Tag: Social Security

The Two Biggest Myths About Privatizing Social Security

Authored by: Matt Palumbo

The Social Security (SS) system turned 83 years old on Tuesday, but given the programs fiscal issues, it has few birthdays left to celebrate. When SS was created, it acted as old age survivors insurance, as the average American died before turning 65 (when they’d be eligible for benefits). It wasn’t until LBJ’s war on poverty that SS became the retirement plan we know it as today.

While there were five workers supporting each retiree in the 1950s, there are now fewer than three. Proving that nothing changes in government, the retirement age has remained unchanged as average lifespans now push 80, hence this declining ratio of workers to retirees. In June, government trustees warned that SS will be insolvent by 2034, and only able to pay out 3/4 of what recipients are owed based on how much taxes they paid into the system.

The most common solutions to SS’ fiscal troubles usually center around raising the retirement age, or having the payroll tax apply to all levels of income. While that would close the gap if done correctly, it doesn’t change the fact that SS’ returns are godawful from an investment perspective, or that politicians can raid SS’ trust fund whenever they please (as Bill Clinton did).

Myth #1: It’s a Radical New Idea

Chile privatized their government pension system in 1981, with great success. Workers are required to put 10% of their incomes towards retirement, but unlike our SS system, they’re allowed to invest their money as they like, into a handful of approved stock and bond funds.

The average Chilean worker who retires after 40 years can expect to receive 87% of their prior salary in retirement under the Chilean system. The average U.S. worker receives SS benefits that equal 38% of their prior income (52% for lower-income earners). 

Unlike our ponzi-like system where current recipients are paid by future recipients, the majority of retirement funds paid out under Chile’s system are the result of income earned on investments. One study of returns over a 32 year period in Chile found a 8.7% compound annual return net of inflation, and that 73% of the pension funds workers retire on comes from profit made on investments, with only 27% coming from the principal.

Another benefit of the kind of private accounts Chile has is that when a recipient dies, there’s money left over to pass to their family. That’s impossible in the “pay as you go” system we have.

Australia also has privatized their retirement system, requiring workers to pay 9.5% of their wages into the system (up to 12% in 2020). Savings in Australia equal 130% of GDP, and unlike our SS system, theirs runs large surpluses.

Myth #2: Market Crashes Make it Too Risky

What about market crashes, like in 2008-09 when the stock market lost half its value? For that objection, we need some perspective. Imagine for a second that you were the unluckiest investor in the world, investing your entire life savings at the stock market’s peak in 1929 before the great depression. At the end of a 45 year period in 1974, you would have increased your portfolio in value eightfold, for an annual compounded return of 4.9% after inflation. And that’s an understatement. In reality someone would be contributing to retirement every year, and thus dollar cost averaging their investment during down years.

What if you had to retire after a crash? Someone who invested in 1887 and retired 45 years later in 1932, when the market hit its absolute bottom during the great depression would have a 4.3% average return after inflation. (Source: Pages 29-30) And like the prior example, this is an understatement, as in reality no sane person would be invested in 100% stocks near the end of their career. 

Historically, Social Security’s returns have amounted to 2-2.5%, roughly in line with inflation. In other words, the real return on investment for Social Security contributions is close to zero. This also means that even the worst market timing in history is preferable to SS. 

Source: Social Security Administration

By contrast to SS returns, even corporate bonds tend to yield a similar return after accounting for inflation, while stocks have historically yielded near 6% after inflation.

Australia’s pension system is routinely ranked as the best in the world, and given the facts laid out here, it’s no surprise why.

 

How Bill Clinton Faked the “Clinton Surplus”

Authored by: Matt Palumbo

The so-called “Clinton surplus” is often cited by liberals who wish to show that the “tax and spend” philosophy isn’t as fiscally reckless as it sounds. If we look at the government’s budget statistics there does appear to be a budget surplus during the last four years of Clinton’s presidency. However, as anyone who looked at the national debt would also notice, that rose every year under Clinton. So how did both these things happen?

First, lets start with some history.

To recap Clinton’s tax policies, in 1993 two new top income brackets of 36% and 39.6% were added, as was a raise in the corporate tax to 35%, an extension of the Medicare payroll tax to all levels of income, and a small increase in the gas tax. Overall, these taxes were expected to boost revenues by 0.36% of GDP during their first year, and an additional 0.83% by 1997. Clinton did manage to see an annualized 19.3% increase in tax revenues from 1993-1996, though it should be noted that Reagan actually managed an impressive 24.1% during his presidency.

