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chegitz guevara
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Ft. Lauderdale, FL Communist Party of Apolyton
Jun 2000
time: 00:33
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quote:
Originally posted by Drake Tungsten
quote:
Out of the frying pan, into the fire, as long as it's change it's good? |
In this case, yes. Moving to a system that may be worse while opening up opportunities for reform is much better than sticking with a system we know is bad and is almost impossible to reform. |
Actually, moving to something worse instead of staying where you are is not a good idea. That's sort of the definition of worse. In fact, doing what Bush wants is more likely to engender a complete breakdown of the system than doing nothing, and do it sooner.
It's kinda like saying, "The way we're going, we'll run into that cliff. With my plan, we'll drive off the edge of the mountain immediately and avoid that nasty crash!"
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Oerdin
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of Internet Music.
Sep 2001
time: 21:33
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quote:
Originally posted by TCO
god there is so much ignorance and poor thinking here.
2. The Bush plan does not cost double Oedin. It just puts the obligations of SS as formal obligations. If you expect to recieve SS, then this is GOOD. (If you want to shaft SS reciepients it's bad). Direct opposite of your thinking. |
Sorry but you are wrong. I point you to the numerous Krugman articles where this is reviewed at depth. You should read it because he covers this extensively and hits the nail right on the head.
Last edited by Oerdin on 02-04-2005 at 10:05
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shawnmmcc
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African-Americans actually get more out of Social Security, due to the fact that the benefit for poor workers (it is insurance, not an investment) is essentially subsidized by those at the higher end of the salary scale. African-Americans, especially males, tend to be in lower income jobs. Evidently the trade-off is so close that it depends on how you run the numbers. Essentially, it's a red herring at best, and a lie at worst.
The other problem with securities is that there are two pricing models - investment and commodity. Any time you have a bubble market, you transition from the investment mode to the commodity mode. That is why the stock market becomes so volatile at that point. This is germane, because as with any commodity, increased demand beyond a certain point increases prices beyond the fundamentals of that instruments as an investment.
To put this simply, it means that putting Social Security into the stock market as a 401K - esque investment, instead of an insurance benefit, is going to increase the value of stocks as a commodity. This means that those with better access to data, i.e. individuals in the investment community, will be able to use their better data to profit off those without access to said data. Look at the market timing in the mutual fund industry is you do not believe this is true. Also, those in the investment community can flee to other investments, i.e. foreign deposits of receipt, due to an impending collapse of the commodity pricing mode. The Social Security investors are NOT going to have that option, that would be considered high risk and that kind of investment is going to be limited, if not prohibited.
Also, and here all of the models about stocks versus bonds are very disingenuous, they do not factor in administrative fees. Many individuals in Chile, the success story touted by many as to how personal accounts work, avoid the legal economy, i.e. reporting wages, etc. because the administrative fees can reach as high as 30%. Note, that figure is from the Wall Street Journal article on that. Plus, the pro-"reform" advocates, so-called, assume average to low yields for continuing Social Security as is, and assume average to high yields for putting it in the stock market with no administrative fees. The same applies to growth rates, they game the numbers and assume one to three percentage points, i.e. at times almost double, difference in growth rates for the scenario where we keep Social Security as it is versus private accounts.
Plus, the nasty little story people don't want you to know about is that one of the things that put the Argentinian economy over the edge was that they also tried to change their Social Security system to a personal account system THROUGH BORROWING. That does not bode well for the US, especially because of other negative fundamentals for the US economy. Almost every argument against the negative fundamentals again games the results, letting the stock market based system have better fundamentals than the current system.
What it boils down to is that the privatization pundits are arguing this largely on faith, the same as their arguments for free markets. I just read an excellent article on that, reference Bush's new trade representative appointee. The commentary walked through the continued deterioration of US Current Accounts, with NAFTA, WTO, giving Chine most favored nation trading status and WTO membership, and now the Central American Free trade deal. This liberal punditry from from US News and World Report, which is a moderate to conservative magazine. I reserve faith to my argments about what happens after I die, not before.
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Oerdin
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of Internet Music.
Sep 2001
time: 21:33
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No. The Social Security Administration recieves less money under the Bush plan because part of its income has been redirected to private accounts. Social Security must still mail checks to seniors but since it is making less money it goes broke much, much sooner. Ergo there is a much longer period where it cannot cover it's bills and money from the General Fund must be used to cover to retiree's benifets.
If we did nothing then at least we wouldn't lose part of the SSA's income. Better yet just remove the income cap and make everyone pay Social Security taxes on all of their income and watch the system remain sound at least until the end of the century.
(edit: For those who don't know what the Social Security income cap is here's an explaination. By law people only pay Social Security taxes on the first $90,000 they earn each year. Any money over $90,000 is not charged any Social Security taxes. That means middle and lower income people must pay taxes on every penny they earn but rich people get a huge tax break. By eliminating this tax loop hole the Congressional Budget Office estimates Social Security would remain solvent at least until 2100.)
Last edited by Oerdin on 02-04-2005 at 10:46
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Oerdin
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of Internet Music.
