What If Social Security Had Been Privatized? The Value of Federal Government Pension Plans
28:30 Share

Auto s best of twenty twenty four picks are here. Discover the years top audio books, podcasts and originals in all your favorite genres, from members and signified to mysteries and thrillers. Audibles curated list in every category is the best way to hear twenty four best in audio entertainment like a stunning new forecast production of George or wells one thousand nine hundred eighty four heart felt memories like supreme court justice ki Brown Jackson, lovely one the year's best fiction like the women by Christian hana and possible ever its brilliantly SUV sive James possible there is more to imagine when you listen, go to audible outcome slash, imagine and discover all the year's best waiting for you.

Walk in the money for the rest of us. This is a personal financial on money. How IT works, how to invest IT, how to live without worrying about IT.

I'm your host David stein. That is episode forty forty one. It's titled what if social security have been privatized in two thousand and five, congressional representative paul ryan and senator john sonu proposed a plan to reform social security.

The act was the national security personal savings guarantee and prosperity act. Under their plan, IT would establish violence tary individual accounts for workers who were under the age of fifty five beginning on january first two thousand and six. These personal savings accounts would allow the workers to allocate a portion of the social security taxes to an investment account.

IT would be controlled by a central administrative authority, but the workers would be able to choose various investment options, with the default option being sixty five percent in a broad U. S. Equity index fund and thirty five percent in a road corporate bond index fund. All participating workers in these personal savings accounts would be guaranteed that their total benefits for, such as security, would at least be as good as what was already in place.

And if their investment accounts did Better than that and they will get more than that, in other words, there was a floor, a guarantee, sign me up for that, if I think at all, they keep all the upside and have done at the downside, I do IT. Interestingly, those who chose not to participate in the personal saving accounts would not be guaranteed their benefits at the levels that was there in two thousand six. Another way of congress cut benefits.

If you weren't participating in the personal savings accounts, then there is a risk of of your benefit being. The program also require that when I came time to take social security, that the baLanced in the personal savings account would be annuitity ed, so that the annuity payments would equal what, at least what would have been gotten under a social security. Keep mind, social security benefits are index to inflation.

And so the annuity, the new itis ation, would need to be and an annual ity that would increase as the cost of living increased. In two thousand five federal erving chair Allan Green span was testifying in front of congress, and representative ryan asked him ma question in regards to these personal savings account and the reform of social security. Ryan asked Greenspan, do you believe the personal retirement accounts can help us achieve solo cy for the social security system and make those future retirement benefits more secure? Greens span replied, well, I wouldn't say the pay as you go.

Benefits are insecure in the sense that there's nothing to prevent the federal government from creating as much money as IT wants paying IT to somebody. In other words, the national security system in his mind wasn't insecure because the money could always be printed to pay the benefits, but he didn't stop there. Fortunately, we continue.

The question is how do you set up a system which assures that real assets are created, which those benefits are employ to purchase? So it's not a question of security. It's a question of the structure of a financial system which assures that the real resources are created for retirement as distinct from the cash.

Cash itself is nice to have, but it's got to be in the context of the real resources being created at the time those benefits are paid so that you can purchase real resources with the benefits. What is referring to is the need for a dynamic economy comprised of workers and businesses that produce goods and services, those real resources that retirees can purchase. We know that money can be printed out of the air, but if there's nothing to buy, that's not very useful.

I share this exchange between paul ryan and alan Greenspan, an episode, one of money for the rest of us, that was released in may twenty fourteen. I completely forgot about IT, but this past week I got an email from my brand new listener to the podcast that started with epson. One heard me share this exchange between ryan and Green span and this listener route.

You seem to think that Greenspan response to senator ryan was good, that the government cannot run out of money. If so, then why invest at all? Why not let the government handle all of our retirement?

My foreign is seriously up performing my sense of security. So i'm having trouble understanding Greenspan gave the answer, why invest at all? We need real resources produced by the private sector so that we have goods and services. As the private sector produces real resources, that's what leads to economic growth.

