Burnt Orange Report

Wanna fix Social Security? Remove the income cap. That simple, really. Throw in some means testing and you're basically done.

Andrew,

Yeah, I pretty much totally agree with everything you said, except the part about wanting to use the savings to increase Federal Spending. Kind of surprising, actually, but there it is. I (of course) would much rather use the savings pay down the debt and slash taxes, but that is tangential to the issue of what to do about social security.

As for the safety of investing in stocks, in the past 70 years or so, which includes much of the Great Depression, the S & P 500 has earned a 10% annual return. Stocks are quite safe, in the long run, which the 90's boom was not. There is a pretty simple reason why this is so. Owning stocks means, quite literally, that you own a part of a corporation. Investing in a diversified portfolio of stocks gives you ownership of(a fraction of) corporate America. As long as the economy is growing, stocks are pretty much guaranteed to have a positive rate of return. In an ironic way, personal retirement accounts are the fulfillment of Marx's dream of workers owning the means of production.

Blue, there are several reasons not to just apply the social security tax above $87k.

First, it would be a huge marginal tax hike, pushing the top US tax rate above many European countries, and a huge drain on the economy.
Also, you assume you would actually collect all that money in taxes. History suggests you would not. When taxes approach 50% (which with 35 + 12 percent federal income taxes, plus state taxes), people tend to a) not work as much, on the margin and b) get very creative about how they actually earn their income. "Really, it is a capital gain. Honest, it is. That's only 15% taxes there." People aren't tax serfs, and don't just sit down and take it when you try to take half their income. They find legal (and sometimes illegal, but I don't advocate that) ways of reducing their tax burden. You wouldn't collect all the cash you think you would from ending the cap.

The bigger issue, is why would you want a huge tax increase to save social security, when it involves NOT moving to private retirement accounts, which still pay more, and leave you with an inheritance for your children, and involve investing in the economy, creating more jobs, growth, which as an added side benefit lower poverty and raise federal revenues. Aren't those good things? Why stick people with a 1% rate of return when you can do so much better?

In all seriousness, why do you liberals (not counting Andrew) oppose private retirement accounts? I just don't get it. The only real reason I've ever heard from my liberal friends comes down to "the American people are too stupid to invest wisely, they'd just waste their savings and be a huge burden when they do retire." Aside from being incredibly condensending, it assumes people won't educate themselves about investment if they now are saving for their retirement future. Even if you don't know anything about saving now, if we move to personal accounts, people will take the time to learn. Besides, even if you do think the American people are morons, it doesn't take much candlepower to beat 1% annual return. A monkey throwing darts at the Wall Street Journal could pick a portfolio that beats that (I'm quite literal, they did an experiment a few years back where the monkey did quite well. Basically, it just shows that a diversified portfolio does well in the long run). Seriously, why are you guys opposed, if not out of belief in the stupidity of the American people? I'd honestly like to know.

Sherk

Huge marginal tax rise? Hardly. In any event, why should the wealthy pay a DECLINING proportion of their income???

As far as the disincentive in the economy...what percentage of the population do you think makes over $87K a year?

And as far as the capital gains issue: tax all income, whether capital gains, dividends, interest, or wages, EXACTLY the same.

I think that moving up the cap on income might be a good idea but removing it would be disastrous. I'm not a "soak the rich" type- I think that perhaps we might need to return to Clinton-era tax brackets in order to get us out of our current fiscal rut but look at someplace like Germany. High taxes and far left regulations on business mean a 12% unemployment rate. We can't afford that here. I'd much rather see SSI and Medicare reform matched with paying down the debt so that we free up money than raising taxes.

While I don't oppose privatization outright, I'm not satisfied with many of the responses that I see on this issue. It's been a while since I looked at Cato's ideas, and currently their site is down. In the past, however, their proposals failed to answer my questions.

1. We are talking about diverting at least millions if not billions of dollars. How will the payouts be funded in that time, while privatization gets its legs, so to speak? Social Security is pay as you go. So, we're talking about more debt or increased taxes somewhere for an indefinite amount of time, assuming that payouts are not changed, which is a third option.

Andrew addresses this issue, but it's vague what happens.

2. What exactly is this minimum amount of guaranteed income? How does it compare with current SS payout rates?

I have seen estimates that, with a proposed 2% diversion to privatization, payments could be cut in half.

3. What are the costs of privatization? Chile charges a 3% tax for fees.

4. What's to prevent individuals from using their investment money for today's expenses?

I think it's a mistake to view Social Security as an individual's retirement fund. Look at the name--"Social security." The purpose is to provide some means of income when you are unable to work. We're so far removed (some more than others) from a time when there were no pensions, no savings, and no Social Security checks. And while it's tempting to disregard that long history, I think it's a mistake. I don't speak of a paralyzing fear to do anything to the current system. I just think the base definition should remain unchanged.

5. What is the impact of the government investing so much money into the market?

This last point is an important one.

a. The performance of the stock market is not bound to overall economic performance. It is first and foremost speculation on future earnings or losses. For example, when it is rumored of a buyout, a company's stock can inflate quickly. Then, when the rumor turns out false, the value of the stock drops below what it was before the rumor. I've seen this happen so it's hardly hypothetical. The point should be clear: The value of stock is not tied necessarily to performance.

b. Our government's policies will be even more driven to ensure a healthy stock market. Is this really how we want to make decisions? Protecting the economy is one thing. Protecting the stock market is another.

