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The Logic of a Liberal

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December 05, 2010 – Comments (22)

Social Security income does not matter to the 250K-club, but health insurance expenses matter to them a great deal. And we are not talking about some very fancy insurance policy, but about a cheap and low-quality policy like Medicare. The same members of the club who realize they can't purchase such a policy from UNH feel at the same time that their Social Security income is chump change. Is there a problem with elementary logic?

 http://krugman.blogs.nytimes.com/2010/12/04/class-and-social-security/

 "The answer, I suspect, has to do with class.

When medical expenses are big, they’re big; even the very affluent are grateful when Medicare pays the bills for their mother-in-laws bypass or dialysis. The importance of Medicare, in short, is obvious to all but the very rich.

Social Security, by contrast, is something that matters enormously to the bottom half of the income distribution, but no so much to people in the 250K-plus club. A 30 percent cut in benefits would represent disaster for tens of millions of Americans, but a barely noticeable inconvenience for VSPs and everyone they know. A rise in the retirement age would be a vast hardship for people who do manual labor, but if anything a gift to VSPs, who don’t want to step aside in any case. And so on down the line.

So going after Social Security is a way to seem tough and serious — but entirely at the expense of people you don’t know." 

22 Comments – Post Your Own

#1) On December 05, 2010 at 2:57 PM, JakilaTheHun (99.93) wrote:

The bigger problem with social security is that it harms retirement savings to begin with.

If anyone wants to see the dramatic differences between a world with Social Security and a world without it, look up the treasury bond rates and compare them with average returns on the S&P over a period of about 45 years. 

By the last year, even under the worst circumstances, you will almost always have 3 times as much money in the equity pot as you would in the treasury bond pot.  So even if you remained 100% invested in equities one year before retirement and there was a dramatic market crash that dropped the value of your retirement holdings by 50%, you would still have 50% more money with the equity pot than with the treasury bond pot. 

And that was pretty much the worst case scenario I could find that would've ever realistically occured over the past 60 years. 

 

If social security were completely replaced by 401(k) and other more flexible retirement options, Americans would be wealthier and have more to retire on to begin with.

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#2) On December 05, 2010 at 3:30 PM, devoish (98.76) wrote:

Jakila,

I f SSI were completely replaced by 401k's and other more flexible retirement options would that also eliminate all risk of capital loss?

Would anybody wind up after 60 years with less than they invested into their 401k?

Would fees of 2.5% deliver the majority of any gains to the 401k manager?

just sayin...

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#3) On December 05, 2010 at 3:36 PM, hanginout (48.28) wrote:

This is touchy but Jakila, how old are you?  When I started to work, the only way to really invest was to buy savings bonds.  You did that or you took the company investment option which was presented at "orientation" as "do you want A, B, or C?  You have to choose now."  No details were given.  You were told that you could come back later and change it if you had to. 

Buying stocks required that you buy in even lots of 100 shares.  Even then the commissions were painful - $60-$80 for an even lot of 100 shares.  Did it appreciate greatly? No, not really.  Could you buy odd lots?  You could but the commissions were all but impossible.  You almost had to have a 3-bagger just to break even. 

This was the environment that Social Security was supposed to suppliment.  You might be invested in Treasury bonds, in a savings account at the bank, in a mattress - they all paid about the same interest.  In the early 70's, things began to change but very very slowly.  The current investment atmosphere of computer information available at any time and communities of investors like this one trading ideas would have seemed as far-fetched as - well - as a baby entering trades from the comfort of his own high chair or crib.  :P

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#4) On December 05, 2010 at 3:43 PM, Lordrobot (89.77) wrote:

Talk about a liberal mind... if they have one... It is safe to say that both Social Sec and Medicare and Medicaid are completely broke. So when one looks at the success of liberal policies the success can be measured by how insolvent the programs have become. 

And of course there is Aunt Zitunni, Obamas aunt freeloader felon. who has every form of gov aid but never contributed a dime. Is she the bottom worth protecting? A scammer?

The concept of medical care is risk pooling. This is where people in a neighborhood would pool money to care for someone who was stricken with an expensive illness. It only works if the majority remain healthy and if the illnesses for which claims are made are no frivolous. Rinoplasty and Breast Augmentation for other than destruction by cancer or are frivolous. And the medicaid patient that runs to the ER every week complaining of belly pain to get lortab to sell on the street also gets a CT Scan and often hospital admissions.

