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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75697  
Subject: Social Security Reform Date: 2/11/2005 3:34 PM
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I was reading the Winter 2005 Efficient Frontier, 'The 150 Billion Dollar Question', by William Bernstein, and ran across his commentary on social security privitization. Here is an exerpt that made me laugh:

Originally, the system was sold to the public as privatized, but quickly wound up as a social welfare program. Even today, the Social Security Administration mails out individual "account statements," as if each of us had our own separate little brokerage account with them. And yes, to a certain extent, benefits are roughly proportional to "contributions," but there is a strong redistributive element. And the "trust fund," let alone the concept that benefits are paid out of savings, are expensive myths. Social Security is strictly a pass-through system; remove it from the public domain and it becomes easily recognizable as a Ponzi scheme that would take the breath away from even Messrs. Fastow and Ebbers.

Here is the entire paper: http://www.efficientfrontier.com/ef/105/goldrush.htm

Russ
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Author: jg4 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44513 of 75697
Subject: Re: Social Security Reform Date: 2/11/2005 4:39 PM
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Good article. He also warns against the wealth transfer to the brokerage firms with privatization accounts if care is not taken.

JG

<snip>
Personally, I'd love to see 2% of my payroll taxes funneled into a private account. That's because I'm a money manager; I enjoy running money, and I know how to avoid the sand traps. And the mere fact that you're reading these pages indicates that you're probably in the same boat. But just who manages the accounts of the folks who flip your burgers, provide your tech support, and teach your kids? More importantly, exactly who is their custodian?

The default answers to these questions are, respectively, those inexperienced folks do (the beneficiaries) and the nation's largest financial institutions. If so, this would result in the greatest transfer of wealth the world has seen since the Spanish silver armadas.

</snip>

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44524 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 12:51 AM
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Very interesting that you chose to highlight this sentence when Bernstein spends most of the article explaining how the cure could be worse than the disease. It's exactly that problem that has so many of us opposing privitazation. Bernstein offers a solution but I wonder how feasible it is in this highly political and self-serving world.

I hope everyone read the whole article and not just the single paragraph. There are serious long term hazards in privitization. And so far nothing proposed does anything to solve the projected shortfall in the existing system. It just pushes additional debt onto our grandchildren.

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Author: wcfenton Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44525 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 1:56 AM
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Very interesting that you chose to highlight this sentence when Bernstein spends most of the article explaining how the cure could be worse than the disease. It's exactly that problem that has so many of us opposing privitazation. Bernstein offers a solution but I wonder how feasible it is in this highly political and self-serving world.

I hope everyone read the whole article and not just the single paragraph. There are serious long term hazards in privitization. And so far nothing proposed does anything to solve the projected shortfall in the existing system. It just pushes additional debt onto our grandchildren.

-------------

It is really hard, at least for me, to discuss the pros and cons of a proposal that has no details. All we know for sure is that the President likes the idea of individual accounts as his way of helping to fix the monetary short-falls of the Social Security System and is against anything that looks like additional taxation. He seems to be making things up as time goes along. Not good!

I have my own ideas, like most of us, about what I think is the right way to go on this issue. Privatization certainly is not my first or even my last choice. All I have to do is think about all the young people, like my own children, that don't have a clue about how to invest and don't want to be bothered with it. I have seen a lot of eyeballs rolling back into their heads whenever I have attempted to educate my family about investing. I wonder how many there are like that out there that would have the same attitude?

What percentage of a person's account would be available for investing? Will the investing be left entirely up to the individual's discretion or will there be limitations? How much will it cost the tax payers, in addition to what we already pay, to administer and keep track of individual investment accounts? What happens if bad choices are made and the individual ends up with little or nothing in their private account? Will they have to bite the bullet upon retirement or will the system bail them out? These are only a small sampling of the questions brought about by the prospects of individual accounts.

