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Letters to the Editor

Where’s the money?

February 18, 2011

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To the editor:

Recently Sen. Mitch McConnell referred to Social Security’s negative cash flow as a one or our “long-term unfunded liabilities.”

That’s not even wrong. Working Americans have been overfunding Social Security to the extent of a current $2.6 trillion surplus (http://www.ssa.gov/oact/progdata/assets.html). So where’s the money? Well, Sen. McConnell’s distinguished predecessors spent it. What’s left is a gargantuan pile of IOUs known as the Old-Age, Survivors, and Disability Insurance Trust Funds.

This sort of thing also happens in the private sector where it’s known as fraud. So what exactly is the difference between Bernie Madoff and our representatives, both of whom spent money entrusted to them with no apparent scheme for repaying it? The central difference seems to be that Madoff forgot to leave behind a pile of bonds, which would have shown that he really did intend to pay it back. Maybe he had an incompetent lawyer.

In any event, given the slim chance that Sen. McConnell and his colleagues from both parties decide to adjust Social Security benefits for current retirees, fixing the mess will fall upon younger generations in the form of higher taxes, increased borrowing, or both. Maybe there needs to be more overcrowding in Mr. Madoff’s prison wing.

Comments

Floyd Craig 3 years, 10 months ago

but yet they let people ages 18 and up that use drugs and drink and cant hold a job or wont hold a job to get social security and the ones who have health problems cant whats up with this make the younger ones work for the sate to have money to support thier habitsnot take the money from the ones who really need it

sr80 3 years, 10 months ago

wake up first,have some coffee, then get on the computer!!!!

m3rryweather 3 years, 10 months ago

Pray tell how you know what and who is on drugs>?

Richard Heckler 3 years, 10 months ago

Separating Fact from Fiction

By Doug Orr who is a professor of economics at Eastern Washington University. He speaks and writes regularly about Social Security.

  1. It has repeatedly been said by politicians that those who put their money in private accounts are "guaranteed" a better return than they'll receive from the current Social Security system.

But every sale of stock on the stock market includes the disclaimer: "the return on this investment is not guaranteed and may be negative"--for good reason.

During the 20th century, there were several periods lasting more than 10 years where the return on stocks was negative. After the Dow Jones stock index went down by over 75% between 1929 and 1933, the Dow did not return to its 1929 level until 1953(24 years).

In claiming that the rate of return on a stock investment is guaranteed to be greater than the return on any other asset is lying. If an investment-firm broker made this claim to his clients, he would be arrested and charged with stock fraud. Michael Milken went to jail for several years for making just this type of promise about financial investments.

  1. Until 1984, the trust fund was "pay-as-you-go," meaning current benefits were paid using current tax revenues. In 1984, Congress raised payroll taxes to prepare for the retirement of the baby boom generation. As a result, the Social Security trust fund, which holds government bonds as assets, has been growing.

When the baby boomers retire, these bonds will be sold to help pay their retirement benefits.

If the trust fund went to zero, Social Security would simply revert to pay-as-you-go. It would continue to pay benefits using (then-current) tax revenues, and in doing so, it would be able to cover about 70% of promised benefit levels

The system won't be bankrupt in any sense. On this point politicians are consciously misrepresenting the truth with the intent to deceive." That is what the dictionary defines as lying.

Richard Heckler 3 years, 10 months ago

  1. Is it true that the trust fund is just a bunch of government IOUs and therefore worthless?

The trust fund does just contain IOUs, but they're not worthless. If they are, someone should tell that to the very smart and very rich people who bought $475 billion in government bonds last year to finance the deficits President Bush and Congress created, and to the central banks of Japan, China, and many other countries that hold a large share of their assets in U.S. government bonds.

  1. What impact would a privatization plan have on the national debt? Unless taxes are raised, the government will have to borrow up to $4 trillion over the next 20 years to make up the money that is drained out of the system by private accounts..

  2. How will the rest of the U.S. economy be affected if the president's plan is enacted? Put simply, moving to a system of private accounts would not only put retirement income at risk--it would likely put the entire economy at risk.

