Social Security Privatization: a Crapo Proposal Redux
Some schemes never see to go away on Saving Private Social Security when in reality Public Citizen Social Security still works, needs no major saving, would take little to fix it, and far short of MMT.
Taken from a 2006 commentary on Angry Bear by “Admin” at the time. I was not here at the time and maybe one of the oldsters can offer up a name. As I read this, what Crapo and the rest of the hooligans are proposing is an exercise in accounting. Some of these guys (all?) are still around.
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Mike Crapo has joined James DeMint, Rick Santorum, Lindsey Graham, and Tom Coburn with another spin on Social Security privatization that Phil Kerpen endorses:
The DeMint-Crapo amendment puts the possibility of meaningful, pro-worker Social Security reform back into play. If the Democrats are smart they will latch onto it before the train leaves the station. The amendment starts off with the obvious: Social Security funds should be used only for Social Security. Many Americans are surprised to learn that billions of dollars are taken out of Social Security each year in a congressional raid that funds everything under the sun – except worker retirement – and in the process masks the true size of the federal deficit. That practice could end under this new amendment. The DeMint-Crapo amendment creates a reserve fund in the budget that could be used to fund legislation protecting Social Security.
Social Security contributions are already placed fund into a Trust Fund. If these Republican Senators wanted to make sure that the Federal government stops raiding the piggy bank, they would do something about reducing the General Fund deficit – such as paying for the Iraq debacle with tax increases. If you suspect that Mr. Kerpen forgot to tell you the real story behind this proposal, check out this review:
Republicans Rick Santorum, Lindsey Graham, Jim DeMint, Mike Crapo and Tom Coburn are scheduled to hold a press conference this morning announcing their plan to privatize Social Security by raiding the Social Security surplus. Not only would this plan reduce benefits, but would also make Social Security’s financial problems worse and add billions to our nation’s deficits. Rather than working to protect Social Security, these Republicans are up to their same old tricks: trying to privatize Social Security while making the long term health of Social Security worse.
The discussion continues with the following headings:
Create New Budget Problems: Taxes Would Have to Be Increased, or Programs Slashed
Make Social Security’s Financing Problems Worse: Accelerate Insolvency, Add $64 Billion to Deficit, $600 Billion in Debt
Reduce Guaranteed Benefits
Simply put – more dishonesty from the GOP and the National Review.
Update: Even Lawrence Kudlow understands that the Republicans in Congress can’t stop themselves from raiding themselves from raiding our retirement benefits:
After all the GOP Congressional talk about newfound budget-cutting religion, including earmark transparency and reform, so far they have produced nothing. People like Arlen Specter, and many others, are still trying to get their pet projects funded. So, what else is new? Gregg has thrown in the towel on mandatory spending cuts because he says he doesn’t have the votes. Well then, I don’t think that the American people should “have the votes” to keep the Republicans in charge of the Senate–or the House for that matter. This is a pathetic state of affairs.
Larry – well said!
Update II: The Spokesman-Review reports on how Senator Crapo gets his campaign funds:
BOISE – U.S. Sen. Mike Crapo, R-Idaho, received more than twice as much money in donations from people in the U.S. Virgin Islands than from his home state last year, according to the Federal Elections Commission. That prompted the Senate Majority Project, a Democratic interest group, to question Crapo’s involvement in the islands, which have a population of 110,000 people. Crapo had received $39,000 from Virgin Islands residents by the end of the 2005-06 election cycle, compared with just under $20,000 from Idaho residents. Lobbyists for the islands are trying to reduce the number of days a person must remain on the islands to be considered a resident, an issue that could have tax benefits. Currently, under a 2004 act of Congress, individuals must spend at least half the year in the Virgin Islands to be considered a resident for tax purposes. Lobbyists would like to see that reduced to an average of 122 days per year over a three-year period. Crapo, a member of the Senate Finance Committee, is looking into the issue.
I admit I’m not familiar with the Republicans plan to privatize Social Security but if even a small portion (10-20%) of SS taxes were invested in and index fund, every working American would be invested in the US economy. I can’t imagine under any circumstance that would be a bad thing except for the Democrats. They couldn’t bitch about how corporate profits are making only the rich, richer anymore.