I'm certainly not anything close to an expert on anything - let alone Social Security, but I do think that there could possibly be a very simple answer. It's certainly not a very original idea, but I would raise the ceiling for taxable income from the current $90,000 to whatever it takes to make the system well. It would only affect the people making the most amount of money in this country and not affect the little guy at all. I'm sure that there would be a lot of controversy about this suggestion from those affected, but then we can't get everything without it costing us something.

So...that's one person's thoughts about this issue. Certainly not thoughts of the caliber of William Bernstein's, but thoughts never the less. Does anyone else concur or am I way off base on this? I'm not much for extended debate, so I'll leave what I've said as it stands and let others state their views.

Regards,
Bill






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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44526 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 9:41 AM
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wcfenton, Good for you re educating your family about investing. Unfortunately many parents don't do that, often because they don't understand the topic themselves. It would be nice if the schools did more in this area but they often don't have the resources or time to handle things that were traditionally done at home.

A word to our younger viewers: I understand you are worried about not having SS when you retire. I'll be 60 this year. When I was 30 I was absolutely convinced SS would be gone by the time I retired. But it won't be. We've made adjustments during those 30 years that have extended it's life. We need to make additional adjustments to assure it will be there for you. I support that. I don't support the desire of conservatives for the last 65 years to dismantle SS. That might not hurt anyone smart enough to be on this discussion board but it will hurt tens of millions at the low end of our economy.



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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44527 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 9:42 AM
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He seems to be making things up as time goes along.

He's been saying the same thing all along. What we don't know is if people are allowed to pull up $1,000 out of the system per year to put in individual accounts, what kind of effect is that going to have on the current system.

We all talk about a bipartisan effort, which is total BS! The democrats don't want to do anything that changes the system and the Republicans don't want to leave it as is.

JLP

http://AllThingsFinancial.blogspot.com

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44531 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 1:43 PM
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>>>>He seems to be making things up as time goes along.

JLP: He's been saying the same thing all along.

Well, not exactly he didn't say a word about it during the campaign which probably was a good idea.

I like the idea of private accounts as a method of funding SS-I like the idea of eating fried chicken, but I don't eat it every day!

The problem with the President's plan is his lack of explanation in how he wants to fund it.

All we know is that "deficits don't matter" according to his Veep.

This is not partisan rhetoric-just tell us where the money will come from to fund privitaztion.

buzman

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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44535 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 5:56 PM
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If the VP did say that Deficits don't matter, then why does the deficit in Social Security matter in his view.
Secondly, the President violated NASD and SEC regulations during his State of the Union address when he stated directly that the private accounts would earn more than the current system. You can not advertise or guarantee future results in any type of statement regarding assets that will be invested in the market. (I know its not a serious error, just found that quote interesting in his efforts to sell his program)
Social Security was never intended to be an individual bonanza. Its designed to be there when one retires, therefore, the investments should not be subject to risk. If one invested their private account in Sun, Lucent, Enron, Worldcom, Fruit of the Loom, Bethlem Steel, etc etc, one would be begging for the old system. The American public has shown its ability to invest for the long term and has been found severly lacking. People tend to invest after the headlines or
after high performance has been reported, they sell after the market drops, they get in high and get out low. Any money in private accounts would be diverted from the current system with no explanation as to where this shortfall would be made up from. (I guess deficits really don't matter) Raise the income level in which we pay into it from its current level, eliminate benefits for those who truly don't need it, (Does Trump or Gates, or any other multi Billionaire really need a monthly check of $2,000) raise the early receipt date from 62 to 67 and the full age from 65 to 70. Roll back a portion of the tax cuts (not all). We have found the money for Iraq, once that is over, I'm sure we can find the money to fix this. If deficits really don't matter, then what are we worried about, we can just keep printing money, right???



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Author: maiday2000 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44537 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 7:40 PM
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I thought social security's appeal was that all people pay in, and all people get a piece, regardless. If you tax everyone and not everyone gets a piece, then it is just a welfare program masquerading as some kind of pension plan.

