The Media and Social Security

[StJeanneDArc]

JamesD:

Vern,

I think the problem might be that if we compensate the wage to illiminate inflation then we must also compensate the rate of return for inflation as well. The problem I think is that 10% rate of return is too high to be considered a real rate of return. Perhaps the 5% is a good number I really don’t know. Can we get some representative real historical rates of return to eliminate this part of the argument. I really want to see how this figures out.

I agree using a more conservative 5% growth rate for investments is better. Katherine is working hard to debunk this by looking at the past. It’s done! That money is gone to waste, fraud, abuse, and previous and current recipients of SS. What’s going to happen in the future? Let’s use a Wal Mart clerk, making $6 an hour for 40 years, giving him an annual salary of $12,000. Never gets promoted or gets a raise. If that person puts 12.4% of that money into a broad fund and we’ll assume monthly payments, monthly compounding of 5% annual growth rate. After 40 years that clerk will have over $1,660,000 in an account. Roll that into a 5% annuity and he’ll draw $83,000 a year. It’s the magic of compounding–too bad the government doesn’t do it.

 

[vern_humphrey]

JamesD:

Vern,

I think the problem might be that if we compensate the wage to illiminate inflation then we must also compensate the rate of return for inflation as well. The problem I think is that 10% rate of return is too high to be considered a real rate of return. Perhaps the 5% is a good number I really don’t know. Can we get some representative real historical rates of return to eliminate this part of the argument. I really want to see how this figures out.

That would be mathmatically incorrect – the rate of return is not linked to inflation (unless you are buying instruments like Certificates of Deposit.)

We have compensated for inflation by using constant dollars – in fact, we have over-compensated by not allowing our wage earner any economic raises in his entire lifetime.

We have selected a rate of return one standard deviation below the mean of a large sample of stock funds (and reduced it further, just to make Katherine happy.)

When I turned 55, I got my letter from Social Security, giving my “estamated contributions” (estimated because they don’t keep records on how much you actually pay.)

I applied those “contributions” to the ACTUAL record of my investments, and found I would have had an extra $550,000 at that time. At the present time, even with the downturn in the market beginning in April of 2000, I would have about $3,500,000 extra.

My wife, who is a bit younger than I, would have almost $2,000,000 extra IF she had invested her “contributions” as she invested her savings.

Now, Kathereine wants me to start at a point 40 years in the past, with a minimum wage of $1.25 an hour. It gets a bit complicated, because we must change the “contribution” every time the FICA tax goes up, and every time the minimum wage is increased. But my calculations yield a bit over $400,000 . If that were then put in a 5% annunity, it would bring $20,000 a year.

This hypothetical person who worked for minimum wage will actually draw slightly less than $6,000 under Social Security.

 

[JamesD]

StJeanneDArc:

I agree using a more conservative 5% growth rate for investments is better. Katherine is working hard to debunk this by looking at the past. It’s done! That money is gone to waste, fraud, abuse, and previous and current recipients of SS. What’s going to happen in the future? Let’s use a Wal Mart clerk, making $6 an hour for 40 years, giving him an annual salary of $12,000. Never gets promoted or gets a raise. If that person puts 12.4% of that money into a broad fund and we’ll assume monthly payments, monthly compounding of 5% annual growth rate. After 40 years that clerk will have over $1,660,000 in an account. Roll that into a 5% annuity and he’ll draw $83,000 a year. It’s the magic of compounding–too bad the government doesn’t do it.

Agreed,
However it is not correct to use a savings rate of 12.4%. Some of that money has to go to pay for beneficiaries who do not fall under the standard work life model. Otherwise, Katherine’s aguement of the disabled and survivors being the big losers becomes true.
From what I have heard bantered about a worker would be able to start with contributing $1000 the first year and then it goes up by $100 /year. I don’t think that it will be a pay yourself or pay into the system only choice.
Over the long term the amount that goes in to “pay yourself” could be a large percentage of the payroll tax and a much smaller portion going into the “system” to pay current beneficiarys. I have no idea what that would settle out to be. My hunch (guess really, not worth much) is that if the benefits are to remain similar to what the system pays now it would be about 2 to 5% of gross income. The amount that people are forced to "pay themselves would be whatever we think people need to be forced to save.

