Social Security, the Stock Market, and Ida May Fuller
A friend recently asked me, given the disappointing performance of the stock market in recent years, whether I was glad we didn't adopt Bush's proposal to "invest in the stock market." Well, I'm not glad -- for a number of reasons:
- Most importantly, I reject the premise. It wasn't a move to invest social security in the stock market, it was a proposal to allow individuals to invest their own money as they see fit. That could include private sector debt obligations and government debt obligations, as well as equities (which could include domestic and foreign stock, commodities, real estate, etc). A prudent investment strategy seems to be a portfolio that includes a mix of these.
- Yes, our 401k's haven't done as well as we'd like. On the other hand, it's still worth something. What equity do we own for the money we've put into Social Security? Zip. We don't even have a written promise to be paid, backed by the full faith and credit of the federal government, which we would have if we invested our retirement directly in Treasuries. We have a current political agreement to be paid . . . . something . . . in the future. The current formula for calculating benefits is byzantine at best. (If any Ricochetoise out there understand how to calculate it, please share.) So there is a current political agreement to pay us -- something. Meanwhile, the previous and current collectors of Social Security all pulled more out than they put in. Absent another baby boom, the current system is unsustainable. So who gets stuck with paying for the previous benefits? Either this generation or a later generation. I would rather look reality in the eye and suck it up than pass this time bomb on to my children.
- I would also hazard to guess that freeing up capital in this way would benefit the economy. Perhaps my 401k wouldn't suck as much if more capital were available for investment, rather than 25.3 percent of GDP being hoovered out in government spending. Social Security itself is part of the huge misallocation of capital. It's possible we'd be looking at a 15,000 or 20,000 Dow right now if we'd allocated part of SS as capital in the real economy. Either way, I'd rather have the equity in hand than a temporary political agreement to pay every succeeding generation more money than previous generations (all to be paid for with debt and taxes on succeeding generations).
I was curious as to who the first Social Security recipient was, so I googled and found it on the SSA Web site. Her name was Ida May Fuller, and she lived in Vermont. She collected her first check in January, 1940. In the three years she paid into the system, she paid a total of $24.75. Her first monthly check? $22.54. Ida May's total Social Security payout through her lifetime? $22,888.92 over 35 years.
Great return on her investment, huh? 100,000 percent! What did the government do -- buy a discounted mine that happened to hit gold or diamonds? No. Maybe they produced an earth-shattering process that reduced costs and increased yields and produced incredible economic benefits that were then returned to people like Ida May? Wrong again. They collected more money from younger workers. It was a transfer payment, pure and simple. (Is it really crazy to call this a Ponzi scheme? Or is it just politically inadvisable?)
But, pyramid scheme or not, it's clear that that's not at all sustainable. You can find Ida May's story (and the payoff numbers) on the Social Security Web site.
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Comments :
Dec '10
Re: Social Security, the Stock Market, and Ida May Fuller
Your third point is why social security will collapse before it is ever reformed. Any redirection of the money we pay into it is a reduction in the funds available with which to buy votes. Our "leaders" will never agree to having their power reduced in such a way.
Jun '10
Re: Social Security, the Stock Market, and Ida May Fuller
Nice post.
P.S.
They actually advertise Ida May's money grab from her grandchildren? She lives in infamy.
Mar '11
Re: Social Security, the Stock Market, and Ida May Fuller
Both Chile and Mexico have proven that a mandatory but private retirement system can work. People feel like they actually own something other than a vague promise of their government. I had two gentlemen in my home this evening, one from each country. They were amazed as I described our Social Security program to them. The Mexican was particularly dumbfounded that we require about 15% of our wages (when you take both the employee and employer contribution together) as contributions to a program that is going broke when Mexico requires only 10% and the people there love it.
Jan '11
Re: Social Security, the Stock Market, and Ida May Fuller
When Obama suggested in July that Granny may not receive her social security check if the debt limit was increased; what did you friend say about that?
He probably wont be your friend once you're out of doughnuts.
May '11
Re: Social Security, the Stock Market, and Ida May Fuller
cdor: Nice post.
P.S.