First, I don't like the initial parts of Bush's plan because it does not address the problems of the funding shortfall. With that said, I believe that the individual accounts are only the first piece. After a while, the real plan has to be that you need to raise the retirement age. When the program was initially conceived, FDR was really just looking for a good way to get cash inflow to fund his socialist programs at the time, thinking he really wouldn't have to pay that many people since the average life expectancy was only 60. The SS program needs to be indexed to life expectancies, because otherwise it really is just a poorly funded ponzi scheme. You cannot continue to create wealth at the rate our country has when you allow transfer payments from the productive to the unproductive. France and Germany are prime examples. The current system has created this new "right" to retire at age 65 and receive money from the government. Sorry, but I never saw that in the Constitution. Of course, our other option is to just continue to raise taxes. I think I will take a pass on that one.

There were a couple of misconceptions I saw in earlier posts. You will only get a choice of like 5 index funds, so you can't really "blow your whole investment" on risky tech stocks. Secondly, it doesn't even effect those over 55, so there will be no loss in expected benefits for those of you who fit into that category.

MM

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44546 of 75697
Subject: Re: Social Security Reform Date: 2/12/2005 10:36 PM
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maiday2000: "I thought social security's appeal was that all people pay in, and all people get a piece, regardless. If you tax everyone and not everyone gets a piece, then it is just a welfare program masquerading as some kind of pension plan."

It has always been a welfare program masquerading as a pension plan.

Regards, JAFO



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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44559 of 75697
Subject: Re: Social Security Reform Date: 2/13/2005 4:40 PM
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Author: wcfenton | Date: 2/12/05 1:56 AM | Number: 44525
I would raise the ceiling for taxable income from the current $90,000 to whatever it takes to make the system well. It would only affect the people making the most amount of money in this country and not affect the little guy at all. I'm sure that there would be a lot of controversy about this suggestion from those affected, but then we can't get everything without it costing us something.

This is exactly what I hope doesn't happen. If we keep taxing the rich for every crisis that comes along, eventually it will not be possible to get rich. It's the possibility of getting rich that drives our entire free enterprise system. Take that away and you are left with pure socialism, and we know how well that works.

I don't know what the answer is to the social security problem, but I do think that fixing it should affect everyone equally.

Russ

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Author: Quakeboy02 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44560 of 75697
Subject: Re: Social Security Reform Date: 2/13/2005 4:44 PM
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This is exactly what I hope doesn't happen. If we keep taxing the rich for every crisis that comes along, eventually it will not be possible to get rich. It's the possibility of getting rich that drives our entire free enterprise system. Take that away and you are left with pure socialism, and we know how well that works.

Russ, I generally agree with you, but I have a problem with this. You seem to be saying that the rich become that way with earned income. In fact, the rich will be only marginally affected by an increase in SS limits. Also, how much does 6.5% of the difference between the current limit and $90K work out to? Now, if you had pointed your argument at small business owners (who will have to foot half of any increase) I would have probably agreed with you.

Hedge

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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44561 of 75697
Subject: Re: Social Security Reform Date: 2/13/2005 4:54 PM
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Perhaps they could split Social Security into two parts.

The first part could be like a medicaid for Social Security. This would cover those who desperately need it. Surely this wouldn't take as much money as covering everybody would.

The second part could be the private account part, allowing workers to put a portion into an investment vehicle of their choice (which would be very limited. We don't want people gambling with their savings).

I don't know what the answers are. But, I do know that sticking our heads in the sand by saying "there is no problem" is just plain ignorant.

JLP

http://AllThingsFinancial.blogspot.com

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Author: Quakeboy02 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44562 of 75697
Subject: Re: Social Security Reform Date: 2/13/2005 5:02 PM
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JLP,

It still boils down to the fact that no US government is going to allow hordes of poor investors die in poverty in their old age. Any SS redesign needs, no Must, keep that in mind, or it's a non-starter.

Hedge

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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44567 of 75697
Subject: Re: Social Security Reform Date: 2/13/2005 9:22 PM
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JLP:

The second part could be the private account part, allowing workers to put a portion into an investment vehicle of their choice (which would be very limited. We don't want people gambling with their savings).

