Respectfully submitted by Lawrence E. Rafferty (rafflaw)- Guest Blogger
We have all heard the cries that so-called entitlement programs like Social Security need to be cut in order to “save” them from extinction. Now that I am 62 years of age, I have become more interested in the issue of Social Security’s solvency.
CEO’s have gotten involved in the process through the now infamous Fix the Debt campaign initiated and funded by Billionaire Pete Peterson and the parallel campaign started by the Business Roundtable. Both of these campaigns are supported by big business and CEO’s of large corporations with no concern where their retirement funds are going to come from.
“In the current budget debate, the loudest calls for Social Security cuts are coming from two lobby groups led by CEOs who will never have to worry about their own retirement security.
The report, titled Platinum-Plated Pensions: The Retirement Fortunes of CEOs Who Want to Cut Your Social Security,
points out that two organizations, Fix the Debt, a PR and lobby machine launched in 2012 and led by more than 135 CEOs of major corporations, and the Business Roundtable, a 40-year-old association made up of about 200 CEOs of Americas largest corporations, are involved in a protracted campaign aimed at cutting, and ultimately, gutting Social Security.
Platinum-Plated Pensions, written by Sarah Anderson, the Director of the Global Economy Project at the Institute for Policy Studies, and Scott Klinger, Director of Revenue and Spending Policies at the Center for Effective Government, found that the CEOs belonging to Fix the Debt and Business Roundtable are sitting on massive nest eggs of their own.” Bill Berkowitz
Maybe I am an exception, but I was amazed to read the report linked above to see just who is claiming that the only way that Social Security can be saved for us mere peons is by raising the retirement age and reducing benefits. Many of the CEO’s making this claim have millions in their own pension or retirement accounts.
“According to Platinum-Plated Pensions, The average Business Roundtable CEO has $14.5 million in his gilded nest egg, more than 1,200 times as much as the $12,000 median retirement savings of U.S. workers who are within 10 years of retirement.
Ten CEO members of the Business Roundtable (four of whom are also members of Fix the Debt) have corporate retirement plans valued at more than $50 million. Of these, three have retirement assets of more than $100 million.” Bill Berkowitz
Now, in all fairness, just because someone has no need for their Social Security benefits, it doesn’t automatically disqualify their opinions on the subject of improving Social Security for all of us. However, these CEO’s do not have a real stake in what happens to Social Security because if it exploded tomorrow, they still have millions in their own accounts.
The ideas that Fix the Debt and the Business Roundtable have offered do nothing to make it more equitable or make Social Security work better for all retirees. Their idea of a “fix” is to delay benefits and force poor and middle class workers to stay in the work force even longer.
They even claim that raising the minimum retirement age to 67 is necessary because we are all living longer. Even that claim is suspect. One economic expert has brought some sunlight to the living longer claim.
“Before I get there, however, let me briefly take on two bad arguments for cutting Social Security that you still hear a lot.
One is that we should raise the retirement age — currently 66, and scheduled to rise to 67 — because people are living longer. This sounds plausible until you look at exactly who is living longer. The rise in life expectancy, it turns out, is overwhelmingly a story about affluent, well-educated Americans. Those with lower incomes and less education have, at best, seen hardly any rise in life expectancy at age 65; in fact, those with less education have seen their life expectancy decline.
So this common argument amounts, in effect, to the notion that we can’t let janitors retire because lawyers are living longer. And lower-income Americans, in case you haven’t noticed, are the people who need Social Security most.” Paul Krugman
While I am hoping Mr. Krugman is correct that lawyers are living longer, his evidence seems to suggest that the Fix the Debt and Business Roundtable people are all wet. Could those millionaire and Billionaire CEO’s have some ulterior motive? Could the CEO’s efforts and money spent pushing their Fix actually be an attempt to prevent the country from taxing the wealthy on all of their income or reducing or eliminating many of their tax benefits that harm the economy and fatten their wallets?
I have often wondered why millionaires don’t have to pay Social Security taxes on all of their income like the rest of us who make less than the $113,700 maximum for 2013. When a CEO makes $20 million a year, that CEO pays Social Security taxes on the first $113,700. When someone makes $60,000 a year, they pay Social Security taxes on their entire income. Why shouldn’t Social Security taxes be paid on all income, no matter what the sources? Wouldn’t that be more equitable?
Mr. Krugman also suggests that part of the problem seniors are facing is that the 401k accounts that many of their employers intitiated have not earned what was necessary to retire on due to the market crash and employer greed and employees making poor financial decisions.
“Today, however, workers who have any retirement plan at all generally have defined-contribution plans — basically, 401(k)’s — in which employers put money into a tax-sheltered account that’s supposed to end up big enough to retire on. The trouble is that at this point it’s clear that the shift to 401(k)’s was a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower than workers were told to expect; and, to be fair, many people haven’t managed their money wisely.” New York Times
What do you think is needed to strengthen Social Security for all workers? Paul Krugman and many Senators like Sen. Elizabeth Warren agree that we should be talking about strengthening Social Security and not cutting it. Some of the CEO’s mentioned above who have millions in their own retirement accounts have actually run up deficits in their own employees retirement accounts, but yet they still claim cutting benefits and extending the minimum retirement age are the way to go.
“While gilding their personal pensions, many Roundtable CEOs have allowed massive deficits to grow in their employee retirement funds:
- Of the Business Roundtable CEOs whose firms provide pension funds for their workers, 10 have deficits in these funds of between $4.9 billion and $22.6 billion.
- The Roundtable CEO with the largest deficit in his companys worker pension fund is Jeffrey Immelt of General Electric, with $22.6 billion. Immelts personal retirement fund is worth more than $59 million, the sixth-largest among Roundtable CEOs.” Bill Berkowitz
Are these CEO’s merely doing an end run in an attempt to steer Social Security funds into the private sector? Are they trying to steer the discussion away from taxing more income to strengthen Social Security? What do you think and who do you believe?
