Social Security - I'm so CONFUSED!

I would like to make a couple of points regarding the origins of Social Security. If these have already been made, so be it, but it is necessary to use the correct framework before arguing further.

Social Security (I'll use SS for short, don't confuse it with the Gestapo) was enacted in the mid 1930's by FDR primarily as a way to get older people out of the workforce. Since the depression was the result of a liquidity trap and insufficient demand by the private sector, it was necessary to stimulate the economy by getting people back to work by any means possible. The SS program was set up to incentivize older Americans into retirement, so that their retirement would open positions for the younger generation to fill, which would allow said households to spend and start pushing demand toward more desired levels.

It should also be stated that at that time, the median life expectancy was 67 (given you were 62, it was probably in the lower 70's) and SS could be taken at 62, with full retirement at 65. The government was only planning on paying out for a few years. Now, median life expectancy is almost 80, and people living until 95 or 100 isn't uncommon, nor is collecting SS for longer than you're working (35 years of work, then 35 collecting SS starting at 62 - being 97 isn't unheard of).

With those historical factors aside, it's a largely illusory debate as to SS being 'bankrupt'. If Congress would eliminate the ceiling on which SS tax is collected (currently only the first $107,500 of income is taxed) and tax dividends and capital gains at 1-2%, SS would be long-term sustainable. Medicare is a bigger problem that does have serious long-term fiscal worries.

Well okay, so it's one thing to say it's the "government" owning corporations via sound investment strategies but let me put a different perspective on it:

Normally companies are owned by shareholders, the vast majority of whom are stock traders, day stock traders, holding companies, single rich individuals and a certain percentage by the middle class via mutual funds. A social security/pension owning stocks would, under my theorycrafting, make the common middle class act like a giant rich holding company. Social security would demand sound long-term strategy, since itself is a long-term investment to begin with, thus would bolster corporations with better judgement and long-term thinking versus short term high risk businesses.

So the net effect should be that there are more investment dollars going to long-term corporations that work and because there'll always be a percentage of people who are about to retire, also a bunch of money in government savings bonds (or t-bills in USA's case). That can go toward whatever government purpose (such as infrastructure to bolster the economy).

Hm, I can only think it would be better if you let social security invest in anything.

Now, if you're afraid that SS owns up corporations would then cause the government to be able to tell them to do stuff, you must remember that unlike normal tax dollars, this is your own investment money. If government starts acting up, people can refuse to pay SS (as a last resort), or vote the party out for communist practices (as a first resort). Then the government will have to use a massive police state move to force you to give money. In which case, SS was never your problem in the first place, instead your problem was that you voted in Stalin and the military/police are on his side.

edited 13th Aug '11 6:47:01 PM by breadloaf

I'm still kind of skeptical. I may be a so-called socialist, but even I don't really think the government should fully control the means of production and whatnot.

On the other hand, if the US government instead just bought into SPD Rs or something, that would be fine, so long as it's so widely diversified that the individual ownership in any given firm is sufficiently negligible.

Well, SS ownership in corporations is mitigated by the fact you can vote on politicians. Unlike banks with mutual fund arrangements, you have more control over the SS. Actually, on that note, if we're so concerned about the government investing in corporations and thereby having partial ownership of a lot of different companies, we're totally okay with handing money over to banks with whom we have zero control over?

But what happens when the government investments tank?

Furthermore, moving large sums of money around the stockmarket tends to distort things whether you mean to or not.

If the SS fund is sufficiently diversified, then it would always grow in the long run. You just have to remember that the current shape of the market is not how you determine the size of the fund because it's subject to short term radical changes.

Even with the various market crashes of the past few decades, I believe that in the aggregate, the market has given superior returns to T-bills for sufficiently diversified investments.

I'll just say that I absolutely hate the idea of any sort of government investment because of BUBBLES MAN, BUBBLES. Not so much that bubbles are risky. More like that more money==bigger bubbles which is a bad thing.

That's an interesting point. I'm not specialized in analyzing bubbles in the market.

Well that's why I gave you guys a real world example of the CPP fund.

Here you can take a look at http://www.cppib.ca/Results/Financial_Highlights/

• 2006: 15.5
• 2007: 12.9
• 2008: (0.3)
• 2009: (18.6)
• 2010: 14.9
• 2011: 11.9
• 2012: 0.9

If you look at the long term, it is pretty good growth as well. A significant portion of it is held in bonds.

The distortion is perfectly fine because regardless, this is retirement savings. If you weren't going to invest that money in the first place, the only reason is because you're retarded. Financially anyway. So the investment is going to (or should) exist regardless.

Unless you want to spend every day managing your funds and be an expert at it, you aren't going to outperform a top-grade, 250k/year actuarial scientists investing your money.

My dad did pretty well in options trading during the few years he tried it out, but he lost money on stocks in general.

: The fees are what kill you. The fact is, it's better to put your money in a broad-based index (say, an SPDR that invests thoughout the S&P 500) and eat .1% fees than be in a managed fund and eat 1-1.5% fees each year.

Especially since there's very little evidence that active funds outperform the average at all.

edited 13th Aug '11 8:32:50 PM by storyyeller

Well that's where economy of scales comes in, as Tomu pointed out, when you pool everybody (CPP's case is over 10 million investors, or whatever, I don't know what the working population of Canada is), paying like 3 actuarial guys a measly 250k/year is basically not even 0.1%. It's a 153 billion dollar fund and you're paying an overhead fee of barely a million dollars per year, spread across 10 million people. Your fee is $0.10 per year. Wee.

I don't disagree with the index fund concept, but again, the point of those guys is to correctly balance the fund into the various risk profiles according to the demographics of the investors it has. If you have more old people, you put more into 99.9% safe investments. If you have more young people, you can afford to put more into risky ventures.

You can look at CPP board's investments. It's basically their own index fund for much of the equity.

That was the reason why my dad actually made a net profit on options. You get eaten alive by transaction costs, so you have to invest big. Which means you have to be prepared to eat a loss of 50k in a given money. At least, that's what his data seemed to suggest-had he avoided stocks and stuck with his options trading using the algorithm he'd set up, he actually would have made money (that's looking at it after the fact).

But that may well be coincidence.

Well to further the point on that, when you have 10 million investors, you can pay the CPP investment board actuarial scientists a good 250k or 300k or whatever crazy amount. For each investor, the change in their pocket is more money than the fees they've paid to join into the pension plan. Plus, the investment board can afford to hire the best guys in the whole world to come and invest, give them a ridiculous salary and it costs you nothing.

^^ There's also diseconomies of scale in investing however. And the US trust fund is much bigger then Canada's so it would be even worse.

Hm, could you explain those disadvantages because this is the first I've heard of it.

Dark Confidant, I'd just like to point out that infant mortality rates make that life expectancy statistic a little misleading; people who had already made it to adulthood would probably have a lifespan a bit longer than that.

But life expectancy at age 65 has also risen. I don't remember the exact statistics but I did look them up before.

^^ Here's an article talking about the problems of size

edited 14th Aug '11 6:34:13 AM by storyyeller