  3. Given that England initiated private accounts in 1984 that failed miserably, what guarantee is there that the Bush plan won't also fail? The British experiment with private accounts has indeed failed to provide an adequate and stable retirement income for the majority of citizens.

The United Kingdom is now trying to figure out how to switch back to a defined-benefit system of retirement insurance.

The problem is that the trillions of pounds that were diverted into the stock market can't be brought back into the defined-benefit system.

Richard Heckler 3 years, 10 months ago

The best way to explain Social Security is to say what it is. It's an insurance system that protects your income when you retire or face disability, and provides income to your children if you die. Politicians and Wall Street want you to look at Social Security as an investment--but it is a form of insurance that guarantees you a constant stream of income in retirement or in case of disability, adjusted to protect against inflation, for as long as you live.

Social Security can be compared to other types of insurance such as home insurance. You insure your home because if it should burn down, you would not be able to afford to rebuild it with your personal income alone. If your house never burns down, you will pay into the insurance fund and never get a penny back. But fire insurance isn't a "bad investment" because it isn't an investment at all. You are purchasing security.

Unlike fire insurance, Social Security inevitably gives most of us our money back. But the fact that we get money back does not change the fact that Social Security is a form of insurance, not an investment. Only the richest of the rich can afford not to have insurance and to rely solely on their own savings and investments to fund their retirement or risk of disability.

Young people must also understand that financial investments are inherently risky. Many investments fail, and when they do, you lose all of the money you invested. Today's 25 year olds have only seen the stock market go up, except for one (very large) drop. But you don't have to go back to the 1930s to see a different picture:

If you put money into the stock market in 1970 and waited until 1980 to take it out, you would have lost money.

There is absolutely no guarantee that stock investors will see the high returns politicians many times imply

Doug Orr is a professor of economics at Eastern Washington University. He speaks and writes regularly about Social Security.

Dollars and Sense http://www.dollarsandsense.org/archives/2005/0505orr.html

notajayhawk 3 years, 10 months ago

"The best way to explain Social Security is to say what it is. It's an insurance system that protects your income when you retire or face disability, and provides income to your children if you die."

No, merrill, it's a tax. The Supreme Court ruled decades ago that the people that pay into Social Security have no ownership rights to that money. Get a clue.

cato_the_elder 3 years, 10 months ago

"Maybe there needs to be more overcrowding in Mr. Madoff’s prison wing."

Starting with Christopher Dodd and Barney Frank.

oliverfinney 3 years, 10 months ago

I was not in any way arguing against the concept of Social Security or in favor of a "private" retirement system. I was simply observing that people talk about the "trust funds" as though their existence will prevent any negative impact on the federal budget until they are fully depleted. As Merrill correctly points out, the special OASDI bonds--"owned" basically by current and future retirees--will be sold to finance the difference between the SS payroll tax income and increasing payouts. But the buyer will be the US Treasury. How will the Treasury pay for these bond purchases? The Treasury will have either to borrow the money--thereby adding to the national debt--or pay for the bonds though taxes. When the Trust Funds run out, there will be no change in how the Treasury operates to pay SS benefits. It is, or should be the case, that the OASDI bonds are as secure as regular US government debt. Time will tell whether politicians actually honor those commitments.

just_another_bozo_on_this_bus 3 years, 10 months ago

There are two relatively simple fixes to this problem. Means testing for benefits and raising the cap on income for social security taxes, which I believe is currently somewhere around $60,000. I'd say keep the current cap at the current rate, but then also collect a smaller percentage on all income above $60,000, but with no cap.

notajayhawk 3 years, 10 months ago

Gee, ya' mean Herr Klowne's 'solutions' are typical income-redistribution welfare programs? How surprising.

just_another_bozo_on_this_bus 3 years, 10 months ago

"Redistribution" is redundant. The whole point of an economy is to distribute income, fairly or unfairly, the latter of which you clearly prefer.

The difference between you and me is that you want all the income to be distributed upward, to the wealthiest of the wealthy, under the absurd notion that you'll one day be one of them.

