perfidy

B, that last bit ducks my question about money management. It doesn't matter what government workers can do now. What does matter is what happens when everybody's money flows through the government's auspices en route to private accounts or whatnot. No matter how thin those auspices are, there's still the stink of Fed.

By definition, a government-mandated and government-sponsored program is different from its private sector counterpart. You can't possibly object to that, being the fan of space travel you are. NASA and Burt Rutan are opposites! Which one do you want your retirement savings with?

By that same token, SS investments are a trust. Unlike a 401(k) or IRA, that money was taken by the government from you and given back to you in the form of securities. Consequently, there will always be legal and actuarial questions about where the government's responsibilities begin and end. No matter how much the government says that private accounts are your responsibility and yours alone, there's still the point that the government is taking money from you and putting it somewhere for you. Their hands are on it.

If the gov't is responsible for choosing the firms that citizens can invest in, can you imagine what would happen if a big scandal broke? Imagine for a minute we had private accounts in 1993 and Janus was one of the approved SS custodians. Janus flamed out extravagantly in 2001, victim to accounting wrongdoing, desperate and shortsightedly awful trades, and a tragic shortages of cash, common sense, and probity. It was a huge mess. Now, imagine that mess with the government involved.

There's also the question of bureaucratic drag. As I said, I expect any firm that takes SS monies to be subject to a wide range of accountability measures that their competitors may not be. What top shelf firm would want that poison pill, and what would it cost the firm to comply with whatever regulations of the season that Congress and the SEC might dream up? Remember: investment costs get passed along to OUR bottom line.

Next, there's the question of returns. The President is fond of saying that the stock market historically shows 5-7% annual returns on average. Historically, that's true. But at the bottom of *every* prospectus you will read, there is one little phrase designed to protect the firm in the event of a crash: "past performance is no guarantee of future returns." A more cautious scenario would be to expect 3.5% returns. As long as inflation stays below that mark, you're in the black. Larger returns are, as you say, gravy. But people can't -- CANNOT -- count on them, and even before he presents a plan the President is, in fact, counting on higher returns as a selling point for his plan.

I'm interested to hear what you consider "unreasonable" transition costs. As a small government conservative, I'd imagine you're halfway to giddy at the prospect of SS monies becoming unavailable to the government. Except, of course, what gets shoveled back in the form of T-Bills in private accounts, but at least T-Bills have a maturity date that you can count on.

Again, I'm undecided on whether private accounts are the right idea. I need to see answers to these questions before I make up my mind. They are the same questions I asked when choosing a company to oversee my Roth IRA. Is that asking too much?

Two key things put me in favor of personal accounts. One, the government will take from you and your employer. If you opt for the personal accounts, that money becomes yours again. Even if the rate of return was as low as the laughable returns for regular social security, that money is no longer a nebulous government promise to pay you at some future date, but rather money in an account with your name on it, which you can pass on to your heirs. That alone makes it a great idea for me, so long as we can make the transition without putting unreasonable burdens on the government. Larger returns, thanks to running the program like a 401k are just gravy to me.

Two, the SS solvency issue is only moderately tied to the personal accounts. SS was not intended to provide a lavish retirement income for seniors. It is not a pension plan. In fact, it is more like a ponzi scheme, trending into intergenerational theft. If we fix the solvency issue, it will result in lower benefits to seniors in the future. Either through means testing, adjusting the payouts, rate of increase of benefits, or whatever. That's fine, because the point of the system is really to prevent abject poverty in old age. The current and soon to be retired will get what they expected. Those who are younger will have time to plan, and to take advantage of personal accounts (among other things like pensions, 401ks, and other investments) to develop a retirement plan to supplement the social security benefits they will get.

I don't think the government would be directly managing the funds, though. Government workers can already duck SS, and invest that money in a 401k type plan. It works fine. There is no reason why the rest of us can't do the same.

Oh, to be sure, there is a very real difference between gubmint mandated and gubmint sponsored. But a personal savings plan modeled on the 401k would be, by analogy, somewhere between NASA and Rutan. NASA is current SS, Rutan is you going out and getting your own retirement plan through whatever means you feel appropriate. Personal accounts would be equivalent to the government saying, "We need a space ship that has x characteristics," and a private company designing and building that ship and getting paid for it. (A scenario I am by no means averse to, as it would work far better than what we have now in the shuttle.)