Wouldn't this just be more IRA/401k's? IF we're going to split it, how about we just means test it? The first part goes to the "medicaid for Social Security part that covers those who desperately need it" and we keep the rest and increase contribution limits for IRA/ROTHs.

I agree that millionaires don't need to be collecting SS.

3MM


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Author: mcain6925 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44579 of 75697
Subject: Re: Social Security Reform Date: 2/14/2005 12:54 AM
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Social Security is... a Ponzi scheme that would take the breath away from even Messrs. Fastow and Ebbers.

No, it's not. Consult, for example, Figure II.D5 from the 2004 trustees report, or Figure 2 and Table 2 from the CBO's "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075". In both, SS benefits as currently promised rise to about 6.2% of GDP and then stay there essentially forever. Ponzi schemes do NOT reach steady-state conditions. The "crisis" in funding is that SS is tied to a payroll tax whose limited base is forecast to be a steadily shrinking portion of the national income. Bad news for low earners -- everyone's forecasts show an increasing share of economic growth going to those who make more than the SS cap.

We can debate whether 6.2% of GDP is too much. We can debate whether SS ought to be funded from a broader tax base. We can debate whether promised future benefits ought to be shrinking along with the portion of the national income subject to the FICA tax. We can debate whether the 1983 and 1992 (I think it was) tax increases to help prepay the Boomers' retirement costs by raising surplus revenue was a good idea (I say no, since it was not tied to any mechanism to force the rest of government to live within their means so that federal debt could be retired, hence the surplus was not and is not being "saved"). We can debate whether the SSA should be allowed to hold assets other than Treasuries (I'm inclined to say no, that a very modest tax on unearned income is a better way to accomplish the same goal). But we can't debate whether SS is a Ponzi scheme consuming an ever-increasing fraction of national income, because there are no credible forecasts that show that to be the case.

If you look at Figure 2, however, we can most definitely debate which of Medicare, Medicaid or interest on the federal debt will grow to consume 100% of national income first :^)

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Author: Stssgabs100 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44583 of 75697
Subject: Re: Social Security Reform Date: 2/14/2005 10:05 AM
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The most disappointing thing about these Social Security etc posts is that very little attention is paid to those people, our children and grandchildren, who face major tax increases.
A fundamental point about Social Security can be seen in an article by Bill Gross of Pimco, the URL for which is given in post 169286 of the Mechanical Investing board.
Gross shows that the number of workers supporting each retiree at present is 5 while in 2030 it will be 3 and it keeps decreasing after that. I think the first number is a firm one while there might be quibbles about the second (immigration perhaps, but will immigrants want to pay SS taxes for people who are quite unrelated to them?).
The CBO's numbers quoted by McCain6925 are more suspect, in my opinion. Many unsuspected things can happen in 70 years (the recent substantial rise in the price of oil came as a surprise to many) and the numbers are tuned to what the political masters want. For example, Kotlikoff & Burns (The Coming Genrational Storm p62) point out that the Social Security Administration's Technical Advisory Panel, asked to review the economic and demographic assumptions underlying the SS Tustees Report, voted unanimously to recommend that the life expectancy assumption be raised by 4 years. The trustees, being all Democrats and realizing the considerable additional expense this increase would imply, voted down this proposal.
Moreover, the problem is not just Social Security. Medicaid and Medicare transfers matter also. Congressional Budget Office figures (see Kotlikoff & Burns p 54) show the value of these programs as a percentage of GDP rising from 7.6% in 2000 to 13.9% in 2030 and 21.1%in 1975. Paying for these programs would require doubling the payroll tax in the short run and trebling it in the long run!



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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44584 of 75697
Subject: Re: Social Security Reform Date: 2/14/2005 10:14 AM
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>> The most disappointing thing about these Social Security etc posts is that very little attention is paid to those people, our children and grandchildren, who face major tax increases. <<

Certainly there's little attention paid by AARP, for whom the entire "solution" is sticking it to their grandchildren so their own sweetheart-deal status quo can be preserved.

