Democrats want to fix Social Security. Unfortunately, the way they want to go about it is to double-down on a poorly designed program. To summarize their plan, they want to raise the payroll taxes by almost 20% (from 12.4 to 14.8), increase benefits by 2%, and expand the program to income 400k and up (excluding income between 132.9k - 400k)
Social Security was designed over 75 years ago for a society much different from todays. It redistributes wealth from low income earners with low life expectancy to the affluent. It redistributise wealth from dual-earner couples to single-earner couples. Why do we want a system that does this?
Furthermore, as has been shown, Social Security is a terrible pension plan. Their own research shows that almost everyone would be better off investing their money in an index fund. The only people whose returns might rival an index fund are couples, with only one earner in the lowest income group. Every other income group, every other combination of earners performs relatively poorly.
Let's take an example to show how much better off most would be with an index fund.
A two-earner couple, born in 1985 is in their 30s now. They can expect a return of 2.45% on their Social Security "contributions." The S&P500's average annual return is 9.8% over the past 90 years. If each starts working at 25 with a salary of $30,000 and gets a 3% raise every year until they retire, at retirement, they'd have more than five times the savings from an index fund as from Social Security. (You can play with assumptions by copying this workbook)
This demonstrates how lousy a program Social Security is. I understand that one of the benefits of Social Security is that it can provide some security in case the market crashes. It would be intolerable to have saved your whole life, and then the market crashes. However, this is an extremely high price to pay to guarantee retirement security. Imagine there was no payroll tax as you worked, but Social Security was funded by taxing your retirement savings right as you turn 65. This example shows that it's an 80% tax of your potential savings.
Surely we can design a system that can guarantee retirement savings (even for single-earner couples) and not mal-distribute so much wealth for a fraction of the price.
Showing posts with label social security. Show all posts
Showing posts with label social security. Show all posts
Saturday, February 9, 2019
Thursday, March 14, 2013
Privatizing Social Security
It's no secret that liberals recoil at the idea of privatizing Social Security. Their primary argument is that it's too desert your retirement funds to the whims of the stock market. In this opinion piece, Clive Crook makes the argument that liberals should embrace privatization as a means to address the growing inequality in the economy.
Although I'm confident that this will have no truck with liberals, he raises an interesting point. The rich are getting richer largely because of their exposure to capital while the rest of the population relies largely on Social Security for their retirement and has much less capital in their portfolio. One remedy for this would be to re-orient Social Security towards market-based assets instead of government debt.
Again, I doubt any liberal will be moved by this argument. They have an inexplicable attachment to Social Security. Yes, they say it's because of the risk, but their reactions to modifying Social Security are disproportionate to their criticisms of any modifications.
For example, if Republicans gave people the option of putting part of their Social Security taxes into private accounts, it would be a non-starter. They wouldn't calmly discuss why that's a bad idea, but would quickly dismiss it (see the Ryan-Biden VP debate). Why? Exposure to risk is limited, and on top of that, people have a choice to participate or not. No one has to lose. If anyone has an idea as to what accounts for this mismatch, I'd love to hear it.
My tentative proposal which I'm confident will have no impact on the debate would be to re-engineer Social Security as more of an insurance program. Instead of paying into an account, your payments to Social Security would be based on how much you save. There could be a list of options (Life Stage funds, for example, and US bonds), but the more you save, the less you pay to Social Security. Then, when retirement comes, Social Security would guarantee a certain level of income (including proceeds from investments). That way, everyone's covered for the risk, but it's likely that it won't cost the government much at all.
Although I'm confident that this will have no truck with liberals, he raises an interesting point. The rich are getting richer largely because of their exposure to capital while the rest of the population relies largely on Social Security for their retirement and has much less capital in their portfolio. One remedy for this would be to re-orient Social Security towards market-based assets instead of government debt.
Again, I doubt any liberal will be moved by this argument. They have an inexplicable attachment to Social Security. Yes, they say it's because of the risk, but their reactions to modifying Social Security are disproportionate to their criticisms of any modifications.
For example, if Republicans gave people the option of putting part of their Social Security taxes into private accounts, it would be a non-starter. They wouldn't calmly discuss why that's a bad idea, but would quickly dismiss it (see the Ryan-Biden VP debate). Why? Exposure to risk is limited, and on top of that, people have a choice to participate or not. No one has to lose. If anyone has an idea as to what accounts for this mismatch, I'd love to hear it.
My tentative proposal which I'm confident will have no impact on the debate would be to re-engineer Social Security as more of an insurance program. Instead of paying into an account, your payments to Social Security would be based on how much you save. There could be a list of options (Life Stage funds, for example, and US bonds), but the more you save, the less you pay to Social Security. Then, when retirement comes, Social Security would guarantee a certain level of income (including proceeds from investments). That way, everyone's covered for the risk, but it's likely that it won't cost the government much at all.
Subscribe to:
Posts (Atom)