Ultimately, the risk pooling system doesn't work. And there are too many scammers to have fidelity in the system, so Soc Sec doesn't work either.

A better system would be no system at all. This would improve people's conduct because they would have to take care of their health and learn to save. While it may appear cruel to Aunt Zitunni at first blush in reality it would be absolutely fair to all. But in the long run it will improve the quality of lives of most people and the real predictor of your health would be your genetic makeup and your own care of yourself. 

In the 1940s most people had no insurance. There was no heart surgery until after 1956 and that was very limited. Yet most people did fine average life expectancy in the 50s, corrected for war was about 71 on average. Today it is about 77 so it is only 6 years difference at a huge cost to everything. This is probably because of antibiotics alone. There were no antibiotics until 1942 when Penicillin was put into mass production. So the advancements are mostly in this area. 

It makes no sense to make everyone poor because of the so-called poor. The conduct of the poor is generally what leads them to be poor. Aunt Zintuni has never been a productive person; she's a parasite.

There are always going to be the few unfortunate that are born disabled and mentally damaged but the numbers are so small that charities could easily handle these cases.

Back in the 30s and up to the 50s, if a child was born on a farm that was terribly physically or mentally disabled, the doctor would deliver the fetus, take it in another room and suffocate it. Why? Because as a practical matter, children on a farm are born to work the farm not to be a drain on the limited assets of the farm. Sounds cruel? Not really. It would be more cruel to shackle the Farmer and his wife and the other children with this tragic and fortunately rare occurrence.  

Medicine using medicines is not terribly expensive in the United States today. Walmart and Target and others have wonderful formularies that can treat most illnesses with prescriptions that cost just $4. These are the kind of medicines which extended life expectancy.

Other disease such as heart disease are mostly due to lifestyle habits. So are most cancers. So the whole objective of medicine would be to attack causes of disease not treating the results of bad lifestyle decisions.

Liberals always look to the gov to solve their problems even after the gov has clearly demonstrated it creates calamity with its endless unforeseen consequences. 

The best system by far in the long run is no system at all.   

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#5) On December 05, 2010 at 3:52 PM, goalie37 (96.88) wrote:

I'm not one to advocate the position that "the people" are stupid and need the benevolent protection of the government, but social security versus stocks isn't far off.  Most of us Fools would benefit greatly by controlling our own funds.  But the average person with little inclination to spend hours studying stocks would be easy prey for the vultures on Wall Street. Am I saying people are stupid?  No.  But I am saying that our corrupt financial system would reap the greatest rewards.

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#6) On December 05, 2010 at 4:09 PM, hanginout (48.28) wrote:

Out of almost 40 people in my extended family, there are only 2 of us that have any interest in the market and market conditions at all.  The other person looks at the market, shakes his head, and hands his retirement to a financial counselor.  I try very hard to get the others to at least read something, but they have decided that money in the bank is safe and that is where it will stay - earning nothing.  The reason I keep studying is that I once knew all of this (in the 1970's) but lost track of it when I had kids.  I don't plan to have that happen again.

You either go forward or backward.  On this subject, there is no standing still and holding your spot in line.  The line will pass you by or run you down.  Thinking about it, this is a specialized type of knowledge.  Less than 25% of my family members would be able to do this and do it well.  Of those people, most would do a great deal better than I can.  They just don't want to do the initial study.   Financial planning is as much a type of learning as being able to cook a gourmet meal, fix a car, or create a work of art.  It is as rare as true common sense which is another quality that is in very short supply in this world.

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#7) On December 05, 2010 at 5:15 PM, JakilaTheHun (99.93) wrote:

I f SSI were completely replaced by 401k's and other more flexible retirement options would that also eliminate all risk of capital loss?

No.  I already mentioned that in my example, suggesting that even if the market crashed the year before retirement and equities gave poor returns, you'd still have in an absolute worst case scenario, about 50% more money to retire on. 

In my more realistic 'better-case' scenarios, you end up with 200% - 1000% more to retire on. Which brings me to the major point: social security is a very inefficient program.  That's why it's bankrupt. 

If any doofus can invest in an index fund and have 300% more to retire on, then how is Social Security achieving its goal to begin with?  It's actually making everyone poorer.  Since the wealthy have more flexibility to use other options, they are the only ones who don't have to worry about its inefficiencies all that much. 

