Applauding Failure

What's the best thing Bush tried to do, but couldn't?

The Best Thing that Didn't Happen During The Bush Administration, by Robert Reich: The best thing to have occurred during the Bush administration is something that did not happen. We did not privatize Social Security.

Had we done so, boomers facing retirement over the next few years would be even worse off than they are today. Now they’re struggling with pension plans worth less than they counted on, and home values that are tanking. At least they can rely on a monthly Social Security check.

But had we privatized, they’d be totally reliant on the stock market. And look what’s happened to the market: Compared to stock values ten years ago, the S&P 500 has risen a little over 1 percent a year, adjusted for inflation. Even Treasury bonds have done better. Go back nine years and there’s been no gain at all. Go back eight years and the market has been off an average of 1.4 percent a year.

Yes, I know, it’s been a rough time. First the tech bubble bursting, then 9/11, then Enron, then the housing bubble bursting, then the credit crunch. But that’s my point. We can’t necessarily rely on the stock market. ...

Sure, the stock market has done well over the past half century. But there have been decades like the 1970s and this one, so far, where it’s been a disaster. That’s why we have Social Security – so that if your timing is bad and you get caught in a downdraft, you still have something to fall back on in retirement.

If we had privatized, you’d have had nothing to fall back on. You’d crash.

I'm pretty happy the whole permanent Republican majority thing didn't work out so well either.

Comments

[Organic George]

This fits nicely with Buffet's comments that small investors should only have index funds with no management fees.

[Patricia Shannon]

Isn't it people's responsibility to choose their birth dates so that the stock market will be favorable when they reach retirement age?

[cas127]

Yep, thank God those SS payments come from the magic money machine in the sky - versus, say, the taxes of a generation betrayed by its elders into an indentured servitude - a servitide seeded by historic liberal stupidities (oh, yes, the entitlement programs are *so* well designed demographically...).

Fine - Bush is a doof - but he didn't build the demographic time bomb that will finish America - liberals did.

[evagrius]

"... the taxes of a generation betrayed by its elders into an indentured servitude ."

Of course those elders didn't provide food, clothing, shelter, medical care and education to said generation.

"but he didn't build the demographic time bomb that will finish America - liberals did."

Right. If the "liberals" had had more children....then you'd find something else to complain about.

[Patricia Shannon]

cas127
I'm sorry you hate your parents so much. They must have been abusive

[kthomas]

bit marxian, but I love this guy.

[Barkley Rosser]

cas127,

Sigh. Yet another person who is ignorant as a stump about the social security facts. Guess what? During the last 11 years the economy/demography has 6 years outperformed what the Social Security Administration calls the "low-cost projection," which never gets reported on in the media. Guess what? Under the low-cost projection, the social security trust fund never runs a deficit, much less "goes bankrupt." There is no crisis, just stupid hysteria.

And, even if the "mid-range projection" were to come to pass with no changes in the system, and it goes "broke" in 2041, or thereabouts, recipients would still receive in benefits payments worth more than 120% in real terms than what current recipients get. But, I suppose you did not know that, did you, cas127?

I suggest you do a bit more studying about the matter before you publicly reveal your ignorance again on this matter, cas127.

And, yes, Reich makes a very good point.

[Jay]

Yes, lets ignore the fact that this is blatent data mining (I prefer the 10 yr period that started in 1989 and ended in 1999). Or ignore the fact that the S&P 500 is in and of itself not a diversified portfolio (think international markets, commodities, real estate and bonds). Or the fact that the baby boomer generation should not have been heavily invested in equities this past decade anyway since they are so close to retirement.

A good reference period for owning stocks is more like 30 years, not some hand picked 10 year period that fits your bias. $1 invested 30 years ago would be up 1333% (9% per annum).

[odograph]

organic george, with those market numbers, the better hold some bond index funds.

[odograph]

Jay, it's my understanding that S&P 500 and "total market" funds track very close together. They are diversified in a strict sense of the word. I worry that when people look back and choose narrower segments that have beaten those wide indexes they are, as you say, data mining.

It's seems like "Look, I can back-test a portfolio for ..."

[Patricia Shannon]

jay, so we must use your hand-picked period?

[odograph]

Patricia, I think this is where Jay was going:

"Siegel found that stocks provided returns at least 5% higher than inflation, and higher than cash or bonds in 99.4% of the 'rolling' 30-year periods from 1802 through 1992; since 1871 stock returns were higher than cash and bond returns in every rolling 30-year period."

http://www.banned-books.com/truth-seeker/1995archive/122_3/13stockslong.html

There are other similar studies out there ... but still, yes, it still sucks to hit retirement in a down-cycle.

[Jay]

Patricia:

So far you've contributed 2 non-sequitors and proved you can't comprehend a simple argument. Investing for retirement is something you do with 30+ year time horizons. If such is the case, you shouldn't give a shit about the variance that occurs over a 10 year period, but instead the variance that occurs over longer periods of time. I don't care what 30 year period you go about data mining. Even then, the fact that your investment should be regularly spaced over time eliminates getting hurt badly going all in at a peak and retiring at a trough. Reich's selected analysis is meaningless with regards to retirement savings.

[Jay]

Odograph: If you were 55 in 2000 you shouldn't have had more than 40% in equities anyway, and the only reason you have that 40% is because you need to plan to live past 80, i.e. you have more than 10 years to recover from the abnormally long bear market (which could have been offset if you were diversified internationally, see BOVESPA, Hang Sent, ASX, etc). If you kept your portfolio balanced in the 1990's you didn't get hammered.

[Patricia Shannon]

I was very into saving for 20 years. I thought I would be able to retire early with a paid off house. I ended up with a foreclosed house (with the mortgage principal paid four years ahead, and only four years to go before it was paid off), and had to spend my "retirement" savings to live. When I joked to a financial counselor that if I had to do it all over again, I would have been a beachcomber, he said a lot of people had told him that. I'm 62, and I'm lucky that the baby boomers did have have fewer children, because the shortage of IT workers allowed me to get back into IT, instead of spending my senior years waitressing at Waffle House.

Most of the readers of this blog are educated, intelligent, and knowledgable enough not to have to have every little tiny point made for them. If I wrote in enough detail and background to satisfy you (if it were possible, which I doubt), I would bore most of the others.