Unlike you, I'm OK with a modest lifestyle earned through the work I actually do. You want promises of fabulous riches, likely not earned, but merely arranged by positioning yourself in front of the most convenient spigot, jumping line at every opportunity.

You're a perfect little Republican.

Richard Heckler 3 years, 10 months ago

Millions of Americans have lost their retirement funds due to:

*unexpected job losses to outsourcing • the savings and loan scandal during the Reagan/Bush years • ENRON • Dot com fraud • Bernie Maddoff • Home loan fraud during the Bush/Cheney admin which put an estimated 11 million out of work..

In essence we never know from one day to the next if we will be employed. As we all know Wall Street investing offers no guarantees of safety.

Myth: Social Security adds to the deficit Reality: It's not just wrong—it's impossible! By law, Social Security's funds are separate from the budget, and it must pay its own way. That means that Social Security can't add one penny to the deficit.

Neither Social Security nor Medicare are free. Users pay.

jafs 3 years, 10 months ago

There are several problems with the SS system.

  1. Pay as you go is another term for a Ponzi scheme, which only works as long as there are more people paying into the system than taking out of it.

  2. The ability of politicians to take money from the fund and use it for other things is absurd.

  3. If it's an insurance policy, as Merrill suggests, then it should be paying out on the basis of need, not how much has been put into the system.

It is a confused system - collecting separately, but not keeping the money separate and untouchable is odd. If it's a tax funded insurance system, then taxes should be collected without separating SS out, and benefits should be based on need. If we're going to collect separately, then the money should be kept separate and untouchable.

Getaroom 3 years, 10 months ago

There are in fact several problems with your assessment. SS was fine until it was robbed.

Richard Heckler 3 years, 10 months ago

Put these tax dollars into Wall Street is nothing more than paying back special interests. Taxpayers cannot afford this high risk venture. Wall Street is for those who can afford to lose money at most any given moment.

Today's 25 year olds have only seen the stock market go up, except for one (very large) drop. But you don't have to go back to the 1930s to see a different picture:

If you put money into the stock market in 1970 and waited until 1980 to take it out, you would have lost money.

There is absolutely no guarantee that stock investors will see the high returns politicians many times imply.

During the 20th century, there were several periods lasting more than 10 years where the return on stocks was negative. After the Dow Jones stock index went down by over 75% between 1929 and 1933, the Dow did not return to its 1929 level until 1953(24 years).

Kontum1972 3 years, 10 months ago

we are screwed..and we did not get kissed...gee thx elected leaders...and Al Capone was a criminal...?

Richard Heckler 3 years, 10 months ago

What is the source of this bogus Social Security disaster?

Washington D.C. politicians. How reliable are they? I have come to believe they are among the most uniformed group on the planet. Like it or not it seems their talking points come from special interest campaign money sources.

These politicians are a group of people who have learned how to manipulate the american people. When they want we americans to think awful of something they begin their assassination campaigns. Then their think tanks and lobbyists go to work.

just_another_bozo_on_this_bus 3 years, 10 months ago

In a capitalist economy, there have to be people who don't make much money in order for the wealthy to accumulate their wealth.

If you want to have a capitalist economy in which it's possible to become wealthy, there have to be programs like Social Security and Medicare. Otherwise, we'd look like every third-world country in the world. But that appears to be what Republicans are striving for.

m3rryweather 3 years, 10 months ago

Would you suggest instead that people should be starved to death or death by the elements? You do not get a LOT of money with disability . I worked for 20 yeaars before becoming disabled. I at least paid something in . But I am very ill and qualified after a bunch of double done tests.

conservative 3 years, 10 months ago

Ss is broke in every sense of the word. Pay as you go won't work with the dwindling number of people paying in versus those taking out. Ss was originally set up to provide a little extra comfort for retirees, it was never suppose to be their sole source of income. with the baby boomers retiring the only ways for the system to stay solvent will be to either reduce benefits or dramatically increase premiums on those working.

Jimo 3 years, 10 months ago

"This sort of thing also happens in the private sector where it’s known as fraud."

