Wednesday, May 2, 2012

Social Security vs. Private Retirement


Anonymous said...

In "social security", I guess they don't understand what social means. Well they do, but in their mind, if you have a low salary, health issues, period of unemployment, you desserve it. You are 80 years old, you were not able to continuously put money in a private retirement, no problem, keep working.

Anonymous said...

This is a very biased. I'm not American, and I've never paid into Social Security or tried to buy T-Bills, but I'm willing to bet that when a consumer tries to buy a T-Bill they would do this through their bank which charges a transaction and annual management fee. I've heard costs like $25 transaction fee & 3% annual management fee in my country. Try going into a bank and ask to buy a $100 T-Bill.

When you are making large investments the annual fee can cease to be a percentage, and will now be a small part of holding the investment, and doing your own investment is a good idea.

The other thing with Social Security is that helps society in that we have to deal with stupid people less. If a stupid person decides to save nothing for retirement, and then at age 70, he realizes he can't work and he is broke, he may decide to rob a bank. If he succeeds society suffers (banks need to charge higher fees and/or go bust), if he fails society suffers, as we pay to feed and house him in jail. During his life he will have slightly more money than the next guy, so he will be willing to pay more for rent/mortgage/etc. and as a result the demand will drive up prices, so the rest of us suffer.

I'm a believer of small payments, and small payouts. The payouts should ensure everyone can get by, and since the payouts are small, the payments should be small as well. IE once you make more than $40,000 a year, you shouldn't have to pay any more. This isn't a tax, but a savings program.

Jeffrey Stedfast said...

Anonymous #1:

The idea is that instead of putting a percent of your wages into a Government-run fund, you'd put that same money into your own personal fund where you'd get back more money than you would if you put it into the Government's "Social Security" fund, *even if* you invested in the same exact thing: US Treasury Bonds.

Jeffrey Stedfast said...

Anonymous #2:

There is no $25 transaction fee or 3% maintenance fee in the US, at least not for investing in US Treasury Bonds (well, maybe it depends on who you go to - but none I've ever used charge anywhere near that much).

The largest maintenance fee I can find is 0.20% and that is for funds with < $10,000, it drops to ~0.10% once you hit $10,000 in your account.

You might be thinking "oh but $10,000 is a LOT of money!" to which I would have to point out that most everyone, if they invested the money that would have been going into Social Security into a private fund, would accumulate fairly quickly - as in, the span of only a few years.

Even if you think 0.20% is "too high", think about what the effective fee is in Government Social Security. It's closer to 0.5% (1.7% ROI that we'd make in a private fund minus 1.2% that you'd get with Government is at least 0.5% fee that the Government is charging each of us to manage our money).

Your "stupid people" argument doesn't even make sense.

Jeffrey Stedfast said...

FYI, I have investments in some Bond Funds though Vanguard and only pay ~0.10% maintenance fee, but $0 transaction fees.

I also have some through Fidelity and Charles Schwab. The fees from all these places are ridiculously low compared to 3%.

I'm pretty sure there are plenty of other brokers that offer similar rates.

If you are paying 3%, clearly haven't done any research.

Gary said...

The major flaw in the argument that he presents is that we're assuming that the person is fully employed for the entire period of his life and that he has enough extra income to place at risk in the market. Even if at the margins he's able to invest in those funds tax-free, would he gain from an employer matched arrangement? Probably not in most jobs, and this is a key reason for the discrepancy in return; your employer is contributing to your retirement. Would he be able to sustain the risk over time? Probably not. Most Americans have trouble with saving as it is, and to present them with a future prospect on higher returns won't motivate better behavior, particularly for people that don't have the marginal income in the first place. That's why it's called /social/ security because we understand that most of the elderly would live in poverty if it weren't for this program, and while young and healthy, few of us make responsible decisions about our situation forty years from now.

Sure, for someone who is gainfully employed in the tech sector with enough disposable income to take a risk in the market, Social Security is too conservative. But for someone that experiences unemployment, sudden death, or disability (something that is less probable sitting at a computer, but important to people working elsewhere), social security is a decent bargain that forces people to be responsible. It's why we compel people to carry insurance in almost every market.

Now, whether the government should compel people into a decent bargain instead of allow them the choice to risk their own capital is a whole other debate. Personally, I see the libertarian argument as fundamentally implausible because it is easy to argue for lower taxation when you are young and willing to take the risk, but what happens if you fail? Shall society's fidelity to ideology leave you in old age to die without dignity and alas penniless? Shall reprimands of "well, you should've planned better," be sufficient to ease the tragedy? And won't some people fail, no matter how smart and well intentioned?

Jeffrey Stedfast said...


Interesting thoughts.

I'm pretty sure that if you aren't employed the whole time, you start losing out on your benefits as well - so it's not any different to having a personal account in which you control.

I agree that most Americans are irresponsible when it comes to saving... but... I don't feel it's fair to burden others with their incompetence.

You ask what would happen to people who failed to save at all and then become penniless. Well, just because we got rid of Social Security doesn't mean that there wouldn't be charities or that there would be a lack of charitable people in the world.

You also have to recognize that Social Security "retirement salary" would only be a small percentage of what your average salary was for your working years (e.g. 25%). I don't know of anyone in the middle class who can live on 25% of their salary, do you?

So the end result is that everyone *still* needs to save save save for retirement if they ever expect to retire and live at all comfortably.

Let's also not forget that the way things are going, we'll need to seriously cut back on the amount of money that Social Security pays out to retirees by 2033 (if not sooner). It's simply NOT sustainable.

Of course, a lot of that can be blamed on politicians spending money from the S.S. pool.

But this is *exactly* the video's point toward the end, which is that investing in US Treasury Bonds in your personal account is a LOT less risky than allowing our politicians to manage our retirement money.

