Asymmetrical Information

Hume didn't imply, he directly stated that FDR had advocated that "government funding, quote, 'ought to ultimately be supplanted by self-supporting annuity plans.'" Hume's statement is that FDR advocated a complete end to government funding of retirement. This is false -- one of the 'self-supporting annuity plans' that FDR referred to is Social Security as we know it today, and obviously hasn't supplanted government-funded retirement benefits. It is a government-funded retirement benefit.

I'm not sure what your comment that SS benefits have gone up more rapidly than price inflation has to do with Hume's misrepresentation.

What LizardBreath said.

I don't get it. What does the size of SS benefits have to do with anything? Hume said that FDR intended for government funding of SS to eventually be replaced by private annuities. This is clearly false, and doesn't even remotely reflect what FDR said. FDR was proposing only that the temporary old-age plan put in place for seniors prior to SS becoming self supporting (funded half by the feds, half by the states) would eventually go away and be replaced by SS as know and love it today. He was assuredly not suggesting that SS would eventually be phased out, a point he made rather clearly in a famous quote that I'm pretty sure you yourself have used from time to time.

Kevin -- I agree with the commenters on your site that say this was a misinterpretation, but it is not so obviously wrong that malice need be inferred.

It's also hard to tell whether this was a throw-away line at the end of a story or whether this was the centerpiece. If it was in the nature of an aside, then it doesn't entirely excuse error, but it lessens the outrage factor.

Jane's point about benefit levels goes to the value of this matter as fuel for outrage (i.e., how far off is it to suggest that Bush's plan comports with FDR's original vision?) I agree with her that it much ado about very little.

I think part of the problem is that Jane is posting about what FDR would have thought of Bush's plan (to which I can only say, probably not much, given that no one has seen it yet).

That's not the issue here. The complaint is that Hume claimed that FDR supported a total phase-out of government funding of retirement benefits. ("Supplanted", the word Hume used, generally means "replaced by" rather than "accompanied by"). FDR supported no such thing, and Hume had to truncate a quote to say that he did. This is a pretty substantial lie.

What FDR would have thought of Bush's plan is unknowable for two reasons: (a) there is, as yet, no known plan to support, and (b) FDR is dead. Even if FDR would have supported Bush's plan, though, Hume is still a liar.

Lizard, we do know what the plan will look like; he talked about it in the State of the Union (what it will look like after Congress gets through with it is another question, but we do know what the plan is). And the plan is close to, but more generous than, the one that FDR proposed. How on earth could you claim that FDR wouldn't have supported it?

And I really don't understand how everyone's claiming that this is beside the point. I mean, isn't this what we're debating here--Bush's privatisation plan? My understanding from the limited transcript provided is that this is the context in which the quotation was offered.

As I say, I don't like selective quotation, and I think that Mr Hume should have been more careful. However, my outrage is completely eviscerated by the way Al Franken claimed that conservatives were "using FDR" to "destroy his legacy". That seems to be directly contradicted by the actual facts of FDR's proposal. In fact, one could say that Al Franken is using selective quotation to totally misrepresent FDR's legacy. But that would be petty.

I could see how Franken could claim, correctly, that conservatives were trying to use FDR to destroy, say, Lyndon Johnson's legacy. But that's not particularly scandalous, is it?

Jane-

I quoted what Hume said -- more of it is available on the page you linked to, so you have enough of a transcript to react to Hume's words. (If it's your position that you don't trust Media Matters to quote accurately, then that's all you need to say -- talking about this with you is pointless, because you don't accept that it happened without further evidence). He quoted FDR as sayong that government funding of retirement benefits should be supplanted.

1. Is it true that FDR advocated that government funding of retirement benefits be supplanted? No.

2. Is that a reasonably careless misreading of the statement Hume partially quoted? No, or at least I find it unbelievable as carelessness. Hume's statement was a lie.

I am strongly opposed to lying by journalists in support of a political end. I therefore think Hume did a bad thing.

Lizard, we do know what the plan will look like; he talked about it in the State of the Union (what it will look like after Congress gets through with it is another question, but we do know what the plan is). And the plan is close to, but more generous than, the one that FDR proposed. How on earth could you claim that FDR wouldn't have supported it?

Jane --

Scroll up. I didn't say FDR wouldn't have supported it, I said "What FDR would have thought of Bush's plan is unknowable". FDR is dead; I don't know what he'd think about any political issue if resurrected. You don't know what he would have supported either. Are you making the claim that you do know what FDR would have supported, and that he would have supported the vaguely described plan referred to in Bush's SOTU? Because that strikes me as silly.

Why are Democrats angry today? Because Hume is lying about what FDR said. What would FDR think of Bush's plan? Who the hell knows -- I hear being trapped in a coffin for 60 years can really sour a guy.

After reading the original quote, I think I know how Mr. Hume could have made his error.

Firstly, the original quote uses rather odd language ("voluntary contributory annuities", "self-supporting annuity plans") which is confusing to someone reading it for the first time.

Secondly, the sentence, "It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans," could very easily be misinterpreted, in precisely the way Mr. Hume did.

I am finance professional with a math background, and I had to read that sentence carefully a couple of times before I determined to my satisfaction exactly what it meant.

Thirdly, it is possible that someone who wrote Mr. Hume's copy misunderstood the word "supplanted" to mean "supplemented", and further muddled the interpretation of the quote.

All in all, absent a previous pattern of misrepresentation and misinterpretation on Mr. Hume's part, I see no evidence whatsoever for deception, as opposed to confusion-induced sloppiness.

And as Jane Galt points out, the original quote is just as newsworthy as the mangled version, so I am glad to see it reported one way or another.

That's absolute bullshit.

The quote, as Hume reported it, states that FDR planned to phase out government-funded Social Security. This is not just false, it's surprising. I might say, very very surprising. We've been talking about Social Security for years in this country, and I've never before heard anyone cite FDR to say that it was originally intended to be a temporary program.

If you misquote Reagan to say "Socialism is a better, more humane way to run a society than capitalism", "Whoops, I misunderstood" is not a believable excuse, because Reagan's position on socialism is well known. Likewise here: finding a quote that on a careless misreading seems to say that FDR supported something that is the reverse of what you have always known him to have supported does not excuse a selective quotation to support the misreading. It is simply unbelievable that Hume saw a quote as surprising as the truncated version and didn't do the double-take and check to see what FDR had really said.

He lied.

LizardBreath,

I'm sure Mr. Hume did do a double-take. But if the error was initially committed by an underling, and if Mr. Hume was in any kind of a hurry when checking the original quote, then I'm sure he could have very easily repeated the original error.

That doesn't excuse the error -- it was a careless mistake -- but if someone's going to spin this as deception aforethought, he'll need to come up with some evidence before he'll convince me.

Some people are missing a major point for a minor one:

FDR absolutely LOATHED the idea that SS would ever be run so as to place a burden on future generations -- exactly as it's been run since after he died (and before, starting in 1939 with changes that he vetoed, but which got an override).

Intergenerational equity and a "fair return" -- all generations getting the same real 3% return -- were cardinal principles with him, and explicit promises that he and Altmeyer and SS's other founders made to the public.

On at least one occasion when he found unfunded "backward transfer" provisions slipped into a draft of the act without his knowledge, he threw it into the trash in front of his whole staff to make his point and made them write it all over again.

He proclaimed his 1935 Act "actuarially sound and out of the Treasury forever", which it basically was.

So when today's defenders of the status quo try to claim the mantle of FDR and pose like they are defending "FDR's Social Security", it is very amusing.

I mean like when somebody writes...

"FDR was proposing only that the temporary old-age plan be put in place for seniors [until it would] eventually go away and be replaced by SS as we know and love it today."

... that's really droll!

Although if FDR hadn't already been killed by a stroke, reading that would probably do it to him. As things are, wherever he is, he pops a wheelie.

PS: Here's a little factoid on the use of language in politics. FDR described Social Security in "insurance" terms with the explicit political purpose of convincing the public that it would be funded on an actuarially sound basis providing a return comparable to commercial insurance annuities, with no big unsound, unfunded transfers -- and thus forcing Congress to enact such a program.

Those who wanted the big generous unfunded transfers that those in the future would have to pay for fought and objected to describing SS as "insurance", but lost in their day.

In our day, of course, it's 180 degrees different. Defenders of the status quo say SS is just "insurance against poverty" -- and everybody who collects on insurance gets far more than they pay for it, of course!

Although why Warren Buffett should be collecting on "insurance against poverty" -- with his Dairy Queen employees paying for it out of their paychecks -- none of them have ever been able to explain to me.

Poor FDR. Victim of posterity. ;-(

"I also think that the current practice of trying to marshal historical figures in support of very modern policy arguments is idiotic."

How can everyone ignore how and why Hume even brought this up? It was in the Grapevine section, and Hume first reported that FDR's grandson had claimed that FDR would have been opposed to Bush's plan. It was a "but would he?" piece - the grandson conclusively stated that FDR would have been strongly opposed to the plan, yet it looks as though FDR said some things in support of something similar. Hume spent very little time on it and didn't claim that he knew for sure what FDR would have supported. The point was that, based on the quote, the grandson's contention that FDR would clearly have been opposed to it was questionable.

The comments on Franken's site are instructive... Many commenters equate this Hume error with Rather's error(much benefit of doubt given)-plus-stonewall-plus-fake-but-accurate claim, which - if intended - was intended to disgrace a sitting president and affect the outcome of a national election. (And, if unintentional but not caught, might still have had these effects.) One commenter (when I read the comments last night it was only one, IIRC) said Hume's error was even worse.