[david myers]

This fits with my intuition that many many people would be victims of poor timing even with an effectively indexed strategy. This is true in housing "wealth" as well. There are many lies we are told about the road to wealth and retirement. The sad fact is that most people will have mostly the money they saved and not really very much from the compounding fairy at the end of the day, not nearly as much as they think they can compound. And unless you time the housing market very well, or move into a 15 year loan early in life, or downsize property drastically at retirement, the same is true there. Ownership society? Give me a break.

Let's start (more entertaining, less depressing) by asking the converse of Mark's lead-in question, "What's the best thing Bush couldn't do, but tried to?" I'd have to say NCLB. And of course that whole democracy in Iraq thing.

[Patricia Shannon]

At least part of the reason stock prices have increased it that people have been buying them for their retirement, either directly or indirectly. What's going to happen to the prices when large numbers of people start selling their stocks in order to pay their bills?

[Winston]

It's a shame that social security wasn't privatized or eliminated during the Bush administration. It would have counted as his one great accomplishment. Baby Boomers are the most selfish and lazy generation that this country has ever produced. Not only were they given lavish educational subsidies that they promptly dismantled when they gained power, but they refuse to plan for or pay for their own retirements so that younger people will have to pay crushing taxes to support them just after paying off the debt they had to obtain to go to college. Privatizing or eliminating social security would have brought huge benefits to future generations - it's a shame that the "me" generation cares only about their own comfort.

[odograph]

Jay, I like "my age in bonds." I was really talking about the diversification people discuss on the equity side, and how many of the choices there are "data mining."

(I essentially use S&P 500 or "total market" for my equities, more to beat inflation than because I'm looking for high growth.)

[Nick]

Fine - Bush is a doof - but he didn't build the demographic time bomb that will finish America - liberals did.

Ok, I think Social Security is a bad idea as much as, or possibly more than, the next guy. I imagine that if the politicians were less deceptive and called it "Social Ponzi Scheme" instead, more people would share my dim view.

That said, the idea that a ponzi scheme which exists only by fiat will finish America is somewhat short-sighted, imo. The government could fix the SS deficit in 5 minutes if they wanted to, the same way every ponzi scheme eventually ends: we're not paying it any more. It's not like most people in the current young working generation don't consider SS tax just another addendum to the regular federal income tax, with no conceivable eventual benefit anyway. By the time the government is forced to dissolve SS and replace it with some other socialist support scheme, most people will heave a collective "well, duh" and move on.

If you're going to think in macro-econ terms, consider what will happen if/when real inflation climbs to 20%, people don't believe the obviously bogus CPI any more, T-bills are paying better returns than industry as the government struggles to service the national debt, and there's a grass-roots movement to figure out ways to avoid paying 10% a year on your savings to the government (the tax effect of inflation). This will probably involve a lot of people with assets getting them out of America, and/or getting out of America themselves. What happens to the American economy when investment there is not profitable, businesses fail because of massive inflation, the currency itself is unstable, people with assets and/or productivity have left, and there's a 10+ trillion bill left over? By the time Social Ponzi runs out of money, it will likely be a trivial concern.

I really do hope I'm wrong, and Social Ponzi is the largest problem in 40 years when I retire.

[odograph]

BTW, for the record I'm quite glad SS was not privatized.

[odograph]

Nick, do you think you'd ever buy a fixed annuity?

(The reason they are not "ponzi" schemes is that some people do die ...)

[anne]

What's the best thing Bush couldn't do, but tried to?"

"I'd have to say.... And of course that whole democracy in Iraq thing."

Of course the whole deceiving destroying impossibly immoral Iraq thing that has cost hundreds of thousands of Iraqi lives and left millions of Iraqis with no country or home and cost tens of thousands of American physical casualties and hundreds of thousands of American psychological casualties. Of course the $3 trillion needless tragedy thing in Iraq.

That Iraq thing, of course.

[anne]

http://rand.org/news/press/2008/04/17/

April 17, 2008

One In Five Iraq and Afghanistan Veterans Suffer From PTSD or Major Depression

Nearly 20 percent of military service members who have returned from Iraq and Afghanistan — 300,000 in all — report symptoms of post traumatic stress disorder or major depression, yet only slightly more than half have sought treatment, according to a new RAND Corporation study. *

In addition, researchers found about 19 percent of returning service members report that they experienced a possible traumatic brain injury while deployed, with 7 percent reporting both a probable brain injury and current PTSD or major depression.

Many service members said they do not seek treatment for psychological illnesses because they fear it will harm their careers. But even among those who do seek help for PTSD or major depression, only about half receive treatment that researchers consider "minimally adequate" for their illnesses....

[The Iraq thing, of course.]

[anne]

http://www.nytimes.com/2008/04/18/us/18vets.html

April 18, 2008

Nearly a Fifth of War Veterans Report Mental Disorders, a Private Study Finds
By LIZETTE ALVAREZ

One in five service members who have returned from Iraq or Afghanistan report symptoms of post-traumatic stress disorder or major depression, but little more than half of them have sought mental health treatment, according to an independent study of United States troops.

The service members and veterans who reported these symptoms represented about 19 percent of the 1.6 million service members who have deployed to war in the last five years, a figure consistent with the most recent findings by military researchers. A 2007 survey of combat Army soldiers who had been home for several months found that 17 percent of active-duty troops and 25 percent of reservists had screened positive for symptoms of stress disorder.

The study, released on Thursday by the RAND Corporation, reported that about 19 percent of the troops said they might have experienced a traumatic brain injury, usually the result of powerful roadside bombs, yet a majority of those troops had never been evaluated for such an injury....

[The Iraq thing that had already classed more than 100,000 returned soldiers variously disabled by October 2006; the Iraq thing from which a military medical study had identified 17.8% of returned soldiers as suffering various degrees of traumatic brain injury by April 2007. The Iraq thing, of course.]

[anne]

* http://rand.org/pubs/monographs/MG720/

http://commentisfree.guardian.co.uk/joseph_stiglitz_and_linda_bilmes/2008/04/3_trillion_may_be_too_low.html.printer.friendly

April 6, 2008

$3 Trillion May Be Too Low: Notwithstanding President Bush's response, our original estimate of the cost of the Iraq war was too conservative: in reality, it will be much higher
By Joseph Stiglitz and Linda Bilmes - Guardian

President Bush has tried to give the impression that the $3 trillion dollar estimate of the total cost of the war that we provide in our new book may be exaggerated.