 

Would anybody wind up after 60 years with less than they invested into their 401k?

Nope.  Not if they invested in any passive index fund.  That was precisely my point.  There's absolutely no period in the past 60 years where someone would have made less by investing in the S&P 500 or Russell 3000 index; even if they retired right during one of the worst market crashes.  (And this is assuming they remained 100% invested in equities one year before retirement, which would be unlikely.) 

 

Would fees of 2.5% deliver the majority of any gains to the 401k manager?

Nope.  I've never heard of fees of 2.5% on passive index funds.  Or even passively-managed mutual funds.  2.5% is more like a rate for an actively-managed mutual fund.  Which is not what I'm suggesting.

I'm not specificially suggesting that 401(K) is the only option to go with here.  I'm suggesting that if the government allowed people to invest a chosen percentage of their income in a passive index fund of stocks, they'd always dramatically outperform Social Security over the long-haul in virtually all cases. 

 

I'm open to different solutions.  I just don't see how the current Social Security system makes any sense.  At most, we should totally abolish it.  At the very least, we should dramatically change the structure of it so that peoples' retirement is specifically tied to how much money they put in, and they are allowed different investment options, including passive equity funds.

 

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#8) On December 05, 2010 at 6:02 PM, ETFsRule (99.89) wrote:

"It is safe to say that both Social Sec and Medicare and Medicaid are completely broke. So when one looks at the success of liberal policies the success can be measured by how insolvent the programs have become. "

I don't follow your logic here. When you say that these programs are "broke", you mean that at some point in the future, the government may not be able to fund them?

That seems to be a criticism of the federal government as a whole... it doesn't indicate that these programs have failed to accomplish what they were supposed to do.

"In the 1940s most people had no insurance. There was no heart surgery until after 1956 and that was very limited. Yet most people did fine average life expectancy in the 50s, corrected for war was about 71 on average. Today it is about 77 so it is only 6 years difference at a huge cost to everything. This is probably because of antibiotics alone. There were no antibiotics until 1942 when Penicillin was put into mass production. So the advancements are mostly in this area. "

I can't tell if this is meant to be treated as a serious analysis, but it is rudimentary at best. For one thing, you have failed to address the fact that a lot of things have changed from the 1940's until now. Rates of heart disease, for instance.

Are you really trying to say that heart surgery and other modern medical procedures haven't made any impact whatsoever on life expectancy? If so, you will need to provide a lot more factual evidence to support this idea.

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#9) On December 05, 2010 at 6:43 PM, starbucks4ever (99.49) wrote:

I personally find this right-wing crusade against Social Security asinine. Having said that, the last one I want to see defending it is that liberal, class-conscious "friend of the poor' named Paul Krugman. I don't want any such "friends" speaking for me. To paraphrase the classic, if Krugman supports Social Security, than I am against it!

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#10) On December 05, 2010 at 6:44 PM, Option1307 (30.51) wrote:

This is probably because of antibiotics alone.

Actually no. The single largest contributer to increased health in the US in the last 100 years has been the implementation of public health programs e.g. vaccination programs, water quality standards (sewage disposal), etc. As someone in the medical field I'm not trying to downplay addvances in medical technology/medicine but they are actually not the "most important" factor in this regard.

Comments #1 and #7 are spot on, +1.

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#11) On December 05, 2010 at 7:10 PM, devoish (98.76) wrote:

Jakila,

The cost of 2.5%http://www.pbs.org/wgbh/pages/frontline/retirement/etc/tyranny.html

With Glass-Steagal gone, gold manipulation rampant, government spending at the beginning of the last 60 years going to infrastucture and jobs and now to finance and hope, I would suggest that the next 60 years will look nothing like the last 60.

Regards,

Steven

PS to the life expectancy posts. The majority of the gain to "average life expectancy" comes predominantly from keeping more babies and children alive. The argument that longer average life expectancys is a huge drain on SSI is incorrect because the life expectancy of those who reach working age and pay into SSI is what matters most, which has barely changed as compared to "average" life expectancy.

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#12) On December 05, 2010 at 9:38 PM, hanginout (48.28) wrote:

Might I suggest a simplistic solution to the Medicare/Social Security problems.  This is only a first step, but it is vital in getting the ball rolling.  Remove ALL members of the government, past and present, from special health care and retirement programs that take the place of these two entitlement programs.

