Bush the Reformer?

[corplinx]

Well, it looks like Bush is once again showing his liberal colors. Bush is planning on implementing social security rerform and tax reform

I mean liberal in the real meaning of the term and not the vernacular meaning.

I expect social security reform will go about as well as medicare reform:

A. To get past the filibuster it will have to be loaded with spending increases
B. fiscal conservatives will complain it costs too much
C. Leftists will decry removing government as the only provider and also say it doesn't go "far enough".
D. democrats will also say it costs too much during the next congressional election to appear to be more fiscally responisble.


Medicare Reform, Social Security Reform, Tax Reform. If these efforts succeed, Bush will be the biggest changer of the federal government since FDR.

But what of those of us who don't think his ownership society goes far enough?

I am pro-choice. I don't want a private medicare and social security alternative; I want to opt-out. I realize that introducing private plans is a dramatic enough change. I only hope that it is the first brick in the wall and helps people's thought change.

When people start asking, "why am I giving uncle sam a dollar who gives me back 20 cents to invest in a private plan?", perhaps then we will finally see citizens _demand_ the right to opt out of these programs.

I've called the Bush medicare and social security the "faux-choice" movement in the past since there is no opt-out. I only hope these dramatic changes in these programs starts the spark a real shift towards real change.

As far as tax reform goes, this is a no brainer and Bush will probably lose the house in 2006 over it. You have two years to fix this mess of spaghetti we call an income tax George. I hope you can get it done.

 

[BPSCG]

Social Security reform is the most important and I think he should focus his time, attention, and effort on that, and leave the others to his successors.

Social Security as it stands now is not a sustainable system and is simply a bad investment for people now entering the workforce. I think ultimately, what we're going to see is the system gradually abolished in favor of a mandatory privatization plan of some sort. Instead of paying 7% of your salary into Social Security, you'll pay it into any of a half-dozen or a dozen different fund accounts, each fund having different objectives (security, growth, aggressive growth, income, etc.). Employers will match it.

The advantages are twofold: 1) The money people put in the fund will actually be investments just the same way that money put into mutual funds is invested money. The extra capital in the productive sectors of the economy will have to be better overall for the economy than government income transfer, which is all that Social Security is. 2) People will do better financially. Yes, the stock market goes up, the stock market goes down, but over the long haul, the stock market goes up, period.

But what about all the people on traditional Social Security? They'll get phased out. There's precedent for this. Federal employees under the old civil service retirement system (CSRS) were not covered by Social Security until 1984. Everyone hired after 1983 was automatically covered under the new Federal Employees Retirement System; those hired before 1984 could opt to switch to the new system. The new system provided retirement income in three tiers: Social Security + a smaller pension than that provided by CSRS + a 401(k)-type "thrift plan."

Most CSRS employees decided not to convert to FERS, and most of us are nearing retirement age. We'll collect under the old system, and when the last of us (and our surviving dependent spouses) dies, that will end CSRS.

Use that template for Social Security.

If Bush can get a serious reform through Congress - not just jiggling the tax rate and the taxable income and raising the retirement age - he'll have done the country a bigger service than catching Osama bin Laden could ever be.

 

[The Don]

The Don's crystal ball says that:

- A good chunk of the growth experienced by these funds will be eaten up with management and service fees for the fund. Unless the funds significantly outperform the market (and few do) the return from these funds may not be as good as current social security provision - more poor old people

- If you've worked a minimum wage job your whole life, you'll have a pathetic pension when you retire (14% of minimum wage doesn't buy much of a pension)

- There will be rampant miss-selling of these products with people steered by advisors to those funds which do best for the advisor. People will not understand the risk they're taking

With annuity rates they are at the moment, to get a pension of $1000 a month would require a fund of between $300k and $400k. This is not a small amount of money for the average Joe (or Josephine).

 

[Cain]

What liberals, leftists, and socialists (all the samething, really) fail to understand is that individuals make choices in life; and if you choose poorly then you deserve to starve on the street and die in the cold. It's not my fault others lacked the same foresight and resolve I demonstrated to be born into a privileged household.

Besides, as one poster below has shown, the Market (all praises and blessings upon thee) will magically generate obscene sums of money for even the dumbest people. That's basically how capitalism works.