In 1997, the now Republican controlled congress reversed some of the Clinton tax increases by lowing the capital gains tax, creating a child tax credit, increasing estate tax exemption and income limits for deductible IRAs. In all, these cuts reduced the burden of taxation by about 0.22% of GDP (or in other words, the tax cuts reduced taxes by $30 billion – 26% of the 1993 increase). Economic performance under Clinton fared better from 1997-2000 compared to the 1993-1996 period in terms of job creation, wage increases, and GDP growth.

Two years following the Clinton tax hikes in 1993, in April of 1995 the CBO released deficit projections for the following years of the Clinton presidency. Below they are tabled against the actual realized deficits. All figures are in billions of dollars.

PredictionActualDifference
1994-203-2030
1995-175-16411
1996-205-10798
1997-210-22188
1998-210+69 (surplus)279
1999-200+126 (surplus)326
Total-1,203-301902

Table Source: Laffer, Arthur. “The End of Prosperity,” p. 129. Based off data from Congressional Budget Office forecast, April 1995. Note: “Surpluses” continued into 2000 and 2001 but weren’t included in that source.

Keep in mind here, this was after the Clinton tax increases and before the Republican tax cuts, and yet the CBO still projected deficits in years to come. So what actually happened?

Clinton was more fiscally conservative than some conservatives. Federal spending as a percentage of GDP has been lowest under Clinton out of our past six presidents, so liberals would have to thank small government for the surplus, had it existed anywhere else than on paper. Unfortunately, paper is the only place the Clinton surplus existed. Tax revenues under Clinton still never managed to eclipse government spending, and if you look at the table below, you’ll see that the national debt increased every year under Clinton:

Fiscal
Year
Year
Ending
National DebtDeficit
FY199309/30/1993$4.411488 trillion
FY199409/30/1994$4.692749 trillion$281.26 billion
FY199509/29/1995$4.973982 trillion$281.23 billion
FY199609/30/1996$5.224810 trillion$250.83 billion
FY199709/30/1997$5.413146 trillion$188.34 billion
FY199809/30/1998$5.526193 trillion$113.05 billion
FY199909/30/1999$5.656270 trillion$130.08 billion
FY200009/29/2000$5.674178 trillion$17.91 billion
FY200109/28/2001$5.807463 trillion$133.29 billion

So how is this possible? How did Clinton produce a budget surplus when he never collected enough tax revenues to fund government entirely? And why did the national debt increase in the face of an alleged surplus?

That’s where a piggy bank other than the American taxpayer comes into play: the Social Security trust fund. Tabled below are the components of the national debt – public debt plus intragovernmental holdings. Public debt is the discrepancy between taxes and spending (accumulated deficits), and intragovernmental holdings is money borrowed from government trust funds, such as the Social Security and Medicare funds. An increase in intragovernmental holdings would signify that more money is owed to the Social Security/Medicare/etc.

Fiscal
Year
End
Date
Claimed
Surplus
Public
Debt
Intra-gov
Holdings
Total National
Debt
FY199709/30/1997$3.789667T$1.623478T$5.413146T
FY199809/30/1998$69.2B$3.733864T  (-$55.8B)$1.792328T  (+$168.9B)$5.526193T  (+$113B)
FY199909/30/1999$122.7B$3.636104T  (-$97.8B)$2.020166T  (+$227.8B)$5.656270T (+$130.1B)
FY200009/29/2000$230.0B$3.405303T  (-$230.8B)$2.268874T  (+$248.7B)$5.674178T  (+$17.9B)
FY200109/28/2001$3.339310T  (-$66.0B)$2.468153T  (+$199.3B)$5.807463T  (+$133.3B)

Table Source: Townhall Finance

Note that every single year there was a claimed surplus, the money owed to intragovernmental holdings increased by a larger amount than the alleged surplus, meaning that borrowing from other areas of government filled both the gap between tax revenues and government spending and produced the “surplus.” This is the governmental equivalent of paying off the AMEX card with a VISA.

This Clinton surplus cannot be used to discredit conservative fiscal policy, because the “surplus” itself was a phenomenon of creative accounting, not policy.

And we’re still paying off the VISA today.

September 14, 2017: Ep. 547 Are We Being Sold Out Again?

In this episode-
If national bankruptcy is staring us in the face, why are we doing so little to stop it?

Why can’t Hollywood-types just act and sing? I’m getting tired of their silly lectures.

The ratings for the NFL keep going down, here’s why.

The federal government raised record tax revenue through August and it still ran a huge deficit.

Shape-shifting bacteria in space? No way!