@Bill,
I can see you are neither familiar with Social Security nor with the stock market and the US economy.
The value of equity investments can rise or fall. For most Americans, SS is the only retirement income they have, so a reduction in their checks because of the whims of the market would be a bad thing for them.
Also, the stock market is not the US economy.
Hope that helps.
Joel:
I started laughing when I read your comment. Still am chuckling. I thought you were addressing me. Then I scrolled down and saw who you were addressing.
@ (the other) Bill,
Sorry. Too many Bills here.
Fixing that. There can be only one.
Joel, I can assure you I am familiar with the stock market and SS. I was a registered investment advisor for a Wall Street firm at one point in my career and have been actively investing in the markets for 40 years. I’m quite certain I’d still be working today if I hadn’t invested in the markets and relied soley on SS for retirement income. Example: Assuming a starting salary of $100k for a married couple today, investing a mere 2.5% or $2500/year (Just 20% of SS tax collected) for 45 years at 8% yield (divdends reinvested) yields over $1M. Factor in salary increases over the years and it’s probably closer to $2-3M. I’d also like to add, Im not certain US Treasuries are all that safe going forward with the untethered spending in Washington.
@Bill,
LOL!
“Assuming a starting salary of $100k for a married couple today . . . “
The median (not starting) income in the US is $44,000. That means half of people earn less, long after they start. The median household income (not starting) in the US is $75,000. That means half of households earn less, long after they start. So your little story is misdirection, irrelevant to the vast majority of Americans and irrelevant to Social Security. “Investing” SS funds in the stock market, like “Medicare Advantage,” is just another scam to shovel taxpayer money into the pockets of Wall Street.
But more to the point, for folks on or soon to be on SS, they are not interested in the possible yield over 45 years, they’re interested in the check they get every month. None of them will be alive 45 years after they start taking SS.
Spending in Washington is irrelevant to SS. SS is mostly pay-go and not part of the general fund. The Trust Fund is invested in special treasuries, yes, but the Trust Fund is projected to be depleted by ca. 2033.
So thank you for your comments. They amply support my observation that you don’t understand Social Security, the stock market or the US economy. And they further show your lack of understanding of how most of your fellow Americans live.
Joel,
Insulting me does not change the facts.
Ok, you want a real situation? This is real life!
My sister at 70 years of age unfortunately is living off of a $700/mn SS check and FORCED to live in a single room government subsidized apartment. She worked her whole life as a waitress. Assuming she started at $10k/yr 45 years ago and put away 50% of her SS tax (6% or $600/yr @8%) in an S&P index fund, she would have accumulated according to ChatGbt:
“So, if you invested $600 per year for 45 years at an 8% return, you would accumulate approximately $519,280.95.”
Please feel free to correct the math here but that equates to approximately $2500/mn assuming she lives another 15 years and it’s not invested in anything.
Regarding corporate profits. Where do they go besides taxes? They are reinvested to grow the company, provide bonuses and pay raises to employees, paid out to investors (retirees like myself) in the form of dividends or capital gains (which people pay taxes on). The only objection I have with corporate profits is the exorbitant CEO pay. I personally feel corporate tax rates should be based on the ratio of the lowest paid worker to the highest paid. The more you pay the CEO, the higher your rate.
Bill Mushock:
She would have been lucky to get 5% return. High Yield PNC account is 4.5 to 4.6% today.
She was also not forced to live in a single one room apartment as subsidized by the Gov. That is what she could afford. Finally, she would also be eligible for SSI in addition to SS. Medicaid would supplement Medicare. Bad things happen to good people. If Edward Kennedy had lived, we would have had a public option too. Witha 5% return for $600 invested yearly the amount would have been ~$106,000 on more modest investments. And why is that, no one would be around to tell her do this or that. Finally in 81 and 82, we had a bad recession; 90 and 91 also, 2001 a mild one, 2007 to 2009 the Great Recession, and 2020 a Covid recession. It appears we may skirt one in 2024.
