Social Security becoming an oxymoron?

[Guest Franklin Evans]

I just finished reading the article linked in the What's New section, and it reminds me of a debate I had with co-workers 20 and more years ago: should the regulations from ERISA governing qualified DB plans be applied to Social Security, including minimum funding, amoritzation of the unfunded liability, etc.? Ignore for the moment that we are not concerned with deductibility (though maybe we should be concerned? How about that, FICA employer portion as deductible contribution?).

Radical notions all; give your radical ideas or your reactions to them.

[Larry M]

should ERISA laws and regns apply to Social Security?

Short answer: No.

Long answer: Absolutely no!

[Guest Ralph Amadio]

I just attended the President's satellite Social Security session here in California, where the Social Security Administration conducted workgroup sessions among the invitation only audience. Although ERISA was not mentioned, the consensus of all five groups was to place the SS money in a REAL trust fund, free from politics. A "blind" trust was recommended. In addition, the preponderance of opinion was in favor of some method of increasing the income of the fund. Privatization was discussed, however most had difficulty with the process, including how the government with trillions of new cash deposits, would end up controlling the investment markets. Four out of five groups also opposed bringing Police, fire, and teachers that are currently exempt from SS under the system. Most Safety employees would not live to receive a benefit with current mortality, and all three of these groups would have suffered substantial reductions in their state and local pensions if the additional 12.4% were sent to Washington, instead of to the local PERS system. Most State and Local plans cost in the vicinity of 14- to 18% total currently. Social Security costs we were told would increase California costs by 1 billion the first year, and cost 20 billion at the end of ten years. Since these people already have fully funded pensions, SS would appear to be a waste of taxpayers money.

The SS Administrations argument was: "We have to get the money from somewhere".

As far as it goes, this "crisis" appears to be based on shaky numbers. The assumptions used are based on a 1.7 growth of of GNP for 20 years. If the GNP stays constant at 3% there is no problem with the current program.

If the earnings of the trust fund increase by 150 basis points, there is no problem.

Why do we have a crisis? Possibly the SSA wants to complete its 60 year old dream of a single universal pension system, which would likely federalize state and local pension plans, at least according to the National Association of State Legislatures May 28, 1998 letter.

[Guest Franklin Evans]

Despite Larry's long answer, I firmly believe that the long-standing politicization of SS, and its even longer-standing "pay as you go" status prevents our powers that be from taking a serious look at this defined benefit plan. Just by itself, the inclusion of the "surplus" in the federal budget balance sheet tells me that true reform is a distant blip on the political horizon.

Radical notions often act as catalysts; I am not expecting these notions about SS to actually happen, but they can serve to push debate in a better direction than whose pork barrel will benefit from the current surpluses.

I and a coworker were having fun on a slow day, sometime in 1978. We theorized what would happen if the principles of minimum funding were applied to SS. I don't recall the basis of what we did, but I do recall one result: an estimated unfunded liability in excess of one trillion dollars... in 1978. I hope this serves to show that my head, at least, is not in the clowds about this. We absolutely need reasonable, practical approaches and methods; but, hey, let's have some fun along the way.

Come on, Larry. Give us some details. Why not?

Question for Ralph... In your opinion, is the SS admin trying to preserve the status quo, or are they actively participating in the search for reform?

[david rigby]

the above comments seem to focus on the numbers. but there is another part of the equation: demographics. the ratio of workers to recipients today is about 4 to 1 (I think). That ratio will be cut in half in the next 30 years.

Part of the reason is the large cohort of people (called the Baby Boom) that is aging into retirement. the other issue is the governmental activism that has (falsely, in my opinion) encouraged low birth rates. why have they encouraged this? so that more married couples can be two income families, generating more tax revenue for the politicians and bureaucrats to spend.

OK, I'll get down off my soapbox now.

I believe that major surgery on the SS system will be a failure, because of the time it takes to see the problem and the success of any solution. those who call for investment of monies in the equity market are just looking back over the last 15 years with regret, relaizing that we should have done it sooner. Perhaps so, but the large volume of dolllars will sway any market, whether it is stocks, bonds, or t-bills. Remember that about 2025, SS will be paying enormous amounts each month. These amounts are cash, so that no matter what the investments are in, they must be sold to generate cash. that will cause that investment market to have more sellers than buyers and prices will go down.

My suggestion is to raise the SS retirement age, probably to 70, gradually. In addition, some of the funds should be invested in other securities, but not a significant portion.

[This message has been edited by pax (edited 12-17-98).]

[richard]

Let me add my three (inflation!) cents worth.

Yes it will be a political decision (gee, that's a no brainer).

Yes, the actuarial organizations are providing Congress with various analyses of the options (and they raise some very good points).

Yes, the investment community is pushing for privatization (they have their self interest, we have ours).

But I wonder if a swing to privatizing Social Security (with individual bearing the investment risk and a lump sum focus) will actually help Corporate defined benefit plans. After all, on some level, individual intuitively want balance.

With the current Social Security providing a "floor" with the government assuming the mortality and investment risk, employees are comfortable with defined contribution plans. If Social Security were completely privatized (obviously an exaggeration), perhaps individuals would not be so comfortable with the risks of DC plans, and would appreciate the "guarantees" of DB plans.

(Or put another way, any move toward inviduals bearing investment risk in Social Security might be met with a move toward individuals bearing less investment risk in private retirement plans.)

Maybe this is wishful thinking ... any comments ...

[joel]

I welcome investment risk. This means I am being empowered. Just look at the the alternative plan to SS operated by the The County Government of Galveston, Texas to see what I mean by individual empowerment. Imagine what the account balances would be today if over the past 17-18 years an employee of the County invested in a balanced portfolio comprised of Stocks and Bonds instead of GUARANTEED RATES with an insurance company. AN INDIVIDUAL NEED ONLY FOLLOW THE SPONSORS OF LARGE DEFINED BENEFIT PLANS. THEY HAVE FOLLOWED A BALANCED APPROACH FOR MANY MANY YEARS.

[Larry M]

Okay - an expansion...by going back to the bsics.

retirement security is a three legged stool:

first: social security - where almost all of us contribute to a plan which subsidizes (read "takes some of our money and gives to those less fortunate") some and provides a floor for all - and adds benefits for disability and death.

Social security is not and never was intended to be a plan of "equity" between individual contributions and individual benefits. It is a social plan to provide benefits to those who are not working paid for by those who are working during any generation.

the Second and third legs are the parts which are "privatized". They consist of the more individually equitable plans of the employer provided retirement plans (qualified and non-qualified) and the individual savings accounts.

If the social security system is scheduled to pay more than its income, it must either reduce benefits or increase its income or use a combination of those items.

Whatever it does, we still have the two other legs for those of us (or our employers) who can afford to put away the additional moneys needed to provide those benefits.