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Come Let Us Reason Together on Financing Retirement
This has been an interesting week in the stock market if not for any other reason but that the Stock Market closed over 14,000 for the first time ever [Note the long-term Dow Jones Industrial Averages Chart pictured above]. One of the first posts that I made to this blog (my third to be exact) was on April 23, 2007 and it was titled “Are you Pro-Choice? (on Retirement Planning).” HERE I remember in the wake of 911 after the stock market resumed activity (with a strong downward bias) the Democratic leadership trotted out in front of the U.S. Capitol and explained how this “collapse” of the stock market is the reason that allowing private equity accounts within the Social Security system was a risky idea put forth by the evil Republicans so their friends on Wall Street could get rich. These timely comments by the esteemed Democratic Senators turned out to not only be wrong, but if you were listening to them it may have caused you to miss one of the best stock BUYING opportunities in quite some time. You see, once again (like on taxes) they were not only mistaken, but exactly 180 degrees out of phase with the truth. Hope your family’s security wasn’t damaged because you followed their “timely” advice then.
As I said in my April 23rd post that there isn’t one day since the institution of the Social Security System where dollars from the fund could have been invested in the US Stock Market and preformed worse to date than the so called “risk free” investments of the plan as it exists. That is of course unless you want to play the game the way the Democrats do and say, “wait, I know there is a time where the stock market did worse and it was an investment on this past Thursday” (since the market was down on Friday). You see their approach is to hope you aren’t really following the numbers too closely or for too long and you will believe what they have to say about alternative investments for the Social Security System merely because of the volume of their protests.
I would urge anyone that doesn’t believe we can “afford” to put our social security funds in the stock market read my post of April 23, 2007 HERE and then re-consider your perspective. I invite anyone who doesn’t like the idea private equity accounts within the Social Security system to comment and indicate which one or more of these reasons you base your objection on:
DRY UP FUNDS FOR CURRENT RETIREES
REPUBLICAN INVESTMENT BANKERS AND BROKERS WILL GET RICH
SOLEVENCY IN THE RETIREMENT SYSTEM IN THE UNITED STATES WOULD DRY UP AN IMPORTANT LIBERAL CAMPAIGN MANTRA
STOCK MARKETS ARE RISKY
I DON’T BEIEVE IN THE LONG TERM VIABILITY OF THE US ECONOMY, CAPITALISM AND/OR STOCK MARKET
I THINK THE RETIREMENT BURDEN FOR ALL AMERICANS SHOULD BE BORN SOLELY BY THE “RICH.”
OTHER……..EXPLAIN
If you think this is an issue that won’t affect you too much I’ll suggest it will have a horrendous impact on your life and that of your family in the long-term and the younger you are the worse it will be.
NOTE: If you think the chart above looks impressive you may have no idea how impressive the chart really is. It is expressed in a logarithmic format that in effect compacts and reduces visibly the full radical nature in the hyperbolic aspect of the curve for the sake of space. You will notice on the vertical scale to the left of the chart how the visible magnitude of the movement of 0-100 is the same as the movement from 100-1,000 which itself is the same as the movement from 1,000 to 10,000. The next (non-illustrated) increment will be an impressive move from 10,000 to 100,000, but on this type of scale it will look minutely unimpressive.
UPDATE 7/22/2007: I should mention that the chart above only goes thru about the year 1998-1999 which wasn’t too long before before 911 when the Dow Jones Industrials first reached 10,000. Since that time this chart is up a whopping 40% in spite of 911. Would you like to speculate as to how much Social Security benefits are up since that time?
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9 Responses to “Come Let Us Reason Together on Financing Retirement”
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Preach!
There are approximately 6 million state & municipal employees, (think police officers, firemen and schoolteachers) who have opted out of the traditional Social Security system & have their retirements in pension plans that they own. The NEA, AFT (American Federation of Teachers) & American Federation of State, County and Municipal Employees are all kicking & screaming to prevent the government from forcing them into the system with the rest of us because they know they have a better deal. They have ownership, & they get a far better return.