Nancy Pelosi's "pre-buttal" to the State of the Union address included this: "Social Security is the most visionary example of what President Franklin Roosevelt called ‘bold, persistent experimentation.'" Yet somehow we're to conclude that FDR intended that "bold, persistent experimentation" was supposed to stop with him, supplanted by tweakings of the original experiment.

In Roosevelt's comments, it seems the question is over the term "self-supporting". Critics of Hume are interpreting self-supporting to mean "we plan to support ourselves by taking money from our grandchildren". Is this really what FDR had in mind? By any meaningful use of the word, I would guess that self-supporting means either that each person supports his own retirement or at least that each generation provides for itself.

How is 'take from the young to give to the old' self-supporting? And how was it different from the old age pensions they began with? Perhaps it's a technical distinction regarding which part of the budget the funds came from - eventually taking money from one tax source would be supplanted by taking the money from a different tax source. But if FDR showed even the slightest concern for intergenerational equity, as Jim Glass said, then this doesn't seem like a good interpretation of what Roosevelt meant by "self-supporting".

Well, at the least the Humegate.com people have a certain advantage over the Easongate.com people. In this case the video is already public......

Now all we have to do is come up with some incriminating memos, and this trumps Rathergate. I hope everyone at CNN and Fox News uses paper shredders and self destructing e-mail. Fact-checkers might be nice, too.

In Roosevelt's comments, it seems the question is over the term "self-supporting". Critics of Hume are interpreting self-supporting to mean "we plan to support ourselves by taking money from our grandchildren". Is this really what FDR had in mind? By any meaningful use of the word, I would guess that self-supporting means either that each person supports his own retirement or at least that each generation provides for itself.

Exactly how would each generation 'provide for itself'?

Right into my Evil Conservative hands, Boonton! By saving and investing its own money.

Being the kindly society that we are, I freely acknowledge that we probably will (and, not being a libertarian I will add "probably should") always have a safety net (sorry for hackneyed phrase) for those whose circumstances spiralled out of their control, but let it be an honest-to-goodness safety net for fortune's fools (in the Shakespearean sense - not trying to call anyone stupid here) rather than a present from the young to everyone fortunate enough to live to old age.

Jamie,

Saving and investing in what? Please provide real examples where the future generation will not be providing for the current generation's retirement.

As far as I can tell, Roosevelt planned for the original social security fund to hold US bonds, right? If so, he was planning to create a "self-supporting" structure, but the money to pay current retirees was being loaned to the government by current workers, and the money to pay off the loans issued to the next generation of retirees was always loaned to the government by the current generation of workers.

On another note, I think this business of arguing who's a "liar" is pointless. As Jane says, we could easily argue Franken's a liar for saying Bush wants to destroy FDR's legacy when the Bush plan isn't that far from the FDR plan. Alternately, we could argue that FDR was a liar for using terms like "self-sufficient" and "trust fund," and that Hume is a *victim* of FDR's lies. It's pointless.

OK, so if Social Security brought 'bonds' today as FDR really wanted then how would those bonds turn into money 30 years from now?

BTW, nice use of moral relativism. The right often resorts to it when one of their own is caught. Another is class warfare (see Jim Glass fretting that Warren Buffet will get a social security check while a kid who works at Dairy Queen will pay social security taxes!) Whose to say anyone ever lied! The fact is Hume lied about FDR, plain and simple.

Boonton:

I'm confused now, which is sadly easy to do to me in the realm of economics... I thought your question to me ("Saving and investing in what? Please provide real examples where the future generation will not be providing for the current generation's retirement.") was going for my sheepish, "Yeah, OK, stocks and bonds, which I guess somehow represent a kind of free-market wealth redistribution scheme," but your last comment ("OK, so if Social Security brought 'bonds' today as FDR really wanted then how would those bonds turn into money 30 years from now?") makes me wonder if I understood. Are you speaking of the fact that the future US gov't will have to repay treasury bonds via tax revenues, as always? Because then I'd say with less sheepishness, "How about stocks and corporate bonds, which - while they have the effect of redistribution because somebody buys and somebody sells - at least represent voluntary transactions?"

But I throw up my hands and declare myself out of my depth. Philosophically I'm foursquare for people's owning their money, including returns on investment. Practically, I'm treading water carrying an anvil.

Boonton,

BTW, nice use of moral relativism. The right often resorts to it when one of their own is caught... Who's to say anyone ever lied! The fact is Hume lied about FDR, plain and simple.

It's clear to me that Mr. Hume did not lie, but made a careless error.

On the other hand, I do think it is likely that Mr. Franken is lying about President Bush's social security plan, and about Mr. Hume as well. I can't actually prove that Mr. Franken is lying, though, so I am willing to entertain the possibility that he is only neurotic and/or ignorant.

And why are you against "the right"? Were you bitten at a tender age by a rabid conservative?

"How about stocks and corporate bonds?"

If retirement funds are invested in stocks and bonds, it lowers the cost of capital for companies, which encourages them to invest more, which means that total production will be higher when the workers retire and want to withdraw some of their savings. If each generation saves for its own future retirement through investing, then large waves of retirees such as the baby boomers will be preceeded by periods of high investment, which will build the economy and help to prepare for supporting the large wave of retirees. But, under the current system, a large wave of workers paying into the system now just encourages the government to spend even more, with little or nothing left when those people who've been paying in for so long need to be supported.

Each generation can pay for itself by investing. I certainly support a safety net and some transfers for those who need it. But for the economy as a whole, we need a genuine savings and investment plan, not a plan that relies on ripping off our grandchildren (but it's OK, because our grandparents did the same thing to us....).

Good grief talk about mountains and mole-hills...

At worst Hume misinterpreted an ambiguous statement. When I read the original I, too, wondered what "self-sufficient" meant. One possibility is that it meant individuals, in which case Hume is correct; but, self could also refer to the system or, as is common in presidential speeches, the country as a whole.

There is one fact which I know for sure...

When I worked for Social Security 30 years ago, in the training classes, it was made crystal clear that "Social Security was NEVER meant to be the sole support of anyone." That is a direct quote from the senior SS Director for New York City circa Feb. 1974.

Sounds to me like FDR always had a significant private component in mind, no?

As the nits get picked to death here (bottom line: if Bush's plan had been passed in the 30s, FDR probably would have signed it without many regrets), I think there's something more interesting going on here, that FDR-- after many years as a rather neglected "great president," as oxymoronic as that seems-- is starting to be cited in speeches as the touchstone of a great vanished era in Democratic history, the man whose stamp from beyond the grave can be applied to offer support to any position today, no matter how different the circumstances. (In this case it's a rightwinger using him to make modern Dems seem puny. But we see more and more use of him for positive purposes too.)

Lincoln, of course, is the figure who's long been used that way-- what historian wryly called the "Lincoln would have hated Formula One racing, but loved Nascar" syndrome. That reminds us that any politician is primarily the creature of his times, and while certain broad principles can be profitably looked at, wondering what Thomas Jefferson would have thought of the Internet requires either an unimaginably crotchety 250-year-old Jefferson, or a Jefferson shaped not by colonial America but by the Cold War, in which case he's no longer Thomas Jefferson and the whole question is absurd.

Boonton,

"Please provide real examples where the future generation will not be providing for the current generation's retirement."

It has to do with delayed consumption. With the current SS model all the money taken in by the system is immediately redistributed to SS receipts who then spend it on their day-to-day consumption. Functionally, the money has the same economic effect as if the taxed worker had just kept the money and spent it immediately.

In a private investment system, each generation delays consumption by putting the money to work building productive capacity. Each generation does without today in order to create a productive surplus in the future which they can then consume when they no longer work.

The current SS model is a fools promise. It consumes every dollar immediately and does nothing, absolutely nothing, to make it easier for future workers to support an increasing ratio of retirees.

But I throw up my hands and declare myself out of my depth. Philosophically I'm foursquare for people's owning their money, including returns on investment. Practically, I'm treading water carrying an anvil.

Don't mean to pick on you Jamie, its very simple. Tomorrow's generation will provide for our retirement. It's always been like that and always will. Unless you want to buy goods with your own money today, bury them in the ground and dig them up again when you're 65 there's no way around it.

If SS was 'self sufficient' and brought gov't bonds then tomorrow workers will have to be taxed to pay off those bonds (or the bonds will be rolled over and tomorrows workers will have to buy bonds and their children pay them off and so on). Stocks & corproate bonds are the same deal. Your retirement is really being provided by tomorrows workers who will either buy your stocks or accept lower wages in order for their companies to pay you dividends (or do a stock buyback).

Philosophically money, stocks, bonds and such are not real assets but more like poker chips. They entitle you to the pot but giving yourself more chips doesn't make the underlying pot any bigger!

In general Social Security serves a useful function as income security backed up by the most diversified investment possible, the entire US economy. There is already generous tax subsidies in place for you to 'own' your own retirement through 401K's, IRA's and even purchasing real estate.

"It's clear to me that Mr. Hume did not lie, but made a careless error."

If Mr. Hume was a college freshman whose knowledge of FDR extended to just seeing that Pearl Harbor movie that came out a while ago then you might have an argument. Mr. Hume, though, is supposed to be an anchor and political commentator & social security is currently a big issue.

Are you really so cynical that you will happily accept gross incompetance as an acceptable defense for your right wing heros? While most of us actually work 40 hours a week Mr. Hume is paid to speak on TV about politics for a handful of hours. You really think that during his 'downtime' he cannot find the time to actually learn what he is talking about? If your doctor made a 'careless error' and 'forgot' that a broken arm had to be in a caste I doubt you'd be so forgiving.

is starting to be cited in speeches as the touchstone of a great vanished era in Democratic history, the man whose stamp from beyond the grave can be applied to offer support to any position today, no matter how different the circumstances. (In this case it's a rightwinger using him to make modern Dems seem puny. But we see more and more use of him for positive purposes too.)