We believe that it is, in fact, conservative. Even the president would have to admit that the $50 to $60 billion estimate given by the administration before the war was wildly off the mark; there is little reason to have confidence in their arithmetic. They admit to a cost so far of $600 billion.

Our numbers differ from theirs for three reasons: first, we are estimating the total cost of the war, under alternative conservative scenarios, derived from the defence department and congressional budget office. We are not looking at McCain's 100-year scenario - we assume that we are there, in diminished strength, only through to 2017. But neither are we looking at a scenario that sees our troops pulled out within six months. With operational spending going on at $12 billion a month, and with every year costing more than the last, it is easy to come to a total operational cost that is double the $600 billon already spent.

Second, we include war expenditures hidden elsewhere in the budget, and budgetary expenditures that we would have to incur in the future even if we left tomorrow. Most important of these are future costs of caring for the 40% of returning veterans that are likely to suffer from disabilities (in excess of $600 billion; second world war veterans' costs didn't peak until 1993), and restoring the military to its prewar strength. If you include interest, and interest on the interest - with all of the war debt financed - the budgetary costs quickly mount.

Finally, our $3 trillion dollars estimate also includes costs to the economy that go beyond the budget, for instance the cost of caring for the huge number of returning disabled veterans that go beyond the costs borne by the federal government - in one out of five families with a serious disability, someone has to give up a job. The macro-economic costs are even larger. Almost every expert we have talked to agrees that the war has had something to do with the rise in the price of oil; it was not just an accident that oil prices began to soar at the same time as the war began.

We have been criticised, but for being excessively conservative, for including only $5 to $10 of the $75 to $85 increase in the price of oil since then. Money spent on the war - on a Nepalese contractor working in Iraq - does not stimulate the economy as much as money spent on hospitals or research or schools at home. These contractionary effects were temporarily covered up, hidden, by the flood of liquidity and lax regulations that led to a housing bubble and a consumption boom - with household savings plummeting to zero. But this simply postponed paying these costs - and increased them.

With the exception of a few lonely surviving supply-siders, most economists believe that deficits matter, and the huge deficits to finance the war will have their toll in the long run. Deficits matter in both the short run and the long. They help crowd out private investment that would have stimulated the economy far more than the war expenditures; and the reduced investments reduce long-run productivity. With 40% of the funds borrowed from abroad, Americans will be sending interest payments abroad - lowering living standards at home....

[The Iraq thing.]

[Barkley Rosser]

Winston,

Since the Greenspan Commission's recommedations were accepted in the early 1980s, baby boomers have been paying high social security taxes, no lower than anybody younger is or will be paying, which have been paying for the "greatest generation's" retirement and piling up a massive positive balance in the trust fund.

If you had paid attention to earlier comments, you would know that there is a very high probability that the economy and demography will outperform the so-called "low cost projection," which would mean that the fund will run a surplus forever.

So, Winston, maybe the taxes you are paying are too high, but they are and do not need to be any higher than those paid by the baby boomers, and unless you and your colleagues are so stupid that you elect politicians who screw the system up, there should be no problem funding your social security benefits, which will be much higher in real terms than those that the baby boomers will receive.

But, I suppose you did not know that, did you? I suggest that you join cas127 in doing a bit more studying before you shoot off your mouth again on this issue, making yourself look completely ignorant and foolish.

[Patricia Shannon]

This age warfare thing sounds to me like something the plutocracy are encouraging in order to benefit themselves. Is it widespread, or just another tool of the right-wing?

Many baby boomers were drafter to serve in Vietnam. Those who survived and did not stay in the military lost out on part of their career path; many had long-lasting physical and/or emotional wounds. They did away with the draft, so that the whiners we are hearing from aren't over in Iraq. (I personally was against doing away with the draft, but that's another topic).

Do young people today really hate their parents and grandparents so much and think so poorly of them? Did they fail to develop the ability to connect with others because their mothers had to work to help support the family? What in the world is going on?

[odograph]

All good points Anne, but I don't think you've got " The Best Thing that Didn't Happen During" quite down.

Would that Iraq didn't happen, or that the outcome was best.

[Arne (not anne)]

cas127: "he didn't build the demographic time bomb that will finish America - liberals did"
Actually, it was the parents of the Baby Boomers who built the demographic bomb, (and the Greenspan Commission did pretty much defuse it,) but my 10 minutes on Google could not verify whether there is a difference between family sizes between liberals and conservatives. Just curious, anyone have a source?

[Bruce Webb]

Oh my. As a first order response: 'what Barkley said'.

Second order: no one has passed the 'No Economist Left Behind Challenge'. No one using honest numbers ever has produced a combined plan that out produced the combined OAS and DI result using the same economic and demographic assumptions. Not Posen not LMS not any of them. Or point me to them.

Which is the fundamental problem for privatizers, if they cherry pick periods and suggest they are typical the resulting rescoring of Social Security produces a better result for most participants. There just is not that much margin between returns of the asset classes to make private alternatives pay.

[robertdfeinman]

The TIAA-CREF stock fund (which both Robert Reich and Mark Thoma are probably familiar with) has had an average gain of 4.21% over the past 10 years. This figure has been dragged down by the performance over the past year, the long range performance (50 years) is 10.31%.

There have been long stretches where common stocks have done poorly, as was pointed out, but the return figures are misleading. People saving for retirement contribute at a more or less steady rate and, thus do a form of dollar cost averaging. This means that when the market turns up they benefit from the greater number of shares that they bought at a lower price.

It would be useful to see how performance figures when calculated using this model. A good plan, like that offered by TIAA, has not only stock funds, but fixed yield options and even real estate. Read their (free) literature and you will see that they always recommend a balanced portfolio.

I think the treatment of defined benefit and defined contribution plans is a false dichotomy. IBM is going gang busters, but they eliminated their defined benefit plans and screwed their workers. Many other big firms have gone under, reorganized or dumped their retirement plans on the government. There was no protection for the workers. Considering one type of plan lower risk than the other just isn't true. What does a firm do with its retirement funds? If it is prudent it invests it similarly to what an individual would do. If it is imprudent it keeps too much in its own stock.

Social Security may be "safe", but it can only provide a very modest retirement. Whether this will maintain its value as a percentage of the needs of the average retiree is unknown. Indexing to inflation is already an area of dispute.