 

[JamesD]

vern humphrey:

That would be mathmatically incorrect – the rate of return is not linked to inflation (unless you are buying instruments like Certificates of Deposit.)

We have compensated for inflation by using constant dollars – in fact, we have over-compensated by not allowing our wage earner any economic raises in his entire lifetime.

We have selected a rate of return one standard deviation below the mean of a large sample of stock funds (and reduced it further, just to make Katherine happy.)

When I turned 55, I got my letter from Social Security, giving my “estamated contributions” (estimated because they don’t keep records on how much you actually pay.)

I applied those “contributions” to the ACTUAL record of my investments, and found I would have had an extra $550,000 at that time. At the present time, even with the downturn in the market beginning in April of 2000, I would have about $3,500,000 extra.

My wife, who is a bit younger than I, would have almost $2,000,000 extra IF she had invested her “contributions” as she invested her savings.

Now, Kathereine wants me to start at a point 40 years in the past, with a minimum wage of $1.25 an hour. It gets a bit complicated, because we must change the “contribution” every time the FICA tax goes up, and every time the minimum wage is increased. But my calculations yield a bit over $400,000 . If that were then put in a 5% annunity, it would bring $20,000 a year.

This hypothetical person who worked for minimum wage will actually draw slightly less than $6,000 under Social Security.

Vern,
The affect that inflation has on rate of return is that the rate of inflation has to be subtracted from the earning rate.
Example, I pick a good stock that returns 20% after one year. Inflation was high that year (10%). My invested amount is worth less than it did and the real rate of return is 20%- 10% = 10%.
If that same year I held a bond with a 5% yield I actualy lost 5% on it.
As for the rest I can’t argue with you or confirm it I wish i had the time to work it out.
I did figure out one thing.
If the amount allowed for private accounts is 4%, the worker works from 18 yrs to 67 yrs old, and the real investment yield is 6.9%. The worker will be able to continue with that inflation adjusted wage into retirement indefinately. Does not mater if the worker worked min wage or at 10 times that average wage.
A 5% of gross saving rate would ensure the worker has more income during retirement than when he worked.

 

[StJeanneDArc]

JamesD:

Agreed,
However it is not correct to use a savings rate of 12.4%. Some of that money has to go to pay for beneficiaries who do not fall under the standard work life model. Otherwise, Katherine’s aguement of the disabled and survivors being the big losers becomes true.
From what I have heard bantered about a worker would be able to start with contributing $1000 the first year and then it goes up by $100 /year. I don’t think that it will be a pay yourself or pay into the system only choice.
Over the long term the amount that goes in to “pay yourself” could be a large percentage of the payroll tax and a much smaller portion going into the “system” to pay current beneficiarys. I have no idea what that would settle out to be. My hunch (guess really, not worth much) is that if the benefits are to remain similar to what the system pays now it would be about 2 to 5% of gross income. The amount that people are forced to "pay themselves would be whatever we think people need to be forced to save.

My example in no way accounts for a transition out of the SS Ponzi scheme. The only point was to show how an individual would do so much better than the government scheme. I agree that there won’t be much choice in whatever we get, because as a country we’re still wedded to the socialist mindset. You demonstrate it perfectly with your last sentence: “would be whatever we think people need to be forced to save”.

 

[JamesD]

StJeanneDArc:

My example in no way accounts for a transition out of the SS Ponzi scheme. The only point was to show how an individual would do so much better than the government scheme. I agree that there won’t be much choice in whatever we get, because as a country we’re still wedded to the socialist mindset. You demonstrate it perfectly with your last sentence: “would be whatever we think people need to be forced to save”.

I am so glad you caught that.
I will submit however, that there is a good practical reason for forcing retirement savings. It prevents alot of foolish people from needing handouts later. Kind of like how some states require the purchase of car insurance.
It may not be a “crisis” but we can see that the longer we wait the more painful it will be to transition out of the “SS Ponzi scheme”.:yup:

 

[vern_humphrey]

JamesD:

Agreed,
However it is not correct to use a savings rate of 12.4%. Some of that money has to go to pay for beneficiaries who do not fall under the standard work life model. .

You’ve fallen into the fallacy of limited alternatives. While we must account for those who cannot work, we DON’T have to do it with a cruely regressive tax.

A person making a million dollars a year pays a smaller percentage of his income in FICA tax than a person making $20,000. The FICA tax works to make it difficult for the lowest income workers to save.

