolleyes:

I have no problems with SS as it is now. I would prefer it to be voluntary, and if it was, I would probably participate. However, I do not expect to get much benefit from it myself, because I am a pessimist who does not expect to get any benefit from government, ever, for any reason. Sometimes, they surprise me; more often they don't.

However, I am opposed to privatization because, to me, that's just an indirect way of killing it altogether. I'd rather the Reps just destroyed SS rather than allow it to be dismantled slowly by some corrupt corporate dirtbag who is just going to waste my money in the process.

Just to say I've no real idea what I'm talking about, but I'd just ask out of ignorant curiosity if such vast quantities of money being invested in the suggested manners would have an affect on the aforementioned markets.
Well, a lot of money is already hanging around in hedge funds and the like. Their effect was that a lot of cheap credit was available for corporate takeovers, private equity deals, leveraged buy-outs and so on. Big hedge funds already have to calculate their own prices sometimes, because they know that if they get into a share, they are so huge that their entry will affect the price significantly.

I would expect more of the same, plus generally rising share prices. But since everyone will be invested in it, people would look even more silly saying that "it only benefits the rich".

The problem here is Social Insecurity.
Imagine dropping a 45 pound weight out a fourth story window because someone looked in your direction.

Now imagine that the car below the 45 pound weight is your life savings.

*mushroom cloud*

SS is not a social welfare program. A person's benefit is determined by the wages they earned while working (I think it's the high average over the 10 or so years before applying for it, or the highest wage earned during that time, or something like that). So a person who had low-paying jobs will get little, while a person who had a higher paying job will get more.


Well, yes and no. It's a welfare program in the sense that the people who are now drawing from it never paid into it anything like the amount needed to justify the amount they are now receiving. Not even close. So pretty much anyone on social security is living off the public purse. The fact that it is not means tested is irrelevant.

Really though, it is just a giant ponzi scheme.

Really though, it is just a giant ponzi scheme.

It's worse than a Ponzi scheme, though, because you're forced to pay in to it and the owners get to pay for it with Monopoly money that future generations will have to pay back under pain of massive economic losses.

It's worse than a Ponzi scheme, though, because you're forced to pay in to it and the owners get to pay for it with Monopoly money that future generations will have to pay back under pain of massive economic losses.

Yeah. That's a good point. Though I've had people tell me it isn't a ponzi scheme exactly because of the point that you *have* to pay into it. I can only assume that they do not fully grasp the problem with the ponzi system.

And that said. You don't really have to pay into it. There are ways around it. But they are not available to most people. Also, I wouldn't bet on the hyper inflation scenario either. It could go either way.

Found a decent article on SS vs the stock market. It seems as suspected one is shafted out of a fairly large amount of money.

http://www.independent.org/newsroom/article.asp?id=362

I rather like the Australian system (http://en.wikipedia.org/wiki/Superannuation_in_Australia). They make you pay something into a retirement (or superannuation) account, and your employer contributes too. The superannuation funds then work the markets to earn returns. And once you retire, you get the money back over time.

And for those few who end up below a certain minimum, there's welfare money in addition.

Similar to Social Security, except it's your money, and you decide how much there is. Superannuation gets taxed a lot less, and occasionally there are especially big breaks for lump sum additions into your fund.

Just one example of how over the last 20 years or so Australian governments have been very good at listening to advice from smart people in setting up institutions.

It does sound pretty smart, but how libertarian is it? It forces people to save. They then can invest asn they like but its still coercive paternalism. In a free market wouldn't people voluntarily save for retirement and face the consequences if they don't?

It does sound pretty smart, but how libertarian is it? It forces people to save. They then can invest asn they like but its still coercive paternalism. In a free market wouldn't people voluntarily save for retirement and face the consequences if they don't?
They would, but try to sell that to an electorate.

The world isn't going to suddenly turn libertarian, just like it's not going to suddenly turn socialist. Unless we want to be completely ignored, we're going to have to judge public policy on its merits, based on a few criteria which are most likely influenced by our more general persuasion.

Social Security these days has become a system in which it is your duty to pay the bills for some old guy. Superannuation would be a system in which you are responsible for your own retirement. That's the plus.

