President Bush will (is) holding a 2 day economic conference focused on social security. His goal is to transfer a percentage of our SS funds to private investments in the stock market. In doing so, they plan to cut up to 45% of the benefits offered by SS, in exchange for the idea that private investments can "make up" that differece. Just a few questions are - Is their not a risk involved in investments? What happens to those that lose? It seems that they are attempting to replace the word security to re-word it "social risk"
This is a very important topic that affects all of us. Please read the following Times article as well as the Democracy Now discussion. We should plan to possibly contact our elected officials with our views of this. Also, possibly attempt to spread the word.
Peace Jut
New York Times, Dec 12
Washington - Of all the arguments being made to replace part of Social Security with private retirement accounts, few are more seductive and more misleading than the prospect of earning higher returns.
Get ready to hear a lot about this next week, when President Bush is host for a two-day economic conference that is expected to focus sharply on Social Security.
Under the current system, investment returns from Social Security are "abysmal," Mr. Bush said in one recent speech, because the trust fund is allowed to hold only low-yielding Treasury bonds.
Letting working people invest some of their Social Security money in the stock market would allow them to earn higher returns, giving them more money at retirement than they would have if they let the government do everything for them, the logic goes.
It sounds like a no-lose proposition. According to the Social Security Administration, Treasury bonds can be expected to yield a real annual rate of return of about 3 percent. Equities, by contrast, can be expected to earn 6.5 percent.
That assumption is crucial to arguments that personal accounts can reduce Social Security's long-term shortfall - which the government estimates to be at least $3.5 trillion. Most of the proposals to overhaul Social Security call for steep reductions in future benefits that would be offset by the higher returns people would presumably earn on their investments.
Stephen Goss, the Social Security Administration's chief actuary, has endorsed the assumption of higher returns. In evaluating the major proposals for putting some payroll taxes into personal investment accounts, Mr. Goss estimated that even people who hedged their risk by mixing stocks and bonds could expect an average return of 4.45 percent.
But that logic is as flawed as a perpetual motion machine. If it were true, the government could erase Social Security's entire projected deficit by selling bonds at 3 percent and buying stocks that yield 7 percent.
Why doesn't the government do just that? Because higher returns are inseparable from higher risk. No risk, no reward. And if the goal is to enhance security, if people are to have a solid reason to expect a particular level of wealth at retirement, the risks have to be relatively low.
"The entire argument is absurd," said William C. Dudley, chief
To be sure, one of the biggest ways to reduce risk is to have a long time frame. People who invest at age 30 or even 50 have the time to ride out most of the ups and downs of the stock market.
But there are no guarantees. According to Ibbotson Associates, which publishes data showing average returns over different periods, large-cap stocks actually suffered a loss of 1 percent, annualized, from early 1929 to the end of 1942.
Granted, it is somewhat unfair to pick a time period that begins just before the great stock crash of 1929 and continues through the Depression. But many analysts contend that it is even more misleading to suggest that people should have complete confidence in their ability to earn above-average returns with no risk whatsoever.
Surprisingly, the Social Security Administration actually goes further than that. In addition to relying on the premise that equities will yield higher returns than Treasury bonds, Mr. Goss of the Social Security Administration suggested that returns in the future might be even higher than those of the past.
"A consensus is forming among economists that equity pricing as indicated by price-earnings ratios may be somewhat higher in the long-term future than in the long-term past," wrote Mr. Goss.
"This is consistent with broader access to equity markets and the belief that equities may be viewed as somewhat less 'risky' in the future than in the past," he added.
If investment funds or stockbrokers made that kind of claim, they would probably be breaking the law.
In an interview last week, Mr. Goss acknowledged that many experts believe investment returns should be adjusted for risk and that the common proxy for a risk-free return is the real yield earned on Treasury bonds.
The Social Security Administration's analyses do include lengthy disclaimers, noting that the projected returns are highly "sensitive" to what happens in the markets.
But other government analysts take a much more conservative approach. The nonpartisan Congressional Budget Office, which is run by a former chief economist in President Bush's own Council of Economic Advisers, assumes that equities and bonds will earn no more than Treasury bonds.
Strikingly, the White House's own Office of Management and Budget recently made the same assumption. The issue was not Social Security but rather the projected growth of assets in the railroad retirement trust. In evaluating the railroad retirement system, the White House budget office also assumed that investments would yield the same as Treasuries.