Finally, I have seen arguments (Here, here , here, here, and here) that refute these claims of higher returns by privatizing. Simply comparing rates of returns without considering the costs of implementation is not good reasoning.

For example, I recently looked into refinancing my house for a whole percentage point difference. Brain dead decision, right? Wrong. Because of increased taxes and a nearly 200% increase in my home insurance, I'm upside down on my escrow. Throw in the fees and payoffs, and my principal rises enough to make my monthly payment exactly what I have now. And it hardly lowers my overall payment for the house.

Andrew, you provide good reasons for supporting privatization, most of which I agree with. But they are reasons to support only a viable, realistic plan.

Rather than private accounts, I'm actually more tempted by proposals of investing Social Security surpluses--not because I think government can make wiser choices than individuals but because it uses the unused money for investment.

Sherk invokes a stereotype opposition. If the facts were truly so clear, there would be no opposition. In fact, I personally know of no liberal with such simple-minded opposition. But the facts are not so clear, and the questions have not been satisfactorily answered.

I support efficiency and improvements, but I refuse to bite on some slippery numbers of averages. If some are willing to look to Chile for reasons to privatize, then we should look at Argentina as well. This is more than comparing 7% to 1.5%.

Andrew,

So many points to make , so little time!

Average rate of return over time is a misdiretion.
1. On average Warren Buffet and I and even you are billionaires, on average.

2. You don't retire over time, you retire in a specific time frame and if the money you have invested, perhaps even wisely according to conventional wisdom is less than the amount that others are getting in Social Security, then who makes up for those unfortunate ones and they may not be so few but a lot--the Amerian government or they become a burden on their families. As a member of the sandwich generation (those responsible for their own children and spouses and their elderly parents) and a woman let me tell that this type of caretaking is not without high economic costs which are also a tax.

The FICA tax we have is the most socially regressive tax on the books; and the sainted and not so liberal or sober ( I knew him personally) Senator Moynihan is responsible for making it even more regressive in the 80's. Raising the cap is one of the best things to do.

Besides this crisis isn't that much of a crisis . Wall Street firms that want your money would like you to think it is one. The predictions of shortfall are based on a a worst case scenario in terms of a GDP growth of @1.7% (about Depression GDP). Of course any investment scheme would have better results. ( Remember these funds are invested in Treasuries, the lowest risk investment because it is supposed to be a guarenteed risk-free floor insurance against old age penury.) Even lacklustre GDP of 2-2.5% will make it past the babyboomers and into the next century. Social Seurity doesn't need saving from itself only from well meanign Dems like you who want to to apply medicine to someone that's not sick.

Now to the issue of wealth creation instead of old age insurance. The genius of the right wing like Cato is they have cunningly confounded them (insurance and wealth creation) both in too many peoples' mind. Don't destroy Social Seurity to create present and heritable wealth.

If wealth creation was the real goal of Republicans then when Cong. Nita Lowey in the 90's put foreward a proposal to create public pensions accounts for people over and above Social Security by using or channeling tax money into the these personal accounts, then the Republican party would not have opposed it en masse. They used the lure of wealth creation to undermine Social Seurity which they have always opposed, but now they see it as also just another way to take tax money and divert to their own crony capitalist purposes like Cheney and Halliburton.

There are other mechanisms to create wealth like an endowment at birth, these personal pension accounts and many others . This may be a worthy goal but destroying Social Security does not need to be the only way to achieve it.

And the transitions will not be the only huge unfundable costs which many impose cuts in benefits or raising the retirement age. When a sufficient number are suffering in an intense or prolonged down market then the government will have to bail them out.

I do think there are legitimate objections to personal accounts on a practical basis. The transaction costs on individual accounts could easily adversely diminish the growth within each account. Some people can't invest and don't know how and except in a significantly rising market there is by the definition of the zero sum nature of financial markets that there will be winners and losers. Winners get a bonanza and losers either get Alpo ot a daughter to take them in or a huge infusion of tax money. (My little plug for why women vote Democratic - because they either are more vulnerable than men and/or they are the caretakers which can make them more vulnerable).

Compare the transaction costs of Medicare- 3% to the overhead in private, profit driven HMO's of 20-30%. It is a red herring that the private sector is more efficient than well run government programs like Soial Security.

Again I urge you to go to the entury Fund report and Cong. Jerrald Nadler has lots of material on
these points.

Taxes I'll get into another time- but a small joke to end with. Death and taxes are considered to be equally inevitable but to Republicans they are both equally fatal!

I apologize for the typos. The letter C key works rarely on my keyboard and it is amazing how often it is used!

I apologize for the typos. The letter C key works rarely on my keyboard and it is amazing how often it is used!

I apologize for the typos. The letter C key works rarely on my keyboard and it is amazing how often it is used!

I apologize for the typos. The letter C key works rarely on my keyboard and it is amazing how often it is used!