The Dow Jones Industrial Average closed above 13,000 yesterday for the first time ever. In other news, we still don't have personal retirement accounts.
I wonder how most people felt yesterday when they saw reports of the DJIA's record-breaking performance, on one page of the newspaper, and reactions to the funding shortfall forecast by the OASDI Trustees Report, on another. It was a thought-provoking juxtaposition, wasn't it?
For those unfamiliar with the DJIA, it's an index of 30 large U.S. companies that reflects the performance of the stock market. The index includes companies such as AT&T, McDonald's, Microsoft, and Wal-Mart. For historical comparison, the DJIA first closed above 5,000 in 1995; 10,000 in 1999; and 12,000 in 2006.
Opponents of investment claim that stocks are risky, but that isn't a valid criticism of personal accounts. For example, lifecycle funds are a type of mutual fund that automatically become more conservative over time, allowing growth in the early years of investment and security in later years. Fidelity is one of many companies offering such funds, and I'll use their Freedom 2050 fund as an example.
The Freedom 2050 fund is for investors planning to retire in 2050, which is about when today's graduating college students will turn 65. So far this year, the fund has a return of 7.44% (adding in last year's numbers makes the return go even higher). How does this compare to Social Security?
Well, the average single male turning 65 in 2050 will receive a 1.14% rate of return from Social Security, while the average single female will receive 1.52%. If that average male and average female get married and both work, their rate of return will be 1.48%.
Doing a little math, the Freedom 2050 fund is currently outperforming Social Security this year by more than 6-to-1 for the average male and more than 5-to-1 for a two-earner couple.
Now why is it again that we can't invest a portion of our Social Security contributions?
"[T]he government definitely isn't the best person to manage your money," writes Dan Caplinger of the Motley Fool, a personal finance and investment company. In his article, Caplinger suggests sarcastically that people should be pleased about the 2007 OASDI Trustees Report, which forecasts that the Social Security trust fund will run out in 2041, a whole year later than the 2006 report predicted!
Amazingly, two papers actually did trumpet this additional year as the most important conclusion of the report. "Social Security funds to last longer," enthused an El Paso Times headline. Not to be outdone was the Indiana Gazette, which boldly proclaimed, "Social Security gets new life." A new life? Of one year?
Perhaps the reporters saw the title of another article: "Social Security Is Saved!" That is the title Caplinger used, and the difference was that he was kidding. From the Motley Fool:
One more year! The report starts out with some great news: Social Security and Medicare won't run out of money as quickly as previously expected. According to current projects, Medicare will remain solvent until 2019, while Social Security will keep chugging along until 2041. Both figures represent an extra year of solvency compared with last year's report.
Of course, you might not be satisfied with that prognosis, especially if you're 35 or younger. Luckily, the Social Security trustees are thinking about you, too. To keep the programs going for another 75 years, we can choose from two easy solutions:
Raise payroll taxes by about 2%, from the current 12.4% for Social Security programs to 14.35%; or
Immediately cut all benefits by about 13%.
Doesn't that make you feel better?
Two people didn't realize the question is rhetorical and sarcastic. Here's a hint: one of them lives in El Paso.
For starters, S4 National Director Mark Harris is featured in this week's Q&A on The Hill's Congress Blog. Mark writes:
"In order to bring the system in balance there will need to be a dramatic cut in benefits, a dramatic increase in the retirement age, a dramatic tax increase, or some combination thereof. Without personal retirement accounts there is little doubt the system will break, and that is why our organization is so dedicated to this cause."
S4 also issued a press release in response to today's 2007 OASDI Trustees Report on the overall health of Social Security and Medicare. Here is S4's Natalie Vernon:
“If we were to look around the world at how other countries are solving similar crises, we would find plenty of models for reform that include individual investment.Personal accounts are tried and true, and they will be a part of reforming our Social Security system.”
It shouldn't be much of a surprise that the Trustees Report is not too optimistic about the future of Social Security. From the report summary:
"Projected OASDI tax income will begin to fall short of outlays in 2017, and will be sufficient to finance only 75 percent of scheduled annual benefits in 2041, when the combined OASDI Trust Fund is projected to be exhausted.
Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system is solvent on a sustainable basis beyond the next 75 years would require larger changes."
Recently I traveled to San Antonio, Texas. I have been in Texas only two times now, but I have to say, San Antonio is my favorite. Primarily because of the HARD CORE ROCKERS that are down there at the University of Texas at San Antonio. In general, they are ALWAYS down to bring awareness to economic issues facing our generation and this past week, they worked hard and put on an awesome "Take a Slice" event.