There's also a minus, which is that it violates the principle that you can't force people do something for their own good, because ultimately you can't rely on your own judgement of that (or indeed on you being the judge). But I think it's a relatively smaller minus compared to the benefits.

Repeat after me:

"Your social security payments are NOT investments".

I'm not going to type the above out endlessly - but just please say it to yourselves over and over enough until it sinks in. Why? Because this is the reality of the situation. I'll explain why:

Social Security payments come entirely from the payroll tax - a tax that everybody pays, rich or poor. It's not the only thing the payroll tax funds - medicare is funded from it too. This is relevant, because the way the medicare system works is fundamentally the same as Social Security.

When Social Security was first set up, and people started paying the tax to fund it, did we have to wait forty-odd years for anyone to see the return? No. The taxes collected were used immediately to pay retirement benefits to the retirees of the day. The time lag between the system receiving tax receipts and the system making payments to retirees was almost zero (in reality, it might have been a few months, as the system got it's ass into gear).

So it is a complete fallacy to think of your Social Security payments as an "investment", because they are nothing of the sort. The system is "pay-as-you-go" - your tax receipts today are used to pay benefits to retirees tomorrow, just as when the system was first set up.
But subsequent generations (including many of you posting on this forum) have misunderstood how the system works, thinking of their payments as investments. Once again - they are NOT. It's not YOUR money you get back. It's the money paid in by future workers.
The few people who do have a vague understanding of this have dismissed the system as "just another Ponzi scheme", calling it "fraudulent". What I would say in return is this: A Ponzi scheme is a pyramid investment plan, which is created for the sole purpose of defrauding investors. Social security was created for the sole purpose of giving retired people an income in their old age. There's nothing fraudulent, immoral or illegal about that.

Of course, this system was (and is) not without problems. Everybody has probably heard about the impending "demographic crisis". At the turn of the century, there were about 3.4 workers paying into the system for every 1 retiree receiving benefits. By 2030, there will be only 2 workers per retiree. Obviously, a pay-as-you-go system would either have to cut benefits, raise taxes, or both in order to survive.

But fortunately, this crisis was foreseen, and was in fact planned for. By who? Well, this is one of the few things we can honestly thank Ronald Reagan for. In the early 1980s, his administration raised the payroll tax by 2%. Up until that point, Social Security had been running happily on pay-as-you-go. But Reagan had the foresight to see that this couldn't last. So he used the extra tax revenue gained by this 2% increase to build up a massive trust fund, earmarked for social security only. This was to be used to supplement the systems outgoings when the demographic crisis hits - to postpone the impending financial "day of reckoning" - maybe even put it off altogether. Thanks to Reagan's foresight, the system can run as it is until at least 2037. And because of the sheer size of the trust fund, modest additional measures could extend the life of the system to 2050 or beyond. Some of you might be thinking "Aha, so it is an investment!". No. Don't kid yourselves. At best, only 2% out of the 17% payroll tax you pay goes into the trust fund. The rest goes to pay current benefits to todays retirees.

But now we get to the really ugly part - where the doom-mongers are (in a twisted sort of sense) right. The salient point here is: What is the trust fund made of? Where was it invested? You might think that it's invested in international hedge funds, or the stock market, or corporate bonds. And you'd be absolutely wrong. It isn't.
It was invested in the historically and economically most secure of all investment plans - US Government Bonds (a.k.a. treasury bills).
Now pay attention, because here comes the sticky part. The Bush Administration (or more specifically, his commission on social security reform) has declared that the accummulated assets in the Social Security trust fund "aren't real", and don't count as resources available to pay future benefits. They claim that government bonds are worthless when they are accummulated by a government agency.

Now hold on a minute here. Private hedge funds also buy US government bonds. Private banks do as well. Even private individuals can in theory buy one (although most will do so indirectly as part of a private savings or pension scheme). Why? Because they are the most secure of all investments.
When a private bank cashes in a government bond, the treasury must make good on it and pay the money back, with interest. Therefore nobody can be in any doubt that these bonds are real assets, with a solid return.
But at the same time, we are supposed to believe that the government bonds held by the Social Security trust fund "aren't real assets". Does this make any sense?

