Obama's economic plan - Soak The Rich

[gdnp]

This is a TOTAL distortion of the truth. It shows a complete lack of understanding of what was proposed. Bush's proposal called for giving people the option of allocating up to 4% of the 12.4% they have to contribute to a PRA.

Azure, Azure, Azure....

Bush's proposal calls for allowing people to allocate 4 percentage points of their contributions, not 4%. For those who do so, 4% would go to individual accounts and 8.4% to the general fund. Thus decreasing their contribution to the general fund by 32%.

And finally, you aren't forced to buy insurance. If you elect not to but suffer the loss, too bad.

I'll make sure to tell the department of motor vehicles that next time I try to renew my car registration.

 

[BeAChooser]

Azure, Azure, Azure....

Tell you what ... since I have no idea what your intimating, why don't tell us why you lead off your latest post this way.

Bush's proposal calls for allowing people to allocate 4 percentage points of their contributions, not 4%.

True. And since I've talked about this multiple times (for example saying in post 237 that "All Bush wanted to do was allow (not even force) individuals to put 4% of their contributions up to a max of $1100 dollars", post 252 that "The investment of 4% of people's social security contributions, up to $1100 dollars", post 263 that "you folks don't even want less than 4% of the yearly contributions", post 281 that "let's see if we can get you democrats to even let 4% of the incoming contributions go"), one might hope readers would know what I meant. But since I confused matters further by wrongly suggesting the contribution at the $90,000 earning level is 1% of new contributions, I award you TWO POINTS!

Thus decreasing their contribution to the general fund by 32%.

No, because the proposal limited contributions to the PRAs to $1,100 which is about 4% of social security wages of 25,000. Anyone making more than that, will pay less into such accounts, which is most of those actually paying social security. Probably the average percentage that would be put in to PRAs is closer to 2% of total contributions, in which case we are talking about 1/6th of total contributions. Not small but not the end of the world.

 

[Pookster]

Azure, Azure, Azure....

Bush's proposal calls for allowing people to allocate 4 percentage points of their contributions, not 4%. For those who do so, 4% would go to individual accounts and 8.4% to the general fund. Thus decreasing their contribution to the general fund by 32%.

Someone may need to check my math with this, but ...

Looking at it further, median personal income (2005 figures) for those age 25 and older is $32,140. 6.2% of this comes to $1,993. If you apply the cap that BAC says was in Bush's proposal, it would come to a 55% reduction in employee (excluding employer share) payroll contributions to social security for each worker that opted into privatization. If you look at it in terms of the full 12.4% contribution, it's a reduction of 28% in total social security contributions, with expenditures unaffected. If every worker switched to privatization, it would've meant a revenue deficit in 2007 of $7 billion, meaning the surplus would already have begun to be drawn down. I doubt every worker would opt for it, but the option is there and has to be considered.

This is just one rough scenario though.

Links for the data I used ...

http://www.ssa.gov/OACT/STATS/table4a1.html - social security receipts & expenditures

http://en.wikipedia.org/wiki/Personal_income_in_the_United_States - personal income

 

[BeAChooser]

Looking at it further, median personal income (2005 figures) for those age 25 and older is $32,140. 6.2% of this comes to $1,993. If you apply the cap that BAC says was in Bush's proposal, it would come to a 55% reduction in employee (excluding employer share) payroll contributions to social security for each worker that opted into privatization. If you look at it in terms of the full 12.4% contribution, it's a reduction of 28% in total social security contributions, with expenditures unaffected.

Ok, I agree I need to take another look at the numbers. My statement that Bush's proposal amounted to only about $20 billion per year in lost revenues appears to be wrong (and frankly, at this point, I'm not sure how I derived it). In any case,

Your Wikipedia source states "The overall median income for all 155 million persons over the age of 15 who worked with earnings in 2005 was $28,567." That means 77.5 million earned more than that amount. I'm going to assume they all reported it to the IRS and SSA.

Those earning less than 27,500 (which is close to $28,567 so let's just use it as the median) COULD have paid up to 4% into a plan. Those above 27,500 could not pay more than $1,100 (4% at the dividing line) initially. So 77.5 million times $1,100 is 82.5 billion dollars. So obviously I was wrong and you are correct. At least partially so. If they all took advantage of Bush's proposal, they would put a sizable dent in the current $179 billion dollar surplus between revenues over expenditures. They wouldn't eat into the trust fund assets of $2 trillion YET, although I have to agree that the year that might happen would be less than the nine years predicted assuming no changes.