M2…….Don’t forget that the Senators and Congressmen have private plans just like the others you mention with the funding in private sector equities and bonds. If you tried to take that from them they would scream………steve
Maybe I”m a little confused, but I’d kinda like to know how the dow cracking 14000 is a negative indicator of just how dismal the “Bush economy” is. Could anybody maybe illuminate a dim bulb so as me on that one?
plodon……..I am a bit confused as well. You’re right, a robust stockmarket is not typically an indicator of poor preformance of the Chief Executive. I am not sure what point in my post you are referring to, could you so indicate so I could then answer the question. I’ll just say that in Sept. 2001 they (Democrats) used the “collapse” of the stock market after 911 as a reason they are against private accounts which is because of the “risk” factor and the get rich schemes of Bush supporters. They have often trotted out this connection during market corrections. They always do it and are always proven wrong, but the never eat their words. Talk about “risk,” there is no risk in the fact that the Social Security system is headed for bankruptcy. That is a riskless assumption.
One thing I guess you could say if you were a Democrat trying to put the worst possible light on the stock market rise is to assert that it only represents a small percentage of society (the rich) and it is the one area of focus by Bush to further enrich his buddies on Wall Street. (after all there are 2 Americas and Edwards should know)
This was once the standard argument about stock market rises until the advent of the IRA’s and 401-K’s. Now that many many middle class American’s have become “stakeholders” in Corporate America, this bit of propaganda has lost it’s luster except for the underclass, which is why I suppose the Democrats continue to dust it off while the Social Security system drifts further and further into an increasingly unresolvable bankruptcy status………steve
like m2, i believe that private sector retirements are the best deal. one thing that is essential is in what fashion will the funds be invested. i think that if it was in indexing funds, that might be acceptable, but if there is a money manger buying shares like a mutual fund, that inside buying and selling info would be valuable. there might be a conflict of interest on the governments part since they would know who will get the federal funds, so they can also invest in the comapny.
Matt, you can be sure that if account privitation became the law there would be guidlines and restrictions for investment and the brokers would be limited as to the type of equites and or funds are suitable for such accounts……..steve
wernt refern ta nuthin in your post, it was more a general “puzzlement” as to how some people try to pass stuff like the dow 14000 as a bad economic sign to be blamed on the executive branch (you know, like everything and anything else real or imagined). You pretty much covered it in your response, I thought.
plodon……….cool. Thanks………..steve
Okay so we found another subject that You, Me and M2 agree on! WOO HOO! Go Dow Go! I know i really don’t even factor Social security for my retirement. I fact or mutual funds and stocks. I figure it wont be around for me anyway.
MZ……..it is worse than that. Even if you don’t figure on Social Security in your own planning, what the government will have to do in debasing the currency to cover the bet will make the value of your side accounts extremely diluted. Hyper inflation wouldn’t be out of the question where you need a wheelbarrel full of money for small purchases……….dad
just wondering what you think the fed would try to do in the event hyperinflation becomes a reality? most, if not all occurances of hyperinflation post ww-I germany were the result of dictators with central, mis-planned economies. is the threat of hyperinflation a realistic scenario given our balance of powers including the strict market forces evident in our market?
personally, and this is just my sociology speaking, i think both parties use hyperinflation and past histories to further agendas. right or wrong, there are agendas and this is a major driving force as the left and right try to decide our future in washington
Matt…….inflation comes when you monetize the deficit. That is to say printing money to cover the spending priorities instead of borrowing the money to do it. When monetization occurs you have an increasing amount of dollars chasing a constant amount of goods and services. Thus you have a disequilibrium between supply and demand and hence the cost of the goods and services rises. If you monetize deficits on the magnitude for the government cover the projected shortfalls in the Social Security system, such massive influx of dollars without a corresponding increase in production could cause hyperinflation. So one way they government could technically meet its obligations to retirees would be to simply continue to write the checks not withstanding the zero balance in the Social Security Trust Fund (HA
there is another oxymoron in this case).