There is one view which states that Social Security shouldn't have a separate budget, because it's all one government. Therefore payroll tax receipts should be considered general revenue, and benefit payments part of general spending. If that's true, then who cares if the payroll tax doesn't make enough to cover benefit payments? We can simply transfer in money from the "general budget". This is clearly justified if the "general budget" has absorbed the massive funds built up by the Social Security trust fund.

The alternative view states that for political reasons, Social Security must have a separate account. But in that case, government bonds held by that account must be counted as "real assets", just as they would be if Social Security were a privately owned pension fund. In fact, here comes a nice little idea (and this is what Social Security Privatisation should be about) - why don't we launder the trust fund by putting it in private banks, which can then buy government bonds. That should make the assets "real", yes?
But we can do better than that. Think about it this way: Every dollar that the Social Security trust fund puts into government bonds is a dollar the federal government doesn't have to borrow from other sources. The trust fund holds a whopping $1.2 Trillion in government bonds - funds the government would have had to borrow elsewhere. Instead of crediting the Social Security trust fund with $65 Billion in interest each year, the government would have to cough up at least that much in actual, cash interest payments to private bondholders. So the Social Security trust fund makes a real contribution to the federal budget. Doesn't that make it a real asset?

The Bush plan for social security privatisation is based on the very same misunderstanding of how the system works. He wants to let people divert their payroll tax payments into "private retirement accounts". Ok, fine. But then that money can't be used to pay benefits to current retirees, can it?
If everybody does this, then social security won't have any money coming in at all. All it will have is it's trust fund, which, in the absence of any money coming in, will eventually run out. Game over.

They would, but try to sell that to an electorate.

The world isn't going to suddenly turn libertarian, just like it's not going to suddenly turn socialist. Unless we want to be completely ignored, we're going to have to judge public policy on its merits, based on a few criteria which are most likely influenced by our more general persuasion.

Do you have any worrys that like how social democracy became capitalism plus a welfare state libertarianism will become a somewhat less regulated, less taxed but still overall big government-style state?

They would, but try to sell that to an electorate.

The world isn't going to suddenly turn libertarian, just like it's not going to suddenly turn socialist. Unless we want to be completely ignored, we're going to have to judge public policy on its merits, based on a few criteria which are most likely influenced by our more general persuasion.

Social Security these days has become a system in which it is your duty to pay the bills for some old guy. Superannuation would be a system in which you are responsible for your own retirement. That's the plus.

There's also a minus, which is that it violates the principle that you can't force people do something for their own good, because ultimately you can't rely on your own judgement of that (or indeed on you being the judge). But I think it's a relatively smaller minus compared to the benefits.

See though, I don't think that you can force people to invest a portion of their income into their retirement. If for no other reason than there are good and bad times to start so you'll end up with disparities simply based on birth year.

No-one should have to invest anything. If you're not semi-retired by your thirties you are a bit of a loser anyway.

Do you have any worrys that like how social democracy became capitalism plus a welfare state libertarianism will become a somewhat less regulated, less taxed but still overall big government-style state?
It wouldn't be libertarianism, would it. It would be something approaching it a bit, but the definition wouldn't change.

But it might be superior to what we have right now, and that's what counts in our immediate reality. A communist might prefer Sweden to the US, but that doesn't mean that Sweden is communist or the communist has become a welfare capitalist.

No-one should have to invest anything. If you're not semi-retired by your thirties you are a bit of a loser anyway.
And I would agree, there are just two real-world problems associated with it: Firstly, it needs to get through the government. Secondly, even a loser without money for retirement can have a negative effect on me.

I just read the other day that homeless people actually use up more money in healthcare and jailtime and so on than it would cost to give them a roof over their head. So even if we think that homeless people aren't owed any help, as long as the current system of emergency rooms and the legal situation exists, it might simply be a better use of taxpayer funds to offer them a place to stay.

Libertarianism is optimal if it's accepted as a complete system. One libertarian policy in a bunch of socialist stuff probably won't be. The trick is to find a combination that is optimal, given the constraint of what is realistically, politically possible.