DavidM: Another way to look at your fire insurance analogy is that fire insurance premiums help build a base of capital along with other premiums from which claims are paid out.
Actually you cannot use premiums to “build your base of capital,” you are required (both by law and any sensible customer) to have assets up front.
DavidM says: specially because premiums must continue to be paid on time when you make your claim.
Actually, you do NOT have to continue paying premiums after a claim is made; the insurance company (as I know from personal experience) is liable if you were covered at the time of the incident. Long ago, a store I had an interest in, which was in a building with other tenants, burned to the ground through no fault of us owners or our employees (the cause of the fire was never determined but began well outside our area, in the proximity of an electrical junction box (which we also did not use) and was probably due to faulty wiring). I asked this question of first my insurance carrier, they said we were covered at the time of the fire and could discontinue payments. I asked my attorney to confirm that, and he said the same. We were covered at the time of the incident, that makes them liable, including (at the time since lawsuits were flying, and I had liability insurance as well) for any liability suits related to that incident, even if brought years later.
DavidM says: Another huge difference is that most people who buy fire insurance will lose their bet and never experience that fire ever. In contrast, the odds are in favor of people retiring.
Social Security is not there to ensure you retire, it is to insure you have an income when you do retire. For some people it is a supplement, for others it is all they’ve got, that is true.
But it is the economic equivalent, roughly, of a retirement savings program run by the government. SS alone (not counting Medicare) amounts to about 12.4% of pay (half from the employee, half from their employer).
The average social security payment turns out to be almost exactly what the average worker would get, after inflation, if they invested their Social Security tax (6.2% of pay) in the stock market at its long-term average returns (and considering average inflation). (FWIW I am trained in PhD level classes in applied mathematics, statistics, and sociological research; and this really is how it works out).
On average, this is not a rip-off or redistribution of wealth at all, just like an insurance program it smooths over all the non-average results and replaces them with the average results.
In a house fire, an ideal non-profit insurance company would charge you, as a premium, the average loss due to house fire, scaled proportionately to the value of your house and any insured contents. Plus their average and sensible (because it is ideal) overhead, of course. By paying the average every month, you never have to pay the low-probability but catastrophic loss. It isn’t a savings program, it is a risk spreading algorithm, but absolutely depends upon the premiums covering the costs (on average) (plus any profit margin and reserve margin).
The “product” of the insurance company is predictability, for paying slightly more (due to overhead) than the average.
The same thing applies to social security. By paying the average expense of retirement each year, the average income is achieved. Fluctuations of the market, particular investments, economic climate (boom or bust) all vanish; you can’t be screwed by bad luck, by company bankruptcies, by fraudulent investment managers, by stupid investment managers. The risks of doing it yourself vanish, for a slight premium to cover the average overhead of all such risks.
Social Security is an insurance program. A mandatory one, true, but still an insurance program. Not just in my mind, in reality. It ensures a sustaining income in retirement, and without it there would be a significant risk (proven by experience and in the Great Depression) of not having that sustaining income.
DavidM says: Technically you are correct, but not if the business model did not pursue a mechanism of producing income for itself.
No, not only “Technically” am I correct, I am correct without caveats. Profit is excess money, PERIOD. By definition. A business has not failed if it breaks exactly even. Ever. All expenses are paid, by definition of “breaking exactly even.” All employees are paid, any taxes and fees are paid, even equipment loss or lawsuit loss is covered in that definition.
Although a private company may not be able to accomplish that, a government with effectively infinite borrowing power can break exactly even over the long term, because unexpected expenses (even wars costing in the trillions) can be offset, over the long term, by future tax payments, producing a net break-even in which revenue has precisely offset costs.
DavidM says: What investor would ever invest in a company set up like Social Security? It would be obvious that the system is a pyramid scheme doomed to fail.
First, that is not obvious in the least; in fact I have already disproven it by proving an equilibrium point exists.
Second, you continue to make the mistake of thinking the “Government” is independent of “Society,” and it isn’t. There is an obvious and clear “investor” for such a company: Its owners.
For a company like a co-op or mutual insurance company, operating as close as break-even as they possibly can provides the owners the maximum benefit possible from the company; absolutely none of the revenue ends up personally enriching others at their expense. They can pay employees competitive wages for necessary jobs (accounting, vetting of new members, etc).
For example, tourist-related companies in a city or region can band together to both provide themselves collective data on the tourists they serve (amount spent, home city, survey results), and even to finance advertising of their businesses based on the results. As a co-op, they are more likely to join if the co-op finances are transparent to members and prove nobody is making a profit or being overpaid by the co-op in administering the operations. It would also be more attractive to them if their membership fees were scaled to their potential benefit — for example, proportional to the number of employees they have, which is highly unlikely to be any more than they actually need, if they are decent businessmen.
Then, their contribution can be seen as a marketing expense, and a more effective one than they can accomplish on their own: If they pay 1% of the cost, together they can afford to hire skilled professionals and negotiators they couldn’t possibly do on their own; they can get an ad in a brochure they couldn’t possibly print and mail on their own, they can get two seconds in one of the commercials on TV, they couldn’t buy (or write, or film) on their own. They might even get, at cost, advertising exchange with non-competitive co-op members, I have seen a restaurant trade that with tour service to the benefit of both.
In Social Security (or socialized medicine or socialized insurance) the owners are Society. The government provides the infrastructure of their co-op, and can (uniquely) operate as an ideal break-even enterprise with all employees earning reasonable wages (e.g. no more than the average of their market-based counterparts in private industry; and such salary surveys do influence civil-service wages).
Social Security exists for its owners, for the same reason an advertising co-op, farming co-op, insurance co-op, promotional or marketing co-op, industry advocacy or lobbying co-op, supply buying co-op, or industry statistical co-op exists. To provide, as close to cost as possible, benefits impossible for any individual member to achieve on its own, through the collective power of larger numbers, and getting a proportional share of a larger, more efficient, more professional and more effective effort. It delivers more bang for the buck, it is a cost-reduction mechanism.