 

[The Don]

I'm sorry, living in the Socialist Worker's Paradise of Great Britain, I was unaware about how the system worked. I withdraw my reservations about privatising Social Security on the grounds that, thanks to the free market, everyone will obviously live like emperors when they retire.

 

[Marc]

In the final weeks of the election, wern't the democrats warning about the huge costs if Bush were to privatize social security? And response from the Bush campaign was they were fear mongering, that there was no plan like that. (even though he had tried to do it back in '01)

 

[a_unique_person]

What liberals, leftists, and socialists (all the samething, really) fail to understand is that individuals make choices in life; and if you choose poorly then you deserve to starve on the street and die in the cold. It's not my fault others lacked the same foresight and resolve I demonstrated to be born into a privileged household.

Besides, as one poster below has shown, the Market (all praises and blessings upon thee) will magically generate obscene sums of money for even the dumbest people. That's basically how capitalism works.

One of the things that pisses me off no end. I find stocks boring, bonds even more so. I work just as hard as anyone else, but I don't profit from spending my time counting every penny, and looking for every tax break. Therefore, I lose.

 

[TragicMonkey]

Sounds good to me.

As a Gen Xer, I never expected to get a dime out of Social Security. I fully expect to pay into it for my entire life, die at ninety while still working, and not see a cent in return from SS.

So even if everything's mismanaged all to hell, and the market crashes creating a gigantic global depression, and I only get two dollars back over sixty years, that's still more than I'm headed for now.

Of course, I think it's absolutely insane for any American to expect to receive returns from Social Security, especially the baby boomers. Did they not notice how many of them there are, and plan accordingly? It's every individual's responsibility to plan for their own future; if you want to trust the government to do it for you, go live in Sweden!

 

[BPSCG]

- A good chunk of the growth experienced by these funds will be eaten up with management and service fees for the fund.

That's incorrect. Millions of people in this country put billions of dollars into mutual funds every month, a huge chunk of it into funds specifically designed to be retirement funds, where the income generated is not taxed until retirement (when, presumably, the worker is in a lower tax bracket). The management fees are tiny - generally a fraction of a percent.

Unless the funds significantly outperform the market (and few do) the return from these funds may not be as good as current social security provision - more poor old people

Also incorrect. If what you're saying is that Social Security outperforms the stock market, that is clearly not the case. And even if it were, that would be unsustainable. Social Security may have a better rate of return in certain individual years, but over a lifetime of employment, the stock market does much better.

Social Security is simply an income-transfer program. The market is a means for people to buy ownership of corporate America. Social Security is a bet that there will always be three or four times as many workers as retirees - a shaky proposition. Privatization is a bet that America's businesses and their owners will be wealthier thirty years from now - and that has always been a good bet.

- If you've worked a minimum wage job your whole life, you'll have a pathetic pension when you retire (14% of minimum wage doesn't buy much of a pension)

People who work minimum wage all their lives are actually relatively rare. But even conceding the point, those people get patheic Social Security today, too - not remotely enough to live on. That's why we have welfare, Supplemental Security Income (SSI - welfare for the aged and the disabled, not to be confused with Social Security), food stamps, Medicaid, and the other social safety net programs. Social Security was never intended, even in 1936 when it was implemented, to be your sole means of support after you stopped working.

- There will be rampant miss-selling of these products with people steered by advisors to those funds which do best for the advisor. People will not understand the risk they're taking

My own 401(k) program through my employment (even though I'm under the old Civil Service retirement System, I can contribute - there's just no matching from my employer) allows me to invest in certain selected , pre-screened and approved funds. There is no stockbroker involved.

With annuity rates they are at the moment, to get a pension of $1000 a month would require a fund of between $300k and $400k. This is not a small amount of money for the average Joe (or Josephine).

I did some Excel calculations. If Joe makes $20,000 a year, which he can do flipping burgers at Mickey D's, $2,800 goes into his retirement account each year - $1,400 from him and $1,400 from his employer, and gets an average annual 6% rate of return on his investment, after 30 years, he'll have $234,644. After 40 years, he'll have $459,000. That's if he doesn't save a single penny anywhere else.

