Internet Advocacy Roundup: Golden Pledge Campaign to Protect Social Security
Americans have lost nearly $2 trillion dollars from their private retirement accounts in the past 15 months, a 20 percent drop in value. Thankfully, Social Security benefits are not subject to market whims. If they were, a new analysis from the Center for American Progress Action Fund concludes that a retiree with a private Social Security account invested in stocks similar to President Bush's 2005 proposal, "would have lost approximately $26,000 if they had retired on October 1, 2008 after 35 years of contributions to such an account."
Meanwhile, come January, Social Security will implement a 5.8 percent Cost of Living Adjustment in retiree benefits, the largest increase in 25 years. Not only are Social Security benefits guaranteed, unlike market investments, but in a year when private retirement accounts are losing money, Social Security benefits are going up.
Yet some conservatives still want to gamble our Social Security in the stock market. Indeed, anyone who still thinks it is prudent to risk our Social Security benefits to the stock market should have their head examined. Not only does the current crisis tell us that such a move would be dangerous, it reminds us exactly why we created Social Security in the first place: to provide a secure retirement for Americans.
I Am Progress's new Golden Pledge campaign (Center for American Progress Action Fund) takes this issue head on. Our campaign: do not privatize Social Security benefits. The campaign asks citizens to take the Golden Pledge to oppose privatizing Social Security.
In what seems like a recurring nightmare, this issue is ripe with examples of prominent conservative leaders telling us how great an idea it would be, only to find out later they were completely out of touch with reality. Take this comment from Dick "Greeted as Liberators" Cheney, "Voluntary personal accounts would represent an entirely prudent risk."
Or how about this ditty from George "Mission Accomplished" Bush, "Because this money is saved and invested, younger workers would have the opportunity to receive a higher rate of return on their money than the current Social Security system can provide."
In his 2005 State of the Union address, he took the case further when he said, "Here's why the personal accounts are a better deal. Your money will grow, over time, at a greater rate than anything the current system can deliver--and your account will provide money for retirement over and above the check you will receive from social security."
The truth is, if we had privatized Social Security then and you had retired a year ago--when the New York Stock Exchange hit an all-time high, your nest egg would have been a whole lot sweeter than if you retired this week. Who wants their primary retirement savings benefit held hostage to a volatile market?
Let's not be foolish. Let's not privatize Social Security. Check out the Golden Pledge campaign and sign the petition.
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Very Nice Dutchman. Our pension plan which we are living off of is involved in investments and I was worried about it until I read your posts and thought about them in relationto the newsletter they kicked out to retirees within a week of the wall street crisis. It is now up to about $5 billion and the state of California under Arnie has been trying to figure a legal way to highjack it and reduce our pension. But is is very well managed and returns money to the county whose employees are vested in it. For a few weeks I worried and now I have relaxed after reading the last newsletter from them detailing just how they are managing its assets. They actually may come out ahead in this crisis and return more money to county above the actuarial amounts required to sustain pension payouts. Sadly Arnie will have to suck up money from less well managed pension plans. He probably will or has already raided those pension plans offered as part of an employees labor agreements. That is the true scandal of the Republican era. The pension plans that were allowed to be raided. If I understand right many hostile takeovers were just to get at richly endowed and well managed pension plans to drain them and then break up the companies.
We need to protect ss from RAIDS by either party. Otherwise actuaries can not really plan well
Thanks for taking the time to read my excessively long post!
You should consider yourself lucky, California's state and county run pension plans (except for those poor taxpayers in San Diego) are very well run. In a prior life I had done some work with the San Bernardino County Retirement Employee Retirement Association. They were both very nice, and very, very sharp.
And you're also lucky, relatively speaking, to not be relying on the private sector for your pension. In the corporate world defined benefit pensions that enabled a generations of those not at the top of the economic pile to retire with relative income security, are being terminated and replaced with 401(k) plans at an alarming rate. I shudder how the next batch of retirees will cope with their skimpy 401(k) balances instead of receiving reliable monthly income.
And you're also right about how politicians (and CEOs) have raided their pension plans. Most egregious were the "contribution holidays" taken by many plans during the good years, which made these last several bad years that much more difficult to deal with.
This is one of the biggest issues of our time, and sadly, too many people have kept their heads in the sand, refusing to touch this "third rail" of politics. Well, the time to fix it is now. Let's hope we get better leadership out of Obama.
