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Author: zorloc Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5267  
Subject: Re: Advantages of the current system Date: 7/4/2000 3:16 AM
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The main advantages of the current system for me personally is
- insuring against the risk of living much longer than you expect by provided an inflation indexed life annuity.
- your real benefit is tied to wages and will reflect wage growth. (demographics change, but not that fast)


Your benefit is not tied to wage growth. It is tied to inflation. SS receipients benefit from low growth/high inflation (i.e. the 70's), but suffer under high growth/low inflation (but it can help the system), because once they retire the only thing that raises their benefit is inflation, not a rise in living standards!

But this doesn't work anyway. Check out the chart on this in re SS solvency:

http://www.socialsecurity.org/sstw/sstw03-31-00.pdf

You can see that because wages have grown faster SS will have more money in the short term, but for the same reason (and increased estimates of life expectancy) the long term financial solvency got WORSE.

This last effect is especially dramatic in Chile, where real incomes are going up at a very fast rate. There, you retire with an inflation indexed annuity which matches some percent of your final salary. But you are stuck living like a Chilean lives in the year 2000. In 2020, non-retired Chileans will be living a lot better than you. Although even there, I suppose Chile can augment their private scheme with a pay-as-you-go system to correct that deficiency.

This is no different than in the US, retirees here will fall behind just as in Chile as long as wages increase and inflation remains small. But Chileans have the advantage of starting with a much higher replacement rate. To retire with the same standard of living (in the US) you need ~80% of your pre-retirement income. SS returns (on average) less than 40%, while in Chile the rate is just over 70%.

In a later post you (I think) mention that the UK's system would be great. But the UK's system has partial private accounts! And it is the UK's partially privatized system that has more assets to pay benefits than the rest of Europe put together.

http://www.socialsecurity.org/sstw/sstw04-28-00.pdf

While Germany has 20 percent payroll taxes, and by 2030 they should reach 25% to support the system:

http://www.socialsecurity.org/sstw/sstw04-21-00.pdf

The guarantees of pay-as-you-go systems are nice, but the only conclusion is that they just are not demographically sustainable. All of the pay-as-you-go systems in the West are facing mammoth debts. The only viable solutions are creating real assests from which to pay-out benefits, either through private accounts or a system like the US Fund.

jbw
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