Privatizing Social Security: How would it work in practice?

[Bullseye]

Social Security surpluses are not an investment and even if they were, they are an investment with zero tolerance for losses. That is why they are put into treasuries. Regardless of what the financial markets are doing, Social Security benefits must be paid out.

Actually, most surplus were loaned to Congress. Back when surpluses were significant.
Essentially special bonds whose value could never drop below parrl.

 

[JohnfrmClevelan]

It's not an investment when the pensioners themselves have to pay the interest.

Pensioners aren't paying any interest. And SS payments are an investment because without them, not only would there be a huge jump in poverty, the economy would also suffer. Government investment in keeping the economy growing is money well spent, no matter where it comes from.

Besides, clearly the rate of return isn't enough to keep the fund afloat. Better investments are obviously necessary.

Well, our government doesn't invest like that. They stay out of the markets. All govt. payments come from taxes and deficit spending (which is just money creation).

The Social Security fund would liquidate its holdings as necessary. It's just like any other individual or institutional investor.

That wasn't my point. My point was that stock funds are not a pile of money; outside of dividends, you can only cash out as much as other investors put in.

So what happens if/when money from today's SS fund is converted to stocks? The price puffs up from the surge in buying, and regular investors take the opportunity to sell, grabbing some of those FICA dollars. Long term, I think that levels out, but short term SS would lose money.

Also, we aren't talking about SS investing funds in the stock market, we are talking about a full transition from SS to, basically, 401(k)s, where the government doesn't interfere, except to force investment in stock funds.

 

[JohnfrmClevelan]

Not really. It's based on wages, which are only indirectly linked to factors like productivity or GDP.

GDP is the national income. GDP goes up, total wages go up, FICA contributions go up, unless there is a big shift in income to the rich.

Investing in stocks, rather than using a paygo system, basically has larger rewards and lower risk. It removes the burden on the government (which is required to pay benefits regardless of, say, a recession reducing tax revenues) and puts it on the individual.

There is still a paygo element to stock funds, because the forced investment supplies the dollars for those cashing out - both retirees and other investors. That's my main concern with stock funds; most of the money for retirees still comes from money from income, workers putting, say, 12% of their income into stock funds. The only other money is from dividends.

So you have the same problem as we have with SS today - a bigger pool of retirees cashing out against a smaller pool of people putting money in. It's just another way of paying retirement checks with a portion of present income, and that present income is coming from the lower end. And there is no tangible pile of money associated with stock funds; they are just stocks, until you find a buyer.

The trick to retirees benefiting passively from the economy, I think, is to skim more money from real production and rely less on new investors supplying the money. A corporate bond fund, for example, lends money to corporations, which is considered pretty safe and steady, and the fund ends up with tangible assets - money from interest paid - which would normally be captured by the finance sector. And other investors can't access that money, like they can (and would) with stock funds.

 

[JohnfrmClevelan]

In general this.

Any "privatization" plan that doesn't explain how to fund current beneficiaries for decades and mid-career people that have paid into social security and don't have time remaining to build a private portfolio based on the diversion of their current FICA taxes is not a real plan.

It's bumper sticker, feel good talking point.

WW

These are all solvable problems.

There are a ton of problems with stock funds. Funding stock funds with the $1.5 trillion would, I think, just serve to puff up the stock market, and those funds would be out in the wild, where any investor is free to cash in and grab some (most?) of that money.

But put that same investment into corporate bonds, and that money stays with plan members. You get your return in real dollars, and aren't dependent on there being enough buyers. You get passive income from interest, paid by corporations. An added benefit - you are taking business away from the financial sector.

 

[Cassandra]

These are all solvable problems.

There are a ton of problems with stock funds. Funding stock funds with the $1.5 trillion would, I think, just serve to puff up the stock market, and those funds would be out in the wild, where any investor is free to cash in and grab some (most?) of that money.

But put that same investment into corporate bonds, and that money stays with plan members. You get your return in real dollars, and aren't dependent on there being enough buyers. You get passive income from interest, paid by corporations. An added benefit - you are taking business away from the financial sector.

I play around in the stock market and hear over and over that passive investing is basically making the stock market very risky. The % of people who actually analyze a company and look at the fundamentals of a corporation before investing- has plummeted. Currently, The average P/E ratio in the Nasdaq has surpassed or is at least approaching that of the ratio before the Dot Com bubble. Aside from the increase in passive investing, speculation in meme stocks is become a runaway train. Currently, it is irrational.