The increase in gross domestic product GDP gross domestic product is the value of those goods and services produce, so as an economy produces more goods and services, economy grows, and as the economy grows, the businesses producing those goods and services grow. Also, they get bigger, they hire more employees, their profits increase. As investors, we receive a share of those corporate profits if we own common stocks.

And that share of corporate profits is known as dividends. Dividends grow as corporate profits grow. And we've broken down on the podcast, and we do IT in great depth on acid camp deconstruct ten year returns for stocks into the drivers and the first drivers, the dividends.

Over the past decade, global stocks have had an average divided yield, the divided payments divided by the Price that divided yellow two point four percent, so two point twenty four percent of the annual return over the past decades been contributed by dividends, another five and a half percent per year with earnings growth, profits growing, divide growing. Combine that LED to return of seven point nine percent for global stocks. For U.

S. Stocks, the average divided was lower one point nine percent, but the earnings growth was higher at six point nine percent. And so combining those two, we get an eight point eight percent analyzed returns for U.

S. Stocks compared to seven point nine percent for global stocks, which includes us and non us. Those numbers don't include changes and valuations.

The fact that investors have been willing to pay more for us stocks today versus a decade ago that contributed another three percent so to U. S. Stock returns, which is why U. S. Stocks have had double digit returns to a decade.

But we're just isolating the main long term drivers that are tied to the economy, the growth of dividends, the cash flow paid in the form of dividends and how that cash flow grows over time. As earnings rose, we invest to participate in that process that why we own common stocks, we can also own corporate bonds, which is debt issued by these companies. We receive interest income, and we get the principle back, and companies borrow money, and the issue shares the stocks in order to invest in projects, projects to expand their business, create new products to increase their productivity by implementing new technologies.

That's the dynamic private economy that supports a public pension system like social security, that social security is reform act of two thousand. Five never went anywhere. But I was curious, this listener mentioned that there four one k their employer sponsored fed contribution plan is significantly outperforming social security.

But what if we actually got those personal savings account and started in two thousand six and have them today? How much would they have grown by? And with that have been Better? Would we be Better off? This is just the way so the security was in terms of the benefits received.

I went and did the analysis. I assumed that the individual is fifty four years old. You had to be under the age of fifty five to participate.

And we went from january first, two thousand and six through the end of twenty, twenty two, sixteen years. The workers started at fifty ford. So by the end of that period, d and twenty twenty two, you've been seventy and then retired and be able to collect the benefits.

We want to compare those benefits under the private savings account system versus the system in place. Sixty five percent U S, stocks, then represented by the vanguard total stock market index E T F V T I. Thirty five percent U S, corporate bonds has represented by the eye's eyebrows investment grade corporate ond tf will assume that the individual has a starting sari. In two thousand, six of ninety thousand, that was the maximum taxable amount for such security benefits. So if you learned above that in two thousand six, you weren't tax on that and that was the max that could be contributed.

So according to the reform act, an individual could put five percent of the first ten thousand dollars that they earned toward these personal savings account, and two and eight percent of the rest up to ninety thousand dollars beginning in twenty sixteen in the program was adjusted to where the participant could allocate ten percent of the first ten thousand dollars that have been index by inflation. So by twenty sixteen, you would be ten percent of the first twelve thousand dollars, and then five percent above that twelve thousand dollars up to the cap, which would have been around one hundred and seven thousand dollars. After indexing IT for inflation, I went under a spread sheet, and each year there was more that could be allocated, adjusted for the changes in two thousand sixteen.

And over that period, from january first two thousand six through december thirty first twenty twenty two, that baLanced account sixty five percent stocks, thirty five percent bonds returned, seven and a half percent analyzed. V ti of vanguards total stock market D T F return eight point nine percent analyzed, and the eyes shares eyes box in the west migration corporate bond etf L, Q D return three point nine percent analyst, a participant in that plan that contributed to the max that was available. We've seen their personal savings account at one hundred and thirty one thousand, five hundred and seventy four dollars sixteen years later when they turned seventy.

If they then went out and bought an annuity that was index to inflation and contributed, this is an immediate annuities income for life. They would get seven hundred dollars per month in the first year, and then IT could be indexed for inflation. And I used a three percent inflation assumption, seven hundred dollars, eighty four hundred thousand a year.