Tony C – “Actually you cannot use premiums to “build your base of capital,” you are required (both by law and any sensible customer) to have assets up front.”
Of course they need a healthy show of assets upfront to demonstrate financial viability, but the actual claims are unknown and premiums are used.
Tony C wrote: “…you do NOT have to continue paying premiums after a claim is made…”
Of course not, but the premiums must be current. You have an uncanny ability to change the subject and talk verbosely along a different line of thought.
Tony C wrote: “Social Security is not there to ensure you retire, it is to insure you have an income when you do retire.”
But from the perspective of a business ensuring you an income for retiring, there must be a mechanism in place, and that mechanism is an investment that will pay an annuity. Social Security does not have this kind of investment in place. They present it fraudulently as if you do, but the truth is that it is a pay as you go system. You keep comparing it to fire insurance, but it is nothing like that.
Tony C wrote: “For some people it is a supplement, for others it is all they’ve got, that is true.”
But it was DESIGNED to be a supplement for everyone, but people mistakenly think they can count on it. The Social Security system is projected by the Social Security Administration to go bankrupt. You just have faith that government will find a way to fund it.
Tony C wrote: ” I am correct without caveats. Profit is excess money, PERIOD. By definition.”
My point was that when you design something to earn a profit, you build into you business plan a viable method of producing income. My primary point was that a business needs a healthy income stream, not a profit, but designing it toward earning a profit helps build a healthy income stream.
What Social Security does is simply take money from people to pay what it needs now. That is how a pyramid scheme works. A pyramid scheme takes a small amount of money from a large number of people, and it pays a smaller amount of people. In a voluntary system, the larger number of people invest because they hope to be in the same position as the people at the top of the pyramid eventually.
Tony C wrote: “There is an obvious and clear “investor” for such a company: Its owners.”
Any business that relies only upon the income derived ONLY from investment from its owners is doomed to fail. That has been my point.
@davidm2575 1, November 30, 2013 at 3:22 pm @
“What Social Security does is simply take money from people to pay what it needs now. That is how a pyramid scheme works. A pyramid scheme takes a small amount of money from a large number of people, and it pays a smaller amount of people. ”
With all due respect I think you have some real problems with this remark.
You seem to be claiming that 1) a fundamental or defining characteristic of pyramid schemes is that they take funds form one group of people and transfer those funds to a different, perhaps smaller, group of people in the present, in real time 2) and further that kind of transfer is intrinsically bad 3) that other entities that operate this way – transferring funds form one group of people to another smaller group of people in real time – are in fact pyramid schemes.
I would argue that transferring funds from one group of people to another smaller group in real time is a characteristic of many economic entities.
For example charities transfer funds from contributors to those in need. Churches transfer funds from parishioners to the poor and possibly to church staff. Businesses transfer funds from customers to contractors and employees. In particular, insurance companies transfer funds in the form of premiums from policy holders to those with a valid loss – who might also be policy holders.
In some, but not all of those cases, the group receiving the funds is smaller than the group who have paid the funds. And these examples make their transfers in real time or near present time.
From these examples we can conclude two things. The first is that there is nothing intrinsically wrong with transferring funds from one group to another smaller group. The second is that whatever pyramid schemes are doing wrong, that something is in addition to transferring funds from one group to another – not the actual transfer itself.
Once we consider these examples we see that entities that transfer funds from one group to another group might have very desirable characteristics or they might serve no useful economic purpose – it all depends on the nature and of the transfer.
I think the only reasonable conclusion is that transferring funds from one group to another group is not a fundamental or defining characteristic of pyramid schemes, and further there is no negative inference to be drawn from the fact that an economic entity transfers funds from one group and transfers those funds to another smaller group in real time.
bigfatmike wrote: “I would argue that transferring funds from one group of people to another smaller group in real time is a characteristic of many economic entities.”
I agree with this, so there is no real need to make an argument for it.
It is not the “transfer of funds” per se that makes the pyramid scheme doomed to fail. It is the type of money being used for paying the top people. It is not based upon selling a product that people want, nor is it based upon investing in a company that is selling a product or service that people want. Instead, they take new investment money to repay the older investors.
Social Security does the same type of thing. It does not invest the money in some enterprise that sells a product or service and pays a return. It just takes the investment money from new investors to pay the older investors.
The reason I use the term “quasi-pyramid scheme” is because one difference is that the investors look at their investment as an involuntary tax and most young people who make this investment really do not expect to ever get anything back from it. They do not approach it in the same way as somebody investing in an actual pyramid scheme does.
The Social Security system is a drain on the economy overall. It is like a lead weight. Even if we keep propping it up, it really does not offer us very much economic benefit. The benefits it provides citizens can be provided through more efficient means and with less bad side effects.
@davidm2575 1, November 30, 2013 at 3:22 pm “But from the perspective of a business ensuring you an income for retiring, there must be a mechanism in place, and that mechanism is an investment that will pay an annuity. Social Security does not have this kind of investment in place. They present it fraudulently as if you do, but the truth is that it is a pay as you go system. ”
It seems to me you have some accurate statements and then miss the point entirely.
Businesses do need to have a mechanism in place to ensure “an income for retiring”. Social Security could, hypothetically, put such a system in place. But Social Security is a government program. Social Security through the power of government can do things that no business could ever do.
Sovereign states have citizens who become workers, the power to enforce their laws, control over their money supply, and economic growth to accomplish the same things that businesses do through other means.
Some of these characteristics have analogies to the business situation that you describe. A steady stream of tax revenue from workers is analogous to the stream of premiums that business requires for survival. And economic growth for government is roughly analogous to return on investment for a business.
The benefit of investment is that at some time in the future the business will have access to the principal invested plus additional funds – the return on investment or interest.