It wouldn't be libertarianism, would it. It would be something approaching it a bit, but the definition wouldn't change.

True except for the fact that definitions can change. Social democracy was first more or less a reformist way to socialism and then became capitalism plus regulation and the welfare state. The definition of libertarianism could change as well.

True except for the fact that definitions can change. Social democracy was first more or less a reformist way to socialism and then became capitalism plus regulation and the welfare state. The definition of libertarianism could change as well.
Hehe, true. But my stance wouldn't, and that's the really important thing. We'd just have to call it something else and be annoyed when people throw strawmen at us.

You communists should be used to it, so we can always get advice there. ;)

It wouldn't be libertarianism, would it. It would be something approaching it a bit, but the definition wouldn't change.

But it might be superior to what we have right now, and that's what counts in our immediate reality. A communist might prefer Sweden to the US, but that doesn't mean that Sweden is communist or the communist has become a welfare capitalist.


And I would agree, there are just two real-world problems associated with it: Firstly, it needs to get through the government. Secondly, even a loser without money for retirement can have a negative effect on me.

I just read the other day that homeless people actually use up more money in healthcare and jailtime and so on than it would cost to give them a roof over their head. So even if we think that homeless people aren't owed any help, as long as the current system of emergency rooms and the legal situation exists, it might simply be a better use of taxpayer funds to offer them a place to stay.

Libertarianism is optimal if it's accepted as a complete system. One libertarian policy in a bunch of socialist stuff probably won't be. The trick is to find a combination that is optimal, given the constraint of what is realistically, politically possible.

I don't consider either of those real world problems. They are both created by government. The sad fact is that some people - possibly the majority - are so feckless that they will never amass enough money to retire. I don't really see why other people should tell me that it is my problem.

Secondly, it is all well and good making the argument that the homeless actually cost us more than the 'helpful' government stepping in and solving the problem. But that is not true. Many people, myself included, would actually start and run businesses for fun if it wasn't for the fact that the government treats you like a criminal for doing so. Only last week I was talking to a friend of mine about starting up an exotic flavor ice-cream business based upon a little place in Flushing, Queens. But it just doesn't pencil out with the constant government harassment. As an economist you probably are well aware of that 'marginal utility' crap that is used to justify progressive income taxes, but the upshot is that it is that it works both ways. It would cost me in terms of time and harassment to go forward with this. So what happens? People in staten island don't get any delicious exotic fruit flavored ice-cream, and probably thirty or forty jobs are not created. Everyone is poorer, and therefore there are more homeless. (Also, I've noticed that the places with the highest budgets in respect of homeless care seem to have the most homeless and any increase generates more).


The best thing that any government could do is get out of the way. It's a sad fact of life that income is not always going to be 'fairly' distributed. But people should grow up and live with it. The more you punish the sucessful, the poorer you make the entire world.

Yah, and suffering is not a virtue either. /endrant.

I keep hearing Republicans praising Social Security Privatization and Democrats cursing it. So, I'd like to know what exactly it does. I know there are several different plans and that it has to do with investing some or all of the money. I am particularly curious about the options in the US and what Bush wanted to do.

Darvo-tran did the best job of answering this particular question before jumping the gun into whether or not Social Security ought to be privatized, so I'll just flesh his account out a bit more and lay out the possibilities from there.

The basic idea of the main part of Social Security is that it is a wealth-transfer system from currently employed workers to retired workers, with the aim of ensuring that no matter what, there is a set floor to the means by which a person who can not or does not work lives. I say main part because people also get funds from Social Security if their parent dies in particular circumstances, such as their parent's were federal workers. Social Security establishes this set floor by collecting payroll taxes from the paychecks of workers, and diverting a great deal of that money to retired workers, with some of the leftover going to a trust fund designed to prolong the solvency of the Social Security system.

The privatization of Social Security, then, comes in one of several forms. First, it could come through the abolition of the payroll tax and the complete ending of the wealth transfer system. That would be the most direct means, but its also someone no one argues for except possibly Ron Paul, because it's political suicide to argue for the complete dismantling of the wealth transfer system. So what most privatizers argue instead is one of two things.