You are essentially asking if this could happen in a modern government. Well lets consider the Universe of options. The first is deficit monetization as described above. The next would be to borrow the money. Borrowing this amount of money could seriously erode the capital base of the country. Thus you would have rising (maybe steeply) rising interest rates. The cost of capital (i.e. interest rates) would in effect probably provoke a recession causing rising unemployment and decreased economic activity. In this case a recession or retarded growth precipitated by rising capital costs instead of excess inventories can combine to produce what we had in the late 1970’s which was called “stagflation.” There would be a lot of negative consequences from this course. Increased foreclosures, reduced IRA and 401-K values due to falling stock markets, increased government demand for social services and a diminishing capacity to fund them resulting in more monetization of deficits or outright debt………..This debt would accumulate causing increasing interest payments on such debt at increasingly higher interest rates. This would place a larger claim on the treasury as a share of revenues crowding out increasingly more discretional spending possibly leading to a reduction of real and expected government services in order to avoid raising taxes to cover the shortfall.
This brings us to the third option, which would be to increase income and payroll taxes to the point of Social Security deficit equilibrium. This would start out as an onerous tax and progress to an unsustainable burden for the remaining producers in the country as the demographics of retirement take hold. Many studies have shown that eventually the weight of retirees per worker will be just intolerable. For example, if you had one income producer working and drawing a pay check and that check was taxed to the point of supporting one, two, or three retirees (not to mention the normal US Budget) it would be like moving these retirees into the household of the workers and saying you have to support these people now. A family of 2 or 4 bringing on 1, 2,or 3 retirees would start to snuff out the economic viability of the working family. This of course would not be tolerated by the working families and they would probably finally vote to “reform” social security, but in that environment it would almost essentially amount to a repudiation of it.
This brings us to the final option which is for the government to actually default on the obligation and repudiate the payments under some “revised” legislation caused by scenarios 1, 2 or 3 above or combination there of. So I believe that any one of these scenarios may be unlikely in a modern government philosophically speaking, but on the practical side it could well happen and in all reality will happen. That is why we need reform of the social security system now and it needs to include not only privatized accounts but also linking the retirement age to life expectancy (actuarially) to balance the working population with the retired population in a more reasonable manner. Some day due to advancements in medicine, living to age 90 might have the same health prospects and functionality of a 65 year old today. This needs to be addressed and indexed in a way that it is removed off the political stage.
Our failure to reform the social security is just as bad as the mis-management of Post World War I Germany. ………..steve
i follow the scenarios you layout, so in your risk assesment of inflation and its impact on our country, what do you think is the largest threat to our society if not taken as a high priority?
i see thing like the ongoing war on terror, the miliarty budget increases, health care reform, social security reform, amt reform and general entitlement spending (education, farming subsidies, student loans and welfare) all as huge budget concerns that could legitimately pressure inflation per your discussion above.
i truely would like this adminsitration to open up some dialog with the senate and house on spending reform before we elect a new preisdent. do you think this is too much to ask a presindent who is running out of time (calendar time, not impeachment or anything like that).
Matt…….I agree with each of the things you mention as items that could place excessive strains on the economy as a result of unrestrained fiscal spending. We would all be advantaged by an opening of discussions on budget priorities between the legislative branch and executive branch. Of each of the risk areas you mention I believe that the Social Security projected shortfalls is the areas of greatest economic risk because of the potential magnitued of the sortfall along with the inherrent nature of Social Security expenditures. Not all government expenditures are created equal in terms of the benefit or burden such expenditures place on the economy. In the case of financing this tremendous Social Security deficit such government expenditures (regardless of the source through monetization, debt or tax) would be made exclusively for consumption and not for investment or production, so the diliterious effect of the spending would be greater than alternative reasons for government expenditures. This leads to a discussion of what economists call mathematical elasticity, but this is a complicated area of study in itself, one which you are more equipped to discuss than myself. I was a Finance and Accounting major with only a minor in Economics and bare minimum math. ……….steve
[…] on the heels of yesterdays bizarre trading. I haven’t yet received any comments about my post HERE on the record stock market of 14,000 on July 22nd with the anticipated see the market is risky […]
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