As I said in my first comment, the big benefit is ownership of the funds that SS takes from you and your employer. This, regardless of whether the returns are 2, 3.5, 5 or 2000 percent is the big thing. In general, I think that I would get a better return from private accounts than for SS (almost certain) and in all likelihood better than inflation. Even straight T-bills are better than current SS. But most important, I can pass on to my spawn a big old lump sum of cash, whereas now he would get little to none, and only under certain circumstances.

Current 401ks allow a certain number of choices, and they work very well for huge numbers of people. Yes, the government would be involved, but I think with a highly successful model, the whole thing can be arranged suitably well. And if someone bombs out, then there is still regular SS (as modified) to prevent utter desolation. Perhaps something like the FDIC could guarantee a certain level of protection for private accounts under SS. It has worked for banks, maybe it would work here.

As for costs, I don't have a number, but it would be fairly large. As part of package that would avoid huge problems later (many, many trillions of dollars) and provide ownership of retirement for every American, I am willing to accept some debt so that we can keep the promises made to current and soon to be retired people.

As for getting answers, good luck. No one is talking perfectly straight on this one. Democrats are screaming hell no! to just about everything, which is not terribly productive, and most republicans are touting the wonderfulnessitude of private accounts while ducking the solvency issues. If the Republicans come up with a reasonable plan, they'll get it through because the Dems have opted themselves out of the debate in most instances through their rabid opposition to personal accounts. (Which is odd, since many of the same congresscritters were for them when a Dem was president.)

Ladies,
I sometimes find that music helps me concentrate on finding my way through policy questions such as this.

What do you suppose would be an appropriate SS-deciphering soundtrack?

Cause Thin Lizzy ain't cuttin' it.

... one part of your argument is ironclad: the 'lump of cash for my spawn' bit. That right there, full stop, is a great idea. I ardently wish it were that simple.

There are a few people out there who I would, well, not "trust," but at least "give them the benefit of the doubt" to come up with a plan that is workable. Marty Feldstein is one. But as soon as anybody planning a SS transition gives one inch to a political need or interest, the game is lost. Nobody is bold enough and politically suicidal enough to really take visionary steps to overhaul Social Security and the giant money-teat it represents for the Federal government. The President talks pretty but has nothing to back it up. The opposition, spirited as they are, have nothing constructive to offer on this point. It's a damn shame.

(Although, I do have to give the Democrats credit in one way. Recently they have allowed the Republicans to win at a game they themselves invented. That is, recasting the vocabulary of their agenda as a given. For example, nobody is seriously questioning in public whether SS in some form is a good or not. That means that Rooseveltian democracy automatically gets like a +5 vorpal advantage in any argument about SS. The Republicans are much better at this now. That being said, on the SS question, the Democratic leadership have resisted allowing the Republicans to set the terms of the debate. However unfortunate this might be from your perspective, it's a display of strategic macrotesticularity that makes me hopeful that we may someday soon have a vital, coherent, and vigorously dissenting minority party once again.)

"If I must."
"Oh, you must, you must!"

Patton ,actually I'd be very interested in an explanation. The only thing more satisfying than being proven right is being proven wrong by someone I respect.

That and a good burger. that's very satisfying.

Well, there are a couple approaches possible here. First, hop into Mr. Whoopie's Wayback Machine with me, to the year 1998.

There were stocks available then which offered interesting value propositions, in that the price for which you could have them was reasonable compared to their future growth prospects. But then everyone was incited to buy them, and predictably, their prices went up. Also predictably, but seldom actually predicted out loud before it was too late, their prices soon far outstripped their ability to justify those prices.

As our second option, let's look at it in terms of the present day. Index funds, by their nature, purchase and sell specific stocks to maintain those stocks' proportion in a given index, such as the Dow 30, the OEX, or the S&P 500. If all the large index funds received investments equal to even a quarter of a year's Social Security withholdings, they'd be forced, by their charters, to put those investments to work. How? The only way they could - buy the stocks in the index they're mimicking.

