booooooring…
Bush calls for key change to Social Security
Taxes would be diverted to private accounts
Cox News Service
Posted: Jan. 20, 2004
Washington - President Bush used his State of the Union speech Tuesday to promote a key economic goal: turning millions of average Americans into investors via the Social Security system.
Bush called on Congress to dramatically alter the nature of Social Security by allowing some Americans to divert their payroll taxes into private accounts.
"Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account," he said. "We should make the Social Security system a source of ownership for the American people."
Posted by P6 at January 21, 2004 05:37 AM
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Comments
I understand that you are old, and when a brain grows old and calcified, ideas become relics of a fossilized past. Among those of my age, even those who associate themselves with the liberal ideology see social security as a failure. When all the old people finally begin dying off- that is unless your lives are extended into immortality through medicine and technology paid for by the slave labor of the younger generations- then there will be a radical abandonment of the system. I would prefer a phase-out myself. Since those who have paid into it have earned a moral right (though no statutory right exists- benefits can be changed or eliminated at any time) to SS retirement, we should allow those who have paid into it their entire lifetimes remain in the system. Those younger can be given the option of switching to a private system or remaining, but if they switch, be paid out in proportion to their contributions to that point into SS.
That would be a costly transition, but Chile did it successfully, and it serves as a good model for us to follow. I would be willing to continue paying taxes into it with the full knowledge that I would get nothing if I knew that I would be the last generation to ever have to pay into it.
Posted by Brian at January 21, 2004 11:38 AMI understand that you are old, and when a brain grows old and calcified, ideas become relics of a fossilized past.
You may disagree with P6, Brian, but you've got a lot of gall talking like that to him on his own blog. Can we at least have some basic good manners here?
Posted by Al-Muhajabah at January 21, 2004 12:44 PMI'm sure that was a bit of humor, Al-M.
Posted by P6 at January 21, 2004 12:56 PMIt was. I'm sorry. My humor can be a bit caustic at times, and a lot of people think I am rude. Apologies for any hurt feelings.
Posted by Brian at January 21, 2004 12:58 PMBrian, the option of grandfathering current contributors is an honorable idea.
My question to you is, do you think you can manage that investment such that you'd have a comfortable retirement? The fact of the matter is, those who are charged with doing so professionally haven't done that well—I think the current state of pension funds in the USofA, which are managed by full time professionals, is a best case scenario and they're folding at record rates.
Posted by P6 at January 21, 2004 01:03 PMIf you have any articles on funds that have folded for mismanagement other than underdiversification (like Enron) or fraud, I would be very interested in seeing that.
Posted by Phelps at January 22, 2004 02:49 PMSenate Ends Year Without Acting on Pension Funding
Albert B. Crenshaw, The Washington Post
December 11, 2003
The Senate's adjournment Tuesday without changing a key pension funding formula leaves companies with traditional pension plans facing a choice, at least temporarily, of adding millions of dollars to pay future benefits, or freezing or even closing their plans, industry experts and lobbyists said.
At issue is the standard used to calculate pension liabilities. Current law requires firms to base these calculations on the interest rate of the 30-year Treasury bond -- a security that is no longer issued.
The combination of poor investment performance in recent years and low interest rates has thrown many plans into deficit. Although an economic turnaround could ease the problem, use of the 30-year Treasury bond makes it worse. In liability calculations, the lower the interest rate used, the higher the liabilities work out to be. Today's rates are low overall, and demand for the 30-year bonds still in circulation has pushed yields even lower.
Employers have pleaded with Congress to replace the 30-year Treasury bond with a standard related to high-quality corporate bonds, especially since a two-year fix expires at the end of the month. The House approved measures that would do that for another two years. But the Senate became deadlocked, primarily over even bolder relief provisions for troubled pension plans, and the best it could do was to agree Tuesday to go back to work on the pension issue when it returns in January.
As it stands, companies become liable for funding requirements under the old formula, beginning Jan. 1. They generally don't have to make the contributions until April -- so a retroactive agreement could spare them. But industry representatives said employers are increasingly discouraged by what many see as lack of concern, or even outright hostility, by national leaders toward traditional pensions.
