Friday, January 14, 2005

The illogic of reform opponents

Bring Ohio Home slams Vice-President Cheney for his support of Social Security reform.

...So, the point is that the US Government is going to mandate how we invest our money. Besides the hypocricy of the GOP's stand on limited government (that went out with Bush v. Gore, of course), does anyone doubt that there will be a host of campaign contributors getting the bulk of the business when the government tells us where to invest?

Here's Porkopolis response pointing out what I believe to be an illogical position in opponents of Social Security reform:
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Paul:

I like your Ohio Politics Resource Page, but your thoughts on Social Security reform are very misleading. I've been following the whole Personal Accounts for Social Security issue closely and I have not seen anyone suggesting that Personal Accounts will be mandated. If anything, I've heard that you will have a choice to set up Personal Accounts or stay with the current pyramid scheme. With all due respect, your argument is a bit extreme.

And a pyramid scheme is exactly how Social Security is currently structured. Personal Accounts are by no means perfect, but they’re better than the current structure. They allow for managed investment risk and transfer of wealth to one’s heirs.

The current Social Security setup does have survivor death benefits. This could be addressed by adding an insurance/annuity-like component to Personal Accounts. I make the assumption that Personal Accounts will be well diversified investments like an S&P 500 Index Mutual Fund. This is what reformists, like me, have been proposing.

I was hoping you could help me understand an inconsistency in the logic implied by reform opponents like yourself.

As Social Security is currently structured, individuals must first be employed. Secondly, employee contributions are matched by the employer. These two things are prerequisites for the continual funding of the program. If I were a proponent of Social Security in its current format, I think that I would be a strong proponent of a vibrant and growing economy that allows for the perpetual contributions; from employees and employers.

You can’t have Social Security without economic growth. No employers, means no employees, means no contributions, means no Social Security funds over the long-term. The Government just can’t tax non-existent assets and profits to meet its obligations. Assets and profits are a prerequisite of Social Security. With me so far?

Now, here’s the kicker. If you assume that the current system requires a growing economy to sustain itself, why would you not translate that same assumption to the Personal Account structure of retirement funding?

Admittedly, there are no guarantees either way. That’s the very definition of a risk; no guarantees. Both structures involve risk. And BOTH sides of the issue (pro/con reform) assume a long term growing economy with occasional set backs.

I planted several Silver Maples in my back yard 15 years ago. The trees were barely 3 feet tall when I planted them. I did my research on what trees would do best considering soil and weather conditions. I almost went with Weeping Willows, but was advised against them. They grow very quickly, but according to the garden store owner, were ‘stringy’ and disease prone. My Maples have survived severe winters, summer droughts and insect infestation. But through it all, most of them have managed to survive; over the long term. They’re now about 40 feet tall. Long-term investing involves a similar patience and risk taking.

6 Comments:

Anonymous Anonymous said...

Actually, it is your argument which has logical hole.

1. Social Security is no long term investment account. It was designed to operate more or less like an insurance package, where you pay your premiums and you get benefits whenever you have the need. As with car insurance, even if you've only made one payment, you're a member, and you get your benefits. This was done on purpose to provide for stay at home mothers and other people who don't have the strength or the opportunity to work and save for 30 years.

2. The whole argument that Social Security is going bankrupt is false. Even after the dreaded 2042 projected end of the surplus, there will still be people working. As long as people have jobs, dollars will be contributed to Social Security. When the surplus runs out Social Security will still be able to fund all recipients at 70% of their current rate. That means all we need to do is make up that 30%.

Actuaries say that a mere 1.89 percent increase in the tax will do it. That's 1 percent to the wage earner, and .89 percent to the employer.

3. You insist that long term investing is a good thing, and opponents of the Social Security reform do not argue that point. If I want to invest my money in the market, I'm free to do that already. Why would I want the government forcing me to contribute? Any good investor knows diversity is the key to security, so I'll want my Social Security the way it's always been, and my investments in the stock market on the side, at MY discretion.

January 15, 2005 at 12:31 AM  
Blogger Paul said...

First of all, thanks for coming by to visit and I hope to see you often. I love the pig and am going to steal the code! I've put your site in my list of Ohio blogs.

The point is not that the government is going to require us to participate in this program, but if we do, they will mandate where we invest. I will quote the Vice President again:

"It's been suggested that many people would spend their retirement in poverty, because the investments they choose will be along the lines of lottery tickets, dice games and the racetracks," Mr. Cheney said. "The answer to this concern, of course, is simply to set guidelines, basic standards of safety and soundness when it comes to investment choices."