No, it's called routine capital funding. Mr. Finney seems to believe this is an unusual practice, unique to the U.S. government. That's quite strange given that any perusal of the financial pages of the newspaper will bring up a mass of small print quotations of the current prices for all manner of "IOUs" issued by every level of government, here and abroad, and private entities large and small.

The United States investing money in a Treasury bond is not "fraud."

There is a large, global, and highly efficient market in U.S. Treasury debt. Real people, investing real money, every day "vote" on whether they believe this debt to be a good investment - not clueless blowhards writing letters to the editor. These people invest this money for the lowest amounts of interest anywhere on earth precisely because they judge the investment to be the safest on earth. In fact, in recent years, at times, investors have been willing to pay the Treasury interest (negative yield) just for the privilege of being allowed to lend to the U.S.

Mr. Finney seems to advocate some manner of "fix" involving current retirees and criticizes current politicians refusal to put it into place. What "fix" Mr. Finney advocates is anyone's guess, as is what effect this would have on the supluses and deficits of a long-term - indeed, perpetual - retirement and disability insurance program. Mr. Finney's outrage at the fact that the Treasury issues bonds has no connection whatsoever to his unspecified agenda.

(Perhaps he is outraged that the revenue raised from these bond sales are used to provide welfare to billionaires, subsidies to business, and a global military empire instead of building roads, scientific research, and education? Those are budgetary priority values. That's where a debate about "fraud" lies not Social Security. Regardless, there would still be the same surplus loaned out in return for Treasury bonds.)

oliverfinney 3 years, 10 months ago

The objective of my letter was fairly limited: to protest the misleading positions of politicians on both the left and right.

Your comment about debt misses an essential part of my comment: fraud is borrowing “with no apparent scheme for repaying it.” A responsible business or country borrows with the intention of growing their enterprise so that they can both profit from the funds AND eventually repay the bond principal. The willingness of our politicians to honor our debts to the trust funds is what’s actually in question, isn’t it? Very low interest rates on government treasuries today indicate that the markets see no problem. The rating agencies are not so sanguine. Here’s one of many interesting discussions of this topic: http://www.washingtonpost.com/wp-dyn/content/article/2009/03/30/AR2009033003291.html.

The SS bonds in question are not in fact traded at all like regular Treasuries. They are an accounting transaction between the Treasury and the OASDI trust funds.

To your last point: I did not have an “agenda” beyond trying, unsuccessfully apparently, to point out the hypocrisy of politicians of all stripes. Social Security is neither “unfunded,” nor is everything "fine" until the trust funds are depleted in 2041 or whenever the funds are currently projected to run out. Beginning in only a few years the Treasury will have to start buying back the special bonds it sold the trust funds, and it will have to do that with real dollars obtained either from taxes or additional Treasury debt, or both. There will be pain well before 2041.

You are correct that I did not hazard to advocate for a specific “fix.” An effective "fix" will depend upon an accurate understanding of the problem. If you Google “Social Security Trust Fund surplus” you can find a number of thoughtful discussions of the issue.

Thank you for your (mostly) civil response to my letter.

Richard Heckler 3 years, 10 months ago

Wall Street Is to Blame for Pension Shortfalls

It's no surprise that Gov. Arnold Schwarzenegger has taken his attack on public employee pensions to the Wall Street Journal, the paper of record for the big banks and giant corporations whose greed and recklessness put at risk the retirement savings of all Americans.

After all, here in California his administration's tired arguments, misplaced blame, and selective use of statistics have worn thin with a public who knows that hard-working public employees like nurses, college professors, and child protection workers deserve to share in the American dream of a secure retirement.

Everyone who works hard and plays by the rules deserves to retire in dignity. But Wall Street doesn't see it that way. The same banks and mortgage brokers who are responsible for our economic collapse got rich by gambling with the jobs, home values, and retirement savings of ordinary Americans.

Too many Americans lost everything, but Wall Street wealth and banker bonuses are on the rise.

Even as Americans are struggling to recover from an economic catastrophe created on Wall Street, the same set of bankers and brokers are trolling for more victims, and they have their sights set on hard working employees in the public and private sectors.