First, the government could, rather than pour the trust-fund money into government bonds, pour the money instead directly into the stock market. The argument here is that stocks dramatically outpace rate of return historically over bonds, and therefore we should invest in stocks rather than bonds if we want to maximize rate of return. The counter-arguments are threefold. First, our interest is not in rate of return but in ensuring there is a return, and in that, bonds are guaranteed while stocks are not. Second, the argument that the rate of return for stocks exceeds that of bonds is true over the last 20 years, and it's been true over the 100 or so year history of the New York Stock Exchange, but most retirees haven't retired in the last 20 years or paid into the system over the hundred year lifetime of the stock market. They've often paid in, like the timeframe between about 1965-1982, when bonds in fact outpaced stocks for performance; this weakens the case for making SS stock-specific because it suggests that recent and overall trends will continue indefinately, when this isn't the case. Finally, there's the question of market distortion: if you think businesses have a great deal of vested interest in getting money from the government now, wait until the government starts announcing that it's pouring trillions of dollars into the stock market. Which stocks gets picked is likely going to be chosen less on market performance than on buying influence with the right people, and the double effect is that the government cannot afford to let a company it has invested in sink.

The second option is to split off a significant portion of the incoming funds and create a savings-account system, ala Bush in 2005. The idea is to take some of the money that pours in from every paycheck, and instead of putting it either in the trust fund or into elderly people's wallets, put it in a saving's account of some kind for current workers. The obvious question then, is what exactly do you use to pay into the trust fund or the current retirees checks to make up for this shortfall. If you dismantle the trust fund, you only exacerbate the stated aim of Social Security reform in the first place, that of further putting off the day of reckoning when outflow exceeds intake. If you break your word to current retirees and cut their benefits, you'd better close the nation's Country Kitchen Buffets in a hurry, because those old nursing home vets are going to revolt in a hurry. Of course, of more subtle but no lesser importance is that this too undermines the overall goal of SS, which is to make sure that everyone has some small means after they either choose or have to retire.

Now obviously, you can see I'm against fundamental overhaul of the Social Security system, but I think I've laid out why fairly clearly, as well as what the options on the table were.

Thank you very much. Now I understand it better.

So, assuming the Bush plan went through, how would we pay for the current retirees? There must have been some plan for paying that. Also the money that goes into a saving account, can people choose to invest it?

Another thing Republicans and Democrats seem to disagree on is whether SS is in a crisis. What do you think, and how do you suggest fixing the problem there is?

Thank you very much. Now I understand it better.

So, assuming the Bush plan went through, how would we pay for the current retirees? There must have been some plan for paying that. Also the money that goes into a saving account, can people choose to invest it?

Another thing Republicans and Democrats seem to disagree on is whether SS is in a crisis. What do you think, and how do you suggest fixing the problem there is?

One would think there would have been a plan for paying that, but Bush's plan essentially died once he admitted that there was no such plan. We'd need to do a seperate "reform" to either maintain solvency or continue current rate of benefits to retirees under the Bush plan, even though this wasn't how it was sold at the time. The cynic in me notes that "You'd think they'd have a plan for this eventuality" is the epitaph for the entire Bush administration, but that's neither here nor there in this case.

As for the crisis in SS, there is a crisis of sorts, and that is the inevitable day, sometime around 2017 I believe, when revenues fall below expenditures and we start draining the trust fund to make up the difference, followed by another crisis circa roughly 2037 when the trust fund completely dries up. But I also note that such a crisis is a long way off, and there are a few easy if politically inconvenient solutions: raise the retirement age a few years, raise taxes, or trim benefits. Like most people, I think that the eventual solution will look something like a combination of at least 2 of the 3 in piecemeal fashion. But I can't help but also note that the American public never deals with crises 30 years in the future; they tend to deal with present crises. As such, mild reforms now will be delayed in favor of rather drastic reforms later. Not optimal, but hey, optimal is something that the President campaigning in 2036 can pine for.