Sep 2001
time: 21:33
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quote:
Originally posted by pchang
$2 trillion to fix the problem once and for all or $1 trillion to limp along and pass the problem on to the next generation.
As for administrative fees, I pay 25 BASIS POINTS to Vanguard. Don't you think the entire SS fund can get a better deal? |
It would be nice if it was the entire Social Security fund getting a better deal but we're talking about 200 million fish all getting their own private accounts remember? Also the problem wouldn't be fixed for ever because some people (let's face it a lot of people) just aren't going to make wise investments and will lose their money. What do we do then? Just let them starve? What happens if the market tanks right when someone is getting ready to retire? They won't have 10 years to wait for the market to recover.
If the government is going to tell people they can only invest in index funds then will people buy into the idea of private accounts when they can't control how their money is invested? Once private accounts are established and people are only allowed to invest in low cost funds how long will it be before Republicans push for "greater freedom" or "more choices" to let people decide to select higher cost funds? Those costs will eat up the returns so that people won't be making much more money but will have much more risk.
Here's a nice selection from one of Krugman's articles.
quote:
Rates of Return on Private Accounts
Privatizers believe that privatization can improve the government's long-term finances without requiring any sacrifice by anyone - no new taxes, no net benefit cuts (guaranteed benefits will be cut, but people will make it up with the returns on their accounts.) How is this possible?
The answer is that they assume that stocks, which will make up part of those private accounts, will yield a much higher return than bonds, with minimal long-term risk.
Now it's true that in the past stocks have yielded a very good return, around 7 percent in real terms - more than enough to compensate for additional risk. But a weird thing has happened in the debate: proposals by erstwhile serious economists such as Martin Feldstein appear to be based on the assertion that it's a sort of economic law that stocks will always yield a much higher rate of return than bonds. They seem to treat that 7 percent rate of return as if it were a natural constant, like the speed of light.
What ordinary economics tells us is just the opposite: if there is a natural law here, it's that easy returns get competed away, and there's no such thing as a free lunch. If, as Jeremy Siegel tells us, stocks have yielded a high rate of return with relatively little risk for long-run investors, that doesn't tell us that they will always do so in the future. It tells us that in the past stocks were underpriced. And we can expect the market to correct that.
In fact, a major correction has already taken place. Historically, the price-earnings ratio averaged about 14. Now, it's about 20. Siegel tells us that the real rate of return tends to be equal to the inverse of the price-earnings ratio, which makes a lot of sense.[1] More generally, if people are paying more for an asset, the rate of return is lower. So now that a typical price- earnings ratio is 20, a good estimate of the real rate of return on stocks in the future is 5 percent, not 7 percent.
Here's another way to arrive at the same result. Suppose that dividends are 3 percent of stock prices, and that the economy grows at 3 percent (enough, by the way, to make the trust fund more or less perpetual.) Not all of that 3 percent growth accrues to existing firms; the Dow of today is a very different set of firms than the Dow of 50 years ago. So at best, 3 percent economic growth is 2 percent growth for the set of existing firms; add to dividend yield, and we've got 5 percent again.
That's still not bad, you may say. But now let's do the arithmetic of private accounts.
These accounts won't be 100 percent in stocks; more like 60 percent. With a 2 percent real rate on bonds, we're down to 3.8 percent.
Then there are management fees. In Britain, they're about 1.1 percent. So now we're down to 2.7 percent on personal accounts - barely above the implicit return on Social Security right now, but with lots of added risk. Except for Wall Street firms collecting fees, this is a formula to make everyone worse off. Privatizers say that they'll keep fees very low by restricting choice to a few index funds. Two points.
First, I don't believe it. In the December 21 New York Times story on the subject, there was a crucial giveaway: "At first, individuals would be offered a limited range of investment vehicles, mostly low-cost indexed funds. After a time, account holders would be given the option to upgrade to actively managed funds, which would invest in a more diverse range of assets with higher risk and potentially larger fees." (My emphasis.)
At first? Hmm. So the low-fee thing wouldn't be a permanent commitment. Within months, not years, the agitation to allow "choice" would begin. And the British experience shows that this would quickly lead to substantial dissipation on management fees.
Second point: if you're requiring that private accounts be invested in index funds chosen by government officials, what's the point of calling them private accounts? We're back where we were above, with the trust fund investing in the market via an index.
Now I know that the privatizers have one more trick up their sleeve: they claim that because these are called private accounts, the mass of account holders will rise up and cry foul if the government tries to politicize investments. Just like large numbers of small stockholders police governance problems at corporations, right? (That's a joke, by the way.)
If we are going to invest Social Security funds in stocks, keeping those investments as part of a government-run trust fund protects against a much clearer political economy danger than politicization of investments: the risk that Wall Street lobbyists will turn this into a giant fee-generating scheme.
To sum up: claims that stocks will always yield high, low-risk returns are just bad economics. And tens of millions of small private accounts are a bad way to take advantage of whatever the stock market does have to offer. There is no free lunch, and certainly not from private accounts. |
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02-04-2005 09:13
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