But let's not lose sight of the fact that either way, that's going to happen unless something is changed. What ultimately we have to do is wean people off a "retirement" system that is badly managed in terms of how those huge assets are invested. That has cost us dearly because had the assets been in the S&P 500 from the beginning, the time when there would be a shortfall would be well into the future, even with the incredible amounts of money being paid to people who put little if anything into the system (i.e., welfare). And one way to start that process is begin switching over to PRAs and separate what is clearly welfare from them. Like I said, the solution to a welfare mess is different than the solution to a "retirement" system mess. And frankly, if you could convince the higher income groups, who probably have a good retirement that is not dependent on SS, that you have a strategy to actually fix the problem once and for all, many of them might be willing to forgo any SS return just to see things fixed so that their kids don't have to watch this whole thing collapse.

If every worker switched to privatization, it would've meant a revenue deficit in 2007 of $7 billion, meaning the surplus would already have begun to be drawn down.

Actually, as noted above, I don't think the trust fund assets would start to go down immediately. But I will agree that putting money into PRAs would hasten the time when the trust fund assets would have to be drawn down. On the other hand, putting that money into PRAs improves the outlook for those who retire past this current crisis. And we could still invest a large portion of the $2 trillion trust to extend the time before the trust is drawn down below current values. So again, the solution is to FIX THE PROGRAM while making sure that those stuck in the current situation are taken care of ... even if more money has to be allocated to WELFARE programs. Let's just not hide the problem any longer like the SSA and democrats have done for so long.

 

[Meadmaker]

That has cost us dearly because had the assets been in the S&P 500 from the beginning,

Total assets held by the SS trust fund: ~2.4 trillion.

Total market cap of all stocks in all exchanges in the world: ~51 trillion.

Total market cap of top 20 US companies: ~4.5 trillion

Does that affect your thinking on this subject?

ETA: I was looking for the total market cap of the S&P 500 stocks, but I couldn't find it. If anyone knows, please post.

 

[JEROME DA GNOME]

Total assets held by the SS trust fund: ~2.4 trillion.

Where did you get that number?

Where are those funds held?

 

[BeAChooser]

Does that affect your thinking on this subject?

Perhaps I should have said assets LIKE the S&P 500. And no, that doesn't change my thinking.

 

[Meadmaker]

Perhaps I should have said assets LIKE the S&P 500. And no, that doesn't change my thinking.

What other assets are there that are like the S&P 500?

Right now, the trust fund holds about 2.4 trillion. (From the SSA web site, confirmed by other sources I went looking for. Held only as government bonds. The SSA web site will also tell you when those bonds mature and the interest being paid.) The reason you wanted to buy stocks is so the investments had higher yields, so presumably there would be at least 50% higher values, so let's say 3.6 trillion.

If that were the case, the US government would own 7% of all the stock in the world.

I don't know what percentage the US represents, but I'm guessing, and this is a pure guess, that it's no more than one half. There would be a lot of pressure for the US government to only invest in US stocks, so that would mean the government would own a 14% stake in every publicly traded company in the country.

Free market? I don't think so.

 

[gdnp]

Total assets held by the SS trust fund: ~2.4 trillion.

Total market cap of all stocks in all exchanges in the world: ~51 trillion.

Total market cap of top 20 US companies: ~4.5 trillion

Does that affect your thinking on this subject?

ETA: I was looking for the total market cap of the S&P 500 stocks, but I couldn't find it. If anyone knows, please post.

I posted this earlier. The market cap of the S & P 500 is about 11.7 trillion.

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,1,1,0,0,0,0,0.html

 

[BeAChooser]

What other assets are there that are like the S&P 500?

There are dozens of stock index funds. Has that been unclear in this thread? I picked the S&P 500 for convenience. As an example. I'm not suggesting we put everything in those 500 stocks or any 500 stocks. I could have picked a fund that invests only in the NYSE or the NASDAQ or any of a number of other markets and any number of stocks. Don't lose the forest in the trees. Don't lose sight of the fact that market valuation around the world is well over $50 trillion.