Absent a bunch of well-timed and utterly unlikely secondary offerings of new stock by all the companies in the index, each of the shares of stock the index fund would purchase must also be sold by a present owner. Present owners of stock are odd beasts - they don't like to sell unless they think they're getting a good deal, and the way the market provides them a good deal is by squeezing the price up in response to demand. Demand, here, is a synomym for a whole bunch of money trying to buy a finite number of shares of stock.

In an absolute and overly simplistic sense, I can understand the statement of your correspondent that the index fund market could absorb all that new investment. Compared to the existing market capitalization of all large US companies, it's not a number that's horribly scary.

The problem is, all large US companies are already fully capitalized, don't need the new cash, wouldn't have a valid use for it, and wouldn't get it in any event from index funds. All that new index fund money goes to existing holders of the stock who sell that stock to the index funds.

To deal with what I think might be the last exception to my anti-thesis here, let's talk about the fact that there's not just one index fund, and not just one index. The "not just one index fund" case is moot, since all Dow 30 index funds chase the same 30 stocks. But there's overlap in the holdings of an OEX index fund with a Dow fund with an S&P 500 fund. Heck, now that there are some blue chip companies in the Dow, there's even overlap between all three types above and a NASDAQ 100 fund.

Ten pounds of shit, five pound sack - too much pressure and the shit's gotta come out somewhere. Same applies to index funds - they have the ability to put excessive amounts of money into the market, as long as one doesn't care whether it's done profitably.

----
I'm all for private ownership of my retirement, and that's why I've got an IRA. I expect never to see a penny from my Social Security, because it wasn't an investment, it was an intergenerational transfer of the fruits of my labor.

I understand why social security (note the small "s" in each word) is important, and I share that goal. The way that we do it now could be fixed in any of a number of ways. First, we could quit lying to people about some bullshit trust fund that, if it even truly existed, is so poorly invested that it generates piddling returns. We could admit to ourselves that, let's be honest - this has been a tax all along, and the promises that our government makes to us, with our own money, might have to be adjusted from time to time to conform to the bounds of reality. Like any other sort of tax, we should be left free to vote the bastards out of office who raise our taxes without our assent.

Or, we could bifurcate the issue, and let part of the assessment on our pay be called a tax, for the general well-being, with the rest of it being an enforced retirement saving scheme, to temper the need for what is, in essence, a welfare payment from the government.

But, as I've feebly argued above, stifling the number of destinations for investment of those savings can be counterproductive, not just to the savings themselves, but to the market as a whole. While it was fun to watch, in a macabre way, and I didn't lose in the process, I'd like to live the rest of my life without seeing another bubble, if I could.

You said, in your original bit

...I really hope that pensions and welfare don’t become conflated in people’s minds.

Pensions and welfare are two separate things. But when talking about Social Security, we're too late, my friend - all the hue and cry about keeping the dysfunctional system we've already got seems to center around not depriving folks of guaranteed future returns in excess of their contributions. And if that's not welfare, I'm at a loss for a name to call it.

J:

"I have asked, and been assured that, even if everyone in the country puts all the weight of their social security money into index fund account, it isn’t enough to skew the market."

Uh, you were lied to.

The sincere hope of anyone who's for the private investment accounts is that a bit of diversity enters that end of the investment pool. Because the alternative would be to make index funds meaningless. I won't bore you with an explanation, unless you insist.

What... you're going to let a little thing like market constraints and a finite supply of indexed stocks get in the way?

That's an interesting take on the matter that I hadn't fully thought through. I now must go consult the Oracles to see if I can think of a rebuttal (the magic 8 ball says... "don't count on it"). And you make a good point that SS isn't really a government pension, consideratin' that some people (many people) get more out than they put in. SS is a strange beast, neither fish nor flesh.

Shit, I wish they could just give me my money back so I could throw it into my heavily diversified retirement portfolio. If that doesn't generate returns in the next 35-40 years higher than what I expect from social security (what... 1%? 1.3?), then I think we'll all have MUCH bigger things to worry about anyway, like nucular war with China or giant robot attack.

Thanks for the two cents. This isn't over!