Well yea, if you're willing to lie about what he said then sure you can use his words to support any position today. Next week: Abe Lincoln, defender of succession!

The current SS model is a fools promise. It consumes every dollar immediately and does nothing, absolutely nothing, to make it easier for future workers to support an increasing ratio of retirees.

Not quite. The current system is running a surplus which by definition is delayed consumption. Just as an increase in private savings can lower the cost of capital, so does an increase in gov't savings (or in the case of a deficit running gov't, a decrease in governmental dissavings).

Bush's plan does nothing to increase savings because for every dollar going into a 'private account' there will be a dollar being borrowed from the economy as a whole. To make matters worse, it will probably decrease savings to some extent because some of those dollars going into private accounts will probably displace dollars currently going into 401K/IRA style accounts.

LizardBreath,

You liberals always like to accuse everyone else of lying. "Hume lied!" "Bush lied!"

Well, I'm guessing LizardBreath isn't your real name...maybe you're lying! (gasp!) Ha!

Media Matters claims Brit Hume quoted FDR out of context. How can anyone tell? The link did not contain the quote. Is Media Matters saying that Hume made up the quote? That is quite different from taking a quote out of context.

Media Matters, and Al Franken, are doing a fine job of showing that Brit Hume, for all that one might argue that he made a mistake in interpreting a short and ambiguous statement by FDR ( who was not known for being precise and clear ), is of higher credibility than either MM or Al Franken.

This is not news, nor do their rather juvenile shouts of "He lied! He lied" actually have any support.

"It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans."

Supplant is defined as "To usurp the place of".
At that time in history annuities were well understood to be THE reasonable PRIVATE means of creating your own insured retirement fund.
You can quibble about what FDR "really" meant but it is hardly a stretch to interpret the statement as meaning that taxes should be used to immediately fully pay pensions because of dire needs at that era (and that era only).
If FDR meant Social Security should always be funded by current taxation of workers why wouldn't he have said so, clearly? And, if that was the case, why would he have even bothered to use the terms "ultimately", "supplant" "self supporting" and "annuity"? Ultimately and supplant have plain meanings. One can argue as to what "self supporting" and "annuity" meant but is it much of a stretch to intrepret "self" as being funded by the individual and for "annuity" to mean, well, what it always meant; a typical insurance policy of that era based on owning real assets (stocks and bonds)?
Maybe FDR did desire Social Security to always be a pension system fully funded by current taxation. However, if he did, this statement can easily be interpreted to the contrary. So the question is; why would he make a statement like this in the first place if what he meant was something so easily stated much more clearly?

"Philosophically money, stocks, bonds and such are not real assets but more like poker chips. They entitle you to the pot but giving yourself more chips doesn't make the underlying pot any bigger!"

Stocks and bonds are real assets. If you buy stock in Intel, you essentially own part of the manufacturing equipment. And yes, they do make the pot bigger. It was the selling of stocks and bonds that allowed Intel to manufacture all those chips, and make all those advances in technology. I’m pretty sure that going from vacuum tubes to Pentium 4s did in fact expand the economy and “make the pot bigger.”

Boonton,

I am not going to argue your view of stocks and Bonds or our SS system, no time. However, I will say that while Hume was sloppy, the outrage is appalling considering Media Matters and Franken itself have misrepresented Roosevelt more than Hume. Roosevelt did not support a pay go system. He wanted something different than Bush, but not that different. MM has distorted the historical debate to imply what Roosevelt was supporting was similar to today's system. However, I am not outraged at them. They just do not know the debate of the time anymore than Hume does and so both are misreading what was said. Big deal.

Ironically Boonton, in your diligent search for ways to attack the "right" you are missing an opportunity. FDR's attempt to establish an asset backed SS was defeated by REPUBLICANS who feared that it would lead to the US Government controlling too much of the economy. The evil Pub's of the time forced the system into a Pay go ponzi scheme. I suggest that meme, it is at least historically accurate. Don't fret that your support for Pay Go puts you in bed with the Pub's of the time. They were also the party most interested in civil rights and other progressive ideas of the time. Me, I'll stick with a reformed FDR and just make sure the assets are controlled by the individuals instead of the government. Win Win!

Boonton: "Tomorrow's generation will provide for our retirement. It's always been like that and always will."

OK, in the narrow and litteral sense that the food I will need to put in my mouth when I'm 70 doesn't exist today and will need to be produced by future generations I guess that's right. But in the sense that the tender used to purchase the food must necessarilly com efrom the same future generation you are wrong. That money, stocks and bonds are not "real" physical assets does nothing to diminish the value of physical assets for which they may be exchanged. I'm sure an economics wonk could punch philosophical holes in my position, but an underlying assumption in any retirement model, SS or private investment, is the continuance of a sound and growing economy. Absent this all models collapse and we're left out on the iceburg with a half pound of whale blubber. As such, I do not see a notional retirement model that utilizes my earned money invested and growing with the economy being made available for my use when I'm older as a model that relies upon future generations to pay my way.

Stocks and bonds are real assets. If you buy stock in Intel, you essentially own part of the manufacturing equipment. And yes, they do make the pot bigger. It was the selling of stocks and bonds that allowed Intel to manufacture all those chips, and make all those advances in technology. I’m pretty sure that going from vacuum tubes to Pentium 4s did in fact expand the economy and “make the pot bigger.”

If you buy Intel stocks you indeed own part of Intel. Likewise someone else had sold Intel. Just like the total of all the Poker chips represents 100% of the pot the total of Intel stocks never represents anything more than 100% of Intel. The act of simply buying the stock, though, does nothing to directly increase real capital. Only if Intel happens to issue new stock will that purchase supply Intel with new funds which it may use to purchase additional capital. *(or it could end up blowing it on unproductive things)

Now examine what happens to Intel when the gov't saves by running a surplus (or by reducing its deficit). Bonds are purchased from the public, debt owed to the public is decreased (or its increase slowed). Those people who want to invest their money will have fewer gov't debt instruments to buy. That causes interest rates to fall for gov't debt and other types of debt as well. Intel will find that it becomes cheaper to issue stock, bonds or simply borrow from banks. Hence private investment is increased quite nicely.

For some reason Bush has been able to caste a spell over normally sensible people like Jane to create the illusion that gov't borrowing somehow represents money being put into the economy while reduced borrowing represents money being held by the gov't rather than 'the people'.

The evil Pub's of the time forced the system into a Pay go ponzi scheme. I suggest that meme, it is at least historically accurate.

1. Social Security is not a Ponzi Scheme. Those who maintain it do not know what a Ponzi Scheme is. We've been down this more than a few times but I'm always game to do it again if you really want.

2. It is more sensible for a gov't pension plan to work off of taxation and 'pay as you go' than attempting to accumulate assets. A private corporation, though, should do the opposite and fund its pensions thru asset accumulations. Surprise surprise, this is not an inconsitancy. Gov't's and private corporations are two different animals.

Well, we could always say that FDR lied. Or perhaps, not lied, but disengenuously said things that he knew people would misinterpret. Quite a few of his policies were advertised as something quite different from what they really were.

It's quite possible that all along he meant SS to be a big government-controlled program to get control of a large percentage of the economy, but use terms like "self-supporting" to make it sound like something quite different.

Here is the transcript of Hume in context... note that Media Matters and Franken omitted the Harry Reid quote.

I also note how the left was not up in arms when Tim Russert did this to Rumsfeld's face and Rumsfeld pointed it out in real time. If anything they took Russert's side.

Of course, the Reid quote is a misrepresentation too -- it was said in the context of a Clinton proposal to invest part of the SS Trust Fund in equities, rather than in the context of any proposal to link any individual's benefits to that individual's investment performance.

Face it Boonton, you're wrong.
FDR wanted Social Security, either in half or in whole, depending upon interpretations of the statement quoted by Hume, to be an annuity. An insurance account with funds to back it up. Hume merely reported upon that FACT.
To claim that because FDR created SS, and Bush's plan differs from the current SS, that FDR would be opposed to Bush's plan is specious. This is because SS has evolved into something completely different from what FDR had intended. Hume was correct, you are incorrect.

So it's just MM talking about Reid, but even when Franken claims to provide "context" he doesn't mention it. The problem with MM's reasoning is they assume that Reid would have rejected private accounts then when he accepted the stock market idea. Only Reid can really clear this up and perhaps not even then. It's an unsupported assumption, and much of the "media criticism" at that site only works with certain unsupported assumptions - in other words, they're preaching to the choir.

"It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans."

Supplant is defined as "To usurp the place of".
At that time in history annuities were well understood to be THE reasonable PRIVATE means of creating your own insured retirement fund.
You can quibble about what FDR "really" meant but it is hardly a stretch to interpret the statement as meaning that taxes should be used to immediately fully pay pensions because of dire needs at that era (and that era only).
If FDR meant Social Security should always be funded by current taxation of workers why wouldn't he have said so, clearly? And, if that was the case, why would he have even bothered to use the terms "ultimately", "supplant" "self supporting" and "annuity"? Ultimately and supplant have plain meanings. One can argue as to what "self supporting" and "annuity" meant but is it much of a stretch to intrepret "self" as being funded by the individual and for "annuity" to mean, well, what it always meant; a typical insurance policy of that era based on owning real assets (stocks and bonds)?
Maybe FDR did desire Social Security to always be a pension system fully funded by current taxation. However, if he did, this statement can easily be interpreted to the contrary. So the question is; why would he make a statement like this in the first place if what he meant was something so easily stated much more clearly?