#29


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Author: OldOne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44613 of 75697
Subject: Re: Social Security Reform Date: 2/15/2005 1:15 AM
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You seem to be saying that the rich become that way with earned income. In fact, the rich will be only marginally affected by an increase in SS limits.

While I do not consider myself "rich", I am "well off" and many on the Fool boards consider me "wealthy". If I look at Scott Burns' "wealth report" my family is certainly in the top 5% of the country, and maybe in the top 3%.

All of my net worth was generated by saving and investing earned income. At some point, the return from investments started to approach earned income, and if I add up my net worth it exceeds the sum of my lifetime income (no interest rate or inflation figured in).

I can tell you right now that another 1% tax rate would have seriously reduced my lifetime accomplishment. It is hard enough to save up enough to "prime the investing pump", with the government taking even more from me it might not have been possible.

The biggest enemy of real wealth generation is youthful discouragement. A feeling that one can never become wealthy just by saving, so why even bother trying? Higher taxes just add to that feeling.

And by the way, even if I might not "need" SS when I retire next year, I will fight to keep it. Why? Quite simply because I was promised it. I have a lifetime of voting decisions and obediently paying taxes, based on that promise.



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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44614 of 75697
Subject: Re: Social Security Reform Date: 2/15/2005 7:25 AM
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>> The most disappointing thing about these Social Security etc posts is that very little attention is paid to those people, our children and grandchildren, who face major tax increases. <<

Certainly there's little attention paid by AARP, for whom the entire "solution" is sticking it to their grandchildren so their own sweetheart-deal status quo can be preserved.


Pardon me, but this is hogwash. This entire 'line' about how we're saddling the young with impossible obligations is just used as a scare/greed tactic by this administration to sell its plan. Actually, the debt incurred via privatization will be just as great a burden.

Young folks today are paying the lowest income tax rates in recent history. For many years the top Federal marginal tax rate was 48%! That didn't include Medicare or SS Tax, which would have brought the rate to well over 50%. The lower income marginal rates were also correspondingly higher. We paid those high tax rates most of our working lives--and for the most part it was paid without complaint because we were concerned about the quality of life of everyone in our society, not just ourselves.

IMHO, to ask our children and grandchildren to pay a few (1-2) percentage points more, considering that they are (and probably will continue) to pay far lower income tax rates than we did, does not seem unreasonable.

2old




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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44615 of 75697
Subject: Re: Social Security Reform Date: 2/15/2005 8:54 AM
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I'm against paying more. There's no guarantee that our taxes (federal, state and local) won't increase in the future. I've never seen the payroll tax DECREASE, so I'm totally against them raising it again. I say make the younger generations wait longer to obtain benefits.

JLP

http://AllThingsFinancial.blogspot.com

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44616 of 75697
Subject: Re: Social Security Reform Date: 2/15/2005 9:17 AM
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<<<Young folks today are paying the lowest income tax rates in recent history. >>>

You can say that again. I happened to look at some old tax returns from the 70's a few months ago and couldn't believe how much I paid in taxes. And I still managed to become what many would consider wealthy.

Also, while I don't want to lump everyone together, I get a little tired of many in a generation that has been given more by their parents than any in history complaining about the old folks wanting their SS benefits.

My parents gave me a sense of pride in my own accomplishments and an understanding of the importance of saving for what I wanted instead of borrowing for it. I might not have fully appreciated it at the time but it's turned out to be worth more than any material goods they could have given me.



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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44656 of 75697
Subject: Re: Social Security Reform Date: 2/16/2005 10:37 AM
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I say make the younger generations wait longer to obtain benefits.

I disagree with you. If we put the issue of privatization for the young aside, any benefit cuts, including waiting longer to obtain them, should be across the board. I think this whole perspective of dividing our nation by age is exactly that, divisive.

If the retirement age is increased, the ongoing benefits of those who are collecting today should be adjusted downward to reflect the additional amount they received by retiring 'early'. This is particularly pertinent to those who started collecting at 62.