Now that not be enough to live on, the question is, what would that worker have gotten had they stayed with the traditional social security? Now we have to make some adjustments because as we want to know what a worker would receive who contributed the same amount in social security taxes. As the other worker sent to the personal savings account.

And because the tax rate service security to all point four percent, we're basically coming up with a lower income number, a pay number to just so we're comparing apples and apples. And if we do that, apple to apple comparison, so the security would pay out fifteen hundred and sixty nine dollars per month, so more than double what the worker we've got from the personal savings account. I used the social security benefits calculator each year.

I put in as the earnings for social s security, the amount that would have gone into that personal savings account each year from a worker participating in that. And again, the anuwa pale of that hundred and thirty one thousand dollars was seven hundred dollars per month, the index to inflation. But this this security benefits would have been fifteen hundred and sixty nine dollars.

Social security is a very, very good deal, and people are highly dependent on social security. One at every five individuals in the us. Collects security. Four out of five are retirees, order adults, and one faith are beneficiaries under the social security disability insurance portion, or their children who had a parent passed away. The benefits are solid, not as solid as other countries.

A medium benefit, annual benefit on this security is twenty four thousand four hundred and sixty three dollars per year that someone retiring at age sixty five, he retired seventy. You get significantly more than that. IT pays the way to take such as security until you're seventy. Because the rater return, the additional amount you receive is very high.

If you wait, if you delay taking IT, a high in commander would receive thirty two thousand three hundred forty five dollars per ince the security if they retired today at eight sixty five, and the maximum is just under forty thousand dollars based on their service security paye. The average worker replaces thirty seven percent of their past earnings in their social security benefits. So only thirty seven percent of really the last few years of income.

We can compare that with other public pension plans. Denmark, its eighty percent recipient receive through the denmark version of service security, eighty percent. The average for developed countries is fifty two percent.

The U. S. Is very low, and IT comes to such security relative to other nations.

I was surprised that us was so low that IT only covers thirty seven percent. And traditionally the rest was covered by defined benefit pension plans. But now only fifteen percent of U.

S. Workers participate or have access to a defined benefit pension plan. Most participate in a define, at least have access to a defined contribution plan, which is set up to replace the pension plans.

But they've fAllen way short in doing that. I'll get to that in a moment. Before we continue, let me pause and share some words on this week.

sponsors. I bought a used denim coat from a reseller oddsson rebuilt. I'd never part of them.

They came across my instagram feed. But I took the leap. I bought the coat. And once I saw the resembLance was using shop of, I felt a lot more confident in my purchase.

I got a confirmation email from shop I, I got confirmation when the item was shipped and one when IT arrived. And I attract IT all along business. Is that want to grow you sharpie y, because they are able to sell whenever their customers are scrolling or stroling on the web in their store, on their feet. And everywhere between business is that sell more, sell on sharp fy, just as auto sy rebuild does.

Most of the e commerce I do with small retailers, they're using sharp fy and you can upgrade your business and get the same checkout otto sy, rebuild users, sign up for your one dollar per month trial period at shop ify that comes lash David all over case go to sharp fy dot com slack David, upgrade your selling today sharp fy, don't come slash David. Ever wonder how much of your personal data is out there on the internet for anyone to see more than you think, your name, contact info, social security number and home addressed even information about your family members. That's why I personally recommend.

And you delete me, delete me fine to remove any personal information you don't want online and make sure IT stays off. I've been using delete me for nine months now, and they've removed a ton of my personal data from the internet and sent me regular personalized privacy reports showing in for they found where they found IT and what they removed. I just got my latest quarterly report from them.

Delete me. Does all the hard work of removing yours and your families personal info of the web take control of your data and keep your private life private by signing up for delete me now at a special discount for our listeners today, get twenty percent off your delete me plan when you go to join, delete me dot com slash David twenty and use proper code David twenty a checked. The only way to get twenty percent off is to go to join delete me dot com slash David twenty and enter code David twenty.

A checkout that's join delete me that comes less David twenty, code David twenty. I looked at a study that that showed other nations that had adopted and converted from their public social security system to more of a privatize system. And a lot of this was in land america, and often times IT was because the public system was in such a disarray.