Ponzi Scheme: "An investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones."

The only difference between a Ponzi scheme and the way Social Security is currently being financed is that we know who will be responsible for paying ALL the future obligations (future taxpayers).
What Bush is trying to do is simply begin to move Social Security into a rational type of normal pension program that invests in real assets (that every other private pension, endowment and trust fund MUST, by law, invest in; diversified portfolios).
Acting now will strenghten the system. As we rely less on future taxation to pay benefits we relieve our children of ever increasing burdens and move away from the relentless political gaming of the issue. Of course this will REDUCE the political power and control over our lives by future politicians. Conservatives like that, liberals don't.
Given the choice (and that's all Bush is proposing, no one is going to be forced to participate) is it any wonder most, responsible, adults will chose to participate? They'll be making their kids and grandchildren's lives better by reducing their burden.
Isn't this exactly what most responsible parents prefer?
Shouldn't this be done "for the children"?

My goodness, we probably wouldn't be having this discussion at all had not the Democratic controlled Congress of years past "borrowed" all the trust fund money leaving it empty. All this partison rhetoric is just that, self-defeating. The system is broken and needs to be fixed, rhetoric like I've read on this board is in my view counter-productive to solving the problem. This constant bickering about who "lied" and who didn't isn't going to solve anything. For the sake of those following us, we need to put aside all this and move forward.

Boonton,

The flaw in your reasoning is that you believe that investing is about money and financial instruments. It is not, it is about the allocation of material resources and human labor. Money is just a mechanism for doing so.

A person who saves and invest today is actually forgoing the consumption of material resources and human labor that otherwise they would have destroyed by their consumption. The material resources and human labor they don't consume is used to created more material resources and increased the productivity of human labor.

A pay-as-you-go system merely shift consumption between individuals in the here-and-now. The resources represented by the money are destroyed immediately. No current day resources are diverted to create greater productivity in the future.

A system of delayed consumption does require that future workers pay for the current generations retirement but it also works to make that task easier by enhancing the productivity of the future workers and thereby making their relative burden much lighter.

A pay-as-you-go system does nothing to ease the burden on future workers. It merely obligates them, often long before their births, to shoulder an increasingly heavy burden with the promise that they will get to place a similar burden on their children as their only reward.

The real question about Social Security is, to we forgo our own pleasures today in order to help future generations more easily support us when we can no longer work or do we eat, drink and be merry and let tomorrow take care of itself?

Shannon Love,
Just say your comments and almost thought about deleting my post since you made the point I was going for much more eloquently than I could.

But, since they are already written . . .

Capital markets are global. The US deficit/surplus has almost zero effect on interest rates. The amounts are just way too small. And even what little effect it might have is somewhat countered by the fact that raising taxes to lower the deficit reduces the amount of money the public has to spend.

If I invest money in Intel, or any company for that matter, it is additional capital invested in the market, where or not the money is used to purchase an IPO. Even if Intel doesn’t receive additional funds at that moment, the person selling me the stock does, and they are likely to reinvest it. Further, purchasing Intel stock drives up the price, and hence makes it cheaper to issue additional IPOs in the future. Either way . . . bigger pot. There is a reason you never hear economists argue that we should treat IPOs different than existing stock purchases.

One last thing, the idea that future US generations will always pay for retirees is way to simplistic. Yes they will provide the labor (assuming the retiree doesn’t buy a Japanese car), but the productivity of that labor is greatly affected by the investments of retirees.

To claim that because FDR created SS, and Bush's plan differs from the current SS, that FDR would be opposed to Bush's plan is specious.

You're getting yourself too huffy. Hume claimed that FDR would have supported Bush's plan based on a distorted quote. I never tried to speculate on what FDR would tell us today about Bush's proposal.

This is because SS has evolved into something completely different from what FDR had intended. Hume was correct, you are incorrect.

Really? When did this take place? Tell me which laws changed SS from what FDR intended to what we have today? By what FDR intended I mean the actual law he signed.

At that time in history annuities were well understood to be THE reasonable PRIVATE means of creating your own insured retirement fund.

Annuities pay you a fixed amount as long as you are alive. This is what SS does and it wasn't anything new in the 1930's. There was ample precedent for 'social pensions' in Germany and even before that Europeans had gov't bond instruments that basically did the same thing. No one in the 1930's understood FDR or Social Security to be an old fashioned version of a 401K account.

You can quibble about what FDR "really" meant but it is hardly a stretch to interpret the statement as meaning that taxes should be used to immediately fully pay pensions because of dire needs at that era (and that era only).

Yes, FDR meant that the 1930's elderly would get the benefit of having some type of gov't pension help even though they never paid social security taxes. That help would by definition be phased out because as time went on nearly everyone would have paid into SS either directly or in the case of spouses indirectly.

My goodness, we probably wouldn't be having this discussion at all had not the Democratic controlled Congress of years past "borrowed" all the trust fund money leaving it empty.

Nothing has been left empty. The gov't budget has two parts, A & B. A runs a surplus and B runs a deficit. For some strange reason people insist that the problem is A. Social Security was purposefully put into surplus not by some wild Democratic Congress but by the Greenspan Commission with the full encouragement of Reagan. The surplus reduced the huge borrowing the gov't was doing under Reagan thereby reducing the dissavings of the Reagan era.

The only way you can maintain this argument is to somehow argue that surpluses in one area of the gov't cause deficits of equal or greater size in other areas. There's a simple way to test their theory, run a regression on gov't tax revenue as a % of GDP compared to gov't spending. You'll find either no relationship or a negative one (increased revenue reduces spending).

The reason is simple. Most of the spending is on auto-pilot as are taxes. When times are good tax revenue goes up (thanks to the progressive tax code) and spending goes down (thanks to lower unemployment, higher incomes etc.). Don't believe me, look at the numbers yourself.

The real question about Social Security is, to we forgo our own pleasures today in order to help future generations more easily support us when we can no longer work or do we eat, drink and be merry and let tomorrow take care of itself?

That's an odd statement Shannon. What pleasures are we proposing to forgo today? Has Bush proposed cutting anyone's benefits? No. Has he proposed increasing payroll taxes? No. He's proposed to borrow trillions and put them into 'private' accounts in our names. How does that cause me to forgo a pleasure? He's proposed to leave the job of paying off that borrowing not to today's taxpayers but to tomorrows?

Long story short, can the sobbing 'think of our children' melodrama sister! A herion addict would do about as well running the Fed. Budget with future generations in mind as Bush has done.

Roy

One last thing, the idea that future US generations will always pay for retirees is way to simplistic. Yes they will provide the labor (assuming the retiree doesn’t buy a Japanese car), but the productivity of that labor is greatly affected by the investments of retirees.

In other words, tomorrows retirees depend on the economy they leave their children for their retirement. Social Security operates in that framework since SS surpluses automatically benefit tomorrows economy (thru the exact process you describe).

Jane said "FDR supported a plan like Bush's."

This is fundamentally false. This is clear from the authoritative document Jane cited.

At the heart of Bush's plan is to take money current flowing to the government and divert it into the hands of Wall Street. This is variously called "privatization," "private accounts" or "personal accounts." The idea is to accept greater risk in return for a chance of greater return.

FDR supported no such plan. He spoke of a "compulsory contributory annuity," to be supplemented by a "voluntary contributory annuity." The latter was never enacted. The former is SS as we know it. The important point, however, is that both these components refer to money to be held by the government (intermingled within the same trust fund), to produce a fixed, guaranteed return. Note that the idea of a fixed return is inherent in the very word "annuity" (notwithstanding the modern invention of a "variable annuity," which is sort of an oxymoron).

FDR was absolutely clear and consistent in his use of the word "annuity," with regard to both parts of his proposed program (both compulsory and voluntary). It is no accident that he did not speak of "personal accounts" or "private accounts."

This distinction between fixed returns and variable returns is crucial. It's the difference between saving and investing. There's a place for both, but the latter does not replace the former. Bush, unfortunately, is encouraging us to believe there is no difference between saving and investing, and he is encouraging us to do the latter at the expense of the former.

FDR, with regard to both the compulsory plan and the voluntary plan, was talking about funds that would be held by the government, and would provide a fixed return. Bush is talking about funds to be held by the private sector, with a return subject to market conditions. Therefore it is grossly incorrect to say "FDR supported a plan like Bush's," especially because it creates the impression that FDR advocated, somehow, someday, diverting SS money away from the government and into the private sector. Nothing could be further from the truth.

Jane also said "though the details of the financing of the annuities differ, the result seems substantially the same: Americans have the choice of putting aside savings with which to buy annuities when they retire"

This is fundamentally wrong. Yes, Bush envisions private sector investments (variable-return vehicles, in other words) being converted into annuities (fixed-return vehicles) at the moment of retirement. This is quite distinct from what FDR proposed and created: money being saved in the form of annuities from the very first moment the worker sends the money to the government. In other words, under the FDR system Americans most definitely do not "buy annuities when they retire." The money is in annuity form all along.

Some folks who are mostly getting it right are making misleading statements. Kevin said "Hume said that FDR intended for government funding of SS to eventually be replaced by private annuities. This is clearly false."

Kevin is right to point out that Hume should have avoided the word "private," because it clearly implies private-sector investments. But it is true that in FDR's eyes, SS is not a government-funded system (except with regard to the very first generation, who never had a chance to pay into the system). FDR envisioned that once this first unfunded generation was gone, that SS would be fully supported by payments received in the form of both "compulsory contributory annuities" and "voluntary contributory annuities." So it is true to say the FDR envisioned that government funding for SS would be supplanted by money received in the form of compulsory and voluntary annuities. And this indeed did happen, long ago (even though the voluntary part was never enacted).