If benefits are to be reduced 10% to those not yet collecting, the same should be done for those already collecting. I don't believe that the randomness of what year one was born should have any pertinence in determining whose benefits should be cut and whose should not. It makes no sense whatsoever. Bush's promise to not cut benefits for those over 55 was strictly a political move, and has no foundation in common sense.

2old


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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44658 of 75697
Subject: Re: Social Security Reform Date: 2/16/2005 10:58 AM
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>> Bush's promise to not cut benefits for those over 55 was strictly a political move, and has no foundation in common sense. <<

True. There's an entire industry, I think, that specializes in stirring up the FUD (Fear, Uncertainty and Doubt) among seniors that their monthly check is in peril.

It's pure politics, then, that results in pretty much all serious proposals "grandfathering" (no pun intended) those already collecting or close to doing so. In some ways it makes sense -- those who are still far from the "finish line" have much more time to come up with other options for retirement savings.

To some degree, though, the politics of Social Security are inevitably intergenerational. And when it looks like any changes will only impact younger folks, the intergenerational conflict is only increased.

#29

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44674 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 10:05 AM
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In some ways it makes sense -- those who are still far from the "finish line" have much more time to come up with other options for retirement savings.

The problem is, Bush's privatization plan number assumptions just don't do what he claims (similar to his medicare prescription drug benefit). He claims that a 3% return over the rate of inflation in private accounts will match his proposed decrease in benefits. Those numbers are just plain wrong. I have only run the numbers for my own situation (54 years old), but here is what I came up with:

His proposed private account contributions: ~$ 8,000

Private account balance @ 66 (6% return rate) ~$10,000

Private account withdrawal @ 4% annually $ 400

His proposed 9% decrease in annual SS benefits: $ 2,182

Annual Shortfall $ 1,782

Additional balance needed to cover shortfall $45,000

Addt'l annual savings required (6% return rate) $ 3,000

(Contributions to private accounts don't start until 2009--that's only 8 years before I retire at 66.)

Even with a 6% rate of return, that $8K will only buy a safe annual withdrawal of $400. Therefore, the balance of $1,782 has to be made up some other way. At a safe withdrawal rate of 4%, it requires ~$45,000 in savings.

At the same return rate of 6%, that would require additional annual savings of $3,000. I just think there are many folks who can't come up with those extra dollars. (I'm already saving 50% of my net income, so it would be a difficult thing for me to do also)

These numbers also assume that everything goes well, and a 6% return rate is 'money in the bank', but we know that returns over short periods like this can fluctuate wildly, and that timing counts. So, if everything doesn't go as well as we're assuming, the scenario becomes even worse.

It wouldn't surprise me if the same calculations done for younger folks would show the same glaring realities. (I believe the SS benefit reduction for folks in their 20s is somewhere around 50%)

In short, Bush's proposal just doesn't hold water. He's lying when he says that private accounts make up for the shortfall in benefits!

2old


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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44675 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 11:19 AM
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Isn't a 6% ROR too conservative?

JLP

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44677 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 11:31 AM
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>> Isn't a 6% ROR too conservative? <<

Maybe. But there's something to be said for making conservative estimates in financial planning. Far better that a surprise be on the upside than vice versa.

Underpromise and overdeliver.

#29

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44679 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 12:09 PM
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2old4bs: "The problem is, Bush's privatization plan number assumptions just don't do what he claims (similar to his medicare prescription drug benefit). He claims that a 3% return over the rate of inflation in private accounts will match his proposed decrease in benefits. Those numbers are just plain wrong. I have only run the numbers for my own situation (54 years old), . . . .

proposed 9% decrease
. . .

It wouldn't surprise me if the same calculations done for younger folks would show the same glaring realities. (I believe the SS benefit reduction for folks in their 20s is somewhere around 50%)

In short, Bush's proposal just doesn't hold water. He's lying when he says that private accounts make up for the shortfall in benefits!"


From what source are you obtaining the reduction numbers you are using. As far as I have been able to tell, GWB does not want to put any details of his "proposal" on the table. I have concerned about the formula for reductions (and/or calculation of SS benefits for those who open private accounts), and have not been able to find any relevant information.