Right now, the trust fund holds about 2.4 trillion. ... snip ... The reason you wanted to buy stocks is so the investments had higher yields, so presumably there would be at least 50% higher values, so let's say 3.6 trillion. If that were the case, the US government would own 7% of all the stock in the world.

2/50 = 4%. And it's not the US government that would own those stocks ... it would be the people of the US. Don't lose sight of that, either.

There would be a lot of pressure for the US government to only invest in US stocks

Well then we just have to fight that pressure. With logic. It's time that Americans woke up to the fact that it's a WORLD economy. And there are better investments out there than some in the US. You also invest some portion of your assets globally to reduce the risk. If only a quarter of the trust account had been in the MSCI EAFE index (an international index) last year, the return would have equaled that of US government securities. The year before, the EAFE return was over 26%.

 

[Meadmaker]

There are dozens of stock index funds. Has that been unclear in this thread? I picked the S&P 500 for convenience.

But none of them have the characteristics of that one. Not coincidence.

Don't lose sight of the fact that market valuation around the world is well over $50 trillion.

No. It isn't. Look it up. It's 51 trillion. (That figure was from last year.) If you've got other data, feel free to post it.

2/50 = 4%.

You are correct, but the 2 trillion figure is, at least according to you, due to the fact that government bonds have such lousy returns. If they had invested in some sort of "good" investment, there would be much more than the current 2.4 trillion. Surely there would be at least 50% more than that. 3.6/51 is approximately 7%.

If you invested only in the S&P 500, you would have approximately 1/3 of the market cap of those 500 companies.(Thanks gdnp) If you invested only in American stocks, I was guessing 14%.

And it's not the US government that would own those stocks ... it would be the people of the US.

Look! Goalposts! (We really need a flying goalposts smiley.)

OK. That's not truly fair. Your preferred method has always been PRAs, but you were talking about how the trust fund could get better returns. If it's the trust fund, then it is the US government that owns the stocks. I don't want the US government owning measurable fractions of private companies, in the US or elsewhere, so whatever portion of SS contributions you leave in the trust fund are going to go back into the bonds.

However, let's look at what happens with PRAs.

First of all, let's not forget that I already have one. I can invest in it, tax deferred, right now. Of course, I still have to pay taxes, and I will still get benefits, so what you are really doing is letting people opt out of the Social Security system. I know you understand that, but we don't want any goalposts moving, so let's make sure that's a given. If it is, we can move on? What's wrong with PRAs as a voluntary Social Security substitute?

I assume you won't have government telling people how to invest, will you? At least, beyond very, very, minimal guidelines? I can use my PRA exactly how I would use my IRA today, right? I can't buy great art, but pretty much any securities, or savings accounts, are ok, right? If it's good enough for an IRA, it's good enough for a PRA.

Well, then, we are back to the same old problem we had before. What do we do about people who make bad investments and lose all of their money?

There are other problems, too, but I think that one covers it fairly well. The others are variations on two basic themes. One is that some people will do very badly and be left with little or nothing. The other is that the only way to try and avoid that would be to have the government dictate what investments to make. I assume any free market supporter would consider that a total disaster.

However, before leaving that topic, I want to just describe one more problem in slightly more detail. The Stock Market is like a casino that's loaded in favor of the players. Most people will win. However, there are still winners and losers. Who will be winners, and who will be losers? That's a bit difficult to say, but in general, rich people are rich in part because they are good with money. Poor people are poor in part because they aren't. That means rich people are more likely to win, while poor people are more likely to lose. It doesn't seem like a good thing to force people into.

So, just so we don't lose sight of the core question, if you allow people to opt out, what happens to the people who opt out, and lose their money?

 

[BeAChooser]

Originally Posted by BeAChooser
There are dozens of stock index funds. Has that been unclear in this thread? I picked the S&P 500 for convenience.

But none of them have the characteristics of that one. Not coincidence.

What characteristics. You need to be more specific. For example, I could have used a NASDAQ index fund or one tracking the DJIA. Since 1990, the average annual growth of those funds has been 10% and 9%, respectively. It's makes no real difference to the conclusion that the way the SSA is investing is plain stupid. You could even use the Wilshire 5000, which tracks 5000 stocks. In 1990 it was 2834. Today it is 14000. That's a growth rate of 9.3%. So all these "characteristics" you mysteriously allude to don't matter. The conclusion is the same.