A fair system would transfer the burden for those who cannot work to a progressive tax.

 

[vern_humphrey]

JamesD:

Vern,
The affect that inflation has on rate of return is that the rate of inflation has to be subtracted from the earning rate.
Example, I pick a good stock that returns 20% after one year. Inflation was high that year (10%). My invested amount is worth less than it did and the real rate of return is 20%- 10% = 10%.
If that same year I held a bond with a 5% yield I actualy lost 5% on it…

You are talking about economic rate of return, not absolute rate of return. Inflation is accounted for in the model by holding wages constant. In the real world, as inflation goes up, the number of dollars available for investment goes up, too.

Because we do not allow our hypothetical worker an economic raise (an increase in purchasing power), we have over-compensated for inflation.

JamesD:

If the amount allowed for private accounts is 4%, the worker works from 18 yrs to 67 yrs old, and the real investment yield is 6.9%. The worker will be able to continue with that inflation adjusted wage into retirement indefinately. Does not mater if the worker worked min wage or at 10 times that average wage.
A 5% of gross saving rate would ensure the worker has more income during retirement than when he worked.

That is correct. I sent another poster a model (ported out to Excel) that shows by the 33rd year, a worker would have his full Social Security entitlement from his savings, and by the 40th, would replace his working wage.

Every time you hear of an elderly person having to give up heating or air conditioning, remember – they actually EARNED and SAVED enough money to live in comfort – but the government stole their savings.

 

[camby]

Social Security has always been unConstitutional

Find where the Constitution where it says the Federal Govt has a right to take your hard earned $$ and put it in 1 big pot, then give it to others against you will. Charity is voluntary, theft is criminal. No one should be forced to save, contribute, etc

Bush’s plan is on course to cost us multi $$ to support. The dems want to do 1. Increase taxes 2. Pretend nothing is wrong 3. Blame someone else.

The system needs to gradually, over a long term phase out this program. The constitution prescribes how bills and laws are passed. James Madison, the Constitution’s father, described general welfare clause as those duties reservved to govt, specifically spelled out in said document. Period. TO amend, as in the 13th amendment for example, there are procedures in place. Social Security is not one of them.

Find out more:

HOME - Constitution Party

 

[vern_humphrey]

camby:

Social Security has always been unConstitutional

Find where the Constitution where it says the Federal Govt has a right to take your hard earned $$ and put it in 1 big pot, then give it to others against you will. Charity is voluntary, theft is criminal. No one should be forced to save, contribute, etc

Bush’s plan is on course to cost us multi $$ to support. The dems want to do 1. Increase taxes 2. Pretend nothing is wrong 3. Blame someone else.

The system needs to gradually, over a long term phase out this program.

You aren’t wrong there – but the Constitution is merely a facade these days.

There is a way out, but first Congress must stop stealing the Social Security surplus while there still IS a surplus.

 

[Meg2]

Here’s a few concerns I have about the Personal Savings Accounts and the state of Social Security. My concerns/questions are based on this article and on this interview.

• Bush continues to say it, but Social Security will NOT be bankrupt by 2042. The Social Security Administration estimates that by then the system could still pay out 73% of promised benefits. Now, I like 100% better than 73%, certainly something does need to be done. I just don’t like that he’s mangling the facts. To me, Social Security would be bankrupt if it could pay out no benefits at all.
• I understand that the belief is that a person will receive more with traditonal Social Security benefits plus PSA investments than with Social Security benefits alone. That makes sense by itself. But where are we going to come with 2, 3, 4 TRILLION dollars (everyone has their own estimate) to finance this program? Will there be some astronomical fee for me to enroll in the program? If not, where? In the short-term, I can’t believe it’s going to pay for itself. My understanding is that the government cannot control the money in the PSAs, at least not to invest it or use it to pay for things in its budget.
• There’s no guarantee that the market will do better. I believe it probably will, according to the article, and we could expect a rate of return of 4.6% from a “conservative mix of stocks, corporate bonds and government bonds.” But what if I invest in the most conservative of conservative funds and I still come out behind? The SSA guarantees my traditional benefits, short of changes in the law of course. There’s no such guarantee for PSAs.
• The money in my PSA will NOT be completely mine.