Peace,
Dutchman
Maybe HP will combine all 8 of Dutchman's comments on the issue of Social Security or invite Dutchman to submit it as a blog. Dutchman, you could try AlerterNet too. It's another progressive site. Lori Price of CLG NEWS might like your analysis & comment.
part 8 of 8
We'll need to issue a lot of additional treasury debt to finance these state-level retirement pools, but here too, the notion of investing in marketable securities makes this workable. So long as the long-term returns on the retirement assets are higher than the cost of issuing the debt, this will help close the gap. It may not always be thus, years like 2008 could see these plans underperform their debt servicing costs. But again, for a program with a decades-long investment horizon, volatility like we're currently experiencing is largely irrelevant to the wellbeing of current and future retirees.
So, there you have a thumbnail sketch of how to fix Social Security. I’m sorry to have taken so much space, but you have touched a nerve, and you deserve to be commended for raising the issue now. For better or worse, the next president will either preside over Social Security's salvation or actuarial failure. Let's hope that President Obama considers this "pre-funded defined benefit" template for his reforms.
Respectfully,
Dutchman
part 7 of 8
Are US public pension plans perfect? Of course not. Too many are poorly managed. Too many are underfunded (although this is in part because many stopped contributing in the boom years of the 1990s). And too many need improvements in their oversight and implementation. But they are still a vastly better template than 401(k) programs, otherwise known as private accounts.
Sadly, even if we do all this, much more will still need to be done. The Social Security "trust fund" will be in surplus only for another 8 to 10 years. After this, the system is truly broken, requiring more money from the rest of the federal budget, and then we'll be staring at deficits for decades to come unless we either cut benefits (bad), raise taxes (mostly bad, but we should eliminate the cap on Social Security premiums paid by the rich), or earn a better rate of return on the assets we have (good!). That this last lever has never been used is one of the main reasons Social Security is so close to being broken. Had we earned even mediocre market returns on the Social Security surpluses we’ve had since the early 1980s, we would not be in the mess we are today, even with the current market sell-off.
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part 6 of 8
Having 50 state offices responsible for managing the nation’s retirement assets is far more prudent than entrusting just one entity, presumably in Washington, with the entire pot. It diminishes the chance of politics interfering with the proper fiduciary management of the retirement assets (which, if successfully implemented, will eventually total trillions of dollars). It also ensures “decision making diversification” so that even if one or some of the state offices make poor investment decisions (it’s inevitable that some will), the average long-term return is still near the actuarial target. And each state should contribute a small percentage of its assets each year into an insurance pool that would come to the rescue of any individual states that were for whatever reason facing a material shortfall (sort of like an FDIC for pension assets).
In the US, most public pension plans have net-of-fee
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1. Social Security has its own accounting but no assets. If the government wanted to start an SS investment fund, it would have to use borrowed money, just as it would for privatization. Since taxpayers have just committed to borrow money for a huge, involuntary investment in bank stocks, this won't happen.
2. If there were funds to invest, it would be important to divide it among management firms, and to require that investments support businesses in all the states. Actually giving it to states to manage seems like more gambling- some states are sure to lose through fraud or bad investments, some will win big. Can the retirees move from the loser to the winner states?
5 of 5
And lastly to your point about some pension plans losing money. I tried to specifically address that by creating a depository self-insurance pool that each state would fund relative to the size of its population. This would establish an emergency fund to cover any shortfalls experienced by one or more individual plans. And, if that were ever depleted, there is always the option of going back to the government for additional proceeds. To be clear, this is not a “just-in-case” defense – we can be sure that over time there will be some funds that get into trouble, so there will need to be a safety net.
In the end, there are no solutions that guarantee Social Security’s solvency. But we can increase the odds in our favor, and I believe, based on the body of evidence I have seen over my career, that it’s possible to do what I’m suggesting.
One other thing before I give this a rest, we still need to get our Federal Budget in order. Even if we fix Social Security but the rest of the budget drowns in red ink, well, it will be like rearranging the deck chairs on the Titanic.
Thanks for paying attention.
Dutchman
4 of 5
That said, we should be very careful about just distributing the money evenly by geography. If New York and Boston manage proportionally more retirement assets per capita than, say, Kansas City, it’s really because that’s where the talent and infrastructure lies. Sorry to seem elitist if your not living in one of the money centers, but that’s what I’ve observed. And, as I indicated, the assets should be globally diversified, meaning that asset managers from all over the world should be employed, again as is currently the custom.