For generations, Americans have counted on three sources of retirement income: social security, employment pensions, and personal savings.

Wall Street is bent on undermining all three by pushing risky social security privatization schemes and pursuing corporate wealth and executive bonuses while stripping workers of jobs that provide for their basic needs, let alone any chance at saving for retirement. http://www.huffingtonpost.com/eliseo-medina/wall-street-is-to-blame-f_b_705133.html ================================= Stick with Social Security Insurance that will bring an extra $1,000 a month. Anyone that will turn that away send it my way........ absolutely

Richard Heckler 3 years, 10 months ago

* BUSINESS
* OCTOBER 16, 2010

Pension Funds Flee Stocks in Search of Less-Risky Bets

After making the same kinds of investment blunders as many individuals, corporate pension funds now are seeking the same remedies: fleeing stocks for the perceived safety of bonds.

A growing number of pension managers are concluding their pursuit of maximum returns was a mistake, interviews with managers and consultants show. Instead, many funds are trying to achieve stable returns that more or less keep pace with the plan's obligations.

Corporate pension plans loaded up on stocks in the booming 1990s and had almost 70% of their money in them by the mid-2000s, a pattern similar to individuals'. By this July, pension plans as a group had cut their stock exposure to 45%, according to the Center for Retirement Research at Boston College. Many say the trend will continue.

Their caution damages a pillar of stock investing. With individuals also currently reducing their exposure to stocks, the market is left increasingly in the hands of investors such as hedge funds that often trade rapidly, contributing to volatility. The pullback could be one reason the stock market has been choppy this year.

Some of the cutbacks at pension funds are the result of losses during the financial crisis. In a trend that began slowly in the 2000-2002 bear market and gained momentum when stocks took another dive in 2008, corporate pension managers have begun concluding that loading up on stocks in search of high returns was a fool's errand. Corporate plans saw the value of the stocks they held at the market peak in October 2007 decline by about $1 trillion through early March 2009, according to the Center for Retirement Research.

"This was a slap in the face, definitely," for the pension world, says Ron Barin, chief investment officer for pension investments at Alcoa Inc. "Risk was never really a big part of the equation, and it really should have been."

http://online.wsj.com/article/SB10001424052748704540904575451793471885092.html

jafs 3 years, 10 months ago

This is one of the astonishing things about the whole mess, to me.

How on earth can one manage investments for pension plans and not consider risk? It makes no sense at all.

Richard Heckler 3 years, 10 months ago

Marketing serpents pitch to civil servants

Next, Evans quoted Chriss Street, treasurer of Orange County, Calif. (The county, for those who don't know, went bankrupt by over-leveraging itself during the infamous 1994 version of the carry trade.) Said Street, regarding the appropriateness of public funds investing in equity tranches, the diciest of all mortgage paper:

"It's grossly inappropriate to take this level of risk. Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig. . . . Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses."

Many companies are freezing or dropping pensions. Here's what to do if it happens to you.

Those losses will be enormous, and we'll see an incredible witch hunt when these pension funds are left holding the bag, even though they brought it on themselves.

As I noted at the beginning, a variation of this theme is going on in the funding of all the junk debt being created for the current LBO craze. However, knowledgeable people have told me that we're starting to see some covenant tightening and higher coupons, as deals already announced are being finalized via bond financing. At some point, even though some of those deals have been announced, they actually won't be funded (a la what happened in 1989 with United Airlines).

As to which deals meet that outcome, I don't know, but I have no doubt that LBO artists will go too far. It doesn't take much imagination to see why once the music finally stops, we will face a litany of problems like we've never seen before.

Ultimately, the debt market is going to gag. That will certainly end the equity party (though other things could end it, as well), and this LBO mania will be over.

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/PublicPensionFundsTakeARiskyGamble.aspx

m3rryweather 3 years, 10 months ago

Would you suggest instead that people should be starved to death or death by the elements? You do not get a LOT of money with disability . I worked for 20 yeaars before becoming disabled. I at least paid something in . But I am very ill and qualified after a bunch of double done tests.

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