May 9, 2005
IF YOU WANT SOMETHING DONE RIGHT....:
GOP, Like Companies, Wants Workers to Carry the Safety Net (Ronald Brownstein, May 9, 2005, LA Times)
In an era when employers are retreating from the guaranteed benefits that once defined the American social safety net, should government accelerate or resist the trend?
Government, business bad at keeping promise
That's a critical question surrounding not only President Bush's proposal to restructure Social Security but also Republican plans to rethink the way the nation provides healthcare to the elderly (through Medicare) and the poor (through Medicaid).
Across all these fronts, Bush and other Republicans are looking to limit government's financial exposure and shift more of the risk for ensuring pension and healthcare security to workers and retirees in the name of increasing choice.
That's exactly what employers have done for a generation, replacing plans that guaranteed workers a fixed monthly pension with systems that obligate employers to make only a monthly contribution to investment accounts workers manage themselves. On healthcare as well, employers are replacing programs that provided workers a defined benefit with alternatives that promise only a defined contribution.
Bush and other Republicans want to realign the public safety net along the same principles, while Democrats want to maintain, as much as possible, the defined benefits guaranteed by Social Security, Medicare and Medicaid. As the baby boom generation retires, this argument looms as one of the new century's defining political struggles.
The revolution in private-sector benefits paints the backdrop for this political debate. In the age of global competition, employers are steadily eroding the cradle-to-grave promises of retirement and healthcare security that American business offered during its post-World War II zenith.
(TERRY SAVAGE, 5/09/05, Chicago Sun-Times)
I admit it. I'm conflicted. I fly a lot, mostly United, and I'm always delighted to get the lowest fare. And because I fly so many miles each year making speeches around the country, I've developed great respect for the flight attendants, mechanics and pilots who make it possible to treat flying as casually as I do catching a cab.
Plus, I've always believed that a promise is a promise, whether it's a matter of promised Social Security benefits or promised retirement benefits offered by an airline. So I hate to get cheap fares at the expense of airline employees' long-term retirement security. [...]
It seems both the government and some businesses are doing a bad job of keeping promises to ordinary employees. [...]
I'm a believer in free markets and capitalism, and I believe the foundation of those institutions is integrity. That's why I suspect something dangerous is going on when it comes to retirement promises -- private and public.
In the past 30 years, many corporations decided to put the responsibility of retirement saving and investing onto the individual worker. Original "defined-benefit pension plans" -- a corporate obligation and liability -- were replaced by "defined savings plans," most notably, 40l(k) plans.
That is, your retirement income is defined not by your benefit, but by how much you save, and how well you invest.
It's a pretty straightforward question and one that has fundamentally divided Right and Left for over two hundred years: given the choice, would you rather depend on yourself or the State?
Posted by Orrin Judd at May 9, 2005 12:05 PM
If that's the division between right and left, it's only been for about 70 years. And for the first 30 years the question would be more accurately stated:
"You've worked hard and saved. You didn't invest in risky schemes or stocks to provide for your family. Your bank did though and went under. Your entire life savings has vanished through no fault of your own. And you're now among the 25% unemployed. Do you or your family a) want to eat? or b) starve?"
Ah, Chris, just like a Democrat to live in the past. There's certainly no one suggesting that people are going to starve. Republicans are asking for a guaranteed minimum support to prevent starving, but not for government outlays to keep the middle and upper class wealthy even in their retirement. They should do their own saving for that.
It would be as fair to note that during those first 30 years the Democratic Party was also championing Jim Crow.
I think it's also interesting that the current Social Security plan, since it only counts a limited number of years (where you earned the most) towards your earning, is explicitly biased towards the highly educated (who have more years of low earning while learning balanced out with years of higher earning) and away from those without as much education. (Who tend to have a flatter income path, and work for more total years.)
It's the Right that wants everyone to have the same guaranteed minimum benefit. If you want more than that, you should save. Social Security should be a welfare plan to ensure that no one starves or is seriously poor in retirement, but no more.
The Left wants the richer to get more benefits in retirement, freezing income levels in place. That's because it's not really about people starving or not. It's about not trusting people to invest their own money wisely enough, about preferring that money come out of one pocket and go into another with a government middleman.
"That is, your retirement income is defined not by your benefit, but by how much you save, and how well you invest."
Every time I read such statements, I want to grab the author by the shoulders and scream at them--"Do you have any idea what the historical return on the stock market is? It doesn't take a financial genius to choose an index fund, do nothing else with it, and retire rich!"