And this issue actually relates to your other point about fraud and best practices: we absolutely needs improvements made to the governance of our pension assets so that 1) they are more transparent to regulators and beneficiaries alike, and 2) pension plan fiduciaries are aggressively prosecuted for any type of malfeasance or gross negligence. You’re right to note that not all state plans are quite up to snuff here. But I think it’s very possible to do this. In The Netherlands, for example, the rules regulating pensions are not only well thought out, but they are quite strict about enforcing the rules. I don’t think it’s an accident that the Dutch have one of the healthiest pension systems in the world, and if the Dutch can do it, so can Americans.
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3 of 5
Anyway, by spreading out the borrowing this way, it's never more than 10% of the federal budget, and never more than 2-3% of overall GDP. And the debt issuances could grow at the rate of US GDP. So if we issue $300 billion the first year, and GDP grows by 3%, it would be $309 billion in year two. This would help give the markets time to digest what is admittedly a big chunk of change.
As for your second point, in practice defined benefit retirement assets are already spread across many hundreds of asset management firms, clustered mainly, but not exclusively in New York, Boston, Chicago, Philly, Los Angeles, Chicago, Dallas, Houston, Minneapolis, Kansas City, St. Louis, Denver, and Atlanta. There are some regional asset managers in the smaller metropolitan areas, but most of the investment community resides in these cities. And in my experience pension boards in, say, California, are not surprisingly pre-disposed to hire managers from California. People all over the US are similarly provincial this way.
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2 of 5
You make a very important point about the recent debt binge. So I'd propose stretching the pension obligation debt issuance out over the next 8 years - say at $300 billion per year. That allows us to continue to accumulate the current FICA surplus in addition to this borrowing so that by the time the system goes in the red in 2017 or thereabouts, there is $3-4 trillion combined pool of assets available with the long-term return target of 1% above all net borrowing costs, or inflation, whichever is higher. Even this small spread, compounding between 2017 and 2042, can help plug the gap that would otherwise cause the system to be completely depleted by then.
A mere 1% on $4 trillion dollars is $40 billion - which over the many years we're talking about here quickly accumulates to a large sum of money. And both capital market theory and observed history suggests that over a long enough investment horizon, an investor with no credit risk (only national governments – backed by the printing press – have this luxury) should be able to earn a higher return on a globally diversified pool of short and long-term assets than it’s associated borrowing cost.
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1 of 5
Zann,
Your observations are perceptive and I think I can address your concerns.
First, I submit to you that the markets already assume that the debt is there, whether or not this approach is used - since there is no way that seniors are ever going to permit politicians to cut Social Security benefits as much as will be needed to keep the program in balance. It’s not called the third rail of politics for nothing.
And we’ve already shown ourselves willing to spend money we don’t have when times are relatively good. We’ve known about this pending crisis since I began my career in 1990, and we’ve done absolutely nothing to stop this slow-motion actuarial train wreck since then. Most observers, I think, are inclined to believe that the obligations will stay put.
So the debt - all $5 trillion of it (the estimate of what's needed in additional monies between when the system goes cash flow negative in 2017 and the "Trust Fund" goes broke in 2042), already exists. The question at hand is how we best finance it. By using a pension obligation debt financing approach like I’ve described, we can reduce this number to something much less than $5 trillion dollars, and, if we’re lucky to earn the returns over the next 30-40 years that we’ve seen over the previous 30-40 years (no guarantees, to be sure), it could reduce our unfunded Social Security liabilities to zero.
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part 5 of 8
Now, before you say "the S&P just had its worst week ever", consider that large pools of assets managed to finance the retirement benefits of a large and age-diverse population can ride out and even profit from the volatility we're currently experiencing. Sure, most have booked losses over the last few years, and a distressingly large number are currently considered "underfunded" - i.e having long-term liabilities that exceed the current market value of their assets. However, these periods of market distress are and indeed have been offset by strong investment years.
The best approach, in my professional opinion, is for the US is to redirect all Social Security premiums (FICA) and surplus on a pro-rata basis to our States' treasurers. Most state treasurer's offices are already involved in the oversight of their public employment retirement systems, and have the staff and infrastructure to manage long-term assets. Each state would receive premiums in direct proportion to their population size, and each would be responsible for managing the assets, with the overriding objective to earn enough return on the assets to close the gap between long-term assets and long-term liabilities. There are tiny details like how to account for individuals who move from state to state, but they are not worth discussing here, and are easily dealt with.