Hume is correct in his interpretation of the FDR quote, and the various knee-jerk Bush-haters calling foul are wrong. FDR intended for SS to be a self-supporting annuity system combining mandatory and voluntary annuities. He did not intend it to be a never-ending Ponzi scheme in which benefits would be indefinitely cut and contributions indefinitely increased.

The problems SS faces today are a result of Congress' failure to phase out the starter system that provided free money to people who weren't born at the right time to fund their own annuities and Bush proposes to fix that.

His plan is entirely consistent with FDR's vision for funding social security, and the haters are either lying or too stupid to understand how investment and savings work.

"Annuities pay you a fixed amount as long as you are alive. This is what SS does and it wasn't anything new in the 1930's. ..... No one in the 1930's understood FDR or Social Security to be an old fashioned version of a 401K account.

You contradict yourself Boonton. First you say people understood what annuities were in the 30's and then you say no one understood what that meant (like an old fashioned form of a 401k).
Well, in many respects annuities then were exactly what 401ks are supposed to be for now; they were invested in bonds and stocks by insurance companies who promised to pay a fixed income in the future. Today anyone can emulate what a conservative insurance company did then with their own 401k investments in mutual funds or bond and stock index funds. The only difference is the individual controls how much, each year, they might draw down at retirement.
The point comes back to what is now BEST way to provide a reasonable pension for people. If you want to argue that everyone should continue to place all of their faith in the ability of politicians to increase taxes in the future, fine. While that is true to some extent it is also true that politicians retain the right to change the benefits of the system too, no? Either way you want to give all the power to the government in this equation.
Maybe most people will agree with you. All Bush is offering (for once) is an alternative to the status quo of total dependence on politicians. If more people agree with you, fine. I'd bet more people prefer more independence (even with some market risk) as opposed to being totally dependent on political risk.

Boonton,
“In other words, tomorrows retirees depend on the economy they leave their children for their retirement. Social Security operates in that framework since SS surpluses automatically benefit tomorrows economy (thru the exact process you describe).”

Actually my retirement won’t depend on the health of the economy, not the US economy anyway. If I make sound investments (maybe some in foreign companies) I can do just fine living off the dividends of those stocks. And in fact if our economy shrank, I might actually be better off since the price of numerous goods and services would fall. This of course assumes the economy doesn’t tank now, but in 20 years when I’m about to retire.

And just so we’re clear, I’m not defending the Bush plan. In fact I don’t care much for it. But me investing in a company with a profit motive is much different than the US govt. spending the SS surpluses on things such as ethanol subsidies and Lawrence Welk museums.

[Deep breath... wading back in:] Three things.

1. Even if he'd been so inclined,even if there had existed such things as mutual funds, much less index funds, to enable small investors with day jobs to diversify their holdings relatively easily, how far would FDR have gotten with any proposal for SocSec that *touched* the stock & bond markets in the Great Depression?

2. Obviously there were "transition costs" (more accurately startup costs, I guess) to original SocSec; I assume that even in constant dollars they were much lower than anticipated transition costs for a Bush-like plan, since the scope of original SocSec was much smaller than the current animal. That there are transitional costs is insufficient reason, taken alone, to keep the program in its current form. Both sides acknowledge a solvency problem, differing only in timing and semantics about its severity. What is the alternative proposal? Any alternative proposal? If there isn't one, why isn't there? Is FDR's "legacy" so sacred as to be untouchable, and if so, why?

3. I say again, the difference - to this non-economist - between FICA as it is now and a personal account is first, philosophical (less involuntary redistribution of my wages, more voluntary redistribution via investment by ME in well-vetted vehicles that MAY be other than T-bonds), and second, practical (I own the money I put in as well as its gains, subject to reasonable taxation). I recognize that the system is "fixable," or at least its insolvency date can be pushed out farther, by tweaking it, but if FDR had the guts, initiative, and brains to set this "bold experiment" in motion, why is a major redesign out of the question now? Does FDR have to return from the grave in order that we can try something different?

(BTW, thanks, Boonton, but I don't feel picked-on; I just know when I'm too ignorant to make a technical argument. Clearly, it doesn't stop me from making philosophical ones...)

Richard's post is incomphrensible nonsense:

He did not intend it to be a never-ending Ponzi scheme in which benefits would be indefinitely cut and contributions indefinitely increased.

Unless you have an infinite population, there is no such thing as a 'never-ending' Ponzi scheme. Again if you want to use the word at least learn what it really means. Benefits indefinitely cut? Contributions indefinitely increased? What is he talking about? The 'do nothing' projections indicate both contributions and benefits ending up at about 6% of GDP basically forever.

The problems SS faces today are a result of Congress' failure to phase out the starter system that provided free money to people who weren't born at the right time to fund their own annuities and Bush proposes to fix that.

Starter system? You mean there are people collecting SS today who retired before SS went into effect so they never paid SS taxes? I'd like to meet those people who turned 65 in the 1930's and are still going today!!! More power to them!

You contradict yourself Boonton. First you say people understood what annuities were in the 30's and then you say no one understood what that meant (like an old fashioned form of a 401k).

A 401K account is not an annuity. A 401K is simply an account that holds various investments (some of which can be an annuity) which a person ideally will draw upon when he retires. An annuity is a promise to pay you a fixed amount at periodic intervals as long as you are alive. Both today and in 1930 it was understood that an annuity could come from a private company or a government.

Maybe most people will agree with you. All Bush is offering (for once) is an alternative to the status quo of total dependence on politicians. If more people agree with you, fine. I'd bet more people prefer more independence (even with some market risk) as opposed to being totally dependent on political risk.

He is offering no such thing. There is already ample tax subsidies for private investing/saving. Bush is offering big tax increases tomorrow and pie in the sky promises today that he won't be around in the future to be held accountable for.

And just so we’re clear, I’m not defending the Bush plan. In fact I don’t care much for it. But me investing in a company with a profit motive is much different than the US govt. spending the SS surpluses on things such as ethanol subsidies and Lawrence Welk museums.

I agree with you here, however by definition surpluses are not spent on anything except reducing debt. If they were they would not be surpluses!!!

1. Even if he'd been so inclined,even if there had existed such things as mutual funds, much less index funds, to enable small investors with day jobs to diversify their holdings relatively easily, how far would FDR have gotten with any proposal for SocSec that *touched* the stock & bond markets in the Great Depression?

Not far at all, the stock market was deeply suspect at the time and was viewed as little more than gambling at best and at worst as a cause for the Great Depression. BTW, believe it or not there were mutual funds even back then! Index funds, however, are something relatively modern.

Both sides acknowledge a solvency problem, differing only in timing and semantics about its severity. What is the alternative proposal? Any alternative proposal? If there isn't one, why isn't there? Is FDR's "legacy" so sacred as to be untouchable, and if so, why?

The solvency problem is not acknowledged on both sides. The anti-SS side has been quite consistent in being dishonest about solvency.

First, SS's 'solvency problem' is based on economic assumptions that are probably unduley pessismistic.

Second, if the predictions that result in SS's solvency problem do turn out to be true it is mathematically implausible to believe stock returns could meet the expectatations Bush has (see Brad DeLong's site for more info on this).

Third, even assuming there is a solvency problem it is about 2% of GDP in nearly a half century in the future. Right now we are running a 4% of GDP deficit yet we are being told the sky will fall if we don't prevent a 2% deficit in 2050? Come one here!

Fourth, there's a trivial fix if there is a solvency problem and you don't want to run a deficit in the future. Simply raise the retirement age slightly and combine that with 'de-indexing' the starting benefit to wage growth.

Fifth, 'crises' mongers almost always lump Medicare (and sometimes Medicaid) into the projections to make the problem look much more like a crises. Jim Glass is a huge offender here. Despite the fact that SS's problems are tiny compared to Medicare and nothing that is being proposed about SS even touches Medicare.

I recognize that the system is "fixable," or at least its insolvency date can be pushed out farther, by tweaking it, but if FDR had the guts, initiative, and brains to set this "bold experiment" in motion, why is a major redesign out of the question now? Does FDR have to return from the grave in order that we can try something different?

That's a fair question Jamie. 'Bold redesigns' need bold justifications. FDR had the Great Depression as justification for radical change, what does Bush have? Gross mismanagement of the budget over just 4 years justifies mismanagement for another 75? For the last 20 years we have had a bold experiment going on with private accounts, they are called 401K's/IRA's. Ironically their success makes SS more valuable as it is. A gov't guranteed annuity benefit offsets the risks of a market based retirement 'nest egg'.

One of the first lessons in risk management is the benefit of diversification. Two assets that are very risky alone can be put together to make a portfolio that is less risky. This is why risky high return assets (junk bonds, stocks) do not put less risky low return assets (CD's, money market accounts) out of business. There's a need for both. Bush's proposal basically offloads risk from the gov't (which can afford to bear it) and onto individuals rather than maintaining SS as a counterbalance to the increasing (healthy) risk people are taking as 401k's/IRA's become the norm.

Social Security was envisioned as part of a three legged retirement system. One leg was gov't guaranteed SS, the other was private savings and the third was employer provided pensions. Nowadays pensions have become unpopular resulting in just two legs (some would argue that real estate may be viewed as a third leg). Why kick another one out?

Why don't we just set up the annuities as FDR had envisioned and give the ownership to the individuals who earned the money? That way, individuals would have something to pass down to their heirs. The same interest rate that is currently paid on SS funds cam be used.

The problem, the government doesn't get the spend the money in the meantime!!

Simply "raise the retirement age".....

Well of course! The answer from Boonton to any problems in the future with Social Security financing is to change the game!