[don]

One effect of privatization, properly done, would be to remove funds from government's custodial care. Who thinks that Congress is the best custodian for the recent social security surpluses? Aren't you afraid Democrats would find all kinds of necessities to spend the money on, or that Republicans would use it to fund tax breaks for the rich (or a war)?

[Jack]

I don't understand this. Free market outcomes are, by definition, the best possible outcomes. This is what economists have taught us, and that means privatization is always to be pursued and even forced if there is a choice (and when isn't their a choice?) If the result today of privatizing Social Security would be millions of elderly people in dire poverty, that would be, again by defintion, the best possible outcome. After all, these people would probably have to either rejoin the work force or, if unable to do that, die on the streets. If the former, then the resulting larger workforce would lower wages--wonderful news for businesses and affluent consumers. If the latter, then we would have unproductive mouths to feed, i.e. less wasted resources, for what is an investment in something unproductive but a waste?
But instead of this best of all possible worlds we have parasites that people who haven't taken an intro to economics class think should get a free ride just because they might be somebody's grandparent. Absurd!

[anne]

Oodograph:

"All good points ----, but I don't think you've got 'The Best Thing that Didn't Happen During' quite down."

Here was the construction I was playing off: "What's the best thing Bush couldn't do, but tried to?"

The answer given was:

"I'd have to say ----. And of course that whole democracy in Iraq thing."

So I think I complained correctly.

To be clear, Iraq was wrong to try but trying had nothing to do with democracy and everything to do with self-defense or so we were repeatedly told even as the International Atomic Energy Agency was telling us there was no threat. Iraq was wrong from the beginning and has never stopped being wrong though we are doing all we can to stay indefinitely.

[Bruce Webb]

Arne if I have to be crude I would have to point out that conservatives of all faiths believe in God's word of 'Be Fruitful and Multiply' while insisting that liberals are fruitless fags.

The current argument is that the Greatest Generation created too many Boomers and that Boomers created too few Gen Y workers to support us in retirement. The reality doesn't survive encounter with the demographic tables.

[cas127]

"... the taxes of a generation betrayed by its elders into an indentured servitude ."

-"Of course those elders didn't provide food, clothing, shelter, medical care and education to said generation."

This is my favorite of all Worst Generation excuses - we supported our children (well, sort of - a quick look at the enormous shortfalls in child support pretty much indicate that the Worst Generation *didn't* support its children financially - at least nothing like prior generations did) so whatever financial abuse we've heaped on you...well...lump it.

How about this rather obvious point - all *prior* generations *also* financially supported *their* children (including the Worst Generation) and yet managed to do so without selling their progeny into servitude.

So what's the next excuse, evagrius?

[Patricia Shannon]

cas127, we could always go back to having several generations living in the same household.

[evagrius]

"all *prior* generations *also* financially supported *their* children (including the Worst Generation) and yet managed to do so without selling their progeny into servitude"

You'll have to do some reading up on child labor, contract marriages, forced marriages, indentured servanthood, slavery, the selling of infants etc; and respond to those facts before making your argument.

Add to this the other factor, that, indeed, the younger generation often had to take care of their parents and grandparents, ( you know-family obligations) and that it was expected of them by society.

Of course, if they couldn't or were callous the elderly would be left to fend for themselves. Quite often the poor couldn't and the rich wwouldn't take care of their elders.

It's one major reason Social Security was created.

[Jay]

"Which is the fundamental problem for privatizers, if they cherry pick periods and suggest they are typical the resulting rescoring of Social Security produces a better result for most participants. There just is not that much margin between returns of the asset classes to make private alternatives pay."

Bruce Webb.... Are you stupid as hell? Which part of this didn't you get????

"Siegel found that stocks provided returns at least 5% higher than inflation, and higher than cash or bonds in 99.4% of the 'rolling' 30-year periods from 1802 through 1992; since 1871 stock returns were higher than cash and bond returns in every rolling 30-year period."

[Patricia Shannon]

It's the conservatives, acting on behalf of the super-rich elite, under Reagan and the Bushes, who ran up a huge federal debt that will burden our citizens for a long time. It was the less conservative Bill Clinton who decreased the federal debt.

[Patricia Shannon]

Jay, do those stock market figures include fees and such?

[evagrius]

It's the conservatives, acting on behalf of the super-rich elite, under Reagan and the Bushes, who ran up a huge federal debt that will burden our citizens for a long time. It was the less conservative Bill Clinton who decreased the federal debt.

The federal debt ain't theirs. And they'll make sure it remains that way.

[evagrius]

How much money would be necessary in investments to equal the average Social Security payment over the average life of the recipient?

[Patricia Shannon]

What happens to the price of stock when the baby boomers start retiring and cashing in their stock to pay their bills.

I don't have to worry about it personally because I had to cash in my 50 shares of CSC stock, as well as almost all of my IRA, when I was out of work, in order to eat and avoid living in my car.

[Jay]

"Jay, do those stock market figures include fees and such?"

Patricia:

Have you seen the expense ratios here before (www.vanguard.com)?

[Jay]

"What happens to the price of stock when the baby boomers start retiring and cashing in their stock to pay their bills."

Patricia: When you retire you mostly cash in bonds, not stocks. Throughout your life you gradually shift from equity and other risky asset classes to safer asset classes. The fact that you keep making comments that assume people either purchase asset classes in bulk at one time, and/or cash out of one asset class in bulk at one time makes me question your financial aptitude.

[Winston]

Barkley Rosser, I suggest you educate yourself or at least act like less of a pompous ass. Boomers have contributed FAR less to Social Security than they're asking the young to contribute. This is because Social security taxes were much lower from the 1960's until 1990 (when the increases finally stopped). A baby boomer who went to work in 1965 only had 6.4% of his income confiscated by the government while 15.3% of my income has gone to pay for your retirement benefits since the time I started working. This means that Social Security is a pretty good deal for a baby boomer who only has to pay the higher tax for 10-20 years but is a terrible deal for the young who have to pay the high taxes for their entire working lives.

[Patricia Shannon]

Jay, I don't claim to be an investment expert. I don't have enough money to make it worthwhile. It's other people who are talking about how great stocks are over a 30-year time period, and what a great retirement investment they are..

[evagrius]

"A baby boomer who went to work in 1965 only had 6.4% of his income confiscated by the government while 15.3% of my income has gone to pay for your retirement benefits since the time I started working."

A baby boomer is a person born from 1945-1963 or so.

