RE: Off Topic: Social Security: Return on Investment

[Greg Peisert <gpeisert@jamesgregory.com>]

Dear Laura;

  I think all you need to do is take a look at the Social Security Web site 
and look at Chile's plan, and you will find that all of the issues you 
raise have been quite adequately addressed. They ARE important issues. And 
they ARE fairly easy to address under privatization.

  You wrote:

> All very well and good for those wealthy souls out there with $$ to 
invest in
> the private sector.

  It may seem that way at first blush, but that's not how it works out, in 
theory or in practice. I know it is counter-intuitive at first, but all the 
models and experiments say that it is the poor, the low income people, who 
fare MUCH better under privatization. That is the actual experience in 
countries which have gone this route. And when you think about it, it makes 
sense. The wealthy have the money to invest anyway. So, it doesn't really 
matter for them. It is the rest of the population, that DOESN'T have the 
money to invest that are at serious risk. If my mother didn't get her 
social security check, she would be nearly destitute.

  If I were a relatively poor, black tradesman working in a kind of 
dead-end job like say, a lathe operator, that would give me a max income 
potential over the next 20 years of, say $28,000 a year in today's dollars, 
I would be almost frantic for privatization. Here's why:

a. Unlike the wealthy, the low-income elderly depend on SS for almost all 
of their retirement income. I would be depending on it, having no 
significant savings to fall back on, even if I were pretty frugal. One has 
to be frugal to live on, say $23,000 a year. I would end up among the 
poorest 20% of the elderly, who receive more than 81% of their retirement 
income from SS. Every privatization system and model shows a far better 
rate of return than government-run retirement programs. I would want to 
take advantage of that better rate. In Chili, over the past 16 years, the 
rate of return has been over FOUR TIMES that of the government rate of 
return, and the return predicted by the economists when they began the 
experiment.

b. To keep SS solvent, it will be necessary to keep raising the payroll 
taxes. The SS payroll tax is the most regressive of all taxes. Indeed, it 
is the closest thing to a "tax on the poor" that there is! The rich don't 
pay it, after $73,000 or whatever their ceiling is. For me, as a 
lower-income worker, it would represent a HUGE bite out of my paycheck. I 
would be forced to contribute 12.4% AND, it would keep me from making as 
much as I would if my employer didn't have to pay a big chunk as well. Any 
raise in the SS tax rate would hurt me...bad. And if the politicians keep 
heading the way they are going, that is EXACTLY what is going to happen. 
Fewer benefits with a bigger hit to my already limited paycheck. In this 
situation, as a low-income worker, I would be scared and angry! It is 
grossly unfair.

c. In Feb 1996, the RAND Corporation published a study that concluded that 
because of difference in life expectancy (wealthier whites tend to live 
longer than poor blacks like me in this example), Social Security actually 
TRANSFERS WEALTH FROM THE POOR TO THE RICH! According to the study, whites 
consistently earn higher rates of returns than blacks. On a lifetime basis, 
the income transferred from blacks to whites under the CURRENT system is as 
much as $10,000 per person! So, as a poor black, I'm thinking to myself, 
"What the hell? What is FAIR about THAT?!" It is grotesquely UNFAIR! I 
would be furious. And I would be furious with Clinton and the do-gooders in 
Congress who are going to yap yap yap and "do-good" me right into the 
grave! I would be horribly INSULTED by their cheap political ploys, 
rearranging the deck chairs while the ship is going down. I would feel 
isolated. I would opt out of the "system." I doubt I would vote. What the 
hell difference would it make to ME anyway?! Those fat cats don't care 
about little people like ME! Look at what they are DOING to me!

   And because, while I might be poor, I'm nobody's fool, I would recognize 
that all this talk about using the surplus to "save Social Security" is 
just a ploy to avoid doing what needs to be done to affect a long-term, 
just and fair overhaul of the system. It's just more words. More BS out of 
Washington. In the mean time, I've got to go to work in the morning, work 
my 8-hour shift, make my $11.50 an hour, hope I can get a little OT at 
time-and-a-half, and try not to lose another finger on that damned 
equipment. I would think, "What are those ass-holes in Washington going to 
do for ME other than talk me into the poor house?!"

   Oh how different that would be under a system of privatization. How 
different indeed.

   You see, Laura, I DO understand. I really don't believe that your fears 
about privatization are justified. I understand your concerns for the poor. 
I plead with you to USE that good-hearted concern and caring to work for 
truly progressive change that REALLY WILL help the poor, and not just make 
it worse for them.


> But to advocate for the elimination of the SSA and replace it with
> a form of private investment is, I think, outrageously unrealistic.