BUT the more basic question is this: Should a rational person believe that Social Security's very real financial shortfall can be reduced just by shifting from bonds into stocks?
Those who imply that stocks can promise higher returns without higher risk are essentially arguing that Social Security can be fixed with a huge exchange of paper.
If that is the government's strategy, people should by all means push for the right to shift all their payroll taxes to personal accounts and invest the money in gold.
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If you want to read a dialogue on the SS issue, here is Wed's discussion of the topic on Democracy Now.
Eric Laursen, independent journalist who has covered Social Security for many years, is writing a new book, it?s called, People's Pension: The Politics of Social Security Policymaking Since 1980. Michael Tanner joins us on the line, he?s head of the project on Social Security choice at the Cato Institute, authored a study entitled, "The 6.2% Solution, a Plan for Reforming Social Security." Michael Tanner, what's the problem?
AMY GOODMAN: We are also joined in our studio by Eric Laursen, independent journalist, who has written a book -- writing a book on Social Security. Well, is Social Security in danger?
ERIC LAURSEN: The short answer is that we don't know. The protections that we get from the Social Security trustees that they put out every year deal with 75-year periods. They also have projections on when the system is going to start to pay out more money than it takes in. But really, these are very speculative numbers. They have to do with birth rates. They have to do with immigration rates. We don't know. They're projections they're not meant to be used as hard and fast rules, here is how you change the system. Social Security is -- it's a social compact. It's not really a -- an investment account. To treat it that way is really the wrong way to address the problem. What's disturbing about the privatization proposals that are coming up is that they treat it as something akin to a savings account or an investment account rather than as a social compact. The numbers that Michael cites are ones that actuaries come up with, but th! ey don't really have much to do with the guts of the system, which is a modest benefit for people who are retired, disabled or the children of deceased workers. What we need to concentrate on is the social promise that's being made there and how we as a society want to fulfill it.
AMY GOODMAN: What's wrong with partially privatizing Social Security? Can't you trust workers to invest?
ERIC LAURSEN: Well, to put that in perspective a little bit, there are portfolio managers on Wall Street today with degrees in higher math who lose millions of dollars every day on huge investment accounts. For them it's all right because theoretically, these investment portfolios they manage go on forever. For workers to have to operate into the same system is a very different story. You have to learn how to ratchet down the level of risk in a portfolio, as you approach retirement or as you approach your death. And that's a very difficult thing to do. It's not patronizing at all to say that this is not a job that should be given to each and every worker in the country. Because it's a formidable task. And to impose a system like that that's highly risky on workers who deserve to have a secure retirement is not fair.
AMY GOODMAN: Michael Tanner?
MICHAEL TANNER: Well, no one is suggesting that workers are going to have to sit down at night with the Wall Street Journal and try to pick between General Electric and General Motors. All the plans being currently discussed would actually have workers invest in a very small number of broadly diversified index-style funds, very similar in fact to the federal thrift savings program that every federal worker is invested in, every mailman and GS2 secretary is participating in the private investments for the thrift savings program. We are suggesting that the average American worker should be able to invest the same way. That would give many workers who are now cut out of the opportunity to build real inheritable wealth a chance to get in on investment and wealth creation the same way that wealthier people can do. We can make every waitress and every lathe operator on the factory floor a participant in capitalism, a participant in ownership of the ! American economy. We can democratize with a small d, the ownership of capital in the country and that will have a profound effect on the future of American labor.
AMY GOODMAN: Eric Laursen.
ERIC LAURSEN: There's something a little bit disingenuous in what Michael is saying, I think. Democratize, yes, for people who have accounts or high wage earners who would have accounts that are large enough to be viable. Most workers, who work at demanding or even debilitating jobs do not make the kind of money that would allow them to accumulate a large enough account to make it viable. This is not a formula for democratizing investment. This is a formula for augmenting the ability of people who already have the resources to increase them. It's going to help to create a more bifurcated, a more wage split society than we already have.
AMY GOODMAN: Michael Tanner, what about someone who?s investment gets wiped out?