Anonymous said...

Social security is the fallback for when all other sources of income fail. If you got rid of this you would be implicitly agreeing that you are ok with people having insufficient money to sustain themselves, even on a plain rice diet.

The point of social security is not to give you the best possible return on investment, it's to ensure that you do invest in a retirement scheme (as the money is taken directly from your salary) and that you do have some money when you eventually retire. A fantastic example of this succeeding in that goal has been the fact that people near retirement age who had their pensions based in irish banks (a *highly* recommended thing until a few years ago) lost a massive proportion of their pension value when those banks collapsed. Despite this, they still have enough to live on. Sure, they can't go on 5 holidays a year, but they have a home, light, heat, food and some discretionary spending. In a world without social security, these people could've ended up homeless on the streets.

Gary said...

Social Security is a safety net, not really a retirement plan, so I think that for most seniors, it keeps them from poverty, but doesn't help them to live comfortably. Many middle class homes spend more than they probably will need to as seniors. I mean, you won't have kids or a mortgage, and your health care costs are funded through Medicare.

Call me a wild, pinko Liberal, but I presume that if government becomes irresponsible or incapable, then it's our fault that we're not paying attention. If we believe in the social safety net, then there's means testing and dozens of other little fixes (including reducing outlays as a last resort) that can keep the program solvent for another 70 years. However much faith we place in the free market, our own "competence," and private enterprise, we can't promise ourselves that much social good and that much charity otherwise.

At a minimum, we have to cope with the fact that the real consequences of scrapping Social Security would be to place 13 million seniors into poverty, and it would amount to a large transfer of wealth from workers whose main taxation is the regressive forms of sales and payroll to workers whose main taxation is the progressive forms. Such a grand experiment has never been tried, and ultimately, the people who argue most fiercely for this change are the ones who are least impacted by the lost wages to Social Security and stand the most to gain. Public policy ought to work the other way around, and be about improving the condition of the least among us. We only then have to decide whether it is worth the personal cost and personal liberty, and we have to keep our public officials accountable.

I sense that for you, that allowable cost is less than mine (maybe even zero), but my basis for that allowable cost is that I've seen even the smartest and most confident people engage in "sure thing" gambles only to be thwarted by market downturns or unexpected health problems which they couldn't imagine until they happen. When the music stops and the party is over, no one should be surprised when we end up with bailouts.

Anonymous said...

Social security is a _TAX_

It's payroll tax. Just like your income tax, sales tax, car registration, licensing fees or any other compulsory payments that are required by law you pay into the state.

The idea that it's some sort of 'social net' is just a lie. It's fraud.

How it works is when you are old enough you are entitled to government welfare. This government welfare comes from taxes younger people pay out of their pay check.

What is more only 50% of the social security tax actually shows up in your pay check. Your employer is forced to 'contribute' half the payment... which in fact comes out of what it costs to hire you.

So it's more lies on top of lies.

What it should be called is:
'Your old, here is free money program'. It's welfare.

The money you pay into social security goes to fund wars and government pay checks and corporate welfare, just like every other tax you pay.

So don't pretend it's some sort of government sponsored retirement plan or anything stupid like that. It's welfare, call it welfare. If your for welfare then admit it and be proud.

If it's WAS a retirement plan it's easily one of the worst possible retirement plan you could think of. The only conceivably thing worse would be try to invest your money in lotto tickets or something. The 'return on investment' is so low that it's just ridiculous. No sane person would voluntarily invest in something like this.

A bank or corporation trying to do something like this would probably be brought up on criminal charges for it being a ponzi scam.

Anonymous said...

> Call me a wild, pinko Liberal, but I presume that if government becomes irresponsible or incapable, then it's our fault that we're not paying attention.

Who are 'we'?

Centuries ago people were well aware who their rulers were. They understood instinctively that the people in the ruling class were in it for themselves. They knew that they were only valuable to the rulers just as long as they were able to pay their tributes and taxes.

In modern times 'Democracy' has been used to convince the population that they are in control of their rulers. That any problems and selfishness on the part of the government is a reflection on themselves. Also it has been used to convince people that they can use government for their own benefit. That through the voting process they can control society for their own personal benefit and personal agenda.

Think about it...

If 'The People' really wanted to take care of the sick and elderly in our country then why do we need a system of involuntary payments to do this?

Why do you automatically assume that the only want to carry out the 'will of the people' and protect vulnerable people financially is to use violence and threats to force them to pay into a system?

IF the 'The People' wanted to make sure that elderly, sick and underprivileged people were taken care of then there would be no point in using the force of state government to do anything. They would just pay out to charities and create infrastructure voluntarily in their own society to support them.

Isn't then state government simply something that is unnecessary overhead? Why does it make sense to have 'The People' vote in the ballot box to force 'The People' to act when 'The People' can just skip all that and just help charities and old people themselves?

I am certainly ALL FOR charities and figurative social safety nets, but I also can tell sometimes when somebody is feeding me a line of bullshit.

Being against social security does not mean that you are against protecting old people. It does not mean that you are against paying charities and against financing your retirement either.

These are NOT the two sides of the debate and defending social security program by saying that 'I am for helping old people' is completely missing the entire point.

Jeffrey Stedfast said...

I'd like to point out that Social Security actually favors the upper middle class and the rich far more than the poor, so again... if you are in favor of helping the poor and elderly, then Social Security is not the way to go. Let's kill Social Security and instead voluntarily invest our money in charities.

You could also very easily argue that Social Security guarantees people are dependent upon it when they retire because they thought "oh, well, I don't need to save because the government will bail me out". Whereas, if they hadn't unwisely decided that they didn't need to save, they'd be fine.

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