If Joe makes $40,000 instead of $20,000, and he and his employer continue to put in a combined 14% ($5,600 a year), he'll have almost a million dollars after forty years ($918,667, to be exact).

Forty years sounds like forever, but if he starts working fresh out of college at age 22, he's 62 when he retires. And if he has a college degree, chances are he won't be flipping burgers all his life unless he's a philosophy major.

You say six percent is an unreasonable rate of return? Nonsense. I put a hundred bucks a month into a municipal bond fund (bonds to build highways, schools, sewers, water works, parks, etc). That fund is currently paying about 4.5%, and it's tax-free. In my tax bracket, that's the taxable equivalent of 6.25%. And I'm no financial wizard

 

[The Don]

That's incorrect. Millions of people in this country put billions of dollars into mutual funds every month, a huge chunk of it into funds specifically designed to be retirement funds, where the income generated is not taxed until retirement (when, presumably, the worker is in a lower tax bracket). The management fees are tiny - generally a fraction of a percent.

Maybe my ignorance of U.S. financial products is showing. In the UK the minimum management fee is around 1% (for tracker style finds) with actively managed funds being anything up to 4% fee. This is paid on the total value of the fund

On top of that you also pay commission and a margin when you purchase units in the fund. The margin (spread) is small but hte commission can be anyhting up to 5%. 1% wouold be considered low.

Looks like you do get a better deal in the States from here http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp

The average equity mutual fund charges around 1.3%-1.5%

Also incorrect. If what you're saying is that Social Security outperforms the stock market, that is clearly not the case. And even if it were, that would be unsustainable. Social Security may have a better rate of return in certain individual years, but over a lifetime of employment, the stock market does much better.

Social Security is simply an income-transfer program. The market is a means for people to buy ownership of corporate America. Social Security is a bet that there will always be three or four times as many workers as retirees - a shaky proposition. Privatization is a bet that America's businesses and their owners will be wealthier thirty years from now - and that has always been a good bet.

Again this may be a UK centric view but an actuarial study was done where they "invested" the pension related social security (some in the UK goes to provide unemployment pay) and it turned out that someone working for 40 years would have a pension of £30 a week, rather than the £79 they get now.

Unfortunately I cannot find the study to link to it. Maybe someone who has better Google skills than I can do it

People who work minimum wage all their lives are actually relatively rare. But even conceding the point, those people get patheic Social Security today, too - not remotely enough to live on. That's why we have welfare, Supplemental Security Income (SSI - welfare for the aged and the disabled, not to be confused with Social Security), food stamps, Medicaid, and the other social safety net programs. Social Security was never intended, even in 1936 when it was implemented, to be your sole means of support after you stopped working..

So there will still be a considerable burden on the state to support these older people. You're merely using public money to underwrite the failure of any investment trusts.

My own 401(k) program through my employment (even though I'm under the old Civil Service retirement System, I can contribute - there's just no matching from my employer) allows me to invest in certain selected , pre-screened and approved funds. There is no stockbroker involved..

I did some Excel calculations. If Joe makes $20,000 a year, which he can do flipping burgers at Mickey D's, $2,800 goes into his retirement account each year - $1,400 from him and $1,400 from his employer, and gets an average annual 6% rate of return on his investment, after 30 years, he'll have $234,644. After 40 years, he'll have $459,000. That's if he doesn't save a single penny anywhere else.

If Joe makes $40,000 instead of $20,000, and he and his employer continue to put in a combined 14% ($5,600 a year), he'll have almost a million dollars after forty years ($918,667, to be exact).

Forty years sounds like forever, but if he starts working fresh out of college at age 22, he's 62 when he retires. And if he has a college degree, chances are he won't be flipping burgers all his life unless he's a philosophy major.

You say six percent is an unreasonable rate of return? Nonsense. I put a hundred bucks a month into a municipal bond fund (bonds to build highways, schools, sewers, water works, parks, etc). That fund is currently paying about 4.5%, and it's tax-free. In my tax bracket, that's the taxable equivalent of 6.25%. And I'm no financial wizard

You need to offset the return against the inflation rate. A return of 6% may only be 3% inflation adjsuted which would give an effective fund of around 1/4 the value you quoted.