Who decides the "guidelines?" Who decides the "basic standards of safety and soundness?" I put it to you that it would have to be an government entity and not you or I. Big government run amok. It's been amazing to see how this administration has been the champion of big government.

The Cato Institute has been instrumental in the underlying numbers the Privateers are using as the basis of their argument. 1.8% return for Social Security or more than 3% for the historical long term return in the stock market. Look at what I wrote last month about this.

If you look at the numbers since the Bush Inaugural the stock market has been, to put it politely, flat. I looked at the Dow Jones 30 and the S&P 500. The numbers on my page above show that the Dow has risen fractionally in 4 years and that the S&P 500 has fallen. Those numbers were as of Dec 16th when I did my post. Looking at yesterday's numbers both are down. I'm going to update the post on Jan 20th to take a full four year reading. The Dow on Friday is actually about 20 points lower than January 22, 2000 and the S&P on Friday is down 158 points from its January 22, 2000 level. We might get back to even after four years on the Dow, but it looks unlikely for the S&P 500.

Hardly a stellar performance, I think you would agree? Not fair, you say? Well, people can't wait for "fairness" to retire. If you had to retire in early fall of 2002, you would have taken a major hit. What if you couldn't have waited until 2005 to sort of break even? The numbers just aren't on Bush's side. But then he has never been encumbered with facts has he?

I don’t disagree that social security is predicated on being employed. That is true for the main part of the system. Since the administration’s proposal (made in the most sketchy way, so far) means taking 2 to 4 percentage points (not 2 to 4 percent, a big difference) from our payroll taxes, it also requires the person to be employed.

Bush has justified heavy tax cuts over the last four years by constantly saying “it’s your money.” Using this logic with Social Security, the government wouldn’t get into the business of taking our money and investing it for us.

You say “both structures involve risk.” The stock market system certainly does (crashes of 1987, 1989, 2002, etc) but the social security system is backed by something known as the “full faith and credit of the United States.” Social Security is a floor benefit and is meant to be something built on whenever possible.

Many commentators lately have been talking about adjusting the cost of living adjustments (COLA) to be based on price inflation to wage inflation. This would lower the COLA. The problem is that you really can’t get much lower than what has happened to my Mother this year. The $1.00 increase is, of course, net of changes between Social Security and Medicare. But “net” is what she gets to spend every month. And before you go there, I support my parents to the tune of about $900.00/month beyond what they get from the Government.

Check out the quotes here to see how commentators are talking about guaranteeing a certain benefit floor during bad times. They can’t have it both ways!

As I finally get the time to respond to this (I’m truly sorry it’s taken me so long!) Drudge is quoting tomorrow’s headlines that the administration is pressing the Social Security Administration employees into shilling for his plan. Disgraceful! We had recent headlines (see this, here and here) about how the right wing is going full guns to make us believe what they are saying. Apparently Bush, tomorrow, is going to tell us that his reelection vindicates his activities in Iraq. Remember that Iraq was sold to us as a crisis that wasn’t. As I write this, we have had 1,363 fatalities due to his folly. Why should we believe this latest “crisis”? I certainly don’t.

January 15, 2005 at 7:43 PM  
Blogger Porkopolis said...

Anonymous said...

"Actually, it is your argument which has [a] logical hole.

1. Social Security is no long term investment account. It was designed to operate more or less like an insurance package, where you pay your premiums and you get benefits whenever you have the need."

Anonymous...is it more or less?

If it's more, most insurance companies I know are regulated by State Agencies that require sound investment policies. They all invest in realestate/stocks or other revenue generating instruments to generate returns (See How Insurance Works. ).

If it's less...then that's called a Ponzi or Pyramid Scheme.

Anonymous said:

"2. The whole argument that Social Security is going bankrupt is false. Even after the dreaded 2042 projected end of the surplus, there will still be people working. As long as people have jobs, dollars will be contributed to Social Security. When the surplus runs out Social Security will still be able to fund all recipients at 70% of their current rate. That means all we need to do is make up that 30%.

Actuaries say that a mere 1.89 percent increase in the tax will do it. That's 1 percent to the wage earner, and .89 percent to the employer."

Can you say Orwellian? This is just more good money after bad. If getting 70% of what I expected isn't going bankrupt, then what is?

Tell me what bank would survive if it told its depositers "Put your money here and by tomorrow will give you 70 cents on the dollar." Call me crazy, but I think that's bankruptcy... a legally declared inability or impairment of an individual or organization to pay their creditors.