Similarly, when government uses the right mix of economic policy, there will be economic growth which means that government, without changing any tax rates or laws in any way, will have additional funds. These additional funds available to government through economic growth are roughly analogous to the return on the investment available to business.
As I see it, part of the problem in your analysis is that you keep pointing out aspects where Social Security is not like business without recognizing the fact that Social Security is a government program that has other powers and capabilities to accomplish much the same thing.
I don’t think I can agree with you that there is any fraud in the presentation of Social Security. First it is one of the best documented programs anywhere.
Second, I would argue that most of us recognize and understand that it is ‘social insurance’, that is it is security from the community. It has some but not all of the characteristics of an insurance policy or retirement program offered by a business.
But there is no contract. Social Security has something far more powerful and enduring than any business contract – it is the promise of one generation to the next that you will be secure in your old age as you have secured others who went before you.
No business or contract can ever match the ability to the entire community to provide for and protect those in need.
There are only two reasons that Social Security can fail: 1) catastrophic failure of the Nation in which case it is unreasonable to believe that any business or contract will be any safer or more secure, and 2) failure of our political will to make Social Security work as it can and should.
bigfatmike wrote: “As I see it, part of the problem in your analysis is that you keep pointing out aspects where Social Security is not like business without recognizing the fact that Social Security is a government program that has other powers and capabilities to accomplish much the same thing. I don’t think I can agree with you that there is any fraud in the presentation of Social Security.”
The fraudulent nature of it is that it is represented to the minds of many like a retirement investment. Have you seen the AARP commercials where old seniors argue that they invested in Social Security and are owed what they put into it? Have you seen here in this forum where people think of the Social Security tax like an income stream to a business and like premiums paid on insurance? No doubt that a government can do things business cannot do because it has the power to make people pay for the product whether they want to or not, but exercising that power comes at a price to the economy. Furthermore, because tax revenue is based upon the engine of the economy, tearing down the economy leads to failing government programs. This is why politicians are always raising taxes. Mathematically, if they collect the same percentage of money every year, and population is growing so that there are more people paying taxes, the government should NEVER have to raise taxes. In fact, they should be able to lower the percentage and collect the same income. They don’t do that because 1) they want more money to expand government programs, and 2) their policies hurt the economy, so the percent is raised to make up for the damage to the economy created by their programs.
bigfatmike wrote: “There are only two reasons that Social Security can fail: 1) catastrophic failure of the Nation in which case it is unreasonable to believe that any business or contract will be any safer or more secure, and 2) failure of our political will to make Social Security work as it can and should.”
If the governmental policies are leading us to economic collapse, why should we keep piling them on and then just say, “well, if that happens, no business or contract will be secure.” The wise and prudent would take steps to change the policies into ones which build up the economy rather than tear them down. In regards to Social Security, there is a way to do that by allowing the taxpayer to put some funds into his own individual retirement account to pay for his own retirement. This way the program operates more like a known business model that works by investing into the economy, in businesses selling products and services and paying back a return on that investment. Such a system is good for the economy and good for retirees.
DavidM:
“Keep thinking the way you do, without consideration for the sentiments of other people in society, and you will lead us into civil war.”
Yes, it will.
I know many of my friends are fed up and we arent rich, just middle class.
Gene: Ahh, hooking the walker itself. I had not considered that… Well honor demands I stick by my offer. We shall attend the first such event in 2030.
Tony,
I considered the “block and pin” capability of the Walkers, but I think the hooking power of the Canes will give them a slight advantage. You’re on!
Gene: I’ll take your twenty! I think Walkers have that bull rush strategy, Cane girl can’t get a good swing in without falling over before Walker girl has her on the floor.
I got ahead of myself typing. I meant to write something like:
Any plan now to extend Social Security solvency past 2030 is inappropriately based on assumptions that won’t be true anymore by 2025, and might be wildly off the mark. Plans for 2030 should be made in 2025. Probably as minor adjustments to plans for 2029 made in 2024, which were steering adjustments made to the 2028 plan made in 2023, etc.
I’m putting twenty bucks on the Canes.
DavidM: When a person pays the payroll tax, and the business he works for matches a payment toward that tax, they are not buying an insurance product. They are paying taxes meant to benefit current retirees and disabled people.
That is precisely how home fire insurance works. You pay your premium and it benefits ONLY people that have a fire, or just had a fire. It is not put in an account pending your future fire; that is an unworkable business model.
DavidM says: The person paying into Social Security is not buying anything. The worker paying Social Security receives no agreement from the government about their terms and conditions.
Of course they do; they have the law. The law is a contract and agreement with citizens.
DavidM says: The government is not agreeing that if they reach retirement or become disabled, then they will receive benefits.
Yes they are, that is the law. Technically, Society is making that agreement, their representative is the Government acting on their behalf. But yes they are, the agreement and contract is in the law.
DavidM says: Unlike a typical insurance product outlining promised benefits for premiums paid, nobody signs an agreement.
Read the law, it precisely outlines the benefits. You also do not sign a contract promising you won’t murder, or steal, or rape women. But you can still be held liable for that. This is the nature of a Social contract (or compact), it is logistically impossible for every citizen to agree to every law or be expelled from the country or incarcerated (the Right to remain free within the country is contingent upon assent to the laws Society has set for the country, and violation of that contract results in penalties).
DavidM says: Social Security could be abolished tomorrow, and while a bunch of people will scream about it, legally, no promises or agreements have been broken.
I am not a lawyer, but IMO abolishing Social Security would be a crime, a breach of contract and fraudulent taking from every worker that has contributed to the system thus far on the promise of benefits in the future.
DavidM says: If Social Security were a business, it would fail because there is no profit involved.
That is complete load of bullshit. Profit does not enable business. Is one penny of profit enough? I will allow that.
Profit is the excess of revenue minus all costs. It is dead money that serves no function in the business whatsoever, by definition: It is excess money. If it were paid back to customers, donated to charity, or burned in a bonfire it would make no difference to the business: it is excess, meaning it is not needed for any expenses, it is not needed for reserves against depreciation, maintenance or emergency, it is excess.