I have no idea why you're grossing up the interest by the way, it's the tax free value which counts.

 

[AtheistArchon]

As a Gen Xer, I never expected to get a dime out of Social Security. I fully expect to pay into it for my entire life, die at ninety while still working, and not see a cent in return from SS.

So even if everything's mismanaged all to hell, and the market crashes creating a gigantic global depression, and I only get two dollars back over sixty years, that's still more than I'm headed for now.

Of course, I think it's absolutely insane for any American to expect to receive returns from Social Security, especially the baby boomers. Did they not notice how many of them there are, and plan accordingly? It's every individual's responsibility to plan for their own future; if you want to trust the government to do it for you, go live in Sweden!

- You and I are of the same mind on many topics. My wife and I decided very early on to simply ignore any and all government promises for social security and plan our own retirement with the assumption that SS is a tax we have to pay that we'll never get back. It's used by the government pretty much like proper "taxes" anyway.

- If, as you say, we happen to actually get anything out of the deal when I'm 80, fine, I can buy the fancy cat food instead of dry for my cats. Whoopee.

 

[BPSCG]

You need to offset the return against the inflation rate. A return of 6% may only be 3% inflation adjsuted which would give an effective fund of around 1/4 the value you quoted.

I have no idea why you're grossing up the interest by the way, it's the tax free value which counts.

Couple of points to address:

1) Yeah, you have to take into account inflation. But even if you do that, private investment would work out better than Social Security, evein if for no other reason than the fact that Social Security returns are unsustainable - the system will eventually collapse if not fixed. Inflation-adjusted returns are better than zero returns.

2) Regarding tax-free value: Most (all? as I said, I'm no financial wizard) 401(k) plans are tax-deferred. When you're working, your income is generally substantially higher than when you're retired, and is taxed at a higher rate. 401(k) earnings, as well as earnings from other common retirement vehicles, are tax-free or tax-deferred, the deferral being until you retire and start making withdrawals from the fund, at which point you're in a lower tax bracket.

Again, this is a model that has worked very well for federal employees, including the conversion from the old civil service retirement system to the federal employees retirement system. I see no reason this can't be done for the country as a whole, barring political demagaguery ("Are we going to allow them to take away your grandmother's Social Security?").

 

[TragicMonkey]

2) Regarding tax-free value: Most (all? as I said, I'm no financial wizard) 401(k) plans are tax-deferred. When you're working, your income is generally substantially higher than when you're retired, and is taxed at a higher rate. 401(k) earnings, as well as earnings from other common retirement vehicles, are tax-free or tax-deferred, the deferral being until you retire and start making withdrawals from the fund, at which point you're in a lower tax bracket.

Except you can't have an active 401k and an IRA at the same time and get them both tax-deferred.

 

[corplinx]

All SS reform will probably do is:
Make a cap or means test the current program
Make an alternative program for younger workers that allow them to invest the money.


There is no investment in the current program, new taxes come in, payments go out. Allowing people to adopt a semi-private plan would probably have a large initial charge as we would have to cover the shortfall of paying for the people currently recieving SS and less money coming into to the government plan because of people spending in the private ones.

The only way of softening that blow is to stop giving SS to seniors who currently don't even need it and to give less to ones getting ourageously large payments.

Having a private option is a win-win, it gets us out of the current mess where a population bubble threatens to kill the program and it also encourages investment which strengthens the economy.

 

[TragicMonkey]

Been doing a bit of reading. Social Security reform may or may not be possible/desirable/useful....but there are some proposals for retirement accounts that are distinctly interesting. The administration is going to push for raising contribution limits to IRAs of all types, removing the penalties for converting traditional IRAs to Roths, expand some of the benefits of regular Roths, and create a new kind of thing called a "Lifetime Savings Account" which will incorporate Roth features with some other stuff.

Of course, it'll all get tweaked and prodded when going through Congress's grubby little claws, but much of this sounds good. Having more options, and better options, for tax-deferred (or tax-free!) retirement accounts is going to do much to help people save properly....provided they bother to use them.

And if they don't....screw 'em. People too lazy to plan deserve to wither in the rotten compost heap that is Social Security!

edited for grammar error. Blush!