This may take a bit of time, especially for those who are in the unions, so start small.  Move the Senators, the Representatives, and the President with his staff (including Cabinet members) to an immediate retirement plan consisting of Social Security - in other words EXACTLY what their constituents have, not a penny more, not a penny less.  Do the same with their Medicare.  The Houses of Congress make the laws (in bill form), and the President ratifies those bills into law.  So long as these people are not affected, they have no reason to address the inequities in the system.  It is simply a political hot potato.  Give them a good reason to visit this system and start to fix it!

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#13) On December 05, 2010 at 10:36 PM, JakilaTheHun (99.93) wrote:

The cost of 2.5%

But I'm not advocating investing in activist mutual funds, so this is sort of irrelevant. Index funds have much lower fees.  Moreover, if you're really worried about the fees so much, there's no reason the government couldn't mimic a passive index fund for virtually nothing. 

2.5% isn't a realistic number, but the sad thing is that even if you use that number, you still probably beat Social Security in most cases. 

 

With Glass-Steagal gone, gold manipulation rampant, government spending at the beginning of the last 60 years going to infrastucture and jobs and now to finance and hope, I would suggest that the next 60 years will look nothing like the last 60.

In which case, the US government will be bankrupt.

If the US is bankrupt, Social Security is bankrupt.  In which case, you would actually be earning a negative return on Social Security, whereas, the market would probably make a positive return. 

So this line of reasoning only seems to support the point I'm making even more so. 

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#14) On December 05, 2010 at 10:50 PM, JakilaTheHun (99.93) wrote:

zloj, 

The longer I observe him, the more I agree with you on Krugman. 

The major appeal of Krugman is that anything the Democratic Party is already predisposed towards doing, he will find a way to spin it as being 'economically vital.'  He's basically the Democratic version of a supply-side economist. 

Krugman's brand of economics becomes non-sensical at some point.  He supports greater spending to "stimulate the economy", but he also supports higher taxes?  So he wants to take one action to pump more money into the economy, but another that would almost certainly take money out of it?  Basically, it's a wash; the only thing he achieved was to make the public sector bigger, which leaves less capital for innovative companies in the private sector. 

How does this make any sense?  Certainly, Keynes didn't support this.  Keynes would have argued that a recession results from too little investment in the private sector and the way to remedy the problem was to increase aggregate demand.  But Krugman ignores the basic underlying reasoning behind Keynesian economics; Keynes wanted to increase aggregate demand during a bad recession, because that will incrase investment in the private sector.  Krugman wants to increase aggregate demand, while simulatenously starving the private sector. 

It's nonsense like this as to why my level of respect for Krugman is not terribly high. 

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#15) On December 05, 2010 at 11:14 PM, starbucks4ever (99.49) wrote:

#14,

He is a most vocal supporter of the 250K club, who also pretends to stand for the poor.  

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#16) On December 05, 2010 at 11:22 PM, ChrisGraley (31.57) wrote:

An interesting debate here...

First, option1307, do you have an opinion how much longer the lifespan would be if we didn't put all the garbage into our bodies? It seems as though all the #1 killers today didn't exist back in the 40's and most of these are traced back to the processed foods that we eat.

Second, to the people proposing that we eliminate SSI entirely, how do you propose that we do it? You would have to phase in the change over the next 30 years to avoid a big schock to the economy. I'm not saying that I'm against it. I personally would love to have control over my entire retirement nest-egg instead of being forced into a government program that won't exist when I retire, by people that don't understand economics trying to protect me from my own stupidity.

Third, for those of you wanting to maintain Social Security as it is, Why? It is funded by government IOU's and we are printing money like water. Even if you forget those two things, it's only prolonging death but cutting benefits and extending the retirement age. At who's expense? The people that depend on it the most, that's who. A guy that digs ditches for a living is going to be hard pressed to make it to a 75 year old retirement age, but that's where we are heading.

My personal opinion is both programs won't exist by the time someone who is 40 now retires. I look at both for what they are. Charity a gunpoint! The biggest problem is that such a large group of people will depend on a single option. The government. When that option fails, the country implodes. Do they also have a chance of failure in a private system? Yes. But with all the options in the private system everyone doesn't fail at once.

And Mary, I agree with you that all Federal employees should not have seperate plans from the public.