I can’t borrow from the account while I’m working (maybe not that big of a deal, but I can do it with my 401K if I have to).

Once I retire, it is mandatory that I transfer some of the money from my PSA to an annunity. This will ensure that my payments will keep me above the poverty line. This money will be out of my control. Any money remaining annuity will NOT go to my family upon my death. Goes back to the insurance company, I guess.

• Will PSAs really be beneficial for those born between 1991 and, I don’t know, 1991? Early on there will be a $1000 cap, possibly to increase by $100 each year, and only people earning $25,000 would actually be able to invest the full 4 percent. If I can’t invest the full 4% between 2009 and my retirement, will I really get the great benefit out of this program that is being touted?

Please kindly correct me where I’m wrong…

 

[quijote]

jlw:

Did anyone see or hear the story about thes black man who spent 30 years paying into SS and his wife only got $250.00 because he died at 55. Now liberals think this is okay? Had he been able to put a small portion of that in a private account his wife would’ve inherited it. She lost her house.

Is it true that blacks are 77% more likely to die before retirement age than whites and on average every black family gives 10k to white women?? Wow. If true, what a travsty if this is allowed to continue. These men work 30 years and because of life expectancy they and their families are discriminated against?

What do you think??

I know that the $250.00 is the “death benefit”, but I thought that the spouse receives a monthly benefit as well.

cheers

 

[vern_humphrey]

Meg2:

Here’s a few concerns I have about the Personal Savings Accounts and the state of Social Security. To me, Social Security would be bankrupt if it could pay out no benefits at all…

The system will be MORE than bankrupt. In 2003, Social Security ran a surplus of $179 Billion – which was ripped off and squandered. So when Social Security stops running a surplus – where will that extra $179 billon a year come from?

Meg2:

I understand that the belief is that a person will receive more with traditonal Social Security benefits plus PSA investments than with Social Security benefits alone.

As I pointed out above, in 2003 (the most recent year for which we have figures) Congress ripped off and squandered $179 Billion in surplus Social Security funds. That’s about $1000 for every working American. At a rate of return of one standard deviation below the mean for stock funds, that would amount to about $688,000 per person. Couples, where both worked would have more, of course. And this assumes we never put in more than $1000 per worker per year.

Between the 33rd and 34th year, the average worker will have all of his entitlement from his PRA. By the 40th year, the average retiree will have his entire working wage replaced by the income from his PRA.

Meg2:

IWill there be some astronomical fee for me to enroll in the program? If not, where?

Did you pay “some astronomical fee” when you opened your IRA,

Meg2:

In the short-term, I can’t believe it’s going to pay for itself.

No one says it will IN THE SHORT TERM. But as I’ve pointed out, by the 33rd year most retirees will be self-funded.

And that’s the whole point – to transition Social Security into the self-funded program Roosevelt was aiming for.

Meg2:

My understanding is that the government cannot control the money in the PSAs, at least not to invest it or use it to pay for things in its budget.

Halleuja!

The idea is it’s YOUR money, and YOU – not the government should control it.

Look where letting the government control it has got us – $179 BILLION ripped off and squandered in 2003 alone!

Meg2:

There’s no guarantee that the market will do better. I believe it probably will, according to the article, and we could expect a rate of return of 4.6% from a “conservative mix of stocks, corporate bonds and government bonds.” But what if I invest in the most conservative of conservative funds and I still come out behind? The SSA guarantees my traditional benefits, short of changes in the law of course. There’s no such guarantee for PSAs…

The experience of nations that have similar programs (for example, Great Britain and Chile) is 11%. And that’s about a standard deviation below the average for a Fidelity stock fund over the long haul.

Meg2:

The money in my PSA will NOT be completely mine. …

The money from Social Security is NOT yours at all – Congress controls it.

Meg2:

I can’t borrow from the account while I’m working (maybe not that big of a deal, but I can do it with my 401K if I have to). …

You can’t borrow from your Social Security Account while working, either.

Meg2:

Once I retire, it is mandatory that I transfer some of the money from my PSA to an annunity. This will ensure that my payments will keep me above the poverty line. This money will be out of my control. …

Please explain that – it will be paid to you on the same basis as your Social Security entitlement. If you have more than you need, there is no obligation that you spend it – you can give it to your children and grandchildren, or invest it.