That baby boomer working in 1965 would have been 20 at the most.

Try again.

[Jay]

Winston: "This is because Social security taxes were much lower from the 1960's until 1990 (when the increases finally stopped). A baby boomer who went to work in 1965 only had 6.4% of his income confiscated by the government while 15.3% of my income has gone to pay for your retirement benefits since the time I started working."

If only the government used accrual based accounting. But that would be logical, something that doesn't go hand in hand with government.

[Patricia Shannon]

A larger percentage of older people are working and paying taxes now.

I am single, and I never begrudged paying for the education of other people's children, but I'm beginning to change my mind.

says...

evagrius,

That's why I said "went to work." It is traditional for 20 year olds to earn money, is it not?

[Winston]

the nameless comment above was me, Winston

[evagrius]

It is traditional for 20 year olds to earn money, is it not?

Yes, but if they are going to college, they won't be working that much. Nor will their income be that much either.

By the mid-seventies didn't their income and contributions go up, especially if they were degreed professionals?

You're grasping at straws.

[donna]

OK, so tell me how many people would have to be living with and/or supporting their elderly parents without social security (assuming they aren't doing so already, of course)?

Oh, and don't forget that the whole reason for the program in the first place was to encourage older workers to leave jobs so that the younger generation could get one. We're about to have to do the same with national health care since right now, my kids can't get jobs because they are all full of older people working just to have health insurance!

I am SO sick of the "oh, it's slavery to pay taxes" bit! Come on, it's a society of people, you are not the ONLY one out there, nor do you pay for everything yourself. Your taxes pay for community services. One of those services is to keep older people in good health and hopefully in their homes (sorry Patricia). If you wish to see all those old sick people out on the street, then fine, just get rid of social security.

But I'm not gonna go around scraping them up for you.

[evagrius]

I am SO sick of the "oh, it's slavery to pay taxes" bit! Come on, it's a society of people, you are not the ONLY one out there, nor do you pay for everything yourself.

Oh yes they do. They received nothing from anyone and therefore don't have to give anything.

They've been well taught by the Reagan-Thatcher ideology.

( There's no such thing as society, only individuals).

[Barkley Rosser]

Jay,

What is so magical about the 30-year window? Or a 20-year window? The Dow-Jones average first peaked at over 1,000 in July 1966. Then it slipped back below that level and did not get above that level again until more than 16 years later in autumn of 1982.

In Japan the Nikkei peaked at over 38,000 at the end of 1989, when it then crashed. It has not been anywhere near that ever since, and is currently less than half that.

In case you think that is only something that happens in Japan, well the NASDAQ peaked at over 5200 in early 2000 and then crashed. It has yet to get over half that. How long will it be before it does so? Yes, the DJI and the S&P have gone back above their peak in early 2000, but how do you know they will not crash hard and start imitating the NASDAQ and the Nikkei? There is not a damn reason that you can rule out such an outcome.

Winston,

Um, the baby boom generation is thought to have been born between 1946 and 1965, with the year of maximum births (and the approximate midpoint) being 1957. So, that is the average year for the birth of baby boomers. Such a person on average entered the workforce in the late 1970s. They only had a few years, less than a decade, before they were up to the full fica tax rates you have been experiencing.

And, you will certainly get much higher benefits than they will, more than 120% of what current recipients get in 2041, even if the system goes "bankrupt," and more like 160% of what current recipients get if it does not. May I ask just what it is that you are whining about? (Of course, you would have a complaint if you get your way and "social security is eliminated" and you get no benefits, even though you have been paying lots of fica taxes, as you have been complaining about so vociferously. Then you would be screwed, but it would be at your own request.)

[Francois]

@cas127:

"Fine - Bush is a doof - but he didn't build the demographic time bomb that will finish America - liberals did."

You're so full of it it's not even funny. Learn that when they designed SS, experts told the politicians: "Start collecting payments now, or put X billions into it as a startup fund, THEN, start sending the checks. Otherwise, you're going to have a problem."

Do you think for a nanosecond conservatives OR liberals listened? Of course not! They ALL wanted the photo-op, showing to the constituents how far out and awesome they were.

As for the demographic time bomb, your argument is laughable. Not ONE country that has experienced a rise in education levels and economic growth did sustain its natality rate over the long term. Liberal, Conservative, Communist, Buddhist, Troskist, you name it. Not one!

says...

Barkley Rosser

You are using a different definition of the baby boom generation than most people use. A more standard one and the one I am thinking of is people born between 1945 and 1955. It is this group that benefits unfairly from the social security system and that has been most influential in selling out all future generations.

[Barkley Rosser]

"says,"

Well, "most people" do not use your definition, but less us use it for the sake of the discussion. So, this makes the average birthdate about 1950. This means that such a person might have gotten a bit over a decade of work at the lower tax rates, and about 30-35 years at the higher ones. But then such a person will receive substantially less in social security benefits than someone born later, someone receiving payments after the "bankruptcy," when they will receive more than 120% of what current recipients receive.

Let me see, I am still having a problem here. Even if the "baby boomers," whichever age group they are, have actually destroyed the future social security system by going along with the Greenspan Commission changes, the later generations will end up receiving much more than them in real benefits, 120% more in 2041, after "bankruptcy" (and more than 160% more just before then), assuming the pessimistic "mid-range projection" comes to pass, which has not been the case so far.

Can you (or Winston) explain to me how receiving 120% more than someone else is having been "sold out" please, especially after receiving upwards of 160% for some time before that? Clearly a lot of this depends on exactly when one went to work and retires and how they live and so forth, but on average, the extra taxes will be more than covered for by the higher benefits.

[german_reader]

I think what all these stock market enthusiasts don't realize is that stock market returns don't come for free.

First of all stocks normally rise and increase their value if company profits rise and are expected to grow. And the higher the expectations the higher the pressure on companies to increase their profits. And that normally means to cut jobs, lower wages or increase prices. What workers may save in the short run by paying no social security fees they might lose in the long run by being layed off, declining wages, higher work load or higher prices as consumers. It's absolutely not clear if the net balance for most people would be positive. On top of the risks of making a false investment in the stock market they would probably see increased pressure and higher risks as workers. There may be winners but there will be also many losers. Social security systems have the advantage of sharing the risks between winners and losers. The gains may not be exceptional but the loses are also moderate. On average the system provides probably more security ( that's why it's called Social Security ) than the stock market.

