Ravenwood - 03/18/05 06:30 AM
The story of Galveston Texas is old, but not well known. Given all the hubub about Social Security, it is one that should be required reading.
Basically, the crux of the story is that Galveston County was allowed to opt out of Social Security way back in 1981. They were concerned about the solvency then, and opted for ownership of private accounts. You contributed money to an individual account that you owned. If you died, it would be passed on to your next of kin.
At the time, the usual suspects were predictably crying doom and gloom if people were allowed to pull out of the Social Security ponzi scheme. After all, how could private citizens possibly be more well off managing their own money than the government could?
Well, the proof is in the results.
Our plan, put together by financial experts, was a "banking model" rather than an "investment model." To eliminate the risks of the up-and-down stock market, workers' contributions were put into conservative fixed-rate guaranteed annuities, rather than fluctuating stocks, bonds or mutual funds. Our results have been impressive: We've averaged about 6.5% annual rate of return over 24 years. And we've provided substantially better benefits in all three Social Security categories: retirement, survivorship, disability.In 1983, Congress passed a law authorizing the use of lethal force against anyone trying to opt out of the Social Security system.Upon retirement after 30 years, and assuming a more conservative 5% rate of return, all workers would do better for the same contribution as Social Security:
oWorkers making $17,000 a year are expected to receive about 50% more per month on our alternative plan than on Social Security - $1,036 instead of $683.
oWorkers making $26,000 a year will make almost double Social Security, $1,500 instead of $853.
oWorkers making $51,000 a year will get $3,103 instead of $1,368.
oWorkers making $75,000 or more will nearly triple Social Security, $4,540 instead of $1,645.
oOur survivorship benefits pay four times a worker's annual salary - a minimum of $75,000 to a maximum $215,000 - rather than Social Security's customary onetime $255 survivorship to a spouse (with no minor children). If the worker dies before retirement, the survivors receive not only the full survivorship but get generous accidental death benefits, too.
oOur disability benefit pays 60% of an individual's salary, better than Social Security's.
Alas! What one can do, all cannot, owing to the fallacy of composition kicking in. One person can see better by standing on his toes, but all cannot.
If SS were privatized today, Galveston would find its annuity companies going belly up as they begin paying out more than they can support with income, as the return on investment falls for everybody.
Everybody can't save at once, just as everybody can't see better at once. It drives up prices when more people are buying than selling, and drives down prices when more people are selling than buying. In other words, investment has the same demographic bulge as SS, if you run SS into investment.
That not only doesn't work for the new SS accounts, but it bankrupts the old outside-SS plans as well.
So the lesson is : if you have a good deal, don't talk about it.
Ron,
You are correct that there is such a thing as too much investment capital. We saw this during the dot.com boom.
But that is why you need to let the free market do it's work. If there is too much capital, the rate of return will decrease. A lower rate of return will drive investors away, thus increasing the rate of return. There is a happy equilibrium in there.
Ideally, people would get to keep their own money. Killing off the social security tax would give everyone a 12.4% raise. Some of that would, no doubt, be invested. The rest would be spent on one thing or another, thus fueling the economy and driving the investment market.
The economy feeds itself and creates wealth for both the spenders and the investors. When you throw government into the mix, you stifle the value gained through capitalist transactions.
Posted by: Ravenwood at March 18, 2005 8:10 AMBut don't you see, that's unfair! The rich get more money than the lower wage-earners! Someone who made $75k gets more than six times what someone who made $17k gets!
Unfair! Unfair! Unfair!
(And I'll hold my breath until I turn blue until you take from the rich and redistribute to the poor!)
Sorry. I was channelling my inner liberal.
Posted by: Kevin Baker at March 18, 2005 11:51 AMLethal force? Come on, Ravenwood!
My tin foil hat is at the cleaners. That can't possibly be true.
Posted by: Bob at March 18, 2005 12:39 PMWhat was the law in 1983 that you're referring to?
Also, Ron, the amount that would be in the private accounts is tiny compared to the amount already invested in the market, the effect would only be noticable in the very low risk/return markets, which would actually improve the eceonomy by encouraging investors to open new markets.
Posted by: Pasty at March 18, 2005 1:24 PMBob,
In 1983, the government said no more opting out of Social Security. Those laws are enforced, by the way, at the point of a gun. Don't believe me? Stop paying your taxes and find out. When the government finds out, the guys with the guns show up.
Posted by: Ravenwood at March 18, 2005 5:24 PMPatsy, you can see that the effect is not small from another invariant. The retirement age has to go up, because otherwise too few people are supplying all goods and services for too many people. That won't work no matter how you finance it, because money is not wealth, and money is all you can save. You can't save future goods and services.
So, if everybody saves today, what breaks down in order to raise the retirement age? The assumption that historical returns on investment will prevail.
In other words, you won't have enough money (on the average) to retire at 65. That means that the effect is not small. It will grow until it achieves this delay in retirement that is necessary to increase the number of workers and decrease the number of retirees.
Delayed future retirees provide goods and services to the delayed retirees to make up the gap.
Posted by: Ron Hardin at March 18, 2005 5:37 PM(c) Ravenwood and Associates, 1990 - 2014