So dumping the nation's retirement wealth in a passive invested casino sounds not only unfeasible but also, very risky!

I think you have made that point several times in this thread. Thanks

 

[AZRWinger]

Treasuries are the safest assets on earth. Would you rather the government invest SS surplus revenues into crypto? What about mortgage securities (That would have gone really well in 2008-2009)? Should it inflate the stock markets more with them?

By law SS surpluses can only be "invested" in special purpose bonds. The only means to redeem these bonds is through general revenue, current year tax money. The real rate of return on these bonds is zero. Unsecured IOU with no earnings, what a grand investment.

 

[AZRWinger]

AZ, you are looking for a solution to a non existent problem. Par for the course these days.

Carry on.

According to the SS trustees the so-called trust find will be exhausted in less than 10 years necessitating a 25% cut in benefit payments. Nonexistant problem indeed.

 

[AZRWinger]

In theory, most, but not all Americans, could self fund their own retirements if they invested in a 401k or IRA consistently starting at a young age. If you start in your early 20s putting 6% to 10% of your income into index funds, you will almost certainly have enough to retire with at age 65. If every American had some basic financial literacy, reasonably good critical thinking skills, and some self discipline, we wouldn't need Social Security.

Unfortunately, that isn't what we are dealing with. A majority of Americans read at a 6th grade level or lower. A significant percentage of Americans lack the financial self discipline to save at an early age. A majority of Americans lack the critical thinking skills to invest well for their retirement. We have basic social safety-nets like Social Security because we have to deal with the world as it exists, not as we think it should be.

Ah yes, noblesse oblige requires looting the retirement savings of millions by compulsory taxation to fund the most massive Ponzi scheme in history. We are to trust the same clown posse of politicians that mushroomed the public debt to $34 trillion to fund our future retirement? Naw.

What most Americans are ignorant of is the nature and financial state of SS.

 

[AZRWinger]

And it works! The govt., after changing a few laws, could also just create currency and pay the bills. Still govt. liabilities, but not debt. They also mint coins that count as money, no debt required, it's just a straight creation of money. They could also mint a $1 trillion coin, deposit it with the Fed (as they do all coins), and spend from their new $1 trillion balance in the TGA - also debt-free.

At some point, you have to admit that the government simply has the power to create and spend their own currency, and what you call debt is really just an accounting operation. It's just another way to create money and spend it.

From ignorance of the stock market to debauching the currency as a cure for profligate spending. Did you learn nothing from the inflation of Bidenomics?

 

[Sooner or Later]

According to the SS trustees the so-called trust find will be exhausted in less than 10 years necessitating a 25% cut in benefit payments. Nonexistant problem indeed.

Your understanding of the problem is severely flawed. The Trust being exhausted is not due to required investing in Special Issue bonds.

 

[AZRWinger]

Social Security surpluses are not an investment and even if they were, they are an investment with zero tolerance for losses. That is why they are put into treasuries. Regardless of what the financial markets are doing, Social Security benefits must be paid out.

Exactly, SS surpluses aren't an investment. They are a transfer of debt to future generations. Legitimate annuities work by investing assets not needed for current payments to offset future liabilities. SS wrote unsecured IOU to itself then Congress spent the money leaving future generations, us, to pay the bill then slash benefits.

Again, the trust fund $ were put into special purpose bonds, not treasuries. It's like you took cash out of your wallet replacing it with an IOU then claimed the IOU to yourself as an asset. It's absurd but that's the SS scam.

 

[AZRWinger]

Your understanding of the problem is severely flawed. The Trust being exhausted is not due to required investing in Special Issue bonds.

First you claim there is no problem. Now you claim I don't understand the problem. It can't be both. Please explain.

 

[AZRWinger]

IPOs generate capital for the company. IPOs are real investment. Secondary sales do nothing.

So, share price doesn't determine a company's capitalization? Again you show your ignorance.

 

[MAGAnificent]

(I know that there was a recent thread on pretty much the same subject, but it didn't go anywhere. I'm hoping for a more nuts 'n' bolts discussion of the money in this thread. So instead of just saying that privatization is just a way to further enrich the rich, explain why or why not. Thanks.)

Social Security, as it stands now, is funded by taxes. We all pay a pretty large percentage of our income, as do our employers. Those of us who are/were self-employed are painfully aware of the burden, as we paid double. Changes to the present system will certainly need to be made. Basically, more taxes and/or a shift in the tax burden to keep normal benefits flowing.