But why is this so bad for her and others? Did Dems make it bad for them or did Repubs who appear to pass bills reducing taxes for the uppwe 1% in income under reconciliation. No gains on trumps tax bill. I rescind the tax break for the upper 25% and leave it alobe for the other 75%. That would pay for the tax cuts.
You really do not have much of an argument.
Bill,
Where did you come with the 5%?
AI is a amazing, you should try it sometime. I just asked what the average S&P returns were for my sisters working years 1975-2019. Here is the response:
“The average annualized return of the S&P 500 index from 1974 through 2019, with dividends reinvested, was approximately 11.78%. This figure includes both bull and bear markets over that period. However, it’s important to note that this is an approximation and the actual return may vary slightly depending on the specific calculation methodology and data sources used.”
Understand, I am in no way suggesting anyone put their retirement savings 100% in the market. Diversity is the name of the game for long term wealth accumulation and management. Even Bill Clinton advocated putting a portion of SS revenues in to the markets during his presidency.
@Bill M,
According to this calculator, the rate of returns over that time period with dividends reinvested was 7.6% after correcting for inflation (which you must always do in a time series).
https://dqydj.com/sp-500-return-calculator/
Not that it means anything to the discussion. Most people can’t afford to invest in the stock market, and most people cannot be certain they won’t need that money when the market is in a dip even if they were invested. SS isn’t retirement investment, it’s retirement insurance.
@Bill M,
I wasn’t insulting you. Just pointing out how you are hoist by your own petard with your posts.
Joel,
However you spin the numbers, 11.5% or 7.6% adjusting for inflation is pretty damn good. Add the power of dollar cost averaging and compound interest over decades and you can grow some real wealth.
You are correct, low wage earners in most cases don’t have enough money or the knowldege to invest in stocks. The majority today don’t have access to 401ks or defined pension plans either. And like my sister, they are destined to become entierly depedent on the state to provide for them in retirement. These are the people who would benefit from an option to invest a portion of their SS deductions into a variable annuity type investment administered thru SSA. This option could be limited to people who fit this category.
As a financial advisor, I often advised clients, that investing too conservativly can be just as risky as being too agressive. Investing even a small amout of money in a variable annuity type instrument over decades vs ultra conservative SSA Treasuries is the best hope many of the working poor have of building wealth and living a dignified retirement IMO.
@Bill M,
No matter how you spin the numbers, Social Security isn’t retirement investing, it’s retirement insurance.
Joel,
I might add. The 2.5% invested in the market would be a transparent verifiable account I could spend and invest any way I please upon retirement vs praying the goverment continues to deposit money in my bank account each month.
BTW, agreed the market isn’t the economy but it sure rymes!
@Bill M,
The day that Social Security goes bankrupt, your stocks will be worthless, too.
“the market isn’t the economy but it sure rymes [sic]!”
Yeah, that certainly fools a lot of people, doesn’t it? Some people believe that investing in equities means investing in the US economy! LOL!
Joel
thank you for taking on the other Bill. it saves me from having to talk to arrogant idiots. “I made money on the stock market, so everyone can.” Well, no they can’t. and “working people” can’t afford to take the risk. For what it’s worth, I made a good deal of money on the stock market in the 1990’s, but if I had left my money in the market after that, I would not have had enough to live on since. Oh, it comes back eventually, but not soon enough to depend on when you need it. “Bill” is an example of the Dunning-Krueger effect: the less you know the more sure you are that you are right.
the government does not “dip into SS funds.” it borrows the SS surplus…just like for any Trust Fund, including big corporation “idle” money. And it is now paying it back, on schedule, as intended. the purpose of the enlarged TF since 1983 was to allow the Boomers to pre-fund their own retirement…as every other generation has done, but which would not have been fair via strictly pay as you go financing due to the unusually large size of the Boomer generation.