They actually advertise Ida May's money grab from her grandchildren? She lives in infamy. · Oct 2 at 8:00pm
Ida May Fuller doesn't deserve infamy. She seems likable enough, and was genuinely surprised when she qualified for her first check. It's as if someone bought a raffle ticket some of her money without her being aware of it, and this secretary suddenly hit a great payday! It also explains, in very human terms, the emotional appeal of Social Security, especially to people of a certain generation who heard about FDR as young children as parents and grandparents expressed their gratitude for such a wonderful program.
Wonderful, indeed. Madoff's first victims were also duly impressed by the kinds of returns he was able to snag for them.
Edited on Oct 3, 2011 at 10:33amMay '11
Re: Social Security, the Stock Market, and Ida May Fuller
The dow in 1971 on Oct 1st was 890ish. If someone was able to invest in a Dow market index fund over the forty years since I think they would doing pretty good. Its not like you roll in a private system right away. I'm confident that someone who put their SSI money in an index fund from 1971 till now would look at their account right now and be mighty happy. But someone should check me 'cause I don't do math.
Sep '10
Re: Social Security, the Stock Market, and Ida May Fuller
I find it strange that all seem to think it is OK for the government to mandate that everyone save a given percentage for retirement. If it has the authority to do this, what does it not have the authority to do? It seems to me that conservatives don’t object to the government playing nanny as long as it dresses up as a young attractive nanny.
Sep '10
Re: Social Security, the Stock Market, and Ida May Fuller
That's amazing that SSA actually tells the Ida May Fuller story, rather than burying it.Where did we lose the sense that stealing, even in such a genial way, is immoral? Dennis Miller remarked that nobody knows about Ponzi, but everybody has heard of Bernie Madoff (h/t, Bagodonuts). There has to be a better way to communicate how wrong this wealth redistribution is.
Nov '10
Re: Social Security, the Stock Market, and Ida May Fuller
Inflation has to be considered; $890 worth of goods in 1971 would cost you roughly $5000 today, according to the BLS. So you basically have to discount your gains by by about half. Or in other words, you would be able to buy roughly twice as much now - after a 40 year investment - as you could in 71. Personally I think that's an underestimate - for example in the 60's & 70's you could still get a good job with a high school education or less, now parents need to lay out for college.
Edited on Oct 3, 2011 at 5:19pmMay '11
Re: Social Security, the Stock Market, and Ida May Fuller
We should get out of social security business entirely, bu that's not in the cards -- the political consensus strongly supports social security, across nearly all groups. A proposal to scrap the system would be rejected immediately. Perhaps, after experience managing at least a proportion of social security savings, the electorate might be willing to reduce the program further. But if they don't, they should have some say in how their retirement is invested.
Social Security is a defined benefit plan. Such a plan is not maintainable. Just as nearly every private employer has had to move to defined contribution plans, Social Security needs to go in that direction as well, funded from the current payroll tax (constitutional under the 16th Amendment).
Sep '11
Re: Social Security, the Stock Market, and Ida May Fuller
I pulled the actual Old Age and Survivors Insurance (OASI) maximum payments for EMPLOYEES ONLY. Those numbers by themselves were interesting. Looking at the period from 1971 to 2010, we can see that the maximum payment INTO the OASI fund in 1971 (chosen just because that’s the year emory king suggested) would have been about $316. In 2010 (40 years later) that amount jumped to $5,660. That’s an annual rate of increase of 7.48%--this increase is mostly driven by the fact that the annual maximum taxable earnings is rising at a rate much higher (about double) than inflation, although it is partly driven by an overall increase in the contribution rate (which has remained relatively flat since about 1984). If we’d deposited the maximum amount each year in the overall U.S. stock market (as measured by the S&P500), our EMPLOYEE-ONLY contributions would be worth $598,400. Note that the S&P500 earned a geometric mean of 10.16% annually (including dividends).
Apr '11
Re: Social Security, the Stock Market, and Ida May Fuller
Wow, great post, bagodonuts. And by "great" I of course mean "really, really, depressing."
Jul '11
Re: Social Security, the Stock Market, and Ida May Fuller
That tells you something if the Mexican system is better than ours.
-E