January 16, 2005 at 1:24 PM  
Blogger Porkopolis said...

My response to Paul:

You put a lot of time and thought into your response and I wanted to respond in kind. 

Q. Who decides the "guidelines?" Who decides the "basic standards of safety and soundness?"  

A. Someone always decides.  Currently it’s our elected representatives.  By their actions they are making two decisions:  

1. Deficit spending which threatens the ‘full faith and credit of the United States’ and 

2. Maintaining the pyramid structure of Social Security, that is the employee
to retiree ratio is declining and unsustainable


With Personal Accounts, the decision process will be expanded to: 

1. A board of trustees that selects the various investment options and 

2. The individual employees that will select from the various options.  

I for one am very comfortable with being allowed to make my own decisions.  These Personal Accounts are going to be one of the most watched over and regulated programs ever.  I’m confident that the guidelines will meet “basic standards of safety and soundness”.   

Q./Comment: Big government run amok. It's been amazing to see how this administration has been the champion of big government. 

A.  I agree with you on this administration being big-government oriented.  But I’m not one to let the perfect be the enemy of the good. 

Q./Comment: The Cato Institute has been instrumental in the underlying numbers the Privateers are using as the basis of their argument. 1.8% return for Social Security or more than 3% for the historical long term return in the stock market. Look at what I wrote last month about this. 

A.  I looked at the excellent Cato Institute report you reference (thanks by the way) and it reinforces my argument:  

From Page 11:
“Given the long-term investment horizon envisioned for workers choosing individual accounts under this proposal, market investment is remarkably safe. In fact, over the worst 20-year period of market performance in U.S. history, which included the Great
Depression, the stock market produced a positive real return of more than 3 percent. At the same time, we know that, even under the best of conditions, Social Security will provide below-market returns. As Figure 3 shows, even with recent stock market declines, a worker
investing all of his payroll taxes in stocks would receive benefits 2.8 times greater than he would receive had he “invested” the same amount of money in Social Security.”
  
3% stock market return was the worst-case scenario; and they clearly make the argument that on average you can expect much more.  Even AARP states
that…” Throughout the last 75 years or so, the returns on investments in stock have averaged about 11 percent per year.”  They also note that the inevitable setbacks require planning. 

Don’t want to use 75 years as your time period?  Then play with the numbers at Yahoo.  

To be fair you should use a time period of at least 30 years.  The numbers you quoted were for too short a time period.  If you can find a 30 year time period with the S&P 500 that return less than 5%, I might start supporting your argument.  

Q. …Hardly a stellar performance, I think you would agree? Not fair, you say? Well, people can't wait for "fairness" to retire. If you had to retire in early fall of 2002, you would have taken a major hit. What if you couldn't have waited until 2005 to sort of break even? 

A. When you retire, you don’t need all your money at one time.  If you retire at 65 and die 15 years later, you should still have some of your money invested.  15 years is more than enough time for the market to recover.

Q. Bush has justified heavy tax cuts over the last four years by constantly saying “it’s your money.” Using this logic with Social Security, the government wouldn’t get into the business of taking our money and investing it for us. 

A. It’s a Personal Account and you decide which investment option to invest it in.  They’re not investing it for us.  Oh, by the way, if you die, your heirs get the money as well.

Q. You say “both structures involve risk.” The stock market system certainly does (crashes of 1987, 1989, 2002, etc) but the social security system is backed by something known as the “full faith and credit of the United States.” Social Security is a floor benefit and is meant to be something built on whenever possible. 

A. One of the best moves I ever made was investing in October of 1987.  I remember that period extremely well.  Even after the 1989 and 2002 down
turns, I’m still way ahead.  I agree Social Security is supposed to be a floor benefit…but it’s also a pyramid, generational transfer of wealth scheme.  We can do better by leveraging entrepreneurship and ingenuity even with all the pitfalls the market offers (Enron, Worldcom, Tech Bubble, etc.)

Q. Many commentators lately have been talking about adjusting the cost of living adjustments (COLA) to be based on price inflation to wage inflation. This would lower the COLA. The problem is that you really can’t get much lower than what has happened to my Mother this year. The $1.00 increase is, of course, net of changes between Social Security and Medicare. But “net” is what she gets to spend every month. And before you go there, I support my parents to the tune of about $900.00/month beyond what they get from the Government. 