Doesn't sound like any "risk" to recipients to me. Why, if I bought a private annuity I'd have no problem with the company changing the terms of the contract...right when I plan to collect.

Defenders of the status quo assume that only "minor" changes (acceptable to them) will get Social Security over any hump in the future. But of course, we can't predict the political future any better than we can markets. Its entirely conceivable that a mean, Nazi like, Republican president, congress and senate could be voted in that would pass horribly unspeakable "adjustments" to Social Security isn't it?
Whether you want to admit it or not the political risks of not getting much (if anything) out of Social Security in the future are far more predictable than not getting a reasonable return out of a privately held, diversified, investment account.
Given the course of recent Democratic political achievement maybe this is the best time to make this deal.....it may get much worse, no?

Jag,

I doubt you could purchase an annuity at age 35 that would not kick in until you hit 65 but promised you a fixed rate unless it was:

1. Priced aggressivly against you.
2. waited until you approached 65 to set the actual amount of the annuity.

As for political risk, guess what it exists in spades with private accounts. What law of nature do you propose to invoke against a future congress taxing successful private accounts and giving the money to private accounts that have done horribly? By definition SS's risk is less than private funds simply because private funds incur all the political risk SS does plus additional political risk (Congress can pass laws that hurt the particular companies/industries you invest in) PLUS market risk.

Here's the acid test for those telling us this is about savings and delaying consumption:

Take Bush's 2% plan and add it to Social Security. Require that everyone contribute 2% of their pay to an IRA/401K of their choice. If you already put 2% or more into an IRA then you're excused.

That would almost certainly increase real savings in the economy plus has the added bonus of hedging our bets. If SS's sour predictions come true then everyone will have a nest egg to ease benefit cuts. If the predictions do not then everyone still has a nest egg to add to their SS benefits PLUS the economy will be that much better due to the added savings. Of course you're free to buy an annuity with your IRA/401K/private account.

Boonton,

By your own admission, SS can no more promise a fixed return at 65 (to someone 35 today) than can an annuity product. You've admitted politicians can change the age eligibility at whim so clearly they can change everything else including the income stream (downward).

Sure, I agree with you that the state could pass a law stealing "excess" (or more) returns from someone's private plan. However, I see that being somewhat more difficult to pull off than simply continuously changing arcane eligibility rules.

Since you can clearly envision an even worse political risk far beyond what I would imagine possible I would think that would make my case for taking as much out of the hands of politicians stronger, not weaker.

Again, you trust politicians on this? You don't trust Bush now, why would you imagine trusting anyone (more) else later? I don't trust Bush or any politician. Your fear/hatred of Bush proves my point. Get guys like him out of your life permanently. Take Social Security assets out of political hands and put it into the hands of individuals. If some people totally screw it up (despite having some risk and diversification limits by law) so what?
We can still help those people with something called "welfare" which is, essentially, what SS was in FDR's time.

It's ironic: the social security system was created to keep old people from becoming a burden on society because they were too irresponsible to save for their retirement. Initially, the system allowed people to collect benefits who had never contributed to it, never made the payments on the annuity. These payments were supposed to be funded by taxes, but somehow we got into a mode of using current workers to pay for current retirees. So the annuity system never got off the ground and old people are a bigger burden on society than they were in 1935.

This is not a successful social program, it's a textbook example of the pitfalls of government getting too closely involved in the lives of the citizenry and letting political considerations instead of prudent financial management direct individual retirement investment decisions.

The government has totally botched the deal, and only privatization can save it, unless we're willing to start killing people on their 75th birthday or thereabouts.

"Hume is correct in his interpretation of the FDR quote"

Hume said "FDR himself planned to include private investment accounts in the Social Security program when he proposed it." That's a lie. See my earlier post.

"FDR intended for SS to be a self-supporting annuity system combining mandatory and voluntary annuities."

It is true that FDR intended for SS to be fully pre-funded (instead of the intergenerational contract system we now have). In other words, FDR wanted high payroll taxes leading to a big SS surplus. He was conservative, in other words. But this has nothing whatsoever to do with Hume's so-called "private investment accounts."

"His plan is entirely consistent with FDR's vision for funding social security"

A core part of FDR's plan was that workers would deposit money into a fund held by the government. A core part of Bush's plan is that workers will invest money in the private sector, rather than in a central government fund. There's nothing "consistent" about this, unless one is "too stupid to understand how investment and savings work."

"Today anyone can emulate what a conservative insurance company did then with their own 401k investments in mutual funds or bond and stock index funds."

That's fundamentally wrong (as Boonton points out). Fixed returns are inherent in the very meaning of the word "annuity" (notwithstanding the modern innovation of "variable annuities," which are sort of an oxymoron, as I said above). An annuity is an insurance instrument with fixed returns. In contrast, typical 401k investments like "mutual funds or bond and stock index funds" have a variable return.

An annuity is a variety of "private investment account;" an equities-based mutual fund is another. In practice, annuities are funded by investments in equities on the part of the guarantor, so in effect there's very little difference between them and mutual funds except the agreement that mitigates losses and caps gains.

A fully self-supporting system of any kind, equities -based or annuity-based, is a huge departure from the system we have now, which itself is a huge departure from any reasonable plan circa 1935. Compared to that gulf, the gap between equities and annuities is tiny.

FDR was of course nervous about equities because of his proximity to 1929. But an honest market isn't subject to the risks of the rigged 1929 one, so we can look at the problem of risk and reward with open eyes now.

Or we can execute people on their 75th birthday, as you wish.

Several of you have now successfully clarified my point about FDR: he couldn't have advanced any proposal involving investment in the stock & (commercial or muni) bond markets even if he'd wanted to, because of at *least* the *perception* that the markets at the time were too wild & wooly for "safe" money. But anyone who has a decent 401(k) now knows that the management co. that your employer uses to run the thing is going to have, at minimum, across-the-board guidelines for diversification mixes at different ages & times to retirement. Why assume that the Bush plan would just repeal FICA and turn people loose with their money, in effect?

As for the timing and justification for a bold redesign, how about:

(a) the fact that there ARE tax-deferred vehicles out there in growing use, increasing people's understanding of risk, diversification, and investing for the long haul,

(b) plus that traditional pensions are going the way of the dodo,

(c) plus that young-to-middling workers seem to have very little faith that there'll even be a SocSec for them upon retirement (and hence are trying to make plans for the future that rely less on it than previously or even not at all, though they're hampered by not having use of 6-13% of their income because someone else is using it instead), so they're already primed for a change (how pleasant if it were a change for the *better*!),

(d) plus the impending retirement years of the baby boom that, no matter what you say NOW, Boonton, Democrats not only admitted would put great pressure on the system but even termed a serious problem, up until last (campaign) year?

And for anybody who made it through THAT, not acting to correct the problems with SocSec because doing so doesn't address the problems of Medicare is (tortured analogy alert) like not cleaning your bathroom because you don't have enough time or energy to clean out your garage simultaneously.

"so in effect there's very little difference between them [annuities] and mutual funds except the agreement that mitigates losses and caps gains."

That's like saying there's very little difference between black and white, except one is darker. After all, they're both colors, sort of, right?

"The agreement that mitigates losses and caps gains" is exactly what makes an annuity a fixed-return instrument. As I said in an earlier post which you apparently ignore, this distinction between fixed returns and variable returns is crucial. It's the difference between saving and investing. There's a place for both, but the latter does not replace the former. Bush, unfortunately, is encouraging us to believe there's no difference between saving and investing, and he's encouraging us to do the latter at the expense of the former.

"A fully self-supporting system of any kind, equities -based or annuity-based, is a huge departure from the system we have now, which itself is a huge departure from any reasonable plan circa 1935."

SS has been fully self-supporting. If that wasn't true, SS would owe money to the general fund, instead of the other way around. SS just isn't perpetually self-supporting (because it was never allowed to reach a stage of being fully pre-funded, although that's what FDR envisioned), and that's a problem that needs to be solved. It's too bad Bush hasn't offered a solution to that problem. A "solution" that requires borrowing a trillion dollars or two is simply a way of stealing some money from my back pocket so you can place it in my front pocket. No. It's more like stealing some money from my kid's back pocket so you can place it in my front pocket. Actually, it's more like stealing some money from my kid's back pocket so you can place it in the front pocket ot a certain class of people who are currently heavily invested in equities. Those folks can't wait to sell some of their holdings to a huge new class of customers Bush is intent on creating. Nice work if you can get it.

"Compared to that gulf, the gap between equities and annuities is tiny."

Since you don't care about the difference between a variable return and fixed return I sure would love to sell you some securities. Stocks, bonds, what's the diff, they're all the same to you.

Anyway, this is a nice way to avoid dealing with the original issue, which is that Hume is lying when he says "FDR himself planned to include private investment accounts in the Social Security program when he proposed it." Annuities offered by the government are fundamentally different from equities offered by Wall St. FDR envisioned the former. Bush promotes the latter. Jane Galt and Hume et al would like you to think these distinctions mean nothing.

"But an honest market isn't subject to the risks of the rigged 1929 one, so we can look at the problem of risk and reward with open eyes now."

A good start would be to realize that saving and investing are not the same thing. In other words, there's no free lunch. There's a reason equities can achieve a greater return: they're riskier. Bush is doing everything he can to deny this. In a spirit of snake-oil salesmanship that few of us would tolerate in a used-car salesman, Bush is doing his best to indeed promise a free lunch. That is, he conveys the idea that higher returns from Wall Street (compared with T-bills) are a sure thing: "a personal account, obviously, under strict guidelines of investment, will yield a better rate of return over -- than the money -- the person's money is earning in the Social Security trust" (link). There is no equivocation in that assurance, and I didn't take it out of context. Any stockbroker who similarly omitted the essential disclaimer ("past performance is no guarantee of future
results") would face serious legal and professional sanctions.