In fact, most businesses do flush the money out of the business and into the owner’s pockets to do with as they please. If the owner buys a yacht, or a vacation in Paris or a gambling spree in Vegas, that is disconnected from the business, it doesn’t serve the business itself any purpose at all. No board or stockholder has any say or claim to make on the disposition of distributed profits.
A business, once established with prudent reserves, can in principle survive indefinitely on exactly zero profit, particularly with modest borrowing power against its assets (the loan principle can pay for unexpected business expenses which are deductible and tax free, and any loan interest is also a business expense that is deductible and therefore tax free.)
For a businessman, you are particularly non-astute in the operations of a business. Profit is not a necessity to the business at all, otherwise it would never be allowed to leave the business and become the personal property of the owner, as dividends (from a C corporation) or distributions (from an S corporation or Limited Liability entity). It is excess money, by definition.
DavidM says: The entire system is more complicated than this simple fact [of equilibrium and workers outnumbering retirees].
No, it isn’t.
DavidM says: Social Security takes care of the disabled too. The qualifications for that are getting easier.
That is our choice, as a people. An equilibrium still exists, workers still outnumber the recipients. If we change it to 2.5 workers per recipient instead of 2.75, that is still an equilibrium. If we increase entitlements, we may need to increase taxes, but that is still a fair trade.
DavidM says: Social Security started failing in 2010 when it paid out more in benefits than it received in taxes.
No, it didn’t. Just as an insurance business has not begun some inevitable slide into bankruptcy if its expenses exceeded its premiums collected for a year, due to some disaster or bad luck. As I described, the ratio of workers to recipients will vary, but if the equilibrium payment is made those will average out, borrowing can provide the difference.
It is similar to a stock strategy. For the last 28 years, the Dow Jones has gained an average of 8.9% per year. If I wanted to invest a million dollars, I could buy the DJI, and always (regardless of performance) sell 5% of my holdings every year, to live on. The portfolio would grow about 4.9% a year, enough to cover average inflation (3.25% per year) with a little edge; so my long term income would have the purchasing power of 5% of $1M which is $50K (before taxes) every year, indefinitely. Some years, my entire portfolio will be down. Some years, it will be up much more than 8.9%. I don’t have to worry about that, there is an equilibrium amount (in either percentage or purchasing power dollars) that the portfolio can pay me that will even out, and beneath that equilibrium point, would even grow.
Social Security is similar; because the ratio fluctuates slowly, for some rather long periods it will pay out more than it takes in, and have to borrow to do that, in other long periods it will take in more than it pays out, and can repay the borrowed funds with the excess. In principle, Social Security does not have to either earn a profit or avoid losses for long terms; all it really has to do is ensure the long term average breaks even, and keep an analytic eye on what that long term average will be so taxation can be set appropriately.
DavidM says: For the last three years straight, Social Security has paid out more than it has taken in through taxes. The projection is that overall, this deficit will continue to grow larger until Social Security is bankrupt in 2030.
Okay. And I suppose in the 17 intervening years, all of us are sheep that will not be permitted to do anything at all to avoid disaster. All the politicians, academics, statisticians and citizens will all be magically constrained to watch in horror as Social Security drives over a cliff on January 1st of 2030, bankrupting our parents and grandparents, causing national chaos, massive defaults on debts for banks and loans by the elderly that now have zero income, and millions of Nanas ejected into the streets to fend for themselves and battle it out for food in “Walker Vs. Cane” cage fights.
Our hands will be tied! We can’t vote! We can’t do anything!
More alarmist bullshit. Do not believe any projection longer than five years. Moore’s Law is not just for electronic technology, all of our scientific knowledge is growing exponentially, our technological knowledge is advancing at an exponential rate, too. In five years, Moore’s law predicts computation will be ten times faster; by 2030, 2500 times faster. There may be some wall to that, but we haven’t found it yet; and we don’t know the ramifications.
The adults of 2018, 2023 and 2028 will have 10 times, 100 times, and 1000 times the technological toolshed to work with as the adults of today, the idea that they won’t be able to devise any solutions to the problems of Social Security before then are ludicrous. That does not imply we shouldn’t do what we know to do now, it means don’t waste your time projecting beyond your useful knowledge. If the Social Security system is solvent for the next five years, then we can revisit those figures every year or every few years, and ensure we have enough time to fix it if we see trouble in the next five years. That is a time horizon in which we reasonably expect our plans won’t be obsolete before they are implemented. Any plan now to extend solvency from 2030 to 2040 would be best made in 2025, not now, and may not be necessary at all, if we focus our efforts this year on the long term health of the Social Security system in 2018, and next year on its health in 2019, and so forth, without decreasing benefits to those in need (but perhaps using technology to prevent any fraud and distinguish those in need from those without it).
Tony C wrote: “That is precisely how home fire insurance works. You pay your premium and it benefits ONLY people that have a fire, or just had a fire. It is not put in an account pending your future fire; that is an unworkable business model.”
This is how you rationalize insurance, but such exists primarily in your mind. It is your personal understanding. It is like how President Obama put forward that the fee paid by people not buying health insurance was a penalty in order to rationalize that he was not raising taxes on people, thereby garnering votes for his plan, but Justice Roberts rationalized that the fee was a tax, thereby clearing it over Constitutional difficulties.
Another way to look at your fire insurance analogy is that fire insurance premiums help build a base of capital along with other premiums from which claims are paid out. It is entirely likely that some of your premiums paid in will end up paying for your claim, especially because premiums must continue to be paid on time when you make your claim. The important distinction is that the person buying it actually agrees to a product he is buying, and he has terms of the agreement by which he can make a claim.
Another huge difference is that most people who buy fire insurance will lose their bet and never experience that fire ever. In contrast, the odds are in favor of people retiring. Most people make it to retirement, which is the exact opposite situation found with most insurance products that do not have an investment aspect to the product.