Another aspect would be the capital that would be needed to provide the necessary returns for a sufficient pension. Let's say every worker wants a pension of $18,000/year ( the number would certainly be higher because every true investors wants maximal returns and must calculate inflation ). At an interest rate of 5-10% ( without inflation ) every worker would have to build up a capital base of $180,000-$360,000 over the time to earn this sum in interests every year. If every of the 146 million workers in the U.S. would do this, it would mean that the total stock market volume would increase by 26.2 - 52.6 trillion (!) dollars.

Total stock market capitalization in the U.S. is currently around 21 trillion, corporate profits are at around 1.6 trillion or 8% of stock market capital. With the fresh money from our new "investors" the total stock market volume would increase to 47.2 trillion - 73.6 trillion dollars. To have a similar relation between stock market capital and corporate profits, corporate profits would have to grow to 3.7 - 5.8 trillion dollars. That's an increase of 2.1 - 4.2 trillion dollars in corporate profits compared to today ( 28-56% of the total compensation of all employees in the U.S. ( 7.5 trillion, 4/2006 ) - including employer contributions etc. ).

Guess my calculation has some serious flaws, but at least there remain questions. Where is all this easy new money coming from? How would wages be affected? Where are the real world investments to provide a decent return for such enormous sums of money? What happens to an market, that already shows signs of inflationary overvaluation, if so much new money flows in? What if other nations follow the U.S. example and increase the money supply further? We've already a massive over-supply of capital in the world market. Even today, with much less money in the market, international investors, among them many pension funds, put their money in highly risky investments such as subprime mortgages. What if the money over-supply reaches completely new dimensions?

If I were an American worker and should have to privatize my pension risk, I would like to have some convincing answers to my questions.

[BJ Feng]

If Social Security had been privatized, at least there would be some real savings in the system instead of unfunded liabilities. Something is better than nothing no? I am well aware of the risks of the market, but privatization is much better than what we have today, which is the government spending all the Social Security surplus and counting on higher taxes tomorrow to pay future recipients. The only way to construct a unbreakable lockbox is to take away possession of the funds from the government. The only way for those SS funds to be saved instead of being spent is to privatize the system.

Unfortunately this is very hard to do as we would still have to pay our current retirees. I propose a hybrid system where the surplus goes into a private account. The rest of what is owed to that current worker and future recipient could continue to be represented by "special" SS bonds held by the government. It's probably too late to do this since the SS surplus is going to disappear in a few years, but at least we would have a few years with savings instead of spending it all.

[Lafayette]

Life is rarely a linear function

PS: Did they fail to develop the ability to connect with others because their mothers had to work to help support the family? What in the world is going on?

I remember mothers, during my childhood, who worked in a plastics factory throughout central Massachusetts often into adolescence and beyond. I recall damn few mothers who stayed home once children were old enough to be "fairly independent", meaning get to and from school on their own.

But, that was in another time when a mother could trust a neighborhood to look after itself. Not many mothers can any longer do that, so they are busy trucking children here, there and everywhere up to a child's much later age.

I also recall a Management Psychologist explaining that it is important to give children the means to achieve as young as possible. He remarked that he had felt a sense of achievement when he had to take, at the age of 12, three different subway lines to arrive at a downtown library, all by himself. It builds both character and self-dependence.

There is so much danger out there nowadays, is it not possible that families forgo the "sense of achievement" that autonomy imbues upon a child simply to protect them? So children become accustomed to cocooning - that comfortable life where their needs are cared for and any independence is carefully monitored -- until they leave the nest (for tertiary education or the army or just work).

Some call this being spoiled. It's happening here in Europe as well. But, aside from the developed West, there are places in this world where adolescents are already working at a living, which is shared with their families. These kids are NOT couch potatoes, by any means.

My point: As western civilization develops ever higher standards of living, and particularly more leisure time, perhaps it also induces in people complacency as regards life’s vicissitudes. It is hubris to think that a comfortable lifestyle will last forever, because risk is still an inherent part of our lives on earth.

Anything can happen and life, despite our best wishes, is rarely a linear function.

[odograph]

What a curiously polarized discussion.

I think investing is necessary because Social Security is not enough, and Social Security is necessary because investment (always) has its risks.

And skeptics of Social Security, remember that it is an annuity plan. It relies on many paying, some dying early, and paying out to those of us who make to 104.

You'd have to start your retirement with millions to make it that far on your own. To protect against that on your own you might buy an a private annuity ... but what's the point of privatizing that?

... if private systems fail the Gov will have to step in anyway with welfare and food stamps to keep the old folks from starving.

Indeed, there's a good argument that Social Security protects the government from covering the folly of many.

[reason]

BJFeng
So you are keen on higher taxes then?
Actually, I would like to see a change - I would like to see something like the German constitution where new Government must not exceed public investment. Then there will be real assets (just not private ones).

[reason]

oops
... new Government debt must not ...

[robertdfeinman]

In 1923 German disabled veterans were committing suicide because the value of their pensions was so degraded by the runaway inflation that it didn't even cover food for a single day. Rather than starve they killed themselves. (They did eventually get an increase in payments.)

The moral is that there is no secure financial instrument if the overall economic system is crashing. Discussions about investing for one's old age all assume that economic conditions in the US will remain generally as they have been. There are strong indications that this may not be so.

Long range trends point to a permanently weaker US, at least relatively. If the nation gets poorer then so will the social benefits available to its citizens. The issues are getting blurred at the moment because of concerns over the current slowdown. Even when this dip is history, resource shortages, unfunded deficits and an over reliance on militarism will remain. With 4% of the world population there is no way that the US can continue to consume 40% of the resources.

Where are the pols willing to address these issues?

[swells]

Mr. Reich makes an assumption that payments will be made under the Social Security system. If one looks at the projected stream of government revenues and minuses out the obligations, there is a gap of between 40 trillion and 70 trillion over time. (those figures come from the GAO and the Social Security Trustees from 2004).

Since that is between 2 to 3 times the total valuation of the stock market a poster supplied above, what is the rational basis for Mr. Reich's assumption? It seems exceedingly unlikely to me that Social Security will make the payments it is obligated to make.

[reason]

swells

If one looks at the projected stream of government revenues and minuses out the obligations,...

Before you get flamed swells - please spell out exactly which projected stream you are talking about and why you think it is correct.