  I suspect that you believe that because you have not had the opportunity 
to really look carefully at the alternatives. Privatization has been 
successfully implemented, in the real world. It is not unrealistic at all. 
I beg you to look at it with an open mind, and to really consider the 
arguments. We know what the current system is and where it is headed. We 
have an opportunity to make a vast improvement in it through privatization. 
When you hear liberal congressmen demagogue it, consider the source. 
Consider what THEY, who do NOT participate in the system, have to LOSE by 
privatization in terms of their arbitrary control over our lives, and the 
potential loss of their power based when people see through their shallow 
diatribes.

> What happens to those poor sots on SS Disability Insurance?  Where 
exactly do they go to invest?  And what, exactly, are they to invest with?

  They obviously don't invest, and nobody is suggesting they would. They 
are taken care of out of the general fund. We OUGHT to be a caring society. 
I am not advocating against that. I simply want to recognize what works and 
what doesn't work, and go with what works. I don't want to sit still on a 
sinking ship while we all drown. Indeed, not only the disabled, but ANYONE 
who has not achieved a minimum level of retirement income under the private 
plan, would be subsidized, as they are in Chili, in order to provide a 
decent retirement.


> People who think
> they know all about the SSA always manage to ignore the "disability 
insurance"
> piece of the puzzle -- like these folks just don't exist in the SS 
system.
> Most of the knotheads I talk with -- those who believe everything would 
be so
> hunky, dorry if we could just plop our money into private
> investment-retirement accounts -- haven't even the foggiest notion about 
the
> amount of money (and the number of beneficiaries) within SS who are
> D_I_S_A_B_L_E_D -- and this includes MANY elderly (e.g., retirement age)
> people.

  See above, and the article below. Retirement-age people receive SS 
whether or not they are disabled. The more poignant issue is providing for 
disabled persons long before retirement age. The statistics show that the 
number of disabled in the country who are between 18 and 62 represent about 
3% of that population group, at any one time. Where such individuals do not 
have disability insurance as part of their job benefits, for example, we 
ought to, and would, provide for those individuals, out of the general 
fund, irrespective of privatization.

>
> So, before you design your grand new libertarian, free-market, private 
capital
> country, keep in mind that lots of folks don't have the same options you 
(or
> I) do.  And believe me well, I know from experience:  I wouldn't be 
writing
> you this email today were it not for SSDI, the help of many federal and 
local
> agencies -- which saved my life, not to mention my sanity...at a time I 
most
> needed it.
>
> There are real faces and names to such folks, Greg.  Keep them in mind as 
you
> develop your plans to wipe out the system we have, because THESE are the
> people who are most hurt by such schemes.

Oh, but I DO. That is why I am advocating real change and privatization. 
The government has failed us utterly, Laura. The SS system, as it stands, 
is an utter sham. It is gross misnomer. The poor are faring the WORST of 
any group. I can't believe you really think the answer is MORE GOVERNMENT. 
I can understand your concerns about major change. It is scary.

  But I ask that you don't presume to impugn my motives. You should not 
rule that something is "bad" or that it is callous toward the poor simply 
because Greg (whom you mistakenly seem to believe is 'rich') believes it is 
"good." Like you, I have been there. I have been unemployed. I have been 
dirt-poor. We (my wife and I) have shared a single house that was nearly a 
condemned structure with two other families. We even relied on food stamps 
one month, and with two little ones, it was a godsend. I've been months, 
with a family, with no medical insurance. On a tightrope without a net. I 
know what that feels like, first hand. I remember it well. So I know. I 
understand. I've been there. I have felt pretty desperate at times in my 
life. And in retrospect, it was a good experience for me. It taught me a 
great deal about myself, and about my inner resources, and about our 
society.

   The great thing about this country is, I didn't have to STAY there. I am 
NOT de facto against all government programs. As I said in an earlier 
message, and much to the chagrin of my far more "pure" libertarian friends, 
I am not even against everything the EPA does. I'm not against the FDA. I'm 
not against all government regulation. By NO MEANS! I think the EPA has 
done a great deal of good. I'm glad that the president is proposing even 
more public lands. I LOVE our national parks. They are a national treasure. 
I LOVE clean air and clean water, and I DO think it is worth paying 
something to keep them that way. Absolutely!

  We NEED a powerful force to counteract the abuses that we would otherwise 
be subject to by big business. I DO recognize and appreciate that big 
business has proven time and again that they will rape our natural 
resources and destroy our communities in the interest of short-term 
profits.  (Have you seen "A Civil Action"? Great movie. And it shows a very 
legitimate role for the EPA.) I'll catch hell for these statements if I 'cc 
this message to some of my liberty-minded friends, but, so be it. They are 
wrong in their assertion that we would all be better off under universal 
privatization and unrestrained capitalism. Some restraints ARE necessary.