Quote:
Don't lose sight of the fact that market valuation around the world is well over $50 trillion.

No. It isn't. Look it up. It's 51 trillion.

Ok, you win. $51 trillion dollars.

Quote:
2/50 = 4%.

You are correct, but the 2 trillion figure is, at least according to you, due to the fact that government bonds have such lousy returns. If they had invested in some sort of "good" investment, there would be much more than the current 2.4 trillion. Surely there would be at least 50% more than that. 3.6/51 is approximately 7%.

No, if you put the 2 trillion into the market now, it will be worth 2 trillion NOW. 4%. Nine years from now, at 7% return (real growth), it will be worth 3.7 trillion. But then the total market at that growth rate will be worth 91 trillion. 3.7/91 = 4%.

Quote:
And it's not the US government that would own those stocks ... it would be the people of the US.

Look! Goalposts! (We really need a flying goalposts smiley.)

Oh ... telling the people of the US that it's their money is moving the goalposts? Well maybe to democrats (like Hillary and Obama) who think it's their money.

I don't want the US government owning measurable fractions of private companies

Why not? It's not like they are going to get controlling interest in any one company and be able to affect their decision making.

First of all, let's not forget that I already have one. I can invest in it, tax deferred, right now. Of course, I still have to pay taxes, and I will still get benefits, so what you are really doing is letting people opt out of the Social Security system.

Is that a problem as far as that person's own retirement is concerned? The major goal of the program was to make sure that person could adequately retire. He/she would still do that under a PRA system ... in fact, most of those now entering the system would do much better than under SS because the assets would be in far better investments. If you want to tax those people to fund a welfare program (the other component of SS), go ahead and tax them. But you need to sell the need to do that HONESTLY (like other welfare) rather than hide that tax year in and year out in the muddle of a system that's now out of control. You need to separate the welfare component from the retirement component because the fix that is needed to each component is different.

I assume you won't have government telling people how to invest, will you? At least, beyond very, very, minimal guidelines?

The goal should still be the same as originally envisioned by SS's creators. Force people to invest for retirement (which many didn't do back then and many just won't do now without guidance). And do so in a relatively secure manner ... so yes, there should be restrictions to keep people from throwing the money away on high return but risky speculation and wild eyed guesses. That's why I talk in terms of stock index funds that track whole markets. They are relatively risk free (because if they collapse, so will the governments) and they do quite well on average.

I can use my PRA exactly how I would use my IRA today, right?

No, because right now you can use your IRA to buy individual stocks. Even some collections of stocks ... certain funds that say specialize in peanut stocks ... are also too risky for this type of system. Again, that's why I talked only of stock market index funds.

One is that some people will do very badly and be left with little or nothing.

Which is why I'm not proposing a PRA where they be allowed to do that.

I assume any free market supporter would consider that a total disaster.

You assume wrong. And what's proposed is no more dictatorial than the current SS system.

The Stock Market is like a casino that's loaded in favor of the players. Most people will win.

Actually, everyone would win if they just stick to stock market index funds like the S&P 500 and not panic when the market falls temporarily. Do you know there are retirement funds with specific retirement dates (like 2030, 2040, etc) now available that shift assets as the fund gets closer and closer to the retirement date to make ensure that stock market variations don't endanger that person's retirement. Those funds typically see average growth more than double what the SSA is offering its "contributors" via it's "trust".

However, there are still winners and losers.

With what I envision, how could there be losers? Other than the democrats who want Americans to be poor and dependent, and therefore democrats.

 

[Meadmaker]

What characteristics. You need to be more specific.

The stocks in it aren't selected blindly, according to specific criteria. It behaves more like a managed fund. On the other hand, it is true that stocks in general have done pretty well, and even the blind index funds would have some pretty good returns lately, though not quite as good.

But why is that? Magic? What's the deal with that? If I can blindly throw money into a pot, and later take out more money than I put in, even after adjusting for inflation, someone gave me money. Why would they do that? Why would people give away money that way?