[anne]

"If one looks at the projected stream of government revenues and minuses out the obligations, there is a gap of between 40 trillion and 70 trillion over time."

"If one looks at the projected stream of government revenues and minuses out the obligations, there is a gap of between 400 trillion and 700 trillion over time."

"If one looks at the projected stream of government revenues and minuses out the obligations, there is a gap of between 4,000 trillion and 7,000 trillion over time."

"If one looks at the projected stream of government revenues and minuses out the obligations, there is a gap of between 40,000 trillion and 70,000 trillion over time."

Sort of like all the stars in the universe if the universe were trillions of trillions of stars bigger than it is. Duh.

[odograph]

I am kind of concerned about the Fed's multiple-mandate right now. Maybe we would be better with a European style single-mandate, to manage inflation?

[Patricia Shannon]

What some people seem to be forgetting is that humans have not suddenly changed genetically in the last couple of generations. We are still largely a product of our hunter-gatherer past. If the people in the younger generation had lived at the same time, under the same conditions, as the older generation, things would have turned out the same. If baby boomers don't retire, then those who are screaming about us for retiring will be screaming at us because we're blocking their advancement. That is the nature of screamers, they will always find something to scream about.

[Bruce Webb]

"Mr. Reich makes an assumption that payments will be made under the Social Security system. If one looks at the projected stream of government revenues and minuses out the obligations, there is a gap of between 40 trillion and 70 trillion over time. (those figures come from the GAO and the Social Security Trustees from 2004)."

Did time just stop in 2004? Are you talking all revenues or just Social Security? Are you using the 75 year actuarial window for the latter or the Infinite Future Horizon numbers? If you download the actual 2008 Report and look at so-called 'unfunded liability' for Social Security you will see that the gap over the next 75 years is now projected at at $4.3 trillion while Infinite Future is sitting at $13.6 trillion with each figure down about 15% from that of the 2007 Report.
http://www.ssa.gov/OACT/TR/TR08/IV_LRest.html#267528

We had a saying back in the early days at dKos: "This is dKos, you don't get to simply make shit up" or in Swells case to cite outdated numbers out of any kind of context.

[Lafayette]

rdf: Discussions about investing for one's old age all assume that economic conditions in the US will remain generally as they have been. There are strong indications that this may not be so.

The paradigm started shifting long ago. The US has been taking its own sweet time understanding that fact. Bill was awash in praise for his hi-tech boom and Greenspan was thought to walk on water with his governing of the Fed (and thereby economic interests of the US). Both where media mirages, we now see.

The dot.com boom became a bust because it was founded on unrealistic expectations. Greenspan's laissez-faire regulatory policy has been shown to be foolish when administered by greedy Finance Executives.

Worse yet is the lack of forward thinking, which should have started with Clinton, not Bush. The hubris was founded in the notion that hi-tech, as manifested by the dot.com boom, would last forever. Dot.com was thought to be the New Milleniums Golden Goose.

Economies is cyclical, even the best of investment prospects boom and then inevitably end in a whimper. Dot.com technologies contained more smoke than steam. It takes effort to make sure there is another boom to take up the slack.

In fact, if there is not continued and substantial R&D investments, the Next-Big-Thing only takes longer to point its nose above ground. In fact, R&D is so very crucial to a modern nation, the responsibility for its promotion and management should be a Cabinet responsibility.

At present, it is spread out amongst all the other Cabinet chairs. Moreover, far too much importance has been given to Venture Capital. VC is necessary, but it can dry up as easily as it becomes readily available in pursuit of a "good idea". Good ideas come out of R&D funded through research institutes and universities.

America does not need a research Federal super-agency that plans everything. Britain tried that in the 1970s and it was a colossal failure at dispensing government R&D funds. But, it should have a Technology Evangelist promoting it across the spectrum, where that person could have a real impact, in the House that decides spending bills.

R&D is a bit like Roulette. One never knows where the ball will land. But, for sure, 100% of the biggest winners systematically play the game (or they will not have won). The R&D spigot should never be diminished.

[Bruce Webb]

And I will repeat this until I go blue in the face. You cannot get traditional rates of returns on equities using the Social Security Trustees' Intermediate Cost assumptions. You particularly can't get those returns if you assume that your PRAs are being funded out of domestic wages. No one has passed the No Economist Left Behind Challenge in that strict context. Every privatization model I have seen relies on rates of return that would require economic performance better than that posited by the Low Cost alternative that the Trustees themselves project as overfunding Social Security going forward.
http://www.ssa.gov/OACT/TR/TR08/V_economic.html#200328
http://www.ssa.gov/OACT/TR/TR08/VI_OASDHI_dollars.html#150920

Bloviators need to understand there are some new sheriffs in town, ones that actually have read the data tables as opposed to picking stale Cato talking points out of their, out of their--. Well lets just say underinformed op/ed pages to be polite.
________________________
BJ Feng: "If Social Security had been privatized, at least there would be some real savings in the system instead of unfunded liabilities. Something is better than nothing no? "

BJ, Social Security is funded by a combined 12.4% tax on wages. FICA is not going away and so qualifies as 'something'. You need to sit down, consult some of the data tables and make some informed estimates of what future income rates will likely be in comparison to projected cost rates in light of the range of projected economic and demographic assumptions. At which point we could have a numerically based discussion weighing whether returns from Social Security under various forecasts can really be outperformed by private accounts working under those same assumptions.

Or you could simply continue to make data free arguments that show a fundamental ignorance of the actual financing of the system as it exists. Your choice. But don't think you are impressing anybody by simply being impressionistic. If on an economics blog you can't say it with numbers fully backed up by links then you really should not be saying it at all. Download the 2008 Report. Read it. And then report back in a newly informed mode. Until then you really got nothing.
http://www.ssa.gov/OACT/TR/index.html

[Bruce Webb]

Jay: "Bruce Webb.... Are you stupid as hell? Which part of this didn't you get????