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#17) On December 05, 2010 at 11:46 PM, NOTvuffett (< 20) wrote:

Taking the politics out of it, the serious numbers that I have seen suggest that SS benefits will exceed SS revenues by 25% in the relatively near future.  This is an untenable situation since this expense is regarded as "non-discretionary" and it is indexed for inflation. 

As a practical matter, it seems the govt. will do things like means testing, raising retirement age, etc. only when forced to by economic circumstances.

Most people here I would wager started their working lives with SS taken from their check, and they were told the employer matched their contributions.  Horseshiite, that is just less money they had to pay you.  As others here have pointed out, even if you invested in some low risk thing during good times and bad you would come out ahead.

Let us suppose, you are a black man, same exact age and in the same job and pay as a white guy.  You payed the same amount into SS as he did.  But the actuaries say you have an increased risk of dying because of higher incidence of heart disease.  If you die prematurely this is not something you can pass on.

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#18) On December 06, 2010 at 10:54 AM, russiangambit (29.98) wrote:

> When medical expenses are big, they’re big; even the very affluent are grateful when Medicare pays the bills for their mother-in-laws bypass or dialysis. The importance of Medicare, in short, is obvious to all but the very rich.

This is a great example of where government involvement distorts the market. I know several families who are not needy yet their parents areon Medicare and the nursing home expense s are paid by Medicare because the assets of the parents are separate and the parents are considered poor even though they have a comfortable family. It is shocking to me, really, to pawn off the care of elderly parents to the government. In Russia elderly parents live with the family and provide houskeeping/ childcare services, if able.  However, I can understanda part of it - medical costs in US can bankrupt anybody. If we didn't have the govenrment support such as Medicare/ Medicaid then nobody would pay such prcies out their own pocket and we would've have had a more reasonabale healthcare system.To balance the situtation - if you want government carrot (payments and subsidies) then you have to agree to govrnement stick (price and access control). You can't have it both ways. But, of course, no polticians will tell you that.

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#19) On December 07, 2010 at 1:43 AM, checklist34 (99.80) wrote:

long ago I accepted that to be liberal, in socioeconomic matters anyway, is to forgoe logic.  Truly, it is to be willing to not think.

 

rec

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#20) On December 08, 2010 at 3:43 PM, chk999 (99.98) wrote:

Jakila - you are spot on in #14. 

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#21) On December 11, 2010 at 11:02 AM, garyc27 (< 20) wrote:

Jakila great comments.

Social Security is a Ponzi Scheme.  Ponzi Schemes are illegal, unless of course you are the government.  In my early 20's I believed that the individual was more capable of establishing financial security for their old age and advocated for the end of Social Security and at age 59, I still do.

I would suggest spending 10 minutes to see what Milton Friedman said about Social Security:  http://www.youtube.com/watch?v=rCdgv7n9xCY&feature=player_embedded

 

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#22) On December 11, 2010 at 3:04 PM, JakilaTheHun (99.93) wrote:

Good video, garyc27.

When I was younger, I considered myself very progressive.  I still view myself more as progressive-libertarian.  But even when I was younger, I never really understood why so many progressives supported Social Security.  Friedman explains some of the reasons why it should theoretically be repugnant to progressives in that video:

(1) It's a regressive tax.  It hits the lowerst wage earners the hardest and the highest wage earners the least. 

(2) The benefits are not even distributed to those who need it most.  They are distributed somewhat arbitrarily. 

(3) The returns are so low that, as I mentioned earlier, even using passive index fund investing would yield more of a return for one's retirement than social security.  So almost all workers are worser off with Social Security. 

(4) The lower and middle income groups are the ones adversely harmed the most by Social Security.  Not only is the tax regressive, but since about 12.5% of their wages are put into SS, they are the groups least able to save for retirement in other ways.  If you make $150,000 per year, you make enough so that you can use more efficient methods of retirement planning and are able to bypass Social Security.  If you make $25,000 per year, you can't.  

(5) If you're young, you are actually having your ability to retire partially taken away from you by Social Security taxes.

(6) Social Security harms employment.  In fact, it is probably the single most stiffling tax when it comes to job growth. It requires employers to develop a complex system for managing it and it also requires employers to pay lower salaries 


I can't see how Social Security is beneficial under a 'progressive' view of the world.  I think most support for Social Security comes from ignorance of finance. 

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