Tony C wrote: “Of course they do; they have the law. The law is a contract and agreement with citizens.”
The idea that the law is a social contract with citizens is a philosophical rationalization that exists in your mind. A real contract involves a meeting of the minds between two parties. Calling it a contract is only how you provide a rational justification in your mind for authoritative one-sided action on the part of government. It is a method you use to force people to submit to your will, which is expressed by government law. The truth is that there is no social contract on this issue because there is no meeting of the minds between two parties about this.
Thomas Hobbes put forward social contract theory to justify his advocacy for a Monarchy which had a King authoritatively order his subjects to submit. He was not very keen on democracy. He lived in a time when civil war in England was based upon many wanting more sharing of power between the King and Parliament. I doubt this represents your idea of social contract theory, but that is the problem with using the idea of a social contract. It can be used to justify pretty much any kind of authoritative action by government by claiming that the people are not being forced against their will. It is all part of the “social contract.” It makes oppressive action sound agreeable.
John Locke put forward a concept of social contract theory that actually justified revolution against government at times, but as his philosophy is based upon private ownership of property, I’m pretty sure you do not follow his model of social contract theory. We really don’t know what you mean when you use the term social contract.
DavidM wrote: “The government is not agreeing that if they reach retirement or become disabled, then they will receive benefits.”
Tony C replied: “Yes they are, that is the law.”
What law guarantees that I will have Social Security when I retire? I am not aware of any law claiming this will happen. People might expect this to happen because people who retire today are entitled to the benefits, but laws can be changed, and the law right now does not guarantee that it will not change. If it does, please reference it for me.
In contrast, an insurance policy is an agreement that if my premiums are paid up to date, I have a right to make a claim for payment. Nothing like this exists for Social Security. I can apply for help even if my “premiums” are not up to date.
Tony C wrote: “A business, once established with prudent reserves, can in principle survive indefinitely on exactly zero profit…”
Technically you are correct, but not if the business model did not pursue a mechanism of producing income for itself. What investor would ever invest in a company set up like Social Security? It would be obvious that the system is a pyramid scheme doomed to fail.
Tony C wrote: “If we increase entitlements, we may need to increase taxes, but that is still a fair trade.”
Maybe according to you increasing taxes is a fair trade, but not according to everybody in society. I saw a bumper sticker the other day, that if 10% is good enough for God, it is good enough for government. Taxes for many people are well over 50% now when all Federal, State, local and payroll taxes are added up. At some point, you will bankrupt society when the number of people working cannot support the number of people not working. At some point, it would be more advantageous for people to dissolve government and fend for themselves. This is what happens in revolutions. Keep thinking the way you do, without consideration for the sentiments of other people in society, and you will lead us into civil war.
Tony C wrote: “Just as an insurance business has not begun some inevitable slide into bankruptcy if its expenses exceeded its premiums collected for a year, due to some disaster or bad luck.”
You added that little word “inevitable” and it changes the whole meaning. I mentioned that adjustments have been made in the past, and will be made in the future. The problem is that because of the pyramid nature of it, having a large group at the bottom supporting a smaller group on top, and the people at the bottom becoming dissatisfied with the results of what the product is suppose to be doing for everybody, it will eventually fail if changes are not made.
**nick spinelli 1, November 26, 2013 at 5:34 pm
I also propose a gradual raising of the retirement age to 70 as life expectancy increases, w/ men being eligible 18 months prior to women since women live longer.
**
Sorry Nick, I don’t that idea at all.
Yes, whoever pays it will be very, very painful, that’s why I propose we Americans take back our Alaskan/Gulf Mexico Oil Royalties from that Red Coat British Queen bitty & we also cut those Red Coats off from the funds the US Federal Reserve System is stealing off us all.
With whats left will be plenty to keep us in Tbones & Beer! 🙂
its no laughing matter. but the irony of them raising the retiree age from 65-to 67 with the bs that we’re living longer is laughable. since they are doing everything they can to depopulate the earth of at the least 5 million people by 2015…….
they raised it in hopes that you will die before receiving it. its the purpose of all the toxins they are forcing into our bodies, thru foods, medications and even the air ex chemtrails. are all designed to weakened our immune systems and body to kill us off faster. our ancestors who had none of the technology we have today. lived much healthier and longer lives. can anyone explain how that is possible? since we have all these medications and operations and machinery which supposedly was designed with the purpose of giving us longer and healthier lives…
if the people really want their country, lives, right and freedoms back they will begin to break the corporations by tearing into their monetary tyranny which will break the po-lie-ticians. just as it took them hundreds of years to put these plans into place with the ability to utilize them against us. it will take our descendants a significant amount of time to turn around our country from the corruption that has infected it from the inside. but it can be done.
After the Boston Tea Party and the Revolutionary War, Americans had no stomach for creating another centralized government with the power to collect and disperse vast amounts of money. The Articles of Confederation, therefore, contained no taxation power since each State retained its own sovereignty. Monies required by the Union had to be requested from the States, who were not obliged to pay. This led to a series of tax revolts in the States, the most famous of which was Shay’s Rebellion in Massachusetts, which was still ongoing in 1787, the same year that the Constitutional Convention was convened.
At the Convention, the Founding Fathers were very much aware of the anti-tax sentiment in the land and knew that a compromise had to be struck. The lack of any taxation power under the Confederation made the United States weak and vulnerable to enemy attack, since sufficient funds could not be raised for defense purposes. But Americans had just freed themselves from European taxes of every description, which effectively confiscated the fruits of their labor and resigned them to a life of serfdom. They were not about to duplicate the mistakes of the European monarches, aristocrats and “enlightened” despots.
Of all the types of taxes loathed by the Founding Fathers, direct taxes were at the top of their list. These taxes on income and property allowed a federal government to have vast power over the electorate since, in order to assess these taxes, the federal government had to pry into the private lives of the citizenry. It was agreed that any such direct taxation power would be reserved to the States, where the representatives are closer and more accountable to the people.