To answer that question, you have to understand the relationship in rational markets between risk and average rates of return. I can go into it later, but the executive summary is that investments without risk have low yields. A corollary is that, over the long haul, the relatively new phenomenon of index funds, and even the huge influx of money into mutual funds, will change the historic returns of the stock market. It hasn't exactly done so yet, but sometimes these changes take a while to percolate through. In a free market, there cannot be reward without risk. To say otherwise is to say that somewhere, someone is giving away free money.

No, if you put the 2 trillion into the market now, it will be worth 2 trillion NOW. 4%. Nine years from now, at 7% return (real growth), it will be worth 3.7 trillion. But then the total market at that growth rate will be worth 91 trillion. 3.7/91 = 4%.

OK. If you start now, that's true. I was basing what I said on your assertion of what would have happened if it had been invested in the past.

Why not? It's not like they are going to get controlling interest in any one company and be able to affect their decision making.

You really can't see the problem with the US government owning significant chunks of US industry?

But you need to sell the need to do that HONESTLY (like other welfare) rather than hide that tax year in and year out in the muddle of a system that's now out of control.

On that, we agree, partially. More later.

They are relatively risk free (because if they collapse, so will the governments) and they do quite well on average.

Past performance is no guarantee of future results, and if you understand why risk and reward are linked, you will understand that, over the long term, both of your statements cannot be true. More later.

 

[gdnp]

Several points I have been meaning to make for a while, in no particular order:

1) The argument that SS is not insurance. It is. Here, I am speaking of only the retirement portion of social security, ignoring the disability and survivors parts. SS retirement is insurance against living too long. It's kind of like the opposite of term life insurance. With term life insurance, there is no value while you are alive. You gain no benefit: the only people that benefit are your heirs after you die. You are insuring against an early death that leaves your family destitute.

With social security retirement, the opposite is the case. You are insuring against living too long and exhausting your savings and thus being left destitute. A person collects money after he retires until death, regardless of how long he lives. If you die before you retire, you collect nothing. After you die, your heirs collect nothing. This portion, which is the core of social security, is insurance against living too long.

When we discuss shifting money from government bonds to stocks, we are thus really discussing two different issues. One is the insurance aspect, where people advocate shifting from the current insurance system to an investment system where people rather than the government have ownership of their contributions. The other question is how to invest the social security trust fund. Right now it is in US government bonds. We could switch portions to stocks or any other investment vehicle without changing from an insurance to an investment system. It would, however, be hard to switch to an investment system without also altering the investment choices; thus those whose main motivation is switching from an insurance to an investment system usually lump the two together.

Other portions have been tacked on to SS to achieve other social purposes. The most logical are the survivors benefits, which insure against the premature death of the breadwinner of the family leaving the spouse and children destitute. These portions are akin to more traditional life insurance.

2) Shifting large sums (billions or trillions) of dollars from US government bonds to the equity markets has the potential of causing some major disruptions. I will list some of these below

3) The government has been using the social security surplus to fund government debt. The trust fund is invested in government bonds. If portions of this money were invested in the stock market, the government would have to issue new bonds to finance this debt, sold to US and foreign individuals and institutions. Yes, this will have to happen eventually as the trust fund is spent down, but the process will be accelerated by the shifting of funds. This will drive up the interest rates on government borrowing. How much? don't know. But I cannot assume that just because I don't know, the effect will be trivial

4) Shift of money into the stock market will have effects on the stock market, with the trend clearly being higher prices. The value of the stock market increasing is not a bad thing as long as it is based on fundamentals. If the value of a stock doubles because the value of what the company owns and does doubles, this is a good thing. Real wealth has been created. But if the value of a stock doubles simply because more dollars are chasing a fixed number of shares, then we are dealing with a paper gain. No real value has been created.

5) forcing people into index funds decreases individual risk, but further distorts the stock market. Think about it: Let's say that 50% of people decide to invest in S & P 500 index funds. This will cause each month millions of
"buy" orders for the shares of companies that make up the S & P regardless of how the individual company is doing. GM has a terrible quarter: the index funds will still be bidding up the price of their shares.

6) As the baby boomers reach retirement, the opposite effect will come to bear. Each month, there will be millions of "sell" orders as shares are cashed in to fund living expenses. This will be at least in part counteracted by the new "buy" orders from the current workers. Net positive or negative on the market: Don't know. Large or small effect: Don't know.