Not only did they do the typical "Take a Slice because the government is taking more than a slice from YOU" free pizza event, but they hyped it even more by writing on over 150 plates personal messages to bring awareness to the issue in a unique and funny way. They also had an added attraction at the event: an egging contest. That's right, students were not only allowed to, but were encouraged to throw eggs as hard as possible at that blasted thing which is not only extremely long and complicated, but also the reason we lose so much of our paycheck each month...the TAX CODE.
Check out the pictures in our photo gallery...FUN TIMES!! Let us know if YOU'D be interested in doing something this amazing at your school...we'll hook you up for sure!!
India has announced that 2.6 million workers will be enrolled in a system of personal accounts over the next 2 years, according to a Wall Street Journal article today. All workers for the federal government and most workers for the state government will take part in the program. Notes Indian economist Ajay Shah:
"New Delhi's reform victory didn't come a moment too soon. India has a large number of young people entering the labor force for the next 20 years. A rapid implementation of the NPS allows them to build up pension wealth invested in sound portfolios of stocks and bonds, thus reaping more benefits from their nation's growth."
India's announcement comes on the heels of Mexico's passage of personal accounts for its workers. Don't these countries understand how risky their privatization schemes are?
The answer is yes. India, for example, plans to offer "three to four standardized fund-management products," which, if they perform nearly as well at the Thrift Savings Plan offerings, should indeed help workers accumulate pension wealth.
For workers in the United States who are not members of Congress, though, we're left with a system that promises most of us a negative rate of return. I wonder how that compares to the "riskiness" of a sound portfolio.
In August of last year, Malcolm Gladwell wrote "The Risk Pool," an article about pension systems published in the New Yorker. Judging by the reaction of his readers, it was the worst thing he has ever written.
Gladwell usually remains cool-headed and diplomatic, but he was so rattled by the reaction to his article that it was about a month before he said something intelligent in response. When he finally did calm down, though, the explanation he provided for his "prickliness" was nothing short of brilliant:
"I'm not usually thin-skinned in the face of critics. So why did I react the way I did? I think it was a degree of difficulty question. What I was saying, unconsciously, was not--"you don't understand how good that story was." It was, rather--"you don't understand how HARD that story was." Because, in truth, it was a really, really hard story. How on earth do you write 5000 words on pensions without putting your audience to sleep? It's pretty tricky, and what I wanted in my heart of hearts, I suppose, was for at least some appreciation of that effort. Even if it was a bogey, I wanted the announcer to point out what a great bogey it was."
If Gladwell struggled to put together 5000 words about pensions without putting readers to sleep, then how can one begin to criticize Christopher Buckley's new book Boomsday, which takes on the intergenerational unfairness of Social Security for over 300 pages? And who would be in a place to do so?
Certainly not I, and that is why I'll keep my remarks about Boomsday short. Before making some comments about the content of the book, though, I should note the obvious: People who care about this issue should be grateful to Buckley for writing Boomsday. Social Security reform isn't going to happen until it dawns on the average citizen how serious the problem of entitlements is, and Boomsday just might get the American public engaged. So whether the purity of an author's intentions should or should not count toward the judgement of a book's quality, I think Buckley deserves some credit regardless of what one thinks of the writing.
Now, on to the book: The back cover includes a Tom Wolfe quote that Buckley is "One of the funniest writers in the English language," the inclusion of which is relevant for a couple reasons. The first is that like Wolfe in his book I amCharlotte Simmons, Buckley doesn't exactly nail the voice of a young person. Both Charlotte Simmons and Boomsday very nearly get down the dialogue and details of their characters, but there are times when each writer is noticeably off.
Second, Buckley is damn funny. Some of the subplots wear a bit thin before the book begins winding down, but it is a testament to Buckley's sense of humor and his ability to write that Boomsday is ultimately an enjoyable read.
In the end, I am not sure whether Boomsday is at par or if it's slightly better. But even if the book is no better than par, it's worth pointing out what a great par Buckley has made.
Students at Eastern Oregon got to "TAKE A SLICE" of pizza the other day in honor of the fact that our government takes much more than a slice from our paychecks!! The event was a great success and brought up the opportunity to talk about Social Security with over 200 students. After all, the point was to hone in on the fact that such a large portion of our paychecks are taken out for Social Security.
And to make things even worse - we KNOW we will not get the benefits