Re: Administration: Social Security Fix Will Require Combination of Benefit Cuts and Tax Increases

On Thu, 27 Sep 2007 13:43:32 -0500, "John Galt"
<whoisjohngalt@xxxxxxxxxxxxxx> wrote:


"El Castor" <No_One@xxxxxxxx> wrote in message
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On Thu, 27 Sep 2007 09:28:30 -0500, "John Galt"
<whoisjohngalt@xxxxxxxxxxxxxx> wrote:


"Harry Thompson" <me@xxxxxxxxxxx> wrote in message
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"John Galt" <whoisjohngalt@xxxxxxxxxxxxxx> wrote in message
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I'd personally like to see (2) substituted for with exposing some of
the
monies to the private bond markets, but I don't think that's in the
cards. However, I'd like to be pleasantly surprised.

I don't understand what you mean here. Could you explain? If I missed
your
idea before, please re-explain anyhow.

Instead of routing a portion of SS taxes to the general fund, you divert
them into goverment bonds, private bonds, or private equity, where they
appreciate at greater rates that in the SS system. Turns out that you
don't
need a very high percentage of the taxes, nor a very high ROI, to change
the
SS formula rather significantly. This notion was part of both the Clinton
1997 reform plan and the Bush 2005 reform plan.

I really don't know what to think of that. First with regard to
routing the surplus into government bonds, that's close to what we are
doing now. The bonds are non-negotiable, but even if they weren't I'm
not sure it would matter much. Either way, the money is used to
finance government spending, and either way, we run into the problem
of redeeming the debt.

Greenspan gave a speech several years ago in which he strongly opposed
diverting the surplus into equities. There are lots of reasons to
question the idea. Here are a few.

1. How do you do it? The surplus is declining and will end in about
ten years, so even if it were all diverted, would it be enough to
matter? Converting a substantial portion of the Trust Fund would in
reality mean borrowing dollars from foreign holders, like the Chinese,
for the purpose of investing those dollars in the U.S, stock market.
Seems like a shaky idea to me.

All legit issues.


2. Public ownership of a large chunk of the means of production raises
issues that particularly disturbed Greenspan. What investments would
be made -- or not made? Would the SS trustees elect members to the
Boards of Chevron, Merck and GM? Presumably, they would. Politics
would almost certainly come into the picture in all sorts of ugly
ways.

Bush's notion was to route $$ to legit investment firms (Fidelity, Vanguard,
etc) who when then open your account and automatically invest the money (no
choices) into the appropriate Target Date fund (Fidelity calls these
"Freedom" Funds, Vanguard has another name for them) which automatically get
more conservative as you age. While we agree that there are people in
financial services licking their chops at the possibility of getting their
hands on a hunk of those investment funds, by spreading it around and fixing
the fees you eliminate the opportunity for shenanigans, like we've seen in
the 529 plans and the retirement plans for government employees.

To be honest, I didn't support Bush's proposal, but the way you put
it, maybe the idea had merit. I think we can agree he did a very poor
job of selling it to the American people. Possibly it's something that
can only come from a Democrat.

3. If we experienced a 40% decline, like we did in the bear market of
2000, the public would go nuts when they saw their retirement assets
evaporate before their eyes. The pressure on the government and the
Fed to "do something" to save Social Security would be enormous. We
can be pretty sure that the something that got done would do far more
harm than good.

Agreed.

4. Lastly, suppose the US equity market experienced a decline of the
length and magnitude of that suffered by the Nikkei? How would we meet
the obligations of social security?

Couldn't.

I agree. That's a risk that we all take when we invest. Alan
Lichtenstein has been a big proponent of equitizing (is that a word?)
Social Security, but when I put the Nikkei question to him, he came up
with a different answer -- fall back on the taxpayer. I'm sure there
are those who would support that approach. It wouldn't work.

Another problem with equitizing Social Security at a national level is
the political pressure that would result during the expansion phase of
a Nikkei type bubble. Suddenly there would be more money than needed
to fund the retirement system. Pressure would build to increase
payments to retirees -- which, if done, would only make the eventual
bust more painful. I think things like that have happened on the
municipal level.
.

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