A change to privatization looks great from some projections, though. If we could truly realize more money for retirement with a much smaller burden (I've heard 3% tossed around), that sounds like a no-brainer.

My problem with the stock market, though, is that it's a bit of a Ponzi arrangement, in that realized gains from appreciation depend on new buyers. The only real connection between the stock market and the economy is dividends paid by the companies. There is no pile of money "backing" stocks, just an expectation (or hope) that new investors will come along and buy our stocks when we want to sell. Anyway, that Ponzi element to stocks is similar to the SS of today, in that present investors pay for the benefits of those cashing out. And 3% of present income in would not be nearly enough to pay for withdrawals. The 15% we pay into FICA now is not even enough.

Can privatization work?
Is there possibly a better way to harvest our private sector production to pay for peoples' retirement?

It would actually start with a small level of privatization by way of choice as was proposed during the GW Bush administration. The concept then was that you could direct about 2.5% of your social security taxes to a private retirement plan and the private sector managing those plans would be audited by the IRS. Even at 2.5% it would have led to greater retirement funds.

 

[Sooner or Later]

So, share price doesn't determine a company's capitalization? Again you show your ignorance.

Share price determines market cap. Share price x outstanding shares. Higher market cap doesn't mean additional capital to the company.

Capitalization is the money received when initial shares are issued, ipo. Shares offered for sale x sales price.

Two different terms. Two different meanings. Two different results.

 

[Sooner or Later]

First you claim there is no problem. Now you claim I don't understand the problem. It can't be both. Please explain.

YOUR "solution " is a solution to a non existent problem. YOUR "solution" (focus on special issue bonds) wouldn't resolve the Trust funding issue.

 

[longview]

I do not think privatization is the way to go, but I think they could look at opening up what choices of investments
SS can make, to include state and local bonds, as well as the full range of federal bonds.
If the 15% annual deposit earned a 4% rate of return, the account would hold a subnational sum by the
time someone who started work at age 23, retired at age 67.
A person who worked at $15 per hour for their whole life would end up with $588.000, which would generate
$1950 per month of income without touching the principal.
A $3000 a month benefit would last for 47 years or until they were 114 years old.
any remaining balance could roll back into the fund to shore up weak areas.

 

[Sooner or Later]

I do not think privatization is the way to go, but I think they could look at opening up what choices of investments
SS can make, to include state and local bonds, as well as the full range of federal bonds.
If the 15% annual deposit earned a 4% rate of return, the account would hold a subnational sum by the
time someone who started work at age 23, retired at age 67.
A person who worked at $15 per hour for their whole life would end up with $588.000, which would generate
$1950 per month of income without touching the principal.
A $3000 a month benefit would last for 47 years or until they were 114 years old.
any remaining balance could roll back into the fund to shore up weak areas.

I wouldn't have a problem investing in bonds in the open market. A higher return should be expected which would help shore up the Trusts future decline.

To get there the 2.7 trillion in Special Issue bonds would be cashed in. The General Fund would need to supply the 2.7 trillion in cash by issuing 2.7 trillion in new debt to the open market. No actual increase in debt, 2.7 trillion added to the General, 2.7 trillion eliminated in the Trust.

The General would be offering 2.7 trillion in new bonds to the market (in addition to normal offerings). The Trust would be in the market looking to buy 2.7 trillion in bonds or other now legal to purchase securities.

Wild times for sure.

 

[Sooner or Later]

Think how crazy it would be if SS took it's 2.7 trillion in cash and purchased the 2.7 trillion the General Fund is offering...

 

[ALiberalModerate]

Ah yes, noblesse oblige requires looting the retirement savings of millions by compulsory taxation to fund the most massive Ponzi scheme in history. We are to trust the same clown posse of politicians that mushroomed the public debt to $34 trillion to fund our future retirement? Naw.

What most Americans are ignorant of is the nature and financial state of SS.

A Ponzi scheme doesn't successfully pay out benefits for nearly 90 years. Social Security is far from perfect, but its better than the alternatives of having to bail out tens of millions of Americans due to bad personal retirement choices on their parts, or even worse, my mother-in-law having to live with us.

The problem with Social Security is not that surpluses were put into treasury bills, the problem is that the demographics are changing to where there are more and more old people, and less kids.