There's a good reason why the Republicans insist that Social Security is in crisis. They want to keep their tax cuts. Again, allow me to explain:

Say for arguments sake that the demographic crisis was in full swing right now, and that we have about 2 workers for every retiree (instead of the current 3.4). Or imagine that you've travelled forwards in time by about 30 years.
Remember that Social Security benefits are funded from payroll tax receipts. So how much would the shortfall be?
It turns out, if you work the numbers (and I'm getting this from the writings of a professional economist - I'm not making this stuff up) that benefit payments would exceed payroll tax receipts by about $180 Billion per year. Quite a lot of money.

But here's the interesting part. When the Bush tax cuts are fully phased in (which they almost are by now), they will reduce revenue by - you guessed it - about $180 Billion.

Remember that the vast majority of the Bush tax cut goes to the already wealthy. The taxes he cut include the income tax (which falls much more heavily on the rich), and the inheritance tax, which is a tax on the downright filthy rich. Spare me the flaming, please. No matter what you believe or what Bush says, cutting the inheritance tax does nothing to help "small business owners or family farms". The threshold was set at $675,000 per estate, double that for couples. Meaning that only 2% of estates paid any tax at all - and the bulk of it (about $20 Billion) was paid by a mere 0.16%.

In any case, Bush announced back in 2001 that his tax cuts were "quite modest". Well, if he's to be believed, then the sums required to cover the Social Security shortfall are also "quite modest".

In other words, we're supposed to believe that $180 Billion per year is a modest sum if it's a tax cut for the wealthy, but that it's an insupportable burden on the budget if it's an obligation to retirees.

I keep hearing Republicans praising Social Security Privatization and Democrats cursing it. So, I'd like to know what exactly it does. I know there are several different plans and that it has to do with investing some or all of the money. I am particularly curious about the options in the US and what Bush wanted to do.

First off, conservatives have been trying to kill social security since it was created. As Rush Limbaugh put it, "FDR is dead. His policies may live on, but we're in the process of doing something about it." The fact that all the people who just wanted to eliminate it 10 years ago want to privatize it now should tell you the main thing that privatization does.

Second, whenever a conservative is asked "what is your plan for privatization," the first thing they say is that they want to assure the retired and near-retired (who always vote in huge numbers) that they will not be affected. They're admitting that it could be a disaster and they don't want their biggest demo to vote against it (fortunately most people that age are more worried about their legacy and care more for their children and grandchildren's futures than their own, and so they vote against privatizers.)

What it claims to do is turn social security from an insurance program into an investment program. Bush's initial idea was to take billions of dollars and have two investment companies manage it. So it's basically a giant give away to some of Bush's friends.

It also takes Social security, which has a guaranteed return, and makes it so that it has a guaranteed minimum investment, but no guaranteed return.

The idea used to scare people into it is that there are less people paying into it, relative to those drawing from it, today than their used to be, so there might not be enough money in it. But their figure of a 3 trillion dollar shortfall is based on if it goes on as it is forever. If we just get rid of the cap it would be solvent forever.

Repeat after me:

"Your social security payments are NOT investments".

<snip for length>
Outstanding overview. Thanks. :) You gave us a lot of good information, and also some interpretations to debate over. On the whole, I agree with you.

However, I'm not optimistic that anyone will repeat the above phrase until they understand, nor use any of the background info you provided, just as I'm sure no one will bother to visit the SSA's site, which I linked to. Why? Because this thread is running into another problem that SS and similar systems face -- so-called "libertarianism."

It seems to me as if only two groups of people have any issues with SS at all -- people like George Bush who want to eliminate all social programs of any kind for political reasons, and these people who call themselves libertarians (though what that means to them, I have no idea). Except for your post, the entire third page at least of this thread has devolved into people complaining that they shouldn't have to do anything they don't want to do at any given moment with their money, especially nothing that involves helping or cooperating with others, and bolstering this position with great big piles of opinions and speculation but no facts. I've seen ridiculously unrealistic remarks suggesting that retirees today are getting benefits they didn't pay for (totally untrue), and people who need to work throughout their adulthood are losers who don't deserve any help in life (please, give me a frigging break with that arrogant and ignorant crap already), etc.