Curiously, JAFO




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Author: investinginstuff Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44680 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 12:30 PM
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I agree, but if you are looking at alternatives to social security and you put the alternative ROR low enough, it will make it look bad in comparison to the current system. Make sense?

JLP

http://AllThingsFinancial.blogspot.com

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Author: wcfenton Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44681 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 12:42 PM
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JAFO wrote:

From what source are you obtaining the reduction numbers you are using. As far as I have been able to tell, GWB does not want to put any details of his "proposal" on the table. I have concerned about the formula for reductions (and/or calculation of SS benefits for those who open private accounts), and have not been able to find any relevant information.
-------------

Have you seen the report of President Bush's 2001 Social Security Commission entitled "Strengthening Social Security and Creating Personal Wealth for All Americans" dated December 21, 2001?

Here's a link to the 256 page report if you would like to wade through it:

http://www.commtostrengthensocsec.gov/reports/Final_report.pdf

Regards,
Bill




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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44687 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 2:23 PM
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wcfenton: "Have you seen the report of President Bush's 2001 Social Security Commission entitled "Strengthening Social Security and Creating Personal Wealth for All Americans" dated December 21, 2001?

Here's a link to the 256 page report if you would like to wade through it:

http://www.commtostrengthensocsec.gov/reports/Final_report.pdf "


Yes, but I have not read it closely. It was a 2001 report, and it discussed three potential reforms:

Reform Model 1: Voluntary Personal Account and Offset, Combined with No Change to Traditional Social Security System . . . page 109

Reform Model 2: Voluntary Progressive Personal Accounts Combined with an Inflation-Indexed but More Progressive Traditional System . . . 119

Reform Model 3: Voluntary Add-On Accounts with Matches from Payroll Taxes Overlaying a Traditional System Balanced with a Blend of Revenue and Outlay Changes . . . . . . 131

As best as I can tell, it is not clear that GWB is proposing any of these three different reform models.

Regards, JAFO

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44692 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 4:15 PM
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From what source are you obtaining the reduction numbers you are using.

Well, I wasn't making them up ;-)

I fully understand that there are no firm numbers on the table. I was using numbers that were published in a Washington Post article on January 4th:

The change would save trillions of dollars in scheduled expenditures and solve Social Security's long-term deficit, but at a cost. According to the Social Security Administration's chief actuary, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised.

http://www.washingtonpost.com/ac2/wp-dyn/A45726-2005Jan3?language=printer

Included in that article is a chart showing the decrease in benefits due to price indexing for the medium earner retiree at various retirement dates. The chart source was the SS Administration's Chief Actuary, according to the article.

Since I'm (hopefully) retiring in 2017, not 2022, I used a 9% reduction.

I admit that I was a little off in the reduction for 20 somethings, the 46% reduction for the 2075 retiree would be for someone now 5 years old, I guess ;-)

2old

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Author: jesserivera67 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44693 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 4:33 PM
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Very interesting thread. Below you'll find a decent description of the issues with Social Security. Douglas Holtz-Eakin is director of the nonpartisan Congressional Budget Office. The article does provoke some thought but the main point is that privatization doesn't really address anything.

http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/02/13/BUGPRBA2A31.DTL

I completely agree with Mr. Holtz-Eakin in that privatization is only a matter of policy and does not directly fix anything. One of four things still needs to happen:

1) Borrow money to compensate for the shortfall
2) Raise Taxes
3) Reduce benefits
4) Combinations of the above

This will need to occur irrespective of the privatization debate.

I also do not agree that democrats do not want to do anything about this. Both parties agree that one of the above will need to take place. The biggest proposal on the table today is to raise the $90,000 limit to $120,000 (raise taxes). I have a feeling that is going to happen since it is essentially an indirect way of raising taxes (i.e. we continue to pay the 12.4%, we just pay it longer). This alone will not resolve the issues so then what? Without details we really can't say. I'll look forward to seeing this thread once the plan comes out!

Jesse


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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44694 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 4:40 PM
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Isn't a 6% ROR too conservative?