Let me know if this is your idea of how we "look at the problem of risk and reward with open eyes now."

That's like saying there's very little difference between black and white, except one is darker. After all, they're both colors, sort of, right?

No, it's not. The agreement you have with the guarantor of an annuity is no better than the solvency of of the guarantor. This isn't a meaningful issue when it's just you and some company with a small fund, but when the government is the guarantor and they're depending on being able to pay your annuity by stealing money from your kids, it's a whole different deal, isn't it?

So when we soberly assess the risks, it appears to me, and to any reasonable person, that your chances of actually collecting some money from a mutual fund are better than my kids chances of ever collecting from the Ponzi scheme are.

So weren't not really looking at a guaranteed return vs. a risky scheme, we're looking at a prudent investment in securities vs. a government-sponsored scam with ever-changing terms.

Would you buy an annuity from a company that was free to alter the terms of the deal after collecting your money? If you would, you're a bigger fool than that idiot to whom I sold a bridge deed last week.

"The agreement you have with the guarantor of an annuity is no better than the solvency of of the guarantor."

True. Your point, essentially, is that the US government is a bad credit risk, and that T-bills are a risky investment, and that the foreign investors who are currently buying US bonds at low interest rates are getting snookered. Of course Bush is essentially making the same point, which is an odd position for him to take, as the head of the government. Here's hoping our creditors, especially overseas, aren't paying attention to either him or you, because if they did then suddenly our $7.6 trillion debt would become even more unmanageable. Not to mention the elevated interest cost of borrowing a few trillion more to pay for Bush's various pet projects.

This is kind of like Arafat making different statements in English and Arabic. Bush needs to tell overseas bankers that the US government is the safest investment in the world, so they should keep buying T-bills. Because if they stopped, the whole edifice would come crashing down. At the same time, Bush (and you) want the American public to believe that the SS trust fund isn't real, because it's "only" invested in T-bills.

Typical BushCo doublespeak.

A further comment on your earlier statement: "But an honest market isn't subject to the risks of the rigged 1929 one."

Since we now have "an honest market," please explain Enron, Worldcom et al.

By the way, nice job ignoring the more on-topic point, which is that Hume lied when he claimed FDR supported "private investment accounts."

If you bought 30 year treasuries in 1960 at 3% yield by 1978 you were sucking wind. Why? Inflation at 10% makes a "guaranteed" yield of 3% significantly less useful. Your "safe" 3% T-bonds would have been worth (in 1978) about half of what you paid for them.

There are risks with EVERY investment, even treasuries. Yeah, you'll get paid back but you don't know how valuable that certain, nominal, return will be unless you stick to very short term T bills....which have recently been yielding about 1-2%. Want to buy 30 year treasuries today? Want to bet 4% isn't going to be all that great a rate in the next 15 years?

Putting your faith in politicians, geez! How is it no one can connect the dots; today you hate and don't trust Bush, tomorrow I don't trust Hillary. Lets make a deal and take both of our huge concerns off this table and put it back in the hands of individuals where it should have always been and leave the other issue (welfare of the elderly) as a completely seperate matter to be dealt with totally on its own terms.
Win/Win, no?

"Lets make a deal and take both of our huge concerns off this table and put it back in the hands of individuals where it should have always been and leave the other issue (welfare of the elderly) as a completely seperate matter to be dealt with totally on its own terms."

If you want to advocate pulling the plug on SS and starting over again with a blank sheet of paper, you're obviously entitled to your opinion. I hope the rest of the Republican Party follows your lead, since even the existing less radical proposal is looking more and more like political suicide.

Hopefully you would agree that it would be a good thing for an informed, educated populace to have a thoughtful, serious, unhurried discussion about these important, complex issues. Please explain how Hume lying about FDR helps such a discussion to take place, or why people who help propagate such a lie should be taken seriously.

If you bought 30 year treasuries in 1960 at 3% yield by 1978 you were sucking wind. Why? Inflation at 10% makes a "guaranteed" yield of 3% significantly less useful. Your "safe" 3% T-bonds would have been worth (in 1978) about half of what you paid for them.

Of course today there are inflation protected bonds that will pay you a return plus an adjustment for inflation. That's besides the point though, bonds are as risky as stocks. People can and do lose money investing in bonds just as much as they do in stocks.

One of the primary things to remember about bonds is that they are only secure in that you will get the interest payments and the principle at maturity. Along the way two problems have to be addressed:

1. Since interest rates change there is no way to be sure you can invest the interest payments at the same rate as you got on the bond.

2. The price of the bond will go up and down. If you sell the bond before maturity it can easily be less than what you paid for it (just as a stock can).

Sure, I agree with you that the state could pass a law stealing "excess" (or more) returns from someone's private plan. However, I see that being somewhat more difficult to pull off than simply continuously changing arcane eligibility rules.

Nothing about Social Security is arcane when actual changes are proposed. Yet there's thousands of laws that have numerous unpredictable impacts on businesses passed every year...the tax code also is host of endless tinkering that can dramatically alter a realized return my friend.

But I'll ask you; people often behave irrationally and marketing often encourages them (if it didn't, casinos would have gone bankrupt long ago and 80% of 'financial advisors' would have been put onto the unemployment line). Do you really want to discount the political risk of having retirees in, say, 2025 having 20% less than those in 2024 simply because a market bubble burst? Do you really think think people won't say something like "Hey, these accounts were supposed to have expected returns of 6% so let's tax those who made 10% or more and give it to those treading water at -30%!"???? Considering that people are being sold this on a half-baked theory that stocks are just like bonds 'but better' you don't think they won't be pissed when they find out otherwise?

So when we soberly assess the risks, it appears to me, and to any reasonable person, that your chances of actually collecting some money from a mutual fund are better than my kids chances of ever collecting from the Ponzi scheme are.

So weren't not really looking at a guaranteed return vs. a risky scheme, we're looking at a prudent investment in securities vs. a government-sponsored scam with ever-changing terms.

By definition SS has political risk. By definition 'prudent investment in securities' has political risk + market risk. Unless you want to contend that the latter is zero your statement is nonsense. BTW you'll be collecting your retirement from your kids no matter what. Who do you think is going to buy your stocks when you sell them off to fund your retirement?

Putting your faith in politicians, geez! How is it no one can connect the dots; today you hate and don't trust Bush, tomorrow I don't trust Hillary. Lets make a deal and take both of our huge concerns off this table and put it back in the hands of individuals

Marx and Lenin were utopianists as well.

"Considering that people are being sold this on a half-baked theory that stocks are just like bonds 'but better' you don't think they won't be pissed when they find out otherwise?"

This is a very good point that tends to be overlooked. In particular, hardly anyone seems to notice or care that this half-baked theory is being touted right from the top: "a personal account, obviously, under strict guidelines of investment, will yield a better rate of return over -- than the money -- the person's money is earning in the Social Security trust."

As I said earlier, there is no equivocation in that assurance, and I didn't take it out of context. Any stockbroker who similarly omitted the essential disclaimer ("past performance is no guarantee of future results") would face serious legal and professional sanctions.

jukeboxgrad says:

hardly anyone seems to notice or care that this half-baked theory is being touted right from the top: "a personal account, obviously, under strict guidelines of investment, will yield a better rate of return over -- than the money -- the person's money is earning in the Social Security trust."

Are you saying that under the Bush plan investors will only be investing in stocks (which the above quote does not state, but which does support your point), or that it's untrue that over the long term, measured as any 10-year period, the market has always had a positive return?

I'm gathering that there's a plank of the Bush plan out there that I've missed - I'm gathering that you're to buy an annuity at retirement that's supposed to support you for the rest of your life, so your retirement fund's value at that moment is absolutely intrinsic to your quality of life for the next twenty years, but its value never matters again because it's gone. Is that the way the Bushies say it's going to work, or the way some are assuming it's going to work? Because wouldn't it make more sense to work it like a 401(k): have a withdrawal schedule so that you keep your principal intact for as long as possible? It would largely do away with that retire-in-2024/retire-in-2025 problem, wouldn't it? There still wouldn't be parity between the two retirees, but (a) there isn't now, and (b) the differential would matter a lot less if both retirees were only drawing on their funds starting in those years rather than cleaning them out.

You'd still have to buy an annuity at some point, because some people are going to beat the actuarial odds and it'd be foolish to expect those people suddenly to live on zero income (or to have to reinstate SocSec as we now know it for them, or put them into the pool of the indigent elderly whose retirement still consists of whatever safety net is left in place). But I assume you could buy a cheaper one than one that was actuarily expected to last from your age 67 to death by buying one (at age 67, or even earlier) that doesn't kick in until your, say, fifteen-year withdrawal schedule would have exhausted your account.

I'm totally punting on how one buys an annuity. I've never looked into one. Please enlighten me if I'm making wrongheaded assumptions about how they work.

"Are you saying that under the Bush plan investors will only be investing in stocks"

I wouldn't say "only," but I think it's pretty clear that an essential aspect of the Bush plan is that people currently holding equities will suddenly have a large new pool of eager customers, waving cash that was stolen from my kids. The bill for the party doesn't arrive until later, so who cares.

"or that it's untrue that over the long term, measured as any 10-year period, the market has always had a positive return?"

A lot of people throw numbers around without adjusting for inflation. Anyway, there's no free lunch. More reward means more risk.

"I'm gathering that you're to buy an annuity at retirement that's supposed to support you for the rest of your life, so your retirement fund's value at that moment is absolutely intrinsic to your quality of life for the next twenty years, but its value never matters again because it's gone."