 

[rahl]

And it works! The govt., after changing a few laws, could also just create currency and pay the bills. Still govt. liabilities, but not debt. They also mint coins that count as money, no debt required, it's just a straight creation of money. They could also mint a $1 trillion coin, deposit it with the Fed (as they do all coins), and spend from their new $1 trillion balance in the TGA - also debt-free.

At some point, you have to admit that the government simply has the power to create and spend their own currency, and what you call debt is really just an accounting operation. It's just another way to create money and spend it.

So, back to taxes are completely unnecessary and we can simply print what is needed each fiscal year to cover government outlays. MMT is hilarious.

 

[Mika-El]

A third party is hired to manage and invest funds for the best risk/ return possible.

The point is that third party as you call it will not do it for free and will be wide open to conflict of interest.

 

[Mika-El]

That's not how the stock market works. Educate yourself, first on the role of stocks in creating capital and then on the function of the stock market.

You have obviously never paid attention to a shareholders meeting or owned stocks.

I have. I was an executive of a company where the President and a few directors corrupted the value of the shares so they could sell their shares when the price was high then buy them back when the price went low. Insider trading. I only did that two years. I am not saying every public co. was like the one I worked at but it sure as hell flavored my biases. I am no expert on the stock market. Just expressing subjective biases against it.

This is why I never invest in stocks. Its a con game. Its controlled by insiders and you can not guarantee a corrupt free system of stock value that isn't. I was fired for not going along with it as a legal counsel. Not a chance. The company went bankrupt two years later. The Commission caught up with them directors and executives in on the insider trading. Years later they each got fined. It was a slap on their wrists. How many stockowners they ripped off I do not know. The shareholder meetings were a joke. A few executives controlled and covered up the whole damn insider fix.

Stocks are a massive con game that appeal to greed and gambling and this notion you can make money buying low and selling high. That is an illusion and always has been. Its just a form of gambling to fool idiots.

That of course is my opinion. I am sure many disagree.

 

[Mika-El]

And it works! The govt., after changing a few laws, could also just create currency and pay the bills. Still govt. liabilities, but not debt. They also mint coins that count as money, no debt required, it's just a straight creation of money. They could also mint a $1 trillion coin, deposit it with the Fed (as they do all coins), and spend from their new $1 trillion balance in the TGA - also debt-free.

At some point, you have to admit that the government simply has the power to create and spend their own currency, and what you call debt is really just an accounting operation. It's just another way to create money and spend it.

While what you say has accuracy to it, I for one would argue printing money is no solution to paying off debt or solving spending more than earning and just escalates inflation that spirals out of control so that we have the exact situation the US has now, such a large debt that just the interest rate on it is snowballing out of control and can not be paid down with any true effect. The compounding interest on the collective debt has long since destroyed the US economy and Trump's con game of creating a consumer tax called tariffs to fund even more debt is the furthest thing from capitalist or conservative financial theories as is possible.

 

[Mika-El]

Pensioners aren't paying any interest. And SS payments are an investment because without them, not only would there be a huge jump in poverty, the economy would also suffer. Government investment in keeping the economy growing is money well spent, no matter where it comes from.



Well, our government doesn't invest like that. They stay out of the markets. All govt. payments come from taxes and deficit spending (which is just money creation).



That wasn't my point. My point was that stock funds are not a pile of money; outside of dividends, you can only cash out as much as other investors put in.

So what happens if/when money from today's SS fund is converted to stocks? The price puffs up from the surge in buying, and regular investors take the opportunity to sell, grabbing some of those FICA dollars. Long term, I think that levels out, but short term SS would lose money.

Also, we aren't talking about SS investing funds in the stock market, we are talking about a full transition from SS to, basically, 401(k)s, where the government doesn't interfere, except to force investment in stock funds.

Again I agree with you and everything you say but here is my worry and again its just my personal opinion. I believe while initially the stock values will go up exactly as you say as is inherently the case in stick exchanges, the value will then drop and that is where people depending on such finances and their higher values will be in trouble. I argue as do many economists although I am not one, that what goes up must go down and anyone who claims they can avoid losses on the stock market are liars. They are inevitable. So this leads me to ask again who are the third parties investing this money in the stocks and since when can they guarantee the stocks can not lose value and if it does be offset or brought back up. Nope. You can have a fund that never drops below the initial price yes but such funds do not necessarily prevent value erosion from inflation.