But this academic study showed that, on average, when these reforms were put in place, many in in the early eighties, they promise that they would pay seventy percent of the end of life, sorry, before the workers retired. But the average across the systems that have been privatize is been forty percent. That taxi higher than what individuals on social security, on average git, that thirty seven percent.

But the public systems continued to get sixty five percent. So under privatizing aspects of this is security, the benefits were less and the number of people accessing IT was less. Only twenty eight percent of workers that could participate in the private system did so.

Whether the public system covered around sixty percent of workers against such as security is incredibly important for most retirees in the us. If we exclude as a security benefits for older adults, thirty eight percent would be in poverty. But with social security, only ten percent are in poverty.

I mentioned that fifteen percent uh workers have access to a defined benefit plan, very less so they're dependent on their four one k and social security. But only sixty million americans contribute to a four one one k even though sixty eight percent of employed americans have access to one most workers that have access to afford and kate are not participate. And then if we look at the average baLances, and i'm just focused on those that are retirement age, age sixty five to seventy, the average for when k baLance is one hundred and eighty six thousand dollars and the medium is forty three thousand dollars.

If we take that hundred and eighty five thousand dollars and purchase an anonymity with IT, one that's not index to inflation, IT would generate thirteen thousand three hundred dollars per year. That's if the annuity is not index to inflation. If it's index to inflation one hundred eighty five thousand dollar four when k baLance that rolled over into a neuva would pay ten thousand and eighty dollars per year, assuming three percent costs of living adjustment. That's if it's a new atis.

If we use the four percent rule where the retirement collects four percent or spends four percent of the starting year baLance four percent of one hundred and eighty five thousand dollars, and then annually increases IT by the rate of inflation two hundred seventy four hundred dollars per year, given the shortfall of most retirees in their foreign plan through accommodation earnings, but often just moving in and out, chasing returns, not taking sufficient risk, focusing more on bonds, not having the hn f allocation, the stocks during the accumulation phase, they don't have much money, and they need such as security, as do workers throughout the world. They are highly dependent on these public pension schemes. Surprisingly though, given how important and beneficial an index annuity can be, in the case that essentially what social security is when participants in private defined benefit plans, pension plants are asked whether they would prefer to have a defined contribution plan instead of for a one k eighty nine percent, according to the study, is all said, yeah, freeze.

Our defined benefit plan will take a defined contribution plan. They wanted a percent of their salary, but on average, as long as the employer was putting ten percent of the sari into a defined contribution plan instead of the pension, they they were content. It's no wonder that only fifteen percent of workers have access to a define benefit plane, but they're incredibly powerful because of the pooling effect and the professional money management, believe me, pension planes are not moving in and out of the market chasing returns.

In most cases, they're more disciplined than individual investors. They can often invest in lower fees. And because of the pooling effect, they can pay more, just like the social security system does versus weather had been in these personal saving accounts.

Now again, that was this one plan back in two thousand five that never got implement, and i'm glad I didn't. Now there's a lot of news about such a security. Well, maybe it's gonna n out money that trust fun, that sort of account mic that was there, that there was his money over the years that was put into a trust fine.

Basically an accounting entry that took the tax revenue from such as security was taken and then they bought treasury bonds with IT. That trust fun will run out of money. But such security has primarily been pay as you go.

There's been a surplus and the surplus was used basically to fund the deficit, the federal deficit, because the surplus was used to buy government bonds, which resolved to fund the deficit, just one big pot of money. But there is different accounting allegations. The congressional during office estimates that over the next seventy four years that currently, such as security, pays five percent of gross domestic product, so GDP the size of the U.

S. Economy, the value, what's produced in goods and services, the real resources such as security cost five percent of that. And by twenty and ninety six, IT will cost seven percent of GDP.

Clearly, there is a lot of assumptions under that. Revenue would remain about the same based on the current system. So revenues make up four point six percent of GDP, and it's expected to be four point six percent in two and ninety six.

So the gap between the the revenue received in taxes and what's paid on benefits IT is growing over time. But as percent of the economy, it's it's not huge. The extra deficit is one point seven percent of GDP or they estimate just around four point nine percent of payroll.