That's the idea I gathered somewhere. On the other hand, Bush is rapidly moving to a posture of "don't expect to hear any details from me," so who knows. Trying to read the tea leaves on this might be pointless. Frankly I think he realizes his proposal is DOA and he's trying to back away from the bloody corpse without doing even more damage to his party.

An annuity would basically be determined by interest rates. In a simple world, if interest rates are 6% and your private account has $1M then you could generate an annuity yourself by simply withdrawing $60,000 a year. An annuity you purchase from an insurance company would give you more since they would keep the million when you die. Financial products are rarely simple and I'm sure there are currently annuities that offer some type of payment upon death (perhaps a combination of life insurance & annuity)...

Anyway, from what I've read the Bush plan would require you to buy an annuity if your account does poorly in order to guarantee you are not left with zero income. This leads to the question of what happens for those whose accounts will not even be sufficient enough to buy a good annuity? It would seem there's a huge political risk that they would demand the gov't step in and subsidize them and the most logical source would be from those who've done well in their accounts.

This leads to another political/economic risk. If the gov't steps in with impicit insurance against loss then people have an incentive to go for broke and take on too much risk in the hopes of a big return.

This is basically what happened in the S&L crises in the 80's, S&L's being insured by the Feds but also facing tough competition tried to make big profits by making risky high interest loans. Not too much unlike our current SS debate, advocates for the S&L's argued they would make better returns if their hands were free to make riskier loans with higher expected returns. This, it was thought, would resolve a cash flow deficit caused by S&L's on the brink of bankruptcy. Unfortunately it caused the bill for bailing them out to skyrocket.

"The fact that Mark Twain wrote a damn fine novel does not mean that we should listen to his opinion on the Spanish-American war..."

You're right. We should listen to his opinion about the war because it was the product of a penetrating intellect, a loathing for human misery, and an abiding hatred for cant.

Not to be contentious. But I felt I had to stick up for my man Samuel.

-Chris

Jane:
Why people are confused by your bringing up the relative benefits in 2004 dollars is that you are ignoring that benefits are based on wages instead of prices (and we all know this, being a huge controversy). Unless you want current retirees with a 1935 standard of living, it is not a just comparison.

Another recent Fox story:

Garrett: "The former President devoted budget surpluses to reducing federal debt, thereby increasing Social Security solvency. He also proposed investing government funds in the stock market in hopes of boosting Social Security surpluses, an idea Democrats endorsed."

Harry Reid, Senate Minority Leader, February 14, 1999: "Most of us have no problem with taking a small amount of the Social Security proceeds and putting it in the private sector."

Why people are confused by your bringing up the relative benefits in 2004 dollars is that you are ignoring that benefits are based on wages instead of prices (and we all know this, being a huge controversy).

They are actually based on both. Your first benefit check is indexed to wages, after that it is adjust to prices. If wages go up faster than prices (this caused by good productivity) then SS tax revenue increses faster than benefits. If prices go up faster than wages the reverse happens.

Some have tried to argue that we cannot grow out of SS's possible deficit because of the wage index. What they don't realize is that this two sided indexing actually increases SS's stability in a period of rising real wages.

Ironically, the wage index was added as a way to control benefits...not boost them. Since there was a period where wages rose slower than inflation it actually saved money to adjust initial benefits by wages and not prices!

Boonton:

Considering the long timeframes younger workers have to spend, why *shouldn't* they be able to use the stock market for part of their retirement nest egg? (I know, 401(k)s and IRAs already offer this option, but MORE people and POORER people could take advantage of the long-term potential of securities if they had a lower FICA payment.)

Unless I've missed a major point (which IS possible), I don't think the Bush plan is to do away with FICA altogether as an entitlement, even after the livelihood of today's retirees is - not to be indelicate - no longer at issue. Last I heard, the goal of the private accounts was to give people a better retirement income for the same cost to them by allowing them (not forcing them) to use PART of their payroll tax to take on the higher risk of investments other than (a) T-bills or (b) the largesse of the gov't, depending on how you look at it, for potentially better payout.

Of course, jukeboxgrad, more reward means more risk, but more time also tends to smooth the bumps of the market. Inflation has averaged less than 4% over the past about fifty years (http://www.mutualofamerica.com/articles/CapMan/October03/CPI.htm); T-bills have beat inflation by about 1.5 points over that period (http://www.mutualofamerica.com/articles/CapMan/October03/Tbills.htm), while the S&P500 index has beat it by almost 7 points (http://www.mutualofamerica.com/articles/CapMan/October03/SandP500.htm) and the bond market (Lehman Bros. Gov't/Credit index as a proxy - I have no idea how good a proxy, but NOTE: index has only been around since 1974), by 6 (http://www.mutualofamerica.com/articles/CapMan/October03/Lehman.htm) (but this 6 pts is not apples-to-apples because of the relatively shorter term, since this index is newer).

In shorter terms - take 20 years, so if these averages hold anybody in their 40s could take advantage of these greater gains in exchange for the increased risk - the numbers in the same order are 4.97% (inflation, for ref.), 6.52% or about 1.5% over inflation (T-bills), 10.89% or almost 6% over inflation (S&P), and 9.92% or about 5% over inflation (Lehman bond index).

I don't deny the risk. But there's risk intrinsic in trusting in the system too - which is why I don't even figure SocSec income into my retirement. I'm fortunate in that I'll have other retirement investments to draw on, but for those who don't, is keeping the investment risk at absolute minimum for their full working lives (impossible to quantify the risk that some future Congress, not faced with a retiring Baby Boom, will be less motivated to protect benefits) preferable to allowing them to choose to take on some risk while young toward an improved living standard when older?

Considering the long timeframes younger workers have to spend, why *shouldn't* they be able to use the stock market for part of their retirement nest egg? (I know, 401(k)s and IRAs already offer this option, but MORE people and POORER people could take advantage of the long-term potential of securities if they had a lower FICA payment.)

1. If securities do indeed have better long run potential then there exists an equity premium. Otherwise the higher long run return is nothing more than the result of their higher risk.

2. If an equity premium exists the higher risk is still a factor. Given that there already exists plenty of options to build a nest egg in stock funds shouldn't an effort to help the poor use stocks involve the gov't assuming the risk instead of the gov't pushing more of the risk onto those least able to afford it?

3. The lower FICA payment is coupled with lower benefits for the poorer person. For the poorer worker FICA offers a higher return at lower risk due to SS's progressive nature.

4. If you were serious might I suggest a real plan to help the poor use stocks.

How about mandating 2% of payroll be deposited into a private account (unless a person is already putting that much into a 401K/IRA). For poorer workers have the gov't match their contribution...say a flat $500 a year funded by a 0.25% payroll tax. For a worker making just $10,000 a year he will put $200 into a private account and receive a $500 match. The risk to this person is small since only 28% of the money in the account came directly from him. Stocks would have to return worse than -70% before his principle is destroyed! His payroll tax would jump by $25 a year but that would be small considering his match was $500.

I don't deny the risk. But there's risk intrinsic in trusting in the system too - which is why I don't even figure SocSec income into my retirement

Here's a problem with thinking about risk, the returns you cite are average returns that have to be coupled with their standard deviation. For example, if the average return for stocks is 10% with a standard deviation of 15% then that means (assuming normal distribution) that 68% of the time you'll see returns between -5% and 35% (one deviation) and 96% of the time you'll see returns between -25% and 40% (two deviations).

This does not magically become a 10% return for everyone anymore than customers at a casino lose 2% of their money. Some will win big, many more will lose their shirts and some will do a bit less than break even.

Here's a brain teaser about using long time periods to 'even out risk'. Imagine the gov't borrows $100B for 30 years at 6 or 7%. It then invests that by buying a 'world index fund' of stocks. Imagine it does this every year and at year 30 it will sell enough stocks to pay off the first round of bonds (and so on at years 31, 32 ...).

Now working off the numbers Jamie gave us. If bonds beat inflation by 1.5 points and stocks beat it by 5.5 points then this little scheme should net the government 5% real returns. An individual has a short time frame, at age 20 there's only about one maybe one-and-a-half 30 year periods where they can earn income. A gov't though always has the power to tax as long as someone is around.

So since the gov't can borrow long term and wait a long time for its returns, this little scheme should net $5B a year return on $100B invested in year 1 plus compounding plus the additional $100B added to the fund every year. This return could be given to the taxpayers by offsetting part or all of the social security payroll tax. You've got the best of both worlds, lower SS taxes without cutting benefits means a much better return on SS.

Now if this works for borrowing $100B a year why wouldn't it work for $200B a year? How about $500B? Since the gov't can use its unique position to garner profits of 5% per year it could eventually eliminate all taxes and fund all of its operations from a huge endownment of borrowed money.

This is a logical implication of what is being asked. If it sounds a bit utopian to you then tell me why...I suspect that reason will apply to at least a few of the privitization of SS arguments.

Typo in that last post...if stocks beat inflation by 7 points using Jamie's numbers and bonds beat it by 1.5 points then the proposed scheme should net the gov't 5.5 points of real return.---sorry about that.

BTW, if the gov't matched the $10,000 a year worker with a flat $500 for 35 years then that would grow to a balance of $27,464.10 at the end of 35 years while the taxpayer portion of that would only total $17,500 assuming a 2.5% real return.

His contributions from working would total $10,985.64 leaving him with a total balance of $38,449.74. Just about enough to finance 4 years of retirement at $10K per year. His return, however, would be very impressive since his total contributions would have only been $7,000.

However his good fortune isn't the work of magic, just income redistribution. The returns of higher income people will be slightly less becaue they had to fund the $500 match.

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