7) There will be further distortions at the margins of the index funds. Indexes are not static, they add and delete stocks. If a stock is added to the S & P 500, demand instantly increases as the index funds are now required to buy their shares. When a stock is removed from an index, the index funds dump their shares. A savvy investor, seeing these changes coming, could profit by their flexibility, while the index investor is tied in. Index funds work while they are a relatively small part of the market. If index funds were to control a large portion of total equity, they would blunt the ability of markets to adjust to changing conditions.

8) there is the question of ownership. Who owns the individual shares of stock? The individual investors? The trust fund? privately run index funds? Who, if anyone, votes these shares? I don't think we want the government to have voting control: the potential for abuse is too high. The individual investor is going to own a trivial share of hundreds of companies, and thus have no power. I suspect the net effect would be to perpetuate the current trend, where I feel companies are run more for the benefit of corporate management than the stockholders, with massive compensation at the top and few checks and balances.

 

[Meadmaker]

gdnp speaks sooth.

I will pass on one bit of advice to anyone reading this who isn't sure what to make of all this talk on the stock market and investing. Understanding investments really is a good idea, so if you want to understand them, here's what to do. Go to the local megabookstore, you'll find some books with titles like "How to Pick Stocks" and "Get Rich on Wall Street." Read the back covers, and then put them back on the shelf. Then, take a few steps to the left, and find a book on finance. I used an earlier version of this book:


http://www.amazon.com/Finance-Barro...=sr_1_2?ie=UTF8&s=books&qid=1214091844&sr=8-2

After you read that, you'll know enough to understand why markets work the way they work, and you'll know enough to understand why BeAChooser's goal of low risk, high yield investments for everyone doesn't work. Of course, you will know enough to understand it, but you might not actually understand it. Some people who ought to know better are sure that plans like GWB's really would have been the key to saving Social Security, and only some of them are lying weasels who expect to reap a windfall from fleecing investors whose hand are tied by the federal government.

ETA: Warning: Some math required. Of course, in my opinion, if it's worth knowing, some math is required to know it.

 

[Lurker]

It is a death tax. This is money that taxes have already been paid. Tax it again because of death? No that's wrong. Getting rid of the death tax helps the middle class, not the mega rich. The " historically wealthy" ,like the Kennedys, have had no problem getting around the inheritance laws with various trust and other loopholes.

Um, are you aware that teh first $1million of inheirited wealth is tax-free? Seems the middle class already have it made with the death tax the way it is.

 

[Lurker]

So, good people pay taxes on this money and when they die they wish to pass it to a family member and the government should impose some sort of additional tax is that it? By what right?

Simply put, it was income the first time it was earned, and then income again when inheirited by someone else.

It is somewhat analagous to me earning money at my job and then giving that money to my son (monetary gifts are taxable).

So if monetary gifts are taxable, why would inheiratance not be taxable?

 

[Lurker]

And of course, I haven't even mentioned the fact that the system is in trouble and there is no guarantee that anyone putting money into it now for retirement in 20 or 30 years will see a dime.

You would have been better off to not mention that since it is baseless rhetoric. In the future, worst case scenario, the SS fund is out of reserve. We still have people working and paying SS taxes sufficient to pay current retirees at least 70% of what SS currently promises.

That is a FAR cry from "no guarantee of seeing a dime" as you said. Your statement is illogical. People will still pay the tax, just where do you think that money will be going in the future?

 

[Kestrel]

Simply put, it was income the first time it was earned, and then income again when inheirited by someone else.

It is somewhat analagous to me earning money at my job and then giving that money to my son (monetary gifts are taxable).

So if monetary gifts are taxable, why would inheiratance not be taxable?

The gift tax is actually part of the estate tax. If you give gifts to one person over a certain yearly limit ($15k as I recall), that amount is subtracted from the $1 million estate tax exclusion when you die. The gift tax closes a loophole in the estate tax by not allowing wealthy people to give their estate to relatives before they die.

 

[Lurker]

All Bush proposed was that FOUR PERCENT of contributions go into personal accounts invested in stocks. A FOUR PERCENT reduction in new contributions to the "fund" will NOT cause the surplus to begin disappearing NOW.

And you have no idea how much that would cost, do you? You really need to educate yourself on that point. You can even find the Bush administration discreetly admitting the cost of their program if you search diligently. Good luck.