As long as Social Security is a punching bag for the "What About Mine?" crowd, I don't see how any progress can be made on it.

Yeah, like Xenophobialand, Darvo-Tran, and Domici said. :)

My own opinion is that SS will have to be reformed, but not yet, so the "crisis" is a false one designed to do two things:

1) Rush through approval of the above-mentioned give-aways to Bush/Republican corporate political donors; and

2) Create a domestic issue hot-button that campaigning politicians can push to derail public debate into knee-jerk histrionics over people's fears about their personal income. Fear-topics are very useful for generating votes quickly because they short-circuit reasoning.

We have two decades to consider our options carefully in reforming Social Security, and we should take that time and make good use of it.

I don’t understand how people can say that bonds are guaranteed investments and yet somehow separate from the government as a whole. Bonds are just obligations on the federal government. If the government became insolvent to the point where it could not fund a certain social program, it is not going to be able to pay back those bonds either.

Essentially it is a regressive tax (because it doesn’t tax income over a certain limit) which funds a welfare system that is skewed towards paying more to those who made more income before retirement. It flabbergasts me how socialist types staunchly defend it as a program to support the poor when it is skewed against them.

In many cases that 12.4% of income is better made available to people now. If people had that money to spend, they could spend it how they best see fit for their individual circumstance. It might make the difference between being able to afford higher education (which would have a lifetime return far greater) or make other choices which could drastically change someone’s standard of living. People can choose how to spend their money far better than bureaucrats can.

Eliminating social security would remove a massive dead weight loss from the economy, a regressive tax, and an expensive government bureaucracy. Current welfare systems (which also need massive reform) are already setup to provide a basic safety net, so it seems to be redundant to have a separate program for the retired as well.

I've seen ridiculously unrealistic remarks suggesting that retirees today are getting benefits they didn't pay for (totally untrue)...
Fact of the matter is that the system as it is depends on young people paying for the retirement of old people. Which is fine, if there are many young and few old people around.

This is however changing. Germany has a similar system, and in a few years we will have come to the point where two young people pay for one retiree, and it's only getting worse. The trend in the US is less dramatic, but still going in the same direction, IIRC.

The best way to not have to worry about the demographics anymore is for everyone to pay into their own, personal retirement fund. In the Australian system no one is starving because they're old, and people aren't working until they're 76. It works, and it's a damn sight fairer than the current system.

I don’t understand how people can say that bonds are guaranteed investments and yet somehow separate from the government as a whole. Bonds are just obligations on the federal government. If the government became insolvent to the point where it could not fund a certain social program, it is not going to be able to pay back those bonds either.


I hate to be one of the doom-mongers by saying this. But the reality is that if in the (increasingly likely, thanks to Bush's financial mendacity) event that the US government becomes so insolvent that it cannot pay back bonds that it's own treasury has issued, then we are all completely fucked. And by we, I mean pretty much every major economy in the world. Why? Because Social Security isn't the only holder of US government bonds. Saudi Arabia has a very significant investment, to give one example. In fact, there aren't many countries in the world that don't own some US government bonds.
Therefore if the US economy goes down, it will (at worst) take the rest of the world economy down with it. At best, it will lead to a worldwide recession.

Now it's true that governments around the world have become insolvent to this degree .See Argentina, Ecuador and Chile in the 1980's for good examples. But said countries were pretty much forced into bankruptcy by the application of harsh neoliberal economic policies. What also didn't help is that the IMF made privatisation of just about everything, plus pegging the local currency to the dollar 1:1, a condition of bailout loans. Privatisation had disastrous effects on Latin America. Most of the workforce was laid off. The government, with no state industries and few working people paying tax, was starved of revenue. The currency collapsed. And to top it all off, the government had enormous debts to pay back in dollars, with a devalued local currency. Result = economic implosion.

So it can happen, and it is possible. Thanks to the growing unemployment in the USA, the fiscally irresponsible tax cuts pushed through by the Bush Administration, and the insane republican drive towards ever more austere economics (driven largely by absolute hatred and distrust of anything government related), it's looking ever more likely that the US government will default on it's debt. Bush is setting the US up for a classic Latin American economic crisis. And the drive towards social security privatisation is only the tip of the economic iceberg.