And so if payroll taxes will raise four point nine percent, then there wouldn't be a deficit anymore. And social security would be on sound flying. This is a program that could be reformed. They could have higher taxes.

Maybe they can make some adjustments to benefit perhaps for a higher income workers that could raise the cap, but the chAllenges aren't that difficult, and that's why i'm highly confidence social security will never go away. IT is too important for retirees, current retirees and future retirees because buying large are not saving enough and they need to depend on social security. One of the things is happening in the U.

S. And many other countries though, is the population is aging. And we've done episodes on that. I saw one academic study that, that looked at data going back to a thousand and seven mony, sure.

And up they found that as a population ages within an economy, that IT leads to lower growth rates in output, not as much as produced. And the growth of that production and the consumption isn't and of because people get older. So that can be a drag on the economy.

The GDP another study is all so though that as human capital increases, the learning smarter workers that also get health benefits, the the nation invest in the health of its workers and the workers are getting smarter that that increases productivity. Output is increased as there's more workers and those workers get more productive and as workers can be more productive, as they get smarter, as they get more education and as they have good help and higher human capital can help the drag from an aging population. We sometimes hear about the the dependently ratio.

Well, there's not enough workers to support the retirees, and the reality is the workers are not supporting the retirees with money. We know that the government can create the money. The workers are supporting retirees by producing goods and services that the retirees can consume.

And as long as productivity remains high and there's investments in human capital and there's a dynamic growing economy underlying the public pension plan, social security, then things are okay. We there can be some changes on the margin in terms of payroll taxes, but that's what's needed there. Economic growth isn't everything we've done episode recently on the difference between economic growth, output and well being.

How abandon our life is is IT full of those basic goods we discussed. Do we have health? We have friends, community to be common with nature, things that don't really have a Price. I don't spend a lot of time worrying about the dependency ratio because I can see that over the years and over the decades, productivity has increased and there's enough for everyone. Social security is incredibly valuable, is not going anywhere.

I need some adjustments in terms of the tax rates or some of the benefits, but the vast majority retirees depend on IT and a very, very large number depend on IT for most of the retirement. But that public pension plan needs to be supported by the private sector, a dynamic economy. And we participated that by investing, you know, four one k, we contribute capital that companies can use to increase their productivity, increase technology we do through bonds and we do with through stocks.

Now once the stocks is issued by the company and IT trade on the secondary market, not something we buy a stock on the stock exchange, the money does not go to the company, but I did initially to raise capital, and then that ongoing publicly traded company passes some of those profits in the form of dividends. And as earnings grow, the dividends grow, for some companies don't pay dividends, eventually they will. The past capitalism and IT supports a public pension scheme that isn't dependent on the stock market directly for its return, that needs to be separate, so that I can benefit from its power to create money at the air.

And the support of a private sector economy is support of investing in basic science, make sure there's infrastructure in place, working together, the public sector with the private sector. And if that private security scheme privatize, national security would have been put in place. And so we had tons of dollars going into the stock market.

I'm not sure what stocks returns would deep with all the money going in and demand for stocks. Potentially the Price earnings ratio stocks would be higher, but the divided yells would be lower, we don't know. And potentially the yields on corporate bond would be lowered because of so much demand to purchase those bonds.

We didn't know. I'm glad I didn't get implemented. We don't have privatized national security. I prefer the public plan, along with private savings.

We need both that can allow us to live a rich in a meaningful retirement. That's episode forty, forty one. Thanks for listening. I have loved teaching you about investing on this podcast for over nine years. Some topics, though, I just Better explained in writing or with a chart. And that's why we have a weekly free email newsletter to insider guide in that news letter, I share charts, grasped and other materials that can help you Better understand investing. It's some of the most important writing I do each week. I spent a couple hours on that newsletter on wednesday morning as I tried to share something that will be helpful to you if you're not on the list, please subscribe, go to money for the rest of us dot com to subscribe to the free insiders guide, weekly email, news letter, everything I ve shared with you in this obsession for general education, and not considered your specific risk situation, not provided investment advice, this is simply general education on money, investigating the economy. Have a great week.