  When I claim this stuff is out of hand, you seem to interpret it to mean 
I don't think we should have ANY restraints. That is not an accurate 
representation of my views. Do I believe the PURPOSE of government is to 
take care of its citizens and ensure them a decent standard of living? No, 
but I'll take that up in a separate installment with Margaret (it will 
probably be a week yet...I'm doing a little more research on it). But I'm 
not the callous or uncaring individual you seem to want to paint me. So, I 
would ask that you recognize that while I may challenge your assumptions 
and offer some new perspectives on solutions, those perspectives are not 
based on any desire to enable the rich to exploit the poor, OR vise versa. 
No class should, or needs to, exploit another. Such exploitation has always 
sewn the seeds of universal destruction.

  I do reject the false premise that we are in a "win-lose" society, that 
we must perpetrate class warfare and class envy. I utterly reject the idea 
that it is, should be, or has to be, the "rich" against the "poor." The 
perpetration of those myths is perhaps the most insidious and destructive 
product of the past 30 years of the welfare state. To reject privatization 
of SS on the basis that it helps the rich at the expense of the poor is to 
fall back on the class warfare mythology. Sam Beard, a staunch liberal and 
former aide to Sen. Robert Kennedy, along with others, has been calling for 
the "democratization of capital" by enabling all Americans, especially 
people in the lower income strata, to participate as real stake-holders in 
our economy via social security privatization.

  Privatizing SS would go a long way toward that. That is why Beard and 
others are beginning to embrace these ideas. Indeed, Beard points out the 
psychological advantages as well as tangible advantages of privatization, 
when he says, "Personal participation will make savings and economic 
education part of everyone's day-to-day experience...The benefits of this 
knowledge for individuals and families will include increased economic 
capability, a confident sense of the future, and more power to make 
fundamental choices that effect their lives." I am not advocating these 
changes because I think they will benefit the rich at the expense of the 
poor. I am advocating these principles because I think they will greatly 
benefit ALL Americans, ESPECIALLY the poor.

I suggest you read the following article and then visit the site 
http://www.socialsecurity.org and take a serious look at the proposal. 
Don't just reject this stuff out-of-hand, Laura. I think that if you really 
give it some study, you will find that these new ideas open up doors for 
the poor, and have the potential to benefit everyone, ESPECIALLY the poor, 
in ways you might not have thought possible. Please take a good look at it.

All the Best, as Always,

  --Greg

************ Article on Chile's Experiment ************


In Chile, They Went Private 16 Years Ago

by Jose Pinera

Jose Pinera was Chile's minister of labor and social security from 1980 
until 1983. He is currently president of the
International Center for Pension Reform and co-chairman of the Cato 
Institute Project on Social Security Privatization.


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

The United States is not the first, or the only, country to face a crisis 
in its government-run retirement system. All over the globe, old-fashioned 
pay-as-you-go social security and pension programs are going broke, facing 
the hard lessons of demographics.
Among the first countries to enact fundamental pension reform was my nation 
of Chile, the first country in the Western Hemisphere to adopt a social 
security system, in 1925, 10 years before the United States. But by 1980, 
when I was Chile's secretary of labor and social security, its social 
security system faced the same financial problems as the U.S. system faces 
today.

Rather than make the usual short-term fixes of raising taxes or cutting 
benefits Chile (population, 14.5 million) decided on a revolutionary 
approach: a privately administered national system of individually owned, 
privately invested retirement accounts.

The success of Chile's venture into privatization can provide a valuable 
example for the United States. After 16 years, Chile's experiment has 
proven itself. Pension benefits in the private system already are 50 to 100 
percent higher (adjusted for inflation) than they were in the state-run 
system. The resources administered by the private pension funds amount to 
$30 billion, or around 43 percent of GDP as of 1997. Because it has 
improved the functioning of both the capital and the labor markets, Social 
Security privatization has been one of the key reforms that has pushed the 
growth rate of the economy upward from the historical 3 percent a year to 7 
percent on average during the last 12 years. The Chilean savings rate has 
increased to 25 percent of GDP, and the unemployment rate has decreased to 
around 5 percent since the reform was undertaken.

Under Chile's privatized system, which is monitored and regulated by the 
government, neither the worker nor the employer pays a social security tax 
to the state. Nor does the worker collect a government-funded pension. 
Instead, during his working life, he has 10 percent of his wages 
automatically deposited by his employer each month in his own, individual 
account. The contribution is not taxed. His pension level is determined by 
the amount of money he accumulates during the number of years he is 
working.