MICHAEL TANNER: Well, first of all, I just respond to that by saying that's an argument for creating larger individual accounts and not stopping with 2% of payroll. Let's let the low wage workers invest their half of the Social Security payroll tax so that they can accumulate substantial amounts of wealth. As for people whose investments don't do as well as others. First of all, I would say, that given a large enough time horizon, whether we are talking about people investing for 30, 40, 50 years, investment is remarkably safe. There's never been a 20 year period in which you would have lost money in the markets, but if you did, every major proposal on Capitol Hill includes some level of safety net or minimum benefit. In fact, many of the proposals actually increase the current benefit up to 100% or 120% of the poverty level.
ERIC LAURSEN: There's a saying in the social welfare profession in the country that programs for the poor tend to be poor programs. You can have a minimum benefit, you can have a sort of a welfare net for people whose savings accounts in Social Security don't work out. But the fact of the matter is, we know what happens to welfare systems in this country. We know what happened to Aid to Families with Dependent Children. They get whittled down. The people who receive them are demonized as welfare queens or whatever. Ultimately, those benefits get cut because they don't have a constituency for them. There's all sorts of goodwill behind some of the proposals that are -- that have gone forward on Social Security, but ultimately, we're talking about a guaranteed benefit that is being turned into an at-risk account.
MICHAEL TANNER: But just imagine the undermining of support for the social welfare aspects of the Social Security system if we have to raise taxes -- payroll taxes by as much as 50%, which is what could happen in order to preserve the current system. If we have to raise taxes on middle income people in order to continue to provide the current level of Social Security benefits, that is going to undermine the long term social compact here. Much better that we give all Americans a chance to build and create real wealth, and then those few Americans who have a problem, let's step in and make the welfare aspects of Social Security explicit and take care of them.
ERIC LAURSEN: Again, making the welfare aspects explicit is an invitation to cut them. I think also, you have to keep in mind here that this is not a free lunch. As it's being portrayed by members of the Bush administration, and I think also by think tanks like Cato in a lot of cases. Private accounts would come at the cost of a cut in benefits. One of president Bush's plans that was outlined in his 2001 Social Security Commission that has been scored by the Congressional Budget Office that worker who was born in this decade would take a 40% cut in benefits. And this is in a system that only makes up on average maybe 30% of a person's working income on average. That's a substantial cut in the kind of -- in the only part of the system that's guaranteed, and what you get in return is a private account that is very much at risk. Michael points out no 20-year period of the market has lost money. Over a 16-year period from 1966 to 1982, if you inve! sted $100 in the market, you would have made nothing until 1982. It depends very much on your timing -- when you participate in the market. That's not something that workers who are in low wage jobs can afford.
AMY GOODMAN: We're talking to Eric Laursen, writing a book on Social Security in our studio, Michael Tanner on the line with us from the Cato Institute. New York Times had a news analysis piece yesterday by Edmund Andrews that says while Bush is focusing almost all his rhetorical energy on the need to let people divert some of their taxes to private retirement accounts, nearly every leading Republican proposal on Capitol Hill acknowledges that private accounts by themselves do little to solve the system's projected shortfall of at least $3.5 trillion. Instead, these proposals rely on deep cuts in benefits to future retirees. He says, the uncomfortable political truth was driven home Monday by the head of the investigative arm of Congress, named David Walker, the controller general of the government accountability office. He said that the creation of private accounts for Social Security will not deal with the solvency and sustainability of the ! Social Security fund. Your response to that, Michael Tanner?
MICHAEL TANNER: Individual accounts and private investment will not get us all the way out of the hole. The unfunded liabilities of Social Security are so huge that even the powers of private investment cannot get us all the way out of there. What they're doing is simply acknowledging that fact. But those -- that hole exists whether or not you create individual accounts. The benefit cuts they are talking about would occur now, by law, that when Social Security has no longer enough revenue coming in to pay the benefits they are promised, it must by law cut those benefits by at least 23%. The benefit cuts are coming if we don't make any reforms at all. What individual accounts do is offset some of the cuts that would otherwise be coming, and raise people's benefits above the level of what Social Security can actually pay. Making any comparison at all to the promised level of Social Security benefits is meaningless. Because those promised benefit! s are simply a fantasy. They cannot be paid.
AMY GOODMAN: We only have 10 seconds, but Eric Laursen, why is Social Security so important?
ERIC LAURSEN: Social Security is the primary income support for over 50% of the elderly in this country. And to reduce it to dollars and cents and not address the fact that it's a social promise that we make that's vital is a very skewed and frankly kind of creepy way to look at the system it's not about numbers. It's about what we are willing to, as a society, provide for the elderly, who have worked all their lives.