Meg2:

Any money remaining annuity will NOT go to my family upon my death. Goes back to the insurance company, I guess…

Where does your Social Security account go when you die?

In fact, money in your PRA will be paid out to your heirs – and you sure won’t get that with Social Security!!

Meg2:

Will PSAs really be beneficial for those born between 1991 and, I don’t know, 1991? Early on there will be a $1000 cap, possibly to increase by $100 each year, and only people earning $25,000 would actually be able to invest the full 4 percent. If I can’t invest the full 4% between 2009 and my retirement, will I really get the great benefit out of this program that is being touted?..

Yes – as I’ve shown, at a mere $1000 a year, you’d have $688,000 with even a low rate of return. Converted to a 5% annuity, this would pay you a bit over $34,000 a year – way more than Social Security will pay you.

And, by using constant dollars, we have allowed for inflation – so this is %34,000 worth of purchasing power.

Meg2:

Please kindly correct me where I’m wrong…

I have a model for fixing Social Security that can be ported to a Microsoft Excel spread sheet. Email me and I’ll send you a copy.

 

[katherine2]

quijote:

I know that the $250.00 is the “death benefit”, but I thought that the spouse receives a monthly benefit as well.

cheers

the spouse does. this shows how little understanding some people have of social security.

 

[vern_humphrey]

katherine2:

the spouse does. this shows how little understanding some people have of social security.

The surviving spouse, who has worked side-by-side with her husband (or his wife) is forced to choose – they can take THEIR Social Security, or the deceased spouse’s. But not both. With Personal Retirement Accounts, they would own the account, and be able to draw an annuity off the full amount which they had jointly saved.

By the way, Social Security payments are made in arrears – that is, you don’t receive a payment until you’ve been eligible for a month.

But when you die, the last month’s payment goes back to the government!

Just a few ways you get ripped off by Social Security.

 

[katherine2]

vern humphrey:

The surviving spouse, who has worked side-by-side with her husband (or his wife) is forced to choose – they can take THEIR Social Security, or the deceased spouse’s. But not both. With Personal Retirement Accounts, they would own the account, and be able to draw an annuity off the full amount which they had jointly saved.

Social Security does have a strong bias in favor of traditional families. A wife who never worked for wages still gets a spousal benefit equal to half of her husbands benefit and get his full benefit if she becomes a widow. Social Security also protects children regardless of family size.

Vern’s example above is flawed because a wife who is not working for wages doesn’t get a Personal Security Account under the Bush plan. She has no wages to put into such a plan.

 

[vern_humphrey]

katherine2:

Social Security does have a strong bias in favor of traditional families. A wife who never worked for wages still gets a spousal benefit equal to half of her husbands benefit and get his full benefit if she becomes a widow. Social Security also protects children regardless of family size. .

But she DOESN’T get the full benefit that both of them worked for, and still gets cheated out of the last month’s check!

katherine2:

Vern’s example above is flawed because a wife who is not working for wages doesn’t get a Personal Security Account under the Bush plan. She has no wages to put into such a plan.

And how many women never work at all these days? Not many!

You’re trying to justify outright theft from widows by saying that maybe SOME widows would get a pittance.

 

[Fitz]

katherine2:

Vern’s example above is flawed because a wife who is not working for wages doesn’t get a Personal Security Account under the Bush plan. She has no wages to put into such a plan.

Yet a person has the ability to choose the old system, whatever works best for their personal circumstance. So, if a woman decided that she wasn’t going to work then perhaps they would choose differently.

 

[katherine2]

vern humphrey:

You’re trying to justify outright theft from widows by saying that maybe SOME widows would get a pittance.

I have it on good authority Vern that among you and me, only one of us is a widow. No one is stealing from me. It is a social insurance program that works quite well.

 

[quijote]

katherine2:

Vern’s example above is flawed because a wife who is not working for wages doesn’t get a Personal Security Account under the Bush plan. She has no wages to put into such a plan.

Wait, if Personal Savings Accounts work like an annutiy, wouldn’t the surviving non-working-spouse “inherit” the working-spouse’s annuity? If not, why the heck no? the money in the PSA is suppoused to be the workers. If yes, whew!

Also, does anyone have any idea how much it will cost to transition to PSA? (provided that benefits are kept to those who are 55+ and that those who are younger would still get some SS benefits)

Cheers