But the fact remains - bonds are inherently (not just historically or statistically) the most secure investment. For example, if you have a savings account with a bank, the bank will invest your money in order to earn interest, so it can pay you interest in your savings. It will typically invest some of that money in stocks and shares, which (statistically at least) have a higher rate of return. But it will also invest in corporate bonds and government bonds. Lets say you have some shares and some bonds from a corporation. If it goes bankrupt, the first people to be paid off are the bondholders. That's guaranteed by law. You probably won't get any interest, but you will at least get your money back. But your shares, on the other hand, will be worthless.

Government bonds are more secure than corporate bonds, because governments don't go bankrupt anything like as often as corporations do. And the government can always raise more taxation in order to pay off it's debt. In fact, this is what the Clinton administration did - he paid off quite a large portion of the national debt (I forget the exact figure - but it was a significant amount). This reduced the annual outgoings (in interest payments), and even turned the budget around, leaving a surplus when he left office. Of course, I don't need to tell you that Bush rapidly squandered that, and has now returned us to deficits big enough to make Reagan blush.


Essentially it is a regressive tax (because it doesn’t tax income over a certain limit) which funds a welfare system that is skewed towards paying more to those who made more income before retirement. It flabbergasts me how socialist types staunchly defend it as a program to support the poor when it is skewed against them.


You're right about one thing - the payroll tax is indeed a regressive tax. I am however somewhat surprised to see you arguing against it for that reason.
But hold on a minute. The only reason why "people who made more income before retirement" get more money (and hence a more comfortable retirement) is because such people are more likely to have their own private pension schemes, in addition to receiving social security benefits.

But said countries were pretty much forced into bankruptcy by the application of harsh neoliberal economic policies.
Be fair though: no one ever forces anyone to go to the IMF. Governments get themselves into that mess, by implementing unrealistic and bad economic policies.

The IMF has hardly been all that successful, but that is no reason to keep harking about the failures of its prescribed policies (in some places, not all of them) without mentioning the failures of the policies that led to countries begging the IMF for help in the first place.

The best way to not have to worry about the demographics anymore is for everyone to pay into their own, personal retirement fund. In the Australian system no one is starving because they're old, and people aren't working until they're 76. It works, and it's a damn sight fairer than the current system.

That's true. However, I think we will see a buffer effect that will offset a good amount of the cost effects of the current system; not only are people retiring later, but an increasing number of older people are reentering the workforce and even pursuing further education in order to obtain highly skilled positions. This will undoubtedly improve the situation, especially if said people keep working in to their 80's, 90's and beyond thanks to technological advances.

I'm personally skeptical of a Social Security "meltdown" because it makes a lot of assumptions that don't make sense in the context of future developments. There are a lot of variables, many of them beneficial rather than harmful, that are not taken in to account. That doesn't mean the existing system is okay; it desperately needs reform, but it's not going to cause some kind of massive economic effect that will cripple the US economy or the government. It will have a negative effect on US economic growth, but won't disrupt it.

You're right about one thing - the payroll tax is indeed a regressive tax. I am however somewhat surprised to see you arguing against it for that reason.
I'm not. My comment was just that it confuses me that people let ideological rhetoric cloud their judgment so much that supposed champions of the poor would push for increasing a regressive tax.

I argue against payroll taxes based on their distortion of the labor market, but that is for an entirely different thread.

But hold on a minute. The only reason why "people who made more income before retirement" get more money (and hence a more comfortable retirement) is because such people are more likely to have their own private pension schemes, in addition to receiving social security benefits.
SS benefits are based on what youve paid in, thus if youve had a higher salary while working, you get better monthly benefits when you retire. This is a pension scheme and not a safety net kind of program like some people talk about. Therefore, it should not be looked at as a welfare program but as a retirement program - thus the returns are pretty pathetic and would be much better if that money were to go into an IRA instead.

Essentially people are forced to put 12.4% of their income into a government mandated retirement account with a lousy return.