IMHO, not for someone approaching retirement in 11-12 years. A portfolio mix of 60% stocks, 40% bonds, would return 6% overall if the stocks returned 8% and the bonds returned 3%. (I believe Vanguard's short-term bond funds are currently yielding somewhere around 3.40, but as interest rates rise, even short-term bonds experience price decline, so I don't think 3% is unreasonable.)

Bush himself said in the SofU that as one got closer to retirement age they would be required to hold a larger percentage of bonds in their private account. (I no longer have the text of the SofU message, or I'd quote it for you.)

2old





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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44695 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 4:58 PM
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2old4bs:

JAFO: <<<<From what source are you obtaining the reduction numbers you are using.>>>>

"Well, I wasn't making them up ;-)"

I never thought that you were.

"I fully understand that there are no firm numbers on the table. I was using numbers that were published in a Washington Post article on January 4th:

The change would save trillions of dollars in scheduled expenditures and solve Social Security's long-term deficit, but at a cost. According to the Social Security Administration's chief actuary, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised.

http://www.washingtonpost.com/ac2/wp-dyn/A45726-2005Jan3?language=printer "


After further review, I think that you are mixing apples and oranges. The article you linked recited:

"That adjustment is based on wage growth over that time span. Under the commission plan, the adjustment would be based instead on the rise of consumer prices."

Changing in the adjustment format would apply to all beneficiaries. It has, as far as Ican tell, nothing to do with the reduced benefit amounts that those who elect private accounts would receive. GWB is in favor of this inflation-adjustment change even if private accoutns do not come to fruition.

I would still like to see the formula that would be used to calculate the reduced benefits for those who chose private accounts.

Regards, JAFO

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Author: wcfenton Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44697 of 75697
Subject: Re: Social Security Reform Date: 2/17/2005 5:58 PM
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JAFO wrote:

As best as I can tell, it is not clear that GWB is proposing any of these three different reform models.
-------------

I agree. There is a whole bunch of "assuming" going on by the pundits which, from what I'm reading, pretty much guess that "Door # 2" will be the winner (Mix of traditional benefits and private accounts).

I read an article in my local newspaper a few weeks ago (don't have a link) by Jonathan Clements that suggested those same pundits think that a person will be able to put 4% of payroll taxes (up to $1,000 a year) into a private account. Another of the reported assumptions is that private accounts will grow 2% faster then inflation. a final point is that the SSA would assume that individuals would purchase an inflation indexed immediate annuity from their private accounts when they are eligible to retire that would give them a lifetime steam of income and then the SSA would reduce their traditional benefit checks by that amount.

Like I said - a whole lot of assuming going on. The major problem is that this model solves nothing. On the contrary - it produces more problems because it does not generate additional revenue, but does generate more expenses which makes fewer dollars available to pay current retirees their entitlements. Even if private accounts produce gains exceeding the assumed 2% over inflation guess, which is great for the individual, it does nothing to reduce the SSA financial obligation to retirees.

Personally, I think that raising the $90,000 ceiling - to whatever level it takes - is the initial corrective action needed whether we go with privatization or not. From there - a modest raise in the tax rate and pushing the retirement age up a little are about all we've got in the way of continuing the system.

Regards,
Bill



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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44749 of 75697
Subject: Re: Social Security Reform Date: 2/20/2005 11:05 AM
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After further review, I think that you are mixing apples and oranges...Changing in the adjustment format would apply to all beneficiaries.

I understand the distinction you're making, and it's true that the reductions in benefits from opting for the private accounts is nowhere to be found (as far as I can tell).

However, since GWB proposes all of these changes, I was viewing all the changes as a 'package'. Sorry I didn't make that clear.

If we look at the cost of living adjustment separately (in my scenario), it would require $55,000 of additional savings to compensate for the reduction in benefits.

Opting for a private account would only compensate for a benefit reduction of 1.65% in my scenario.

I would still like to see the formula that would be used to calculate the reduced benefits for those who chose private accounts.

Me too.

2old



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