Superbowl Sunday and Social Security
Next to Thanksgiving, Superbowl Sunday is the closest thing we have to a national holiday. Superbowl is the most watched event on television, and has become ever more so, as even the commercials (for once) are interesting, funny, and even thought provoking. What better event than the culmination of our favorite national sport (no other country plays football the way it's done here -- not soccer, not rugby, etc.) And what better sport to mirror true bloodthirsty competition and conquest than football? Interestingly, the New England Patriots are not only physically talented, but smart, raising the intelligence of the contest from the pure physical brutality dominated by a couple of superstars of early pro football games to a team gestalt, with the agility to radically change tactics on any play to confound their competition.
Yes, even football has become complex -- with the difference between winning and losing hidden in a myriad of details.
Which brings us to Social Security.
Social Security started with basic concepts from the Depression -- workers contribute to a national pension program, and benefits are paid after they retire for as long as they live. This worked great for the Depression generation -- the amount they contributed dwarfed (even after inflation) the amounts they received. Life expectancy inreases and indexes that were tied to wages made the program popular. And since the number of Depression generation retirees was balanced by the large number of baby boomer wage earners, the program worked great.
But even in 1970 as boomers started working, talk about how boomers would never see a penny of social security was prevalent. The system would 'go bankrupt' around the turn of the century. These concerns only got more exacerbated as boomers had fewer children than their parents, and had them later in life. So in the 1980's, Congress raised the Social Security taxes from 4% to 6.2%. (actually double that -- employers/employees pay the same amount) That way we would generate a Social Security surplus before the boomers retired to keep the system solvent without putting the country into debt. Everyone breathed a huge sigh of relief. Yes, taxes were higher, but it would be worth it. Boomers could at least count on Social Security.
Then the Reagan Administration decided to spend the Russians into the ground, relax FDIC insurance limits, and fund all kinds of pork barrel projects with the help of a Democratic Congress, who to prove they were tougher than Republicans, escalated spending on War on Drugs, etc. all popular programs with little attention paid to how this would be paid for. One of the places they got the money was to lump the surplus in the Social Security system in with government spending, so things looked better on paper, and we wouldn't have to worry about boomers retiring for another 20 years or so, so everything was hunky dory because we could conveniently forget about the future again.
Now as the present Bush Administration accentuates "Security" but pisses and moans about anything "Social", we again are asked to increase spending on Defense (er Homeland Security) and figure out how to reduce future government spending on Social Security. This is ultimately what is going on -- Without the big entitlement programs (Medicare, Social Security) the only other really large government expense is 'Defense' oh and of course interest on the deficit which exists because of all the wars we fought.
In the current version of the ongoing shell game we are asked to believe that 'privatizing Social Security' is a good thing, because it would allow savvy but poor workers to invest their social security money not in Treasury bills but in stocks and bonds. The conventional wisdom is that since stocks historically on average return 12%/year and T-bills are stuck at bond rates that are typically 3% - 6%, stocks would be a better deal. But would they? It is hard to tell because adjustments for inflation mask much of the information, making it extremely difficult to know what would be better.
What we do know is that the stock market is essentially a zero sum game after adjusting for inflation. For everyone who makes a killing, somebody eventually loses. Keep in mind that stocks are actually priced as 'futures' since the market share price is a reflection of 'future expecations' for the company. This is why an attractive stock typically has a stock price/yearly earnings ratio as a positive multiple -- often in the 10x to 20x range, except when significant speculation drives up P/E ratios to 30, 50, and 70x earnings or more. As this happens, the savvy investors sell, since they know that ultimately, any companies share price has to reckon itself with real returns. Companies do not grow by double-digit amounts for long. Even now stocks are overvalued if like General Electric (to pick the only company that has been on the Dow Jones average since the beginning) they continue to sport a P/E ratio higher than 10.
So what happens in macroeconomic terms to the stock market as boomers retire? Do all those 401K contributions that keep driving more money now into the market drop? Probably. Do more people invest aggressively in stocks or less? Probably less -- since risk and uncertainty are not desireable when you retire and are dependent on actual returns to live -- no more rolling over profits into future investments, or delaying capital gains by just holding the stock. Will the market continue to rise by 12% a year? Perhaps, but not after adjustments for inflation. None of this bodes well for investing in stocks for the boomers. Perhaps it would for the next generation (Generation X) but maybe not. It's a crap shoot at best. Even for them, assuming another market cycle of boom and bust over 20 years, savvy timing is required AHEAD of the big fund movers.
Let's compare this to what the Social Security Administration is telling a typical hardworking boomer who has maxed out their Social Security contribution for the past 25 years, and likely will continue to do so for the next 12 years before retiring. He paid $78,000 as of 2004. His employers paid $82,000. These amounts are actual, no inflation adjustment. $160,000 contributed. Social Security reports that this will be worth $2000/mo from age 66 on. Since he is married his wife is entitled to an amount equal to half of that again, or another $1000/mo. This adds up to $36,000/yr. If they live to be 90, they would collect $964,000 from social security. Not too shabby.
How much would he have to have in a bank (invested in T-bills at 5%) to collect $36,000/year? About $720,000 in perpetuity, or if we assume he will spend down to 0$ by 90 since he won't live to be 91, he would need about $300,000. Although even that is hard to calculate since you don't know what inflation is going to do, you don't know how the interest rates will fluctuate, and you don't know if you will live to be exactly 90. Social Security takes the risk out of these things by assuming that the country will take care of its elderly citizens.
Before Social Security, the burden of the elderly fell directly onto their children. This encouraged big families to share the burden of food, shelter, and caregiving for the grandparents. Social Security helps the current working generation too, assuming that each generation cares for the previous ones in old age. Either way, you're going to pay.
So how does this stack up against having each worker's contribution to Social Security invested in something like stocks, that may have a higher return? The problem is inreased risk. They have to invest in investments that actually earn a higher return, buying and selling in time to do this. There cannot be any capital gains taxes. What happens when all this extra capital hits the markets? Will this drive prices up for companies that are in the 'selected' category? Yes, but for how long? Looks like a great deal for financial traders, for getting more people into the market, and for those who know which companies will get picked. What happens when the Social Security admin sells a stock? Who benefits? Who gets burned? If the past is any judge, private corporations will benefit at the expense of the public. Aw. too bad. You have no one but yourself to blame for your piddly retirement.
Using our example above, what if our boomer had invested the $160K paid into the Social Security system over the past 25 years with an average return of 12% per year compounded annually? (Note that the example does not take into account the extra dollars this taxpayer would have had to pay for either financing the national debt or paying current retirees with those dollars the government had to 'make up' somewhere.) Would he have done better? By how much? And at what risk? When you do the math, you realize that Social Security is a pretty good deal.
All investments are a balance of risk and reward. Considering the low risk of social security, and the historical track records of increasing payments tied to wages and the inevitable longevity due to technological advances, it is a great deal. No wonder they want to change it for the latest shell game.
Want to see the krony pigs scream? Let's propose that the only way to get the privatization scheme to work is to tax all people who make more than $200K per year with the funds required to make up the Social Security shortfall due to the change to a privatization scheme. And make the investors who stand to benefit the most from the privatization get taxed the most.
The difference between winning and losing is stuck in a myriad of details.
Now watch the shells carefully, Notice that at no time do my fingers leave my hands....