SS can’t go bankrupt..it does not owe anyone money. it will not run out of funds as long as people undertand it is the best deal they are ever going to get for saving for retirement. but since we are going to be living longer in the future we will need to save a little more..via the FICA “tax” to have enough to pay for the costs of living longer, That turns out to mean increasing the payroll tax about 2% for workers and 2% for employers [the employers share is generally considered the “workers money” subtacted from would otherwise be his pay..but this is a can of worms best no opened unless you are ready to think about it carefully.
SS is “invested” in special Treasuries, but it’s best not to think of it as “investment.” SS could continue just fine if there was no Trust Fund at all. but it would still need to raise the “tax” about one tenth of one percent per year. Doing that starting now would stop the Trust Fund declining, and that would mean that Congress never has to repay the money it borrowed FROM SS (a mutually beneficial arrangement like all borrowing and lending…not counting payday loans.)
I assume “Bill” is smart enough to make money on the stock market with the money he has left over after paying for Social Security. and since he is also smart enough never to have an accident or get sick or run into a long depression, or have his business become obsolete… he won’t need no steenking insurance like about 50% of the rest of us….those who would be in serious poverty without Social Security–which they paid for. He’s like the man who wants his insurance premiums refunded because he never had a fire.
enough for now.
The Other Bill
i would apologize for “insulting” you. But you insult me with your claims. It is easy to come up with anecdotes and statistics that support any claim anyone wants to make. The history of Social Security in particular and poverty in old age in general suggests that your argument is missing something that happens in the real world.
If the hate-Social Security arguents had any validity, the haters would not have to lie about it. which they do and have done since the beginning.
As much as I am compelled to respond to your peersonal attack, I will refrain and stick to the topic.
Whatever you want to call it, OASDI is the primary income source for most Americans in retirement and acts very much like a fixed annuity with an insurance component.
“Special Treasuries” are unmarketable IOUs from the Federal government who use the funds to blance the budget. The borrower, the federal government, is effectively broke ($34T in debt) and still running trillion dollar deficits with no end in site. They are effectively paying intrest with borrowed money (printed by the federal reserve, fueling inflation, the hidden tax). So it is actually “We The People” paying the the interest in more ways than one.
Fact: Over the life of SS, benefits paid out have actually exceeded the payroll taxes by nearly $1T.
From the Concord Coalition:
“most of the surplus comes from the interest earned on the government securities held by the trust fund. Without these investments, there would be no surplus. There has never been a consensus for investing the surplus in anything other than government securities.”
Many prominent contries invest thier public pensions in a diversified portfolio of stocks bonds and realestate. Canada, with a similar demographic and lower taxes has been growing their trust fund consistently and it’ projected to continue growing without cutting benefits or raising taxes well in to the future.
https://www.wsj.com/articles/how-to-save-social-security-without-privatizing-or-cutting-benefits-canadian-example-f18f0600
Contrary to what you may beleive, stocks represent ownership in a company. Owning profitable companies in the long run has been one of the greatest wealth builders for common hard working people. Sounds to me like you had no knowldge of portfolio management, what you were invested in or what your level of risk was back in the 90’s. This “arrogant idiot” also lost plenty of money in the dot-com bust. However, I realized my mistakes and chose to use it as a learning experience.
Are we absolutely certain this is not just a ‘Crap-oh’ proposal?
Social Security and Medicare Are on the Ballot
NY Times – Paul Krugman – March 14
first Medicare is not “Social Security.” Medicare is part worker paid and part paid by the rich an general taxes, and is too expensive because Congress in in the pocket of the Health Care Industry.
SS…OASDI… on the other hand can pay for itself forever) with one tenth percent increase in payroll tax at need . after it reaches 2% increase over time…while payroll increases by 20%…no further increases will be needed. btw, for SS that is about a 1% increase in share of GDP over the next 75 years/ that share would be about 6%. not very much to pay for the food and housing of25% of the population, especially given that they paid for it themselves.
“making the rich pay” as Biden proposes is not needed, would provoke backlash…and is in part at least what is wrong with Medicare. it really is not “fair” to anyone who has a noral sense of “fair” and not one based on greed and envy.
privatizing SS would just be subsidizing the Financial Industry at a time when there is already more money being “saved” than can find productive investments.
“put your money in derivative. invest in bad mortgages.”