A worker may contribute an additional 10 percent of his wages each month, 
which is also pre-tax, as a form of voluntary savings. Generally, a worker 
will contribute more than 10 percent of his salary if he wants to retire 
early or obtain a higher pension.

A worker chooses one of about 14 private Pension Fund Administration 
companies to manage his account. Each company operates the equivalent of a 
mutual fund that invests in stocks and bonds. Investment decisions are made 
by the managing company. Government regulation sets only maximum percentage 
limits both for specific types of investments and for the overall mix of 
the portfolio. In the spirit of the reform, those regulations are to he 
reduced with the passage of time and as the companies gain experience.

Workers are free to change from one investment company to another. For that 
reason, there is competition among the companies to provide a higher return 
on investment, better customer service or a lower commission. Each worker 
is given a passbook for his account; every three months he receives a 
statement informing him of how much money has accumulated and how his 
investment fund has performed. The account bears the worker's name, is his 
property, and will be used to pay his old age pension (with a provision for 
survivors' benefits).

The government retains some involvement in the system, via a safety net 
financed from general revenues for those who have not accumulated enough. A 
worker who has contributed for at least 20 years but whose pension fund, 
when he reaches retirement age, is below the legally defined "minimum 
pension," receives a pension from the state once his account has been 
depleted.

What should be stressed here is that no one is defined as "poor" in 
advance. Only after his working life has ended, and his account has been 
depleted, does a poor pensioner receive a government subsidy. (Those 
without 20 years of contributions can apply for a welfare pension at a much 
lower level).

Upon retiring, a worker may choose one of two general payout options. Under 
one option, a retiree may use the capital in his account to purchase an 
annuity from any private life insurance company. Alternatively, a retiree 
may leave his funds in

the account and make pre-arranged withdrawals, subject to limits based on  
 the life expectancy of the retiree and his dependents.

In the latter case, if he dies, the remaining funds in his account form a 
part of his estate. In both cases, he can withdraw as a lump sum the 
capital in excess of that needed to obtain an annuity or programmed 
withdrawal equal to 70 percent of his last wages.

In moving to this new system, we set three basic rules. The government 
guaranteed people already receiving a pension that it would be unaffected 
by the reform. That was important because it would be unfair to the elderly 
to change their benefits or expectations.

Every worker already contributing to the pay-as-you-go system was given the 
choice of staying in that system or moving to the new system Those who left 
the old system were given recognition bonds that were deposited in their 
accounts. Those bonds reflected the rights the workers had already acquired 
in the pay-as-you-go system

All new entrants to the labor force were required to enter the new system.  
 The door was dosed to the pay-as-you-go system because it was 
unsustainable. This requirement ensured the complete end of the old system 
once the last worker who remained in it reaches retirement age (from then 
on, and during a limited period of time, the government has only to pay 
pensions to retirees of the old system). That is important, because the 
most effective way to reduce the size of government is to end programs 
completely, not simply scale them back so that a new government may revive 
them at a later date.

Since the system began to operate on May, 1, 1981, the average real return 
on investment has been 12 percent per year (three times higher than the 
anticipated yield of 4 percent). Of couse, the annual yield has shown the 
oscillations that are intrinsic to the free market -- ranging from minus 3 
percent to plus 30 percent in real terms -- but the important yield is the 
average one over the long term.

Pensions under the new system have been significantly higher than under the 
old, state-administered system, which required a total payroll tax of about 
25 percent. The typical retiree is receiving a benefit equal to nearly 80 
percent of his average annual income over the last 10 years of his working 
life -- almost double the percentage available in the U.S. social security 
system. The law requires that the benefit represent at least 70 percent of 
the recipient's last monthly salary.

The new pension system, therefore, has made a significant contribution to 
the reduction of poverty by increasing the size and certainty of old age, 
survivors and disability pensions and by the indirect, but very powerful, 
effect of promoting economic growth and employment.

What would happen if the United States followed Chile's example? The 
benefits to the U.S. economy would he substantial. Harvard economics 
professor Martin Feldstein estimates that "the combination of the improved 
labor market incentives and the higher real return on savings (of moving to 
a fully funded Social Security system) has a net present value gain of $10 
trillion to $20 trillion, an amount equivalent to 5 percent of each future 
year's GDP forever."

And, most important, today's young workers would be assured that when they 
retire they will be able to do so with dignity and security.

(This article originally appeared in the Washington Post)

>