A. Your mother is entitled to 100% of all the money she invested into Social Security plus a reasonable rate of return.  COLAs were introduced in the 1950’s by legislators that didn’t take into account the pyramid structure of Social Security.  The best evidence I have to offer that the legislators didn’t take COLAs properly into account is that no one denies that the system is not self-sustaining.  

Everyone agrees that it will run out of money at some time.  The question is do we just keeping heading toward the iceberg or do we make a course correction.

January 16, 2005 at 1:48 PM  
Blogger Porkopolis said...

tetricus posted a comment on the Virgina Horse Center post, but it was regarding Social Security. So, I'll respond here.

I think we can all agree on the goal (secure retirement for all Americans) but we definetely differ on the means. The pyramid structure of the current program is unsustainable. The very computer you posted your comment on was a result of ingenuity and risk taking. I bet some investors even made a profit on it. Reform proponents believe that the structural ills of the current system can be addressed by allowing everyone to tap into the long term growth of our economy.

I'm prepared to pay my own way. I don't want to be dependent on our collective grandchildren to fund my retirement.

January 16, 2005 at 2:18 PM  
Blogger Paul said...

I'll try to bring this down to just a few points so I can get to bed tonight :)

First about the NY Times story. I have no trouble believing that people in the administration would pressure careerists to do their bidding. This group has shown itself quite willing to say anything, do anything, scare anyone, to get their agenda. In my darker moments, I wish Bill Clinton was willing to do such things. He relied on public debate instead of the schemes thought up by this crowd.

I hope you will excuse me if I don't believe everything Dan Bartlett said this weekend on the Sunday shows. I saw him on several. When he wasn't soft peddling expectations in Iraq, he was beating the drum for the "Leave No Broker Behind" bill. No problem ... that is what he is paid to do. I have to admit to some admiration for this group's ability to pound home a message, even if it means shifting back and forth. I remember during the 2002 cycle Bush et al were running away from privitization like burning dogs. I read a story a few days back when Bush actually claimed he never used the term "privitization". The reporters then quoted him chapter and verse and he did a lot of stumbling around it.

So to summarize ... I believe the NY Times story. It fits this group's pattern. I'm just watching a report about how the Inspector General of the Dept of Homeland Security was fired for reporting that known felons maned airport security, no cargo was being inspected, and that Tom Ridge threw a half-million dollar party.

This from the group that wants Dan Rather to apologize for reporting a true story.

Back to guidelines, etc.

Why should we allow our elected representatives decide where we invest our private money? You say that with such dismissal as if that is a good thing. Remember Bill Frist and his campaign funds a few months ago?

By the way ... let's update numbers on the great ROI on the stock market. As of today, the Dow is down 20.24 since Bush's first inauguration and S&P is down 158.38. Not the hot long term growth that Cato promises.

Which reminds me ... you're welcome for the link to the Cato report, but it reinforces nothing since they are driving the talking points on this!

If Personal Accounts are "going to be one of the most watched over and regulated programs ever" how does that square with the GOP being the party of personal responsibility? Remember that Bush wants us to keep more of our money, but then he wants government bureaucrats to micromanage where that is invested. It just doesn't add up. Everything I've heard says that the government WILL be deciding where it goes, or at least in which of a few chosen areas it will go.

One point I meant to make before ... Cheney is on record as saying that "Ronald Reagan showed that deficits don't matter" which I think is true at least in Reagan's mind. (and don't forget that Reagan signed 3 tax increases to get things back under control as things were spiriling down in 82 and 83). This hardly squares with concern about a deficit in the Social Security system. Money is money.

Enough back and forth ... it's time for a few proposals:

1) Raise or eliminate the ceiling of wages taxed by FICA

2) Continue the slow increase in retirement age ... we are living longer and Social Security should keep up.

3) Health care reform ... somewhat off topic, but related as the current health care system is in much bigger danger and Social Security will ever be and fixing this will allow people to retire later.

4) Get the budget back under control. I believe in a balanced budget amendment and have done so for years. You rightly rage against pork and that certainly contributes to the horrific deficit. The most of it comes from two sources: large tax cuts which don't flow back into the economy (See Reagan's '81 instead of Reagan's hikes in '82, '83 and '86) and the massive cost of this "war of choice" we are mired in within Iraq. The cost is huge and reports are out saying another $100 billion will be requested. And today there are reports out by Seymour Hersh (who was right about the Iraqi Prison Scandal) about Iran being next on the list.

Those are my proposals ... off to bed, perchance to dream of a time when we actually had a surplus and were at peace.

January 17, 2005 at 10:20 PM  

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