The lack of action "will be interpreted that Congress and the administration are not going to support companies that are providing defined-benefit plans," said Mark J. Ugoretz of the ERISA Industry Committee, a group representing large companies with pensions. "That's the danger: These companies start shifting their operations and their own thinking to reflect that. That's not a good signal today."
House Education and the Workforce Committee Chairman John A. Boehner (R-Ohio) said: "This issue is important because providing employers with some degree of limited, short-term funding relief will reduce the likelihood that the federal government will have to step in and pay benefits for underfunded plans, often at lower benefit levels for workers. Without this interest rate fix, the pension benefits of millions of workers could be jeopardized."
Many companies have already frozen their plans, meaning they are closed to new employees and that those in the plan stop getting credit for further benefits. A recent survey of 1,000 pension operators found that more than 20 percent have either frozen or are considering freezing their plans.
I see deficit. I don't see folding. When the rates go back up, then the plans will go back into the black (if the funding company doesn't prop it up before then).
Posted by Phelps at January 22, 2004 05:54 PMPhelps--
Check out Long Term Capital Management (LTCM); founded by Robert Merton and Myron Scholes, Nobel laureates in economics who between them (together with the late Fischer Black) all but invented modern finance through their theory on pricing options.
Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It
Nicholas Dunbar
ISBN: 0-471-89999-2
People who talk of privatizing Social Security--The Economist devoted an entire issue to it in 2000--often overlook the problem that such a system would have to have a capitalization of something like 60% of GDP or more in order to pay out at the required rate. The bottom line is that most of the additional investment would have to go abroad (and we'd need to assume the Japanese, Europeans, and other rich comunities did the same).
The Economist completely ignored this, of course.
Chile's privatized system is not applicable to our situation because income flows are entirely dissimilar. Besides, the UN Program for Development 2000 report on Chile shows that at least half of the six million workers in Chile will get no benefits for retirement.
Another 25 percent, low-earners who contribute regularly to their individual accounts, will have to rely on the minimum pension guaranteed by the government ($130 per month for anyone contributing to their individual accounts for 20 years). This minimum pension is but 75 percent of the poverty level minimum wage. That tends to defeat the purpose of Social Security, does it not?
Please see also
Chile's Pension Mirage, Marc Cooper
Chile's private retirement system holds clues for U.S. By REESE ERLICH � St. Petersburg Times, published April 23, 2002Anybody care to guess what median mutual fund performance in the USA has been in the last 21 years? 7.5%. Splendid; the Chileans got 9-fold growth in 21 years, while we've gotten 4.5-fold growth.In 1981, midway through the dictatorship of Gen. Augusto Pinochet, Chile's social security system faced bankruptcy if the government didn't provide more subsidies. A group of U.S.-trained economists recommended privatizing the system, creating something like a mandatory national 401(k) plan.
Ten percent of a worker's wage is automatically deducted and sent to one of several independently managed mutual fund companies selected by the worker. Workers can choose to have a greater amount deducted. The contributions are tax deferred and remain under the worker's control if he changes jobs. Neither employers nor the government contribute to the accounts.
The vast majority of working class and many middle class Chileans don't have private pensions or other sources of income after retirement. So their retirement income depends on how much they save in the mutual fund and on their investment choices.
Before 1981, Chilean employers paid about half of a worker's pension contribution. Eliminating such contributions doomed Chile's system from the start, argues Jorge Millan, pension specialist with Chile's main union federation, because workers can't save enough for a decent retirement.
"The pension system was created during the time of the military dictatorship when there were no parties, no voting," he says. "The Chilean pension system won't succeed in any democratic country."
But supporters of the system say many retirees do quite well. The average monthly pension is $450, and the mutual funds have grown an average of 10.7 percent over the past 21 years. The seven pension mutual funds have combined assets of nearly $40-billion.
That ain't gonna happen again. Especially not if we plow another 6 trillion into the capital markets.
Posted by James R MacLean at January 22, 2004 10:08 PMI love it when people know more than me about stuff I'm interested in. I think Chile's system is off the table.
And Phelps, you see deficit, but it's in tha agency that guarantees pensions…and it's in deficit because of record failures that had nothing to do with lack of diviersification or fraud. And this isn't just nit-picking…the point is, very few people have the knowledge to anticipate such shifts, or respond to them after they happen.
Posted by P6 at January 23, 2004 12:14 AM