"Siegel found that stocks provided returns at least 5% higher than inflation,"

Well I may be stupid but I can read. The Social Security Advisory Board assumes a real return of 6.5% in urging a system of private accounts. Growth rates that would deliver that rate of return exceed those of the 2008 Low Cost alternative that would deliver a system overfunded going forwards with results to be seen in outcome I on the following chart The Shape of Low Cost

Not to unduly blow my own horn but I am not exactly new to this topic. I have been studying the Social Security Reports as they came out since 1997, I maintain a Social Security blog that I started in Nov. 2004, and post regularly on this blog and most other econoblogs on Social Security and somehow have managed to keep the PhD in economics hosts from pointing out that I am in fact stupid. Or even wrong on any particular data point. Maybe they are all just being kind to me the village idiot, but as it is I would suggest that you bring more data and less bluster. Because I have numbers drawn from the actual data tables in question and am not at all afraid to use them.

[Barkley Rosser]

BJ Feng,

I was going to say something about your numbers, but I think that the estimable Bruce Webb has done pretty well. I will simply add what has already been said: that there is a not-too-bad probability that reality may look a lot more like the low-cost projection than the mid-range projection, in which case the system may never even run a deficit, not ever, or if so, only for a short period of time. In which case all this talk of unfunded liabilities in the distant future is just a joke.

Regarding privatization, I think those calling for it need to step back and ask what is it exactly that they are asking for. Is it a reduction or even an end to a government-guaranteed insurance for old age? Or is it a tax break for money to be invested in the stock market or whatever? If it is the latter, well, we already have that with Roths and so on. If you think there should be more of that, then call for it. Do not call for cutting the government-guaranteed minimum backup so that people will be forced to have private accounts out of mandatorily taken taxes. Let them choose to use these tax-free accounts if they want to. Is this not more in line with free market individualism anyway?

As to the various folks who think that the baby boomers are responsible for all the financial ills of the country, whether the more broadly defined set born 1946-65 or the more narrowly defined 1946-55 birth cohort, I would say just what is the evidence of this? The major source of the financial problems of the US federal government overall have arisen during two presidencies in which we had spendthrift policies combining with tax cuts, in short, the Reagan and Bush Jr. presidencies. Now, do you folks want to blame baby boomers for having elected those two? I would call that a stretch.

OTOH, one might say that it was the baby boomers, or some group of them, who led the decline in savings rates that we have seen over the last couple of decades. There may be more of an argument there, although the last time I checked the savings rates by Gen-Xers and Gen-Yers are if anything even lower than those of the baby boomers, especially those supposedly especially wicked front-end baby boomers. But, I suppose we could blame these even lower savings rates on the bad examples set by the baby boomers, just so we can blame them for everything.

A final btw is that if there is a group that really made out like bandits with regard to social security financially; it was folks who retired in 1971 when the COLA kicked in, but who paid the extremely low ficas that went before. Of course these folks were "Greatest Generation" members, so I suppose they were owed their financial favoritism. But, more generally, if there was a generation that "ripped off" another with regard to social security, it was the GG ripping off the BBers, not the latter ripping off later ones.

[Barkley Rosser]

Regarding all those future projections I would add that in the last couple of days there have been stories about declining life expectancies for women in various parts of the US. This is one of those bad news/good news stories. So, I do not like seeing such a decline, but it does suggest that the more favorable financial outcomes for the future of social security are more likely.

[Bruce Webb]

BJ Feng "The only way to construct a unbreakable lockbox is to take away possession of the funds from the government. The only way for those SS funds to be saved instead of being spent is to privatize the system.

Unfortunately this is very hard to do as we would still have to pay our current retirees. I propose a hybrid system where the surplus goes into a private account."

BJ unless those private accounts are not administered by the government then those funds will always be in possession of the government. Calling something 'private' or 'personal' does not grant it magical powers against the government. There is no such thing as an 'unbreakable lock box' for any asset within reach of the governments powers to tax, print money, and regulate. People who think that the $100 bill in their wallet is 'real' and the Special Treasuries are 'phony' need to sit down and think hard about what money is and is not. Or perhaps read a newspaper article about inflation in Zimbabwe today, of perhaps a history text about inflation in Weimar Germany.

You can make a rational argument for abolishing Social Security outright and letting everyone invest their own money. I doubt that you could actually replace the actual combination of disability insurance and retirement annuity promised by Social Security using identical economic assumptions, but at least your argument would be logically coherent. But this notion that government controlled PRAs (Personal Retirement Accounts) whose returns are fully annuitized and so not inheritable somehow equates to 'Ownership Society' is simply magical beans thinking. "Possession is nine points of the law". Damn straight, if you don't control your property you don't in the strictest sense own it. I have money in the bank, I have a can of corn in my cupboard. As it turns out I have no green money in my wallet (I broke my last twenty yesterday) but I have six different plastic cards and two checkbooks that I am pretty confident will be convertible to green when I leave my house in the next hour. On the other hand if the entire world economic order collapses within the next 45 minutes I still have that can of corn.

My cash and my cash equivalents not existing in the form of material goods are in the end only government promises to enforce contractual relations between me and my bank. The notion that an FDIC insured savings account is 'real' and a government promise to make good on the Special Treasuries is 'phony' just means that one has not seriously thought about what the relation between currency and Full Faith and Credit. The logical razor is just not as sharp as the argument would require.

[BJ Feng]

BJ, Social Security is funded by a combined 12.4% tax on wages. FICA is not going away and so qualifies as 'something'.

Bruce, I'm only pointing out that private funds would be at least funded. If you allow a system where people can choose their asset mix and have it in their own names, then ostensibly those securities and assets will have to be purchased and held, thus providing real savings. Right now, all the surplus is spent, and all of our liabilities are unfunded. You can say that they are fully funded by special US Govt. bonds, but those bonds themselves are unfounded. It would be illegal for any company to do this with their retirement plans, take employees wages, spend it, and issue corporate bonds to say that the retirement plan is fully funded. Executives would go to jail for this kind of scheme.

I already admitted that privatization would be very hard due to the fact that we need to pay out current retirees because their SS retirement accounts are UNFUNDED (if they were we would not have to use current income to pay). Privatization would at least assure that some surplus is saved, that's all.

Of course I realize that our currency is backed by nothing but my, and your willingness to accept it as money. By the full faith of the American people should be the term. But if our monetary system collapses, then SS would be the least of our problems, when the ship goes down, all on board will be lost.

To Barkley, what we want is some sort of forced retirement savings plan. As long as people are forced to save some amount and invest it, we have the crux of Social Security. This doesn't necessarily mean the government has to hold on to the assets, as long as people save automatically by having wages withheld and can't use that money until a certain age.

I concede this does not address the disability part of Social Security, perhaps the two can be separated, or absorbed into Medicaid.