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part 4 of 8
So, we agree that private accounts are a very bad idea. But the notion that Social Security should NOT invest in a well diversified mix of marketable securities, including stocks, is dead wrong, and has actually contributed to its near insolvency. As just mentioned, our Social Security assets earn a ZERO percent rate of return. Sure, the government accounting rules say that the current Social Security surplus are invested in interest bearing Treasury Bonds, but that results in the Federal Government (read: taxpayers) paying interest to……the Federal Government! It’s all slight-of-hand, and you can thank President Johnson for starting this sorry tradition.
Anyway, the model for Social Security should be the US public employee pension plans, including such well-run programs like CalPERS, Mass PRIM, Washington State Board of Investments, and many more. These programs are professionally managed, invest in a globally diversified mix of short and long-term, liquid and illiquid assets, and have the economies of scale and resources to invest prudently and for the long-term, attempting to match their assets with the very long-term (decades) nature of their liabilities.
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part 3 of 8
The long-term return may indeed be better for some relatively small percentage of individuals choosing private accounts over Social Security (our government earns a 0% return on Social Security proceeds), but by definition 50% of the people out there will underperform this average return, and a large portion, say 25% of the population, will underperform it by a wide enough margin to be much worse off than what Social Security would currently allow for.
Social Security (like most defined benefit programs) also provides cost of living increases and survivor benefits that make it a far better deal for those who live longer and/or have spouses and children as dependents. Private accounts are only a much better deal than Social Security if the beneficiary doesn’t live very long past retirement, or doesn’t care about survivor benefits. And most 401(k) accounts don’t have anywhere near the money needed to finance retirement for someone living past, say 85 years. The average 401(k) balance, even before the market panic, is only enough to finance a few years worth of retirement. And when the money’s gone, it’s gone. Of course the 401(k) accounts are often annuitized, but unless it’s on a large base, the annual proceeds, after fees and expenses, is usually less than what someone could have earned from a defined benefit pension.
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part 2 of 8
In contrast, because of their vastly smaller individual size, private accounts are much more expensive on a per person basis (some estimate it’s as much as a hundred fold more expensive to carry out the management, custody and recordkeeping of private accounts), and private accounts do not allow the time horizon diversification previously mentioned as a major strength of Social Security. These "defined contribution" savings are just that – a pool of money determined solely by how much was set aside and how much money was earned (or lost) on those assets. If the money, for whatever reason, isn't there at retirement, there is no safety net to make up the difference.
So we completely agree that we shouldn't turn Social Security into a version of a 401(k) plan. Having individuals bear responsibility for their retirement returns will result in many who are worse off if they either do not choose wisely, or they do choose wisely but have the misfortune of retiring just after the markets have experienced a sell off (which they will do with more frequency than most investors assume). While there are many who could do well looking after their own retirement finances, most will do worse, if for no other reason than the fact that investing is difficult and time consuming and many people don’t want to be bothered with it.
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Sir,
I must cast all modestly aside and begin by telling you that I have devoted the last 20 years of my career to working with various pension programs, both public and private, all over the US and Europe. I have also spent a great deal of time studying the US Social Security situation and feel compelled to point out that your argument about Social Security is only half right.
Social Security was expressly designed to be a form of social insurance whereby retired (and eventually disabled) individuals would not fall into extreme poverty. It established for its participants a floor below which annual income would not fall, and is thus a "defined benefit" program, whereby the benefits are known in advance, and are influenced by the number of years worked, family status and average career salary, thus rewarding workers more than non-workers, and encouraging (too modestly, in fact) later retirement.
Compared to private accounts (studying 401(k) accounts can provide lots of insight into this) the per-person cost associated with implementing Social Security is very, very low, owing to its huge economy of scale. Social security, like all defined benefit plans, also permits participants to diversify their time horizon risk, allowing individuals to retire at any time, regardless whether the markets are up or down.
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But Mr Buffett says that this is the time to get into the stock market. Look at the bargains. You couldn't ge PE ratios like that before 9/15/08. People that bought GM in 1930 got a real bargain. Those who sold GM in 1955 made real money. Capatilism isn't dead yet; is it?
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