The federal government would limit its sources of income to indirect taxes, such as import duties and excise [luxury] taxes. The Founding Fathers reasoned that such taxes could be avoided by citizens simply by not purchasing the taxed items. In Federalist #21, Alexander Hamiltion — who would become Secretary of the Treasury under George Washington — said:
The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. … It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. … If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them. Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country. Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment.
By this time, politicians had been given a taste of the way things could be, and thereafter regarded Constitutional limitations on federal taxation power as a thorn in their side. In 1893, President Grover Cleveland wanted Congress to lower import duties and make up for the loss by taxing the income of corporations. Congress jumped at the chance to get their foot in the door on an income tax and expanded the bill to include a personal income tax as well. The bill passed in 1894, but was declared unconstitutional by the Supreme Court in the case of Pollock v. Farmer’s Loan and Trust Company in 1898. The Supreme Court upheld the Constitution and declared that an income tax — and any other tax which cannot be avoided — is a direct tax. As such, it must be a periodic tax in accordance with the Constitution, duly defined as to its purpose by appropriate legislation, divided among the States by population and collected by the States themselves. The court stated that:
… Ordinarily, all taxes paid primarily by persons who can shift the burden upon someone else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect to their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes … A tax upon one’s whole income is a tax upon the annual receipts of his whole property, and as such falls within the same class as a tax upon that property, and is a direct tax, in the meaning of the Constitution…
Undaunted by this initial setback, the federal government then set out to collect an income tax in the only Constitutional way possible — by amending the Constitution. Such an amendment was put before Congress in 1909. It is not surprising that the amendment passed overwhelmingly in the House and Senate, given that the federal government was in effect voting for its own pay raise, but an informed electorate should have been more skeptical, if not cynical. The debate surrounding ratification of the 16th amendment centered on the appropriateness of taxing the wealthy individuals and corporations who had engineered the Industrial Revolution. The destructive philosophy of class envy was successfully employed to sell the amendment to the American people, who were assured that the wages of the working man would never be taxed.
http://americanwisdomseries.com/334.html
Michael J. Marsalek 1, November 25, 2013 at 10:06 am
Social Security & Medicare are entitlement programs …
==========================
Wrong:
(Wikipedia).
Dredd wrote:
Social Security & Medicare are entitlement programs …
==========================
Wrong: …
———-
Dredd, you quoted Wikipedia, so I will quote Wikipedia back at you. 🙂
https://en.wikipedia.org/wiki/Entitlement
Examples of entitlement programs at the federal level in the United States include Social Security, Medicare and Medicaid, most Veterans’ Administration programs, federal employee and military retirement plans, unemployment compensation, food stamps, and agricultural price support programs.[3][4]
Originally, the term “entitlement” in the United States was used to identify federal programs that, like Social Security and Medicare, got the name because workers became “entitled” to their benefits by paying into the system. In recent years the meaning has been used to refer also to benefits, like those of the food stamps program, which people become eligible to receive without paying into a system.[5] Some federal programs are also considered entitlements even though the subscriber’s “paying into the system” occurs via a means other than monetary, as in the case of those programs providing for veterans’ benefits, and where the individual becomes eligible via service in the U.S. military.[6]
I also propose a gradual raising of the retirement age to 70 as life expectancy increases, w/ men being eligible 18 months prior to women since women live longer.
nick spinelli 1, November 26, 2013 at 5:28 pm
Who here believes SS is sustainable w/o fundamental and painful solutions? We need to weed out the uninformed before a serious discussion can be had
========================
You mean FDRcare don’t you?
Let’s get the nomenclature down first. 😉
I want SS to be available for my kids and grandkids, They all realize that w/o serious changes it wont’s be. I propose either means testing for recipients OR an increase in the taxable FICA income to 300k. The haters of the rich will want both,
Who here believes SS is sustainable w/o fundamental and painful solutions? We need to weed out the uninformed before a serious discussion can be had
http://www.zerohedge.com/news/2013-11-23/killing-we-paid-our-taxes-we-earned-our-benefits-social-security-ponzi-meme
Bron: He doesnt want his fair share from the govmint,
But like Rand, I feel certain he will take it. The selfish don’t turn down money; like Rand I am sure he will find a way to rationalize it.
Bron says: he just wants to keep what he earns by his personal effort.
I don’t have a problem with that, but everything you earn is not earned by your “personal effort.” It is earned in this society relying on the rest of us to pay for the police that kept you from getting robbed, the inspections that kept you from getting poisoned, the roads that you used, the sewer systems you used, the military that defended you, and on and on. All of that contributes to your success. What you “earn” is not entirely by your personal effort, that infrastructure is a tool you used in the earning process and it isn’t free. Our evidence that you used it is that you have income, and based on that income, we charge you a percentage for rent and maintenance, which we call “taxes.” We aren’t taking anything that belongs to you, we are taking what belongs to us when you use our infrastructure to make money.
Bron says: Why not let ron and the 100 million plus who think like ron, prepare for retirement and catastrophe on their own.
We tried that. When catastrophe happened and it turned out almost nobody was prepared for that, we realized that “self reliance” and “responsibility” was not a viable route. So collectively, with the pain of that realization still smarting, the smart people of the time devised a different scheme that was agreed upon. Mandatory contribution throughout life with an unbreakable guarantee that, unlike a private bank, or brokerage, or company or union retirement plan, and regardless of economic circumstances, the government would be there to finance basic retirement.
As is always the case with your fantasy’s, we’ve been there and done that and it didn’t work.
DavidM: Do you agree that Social Security involves no real investment or sale of products or services to the public?
That is ludicrous; the product and service is a guarantee of “Security” if they reach retirement; it is just as much a product and service as Insurance is.
DavidM: Do you agree that the benefits are paid from new capital paid from new contributors?