Good Luck! You may need it. I hope you have many years to save and invest. Dividends and bond coupons (and the occasional, individual, small or mid cap growth stock) may be the only thing generating returns for 10-20 years. Indexing may not be the panacea many (Ibbotson, et al) assume it to be. The assumptions behind the entire Ibbotson exercise are just that: assumptions based on the future mimicking the past.
Tom C -
Very true that past performance does not guarantee future performance. That said, the returns on social security are so poor (even negative for some groups like African American males) that simply rolling it in TBills or CDs would generate a better return.
No disagreement here. The whole indexing assumption, once fees are taken into account and minus opportunistic 'timing' of those indices, may get an investor nowhere. Cash flow in the form of coupons, cd interest and dividends generated from the capital appreciation segemnt of one's portfolio could make all the diffrence.Social Security, on average, is no return at all.
Over the past few months the argument over the Social Security Trust Fund has came down to .. when paying future Social Security benefits should we use an old T-bill from the trust fund or a newly printed T-bill, as the effect on the capital markets is the same.
The follow on question to answer is .. if Congress and the White House start raising new funds to keep off future problems, what will stop this or a future Congress and/or White House from spending all the new cash the way they exchanged the cash for the IOUs of the current trust fund ?
The most obvious answer is to invest the money anywhere but in more T-bills, some where out of the grasp of the Treasury .. like perhaps .. private accounts.
Tom: I've got plenty of years. The only way that the stock market won't make you rich through regular investing for several decades is if something fundamentally disastrous happens to the US (and therefore the entire world) economy. And if such a thing happens, no one is going to be getting a penny of any modified SS program, either...
b is all too right. An S&P500 index fund is the proxy for the American economy.
Frankly, I don't care for ANYONE's promise---not the government, not my company. I want to have my retirement money to be handled exactly like my paycheck---I want them to give it to me every two weeks, cash in hand. That way, I am not depending on them to keep any promises 20 or 30 years from now.
It's funny how indexing is believed to be foolproof in all market conditions. It's not. Dividends from carefully selected stocks in conjunction with bond coupons and cash interest is the key. Allocation among the different asset classes is the name of the game. Yields on certain stocks can reach incredible levels over time. Indexing will not do that for you. Post bubble, markets can tread water for decades. Indexes are markets. Who cares if the markets are range bound when your cost adjusted yields are averaging say, 10%? Buy and hold investing in indexes, post bubble, will not do that for you. Buy them low and sell them high. Bonds can get ridiculously cheap at times during the business cycle. Buy them when they are. It goes without saying it again, but of course, SS is a joke.
The taxation of social security payments to certain taxpayers is simply a matter of criminal fraud. It is as if you invested in an annuity based upon a guaranteed return and then the company you invested with decided to chop a percentage off of that guaranty. The SEC would be all over them like ugly on Barbara Mikulski.
If Chris wants to argue that in the past there were risks which people should not have had to bear, he will get no argument from me. But to extrapolate from the 20s that there should not be some kind of private retirement account for the excess over SS minimum strikes me as arrant uneconomic nonsense. That is not to say that people should be permitted to take their SS funds, go to Vegas and put them on Red or invest in derivatives, but it means that there are classes of private investment which are virtually completely safe which give a return significantly better than SS does now. We should use the time value of money to our advantage.
Of course, members of Congress from both parties who view their role in life as looting the Treasury for themselves and for favored interests, see the current SS fund as a subsidy for their profligacy. It keeps the interest rates on Treasuries artificially low by creating a mandatory buyer for so much of that market.
On principle alone, that should be sufficient for privatization. It is long past time for that sty that is the US Capitol to be emptied out and its denizens led to the abattoir.
It's not an investment--it's a welfare program.
It actually is foolproof over the timescales we're talking about.
It is. Great bull markets in equities tend to be followed by great bear markets for a host of reasons. Caution is in order. The right portfolio structure will serve investors needs no matter what happens. If the market takes off you're fine, if not, your index is dead money with a 1.8% yield. An overall yield of 5-6% is perfectly attainable with the proper mix which won't leave you behind when the next bull market appears. Indexing works in bull markets only. With dividend growers in the equity mix effective yields can grow to lofty heights over time. When it comes time to start drawing down for retirement needs, one's principal tends to remain secure or even continues to grow. Indexers will generally need to draw down on their principal. I have no problem with those wishing to die broke although most would like to leave something for the grandkids.
Yes, a public/private system will have to require that folks adjust their risk level as they age.
The mechanistic approach applying demographic formulas and such overthinks the problem. Buy bonds when their cheap no matter what your age. Total return equities should be accumulated when cheap as well. One's risk should be redcuced as age requires but the nest egg won't be there unless invested intelligently from the get-go.
too complex. The point isn't to maximizxe return but improve it.