I would not, because the premiums are not intended to be “capital” and are not intended to “earn” any profit. Capital is preserved or spent on a business. Nobody in the government or social security offices will pretend that is what is happening at all. There is no fraud. It isn’t intended or operated as a money-making business. They treat it like insurance, with the added benefit that the Government will not go bankrupt.
Both a pyramid scheme and a Ponzi scheme are characterized by fraud and unsustainability. The Ponzi scheme defrauds investors by making them think their capital is preserved and invested when it isn’t. The pyramid scheme is a fraud, and although the fraud can take different forms, it is usually a fraud in pretending the profits are ultimately derived from foot-soldier sales, when in fact they are a function of fees or “sales” in the service of unsustainable recruitment, that ends up with the final dupe getting stuck with owning products he bought for resale, but did not want himself and finds he cannot sell for enough to recover his costs.
Social Security is sustainable, and sustainable on the face of it: The percentage of retired is always smaller than the percentage of working, and as that ratio fluctuates the government can easily buffer the difference.
Tony C wrote: “…the product and service is a guarantee of “Security” if they reach retirement; it is just as much a product and service as Insurance is.”
Either you have been deceived by the fraudulent aspects of the Social Security Quasi-Pyramid Scheme, or you are purposely perpetuating the fraud yourself.
When a person pays the payroll tax, and the business he works for matches a payment toward that tax, they are not buying an insurance product. They are paying taxes meant to benefit current retirees and disabled people. It is security for someone else, not for the person making the tax payment. The person paying into Social Security is not buying anything. The worker paying Social Security receives no agreement from the government about their terms and conditions. The government is not agreeing that if they reach retirement or become disabled, then they will receive benefits. Unlike a typical insurance product outlining promised benefits for premiums paid, nobody signs an agreement. Social Security could be abolished tomorrow, and while a bunch of people will scream about it, legally, no promises or agreements have been broken.
When a person is entitled to a benefit from an insurance company, they file a claim. That does not happen with Social Security. With Social Security, the person files an application for benefits. Someone might think that is a semantic argument, but it is more than that. It represents the distinct difference between the two types of benefits. With a claim, the claimant is making a demand for something he is owed, for something he paid for. With an application, the applicant is making a request.
When insurance companies offer pensions and annuities, they actually invest a portion of your premiums in companies that produce products and services and make a profit. Usually your benefits are based upon the performance of those investments, and if they do well, you are owed those benefits. This investment is good for the economy too, by building businesses that create jobs and stimulate more buying and selling in the economy. Social Security provides no such benefit to society. It is basically a monetary pipeline, conducting money from one group of people to another. There is overhead to running this pipeline, so the whole system costs more than if people just gave money directly to those who needed it.
If Social Security were a business, it would fail because there is no profit involved. It would run for awhile, then eventually run out of money when their borrowing power ran out. It is like a failed business model that might run for years while they can borrow money, but eventually their borrowing power runs out and the business goes bankrupt because the money owed exceeds the money received. So Social Security is an economic hole whereby only expenses are incurred. It is a system whereby one group of people pay for the benefit of another group of people, and that group also must pay others a salary and pay overhead costs of huge office buildings, furniture, big electric bills, computers, water, cafeterias, websites, programmers, etc. to administer the program. The entire model is doomed to fail for this reason.
The reason Social Security has not failed yet is because rather than just having a small subset of the population voluntarily get in on it, we have every single worker in the country being forced to participate. That is a lot of borrowing power. A business could run for more than a century like this. Furthermore, government keeps making adjustments that slow down its tendency toward failure. Right now it is projected to fail in 2030. The government will likely continue to make adjustments, but eventually, it has to fail because there is no mechanism of profit involved whereby all the overhead involved in administering the program can be paid by the system itself. It is like someone without a job who buys a car and continually borrows money on his credit card to put gas into the car. The car will run for awhile, maybe for years, but eventually after all the efforts to borrow money to keep it filled with gas are exhausted and the borrowing limit has been reached, the car will run out of gas and be useless.
Tony C wrote: “Social Security is sustainable, and sustainable on the face of it: The percentage of retired is always smaller than the percentage of working, and as that ratio fluctuates the government can easily buffer the difference.”
The entire system is more complicated than this simple fact. Social Security takes care of the disabled too. The qualifications for that are getting easier. People get on Social Security for anxiety, arthritis, back pain, personality disorder, and many other common ailments. There are roughly 63 million people getting social security with about 140 million in the workforce, but with only 12.4% being collected, the overall payout is higher than what is being paid in.
Social Security started failing in 2010 when it paid out more in benefits than it received in taxes. For the last three years straight, Social Security has paid out more than it has taken in through taxes. The projection is that overall, this deficit will continue to grow larger until Social Security is bankrupt in 2030. It could happen sooner or later, depending upon various assumptions of the mathematical models. The only thing the Social Security Administration knows for sure is that it will fail unless something is done to change the way that Social Security is structured.
FDR originally proposed part of the program having an investment aspect. Ronald Reagan proposed it too, and so has Paul Ryan. This seems like a logical way to have a profit aspect so that the system can pay for itself. Unfortunately, the left is blocking consideration of that solution with their rhetoric and blind faith that somehow because it is government without a profit motive, it will just magically somehow work. Collect more taxes from people, and the idea is that it will just work. It is like running up a credit card and assuming that you will always be able to raise your credit limit and keep borrowing in order to pay for everything. Others have a more realistic perspective about how things work in the real world.
tONY c:
“ron: You have the right to be angrily ignorant; exercise it all you want. You will still be entitled to your fair share when you need it.”
A guy like ron, probably already is prepared or preparing for retirement. He doesnt want his fair share from the govmint, he just wants to keep what he earns by his personal effort.
Why not let ron and the 100 million plus who think like ron, prepare for retirement and catastrophe on their own. It is called self reliance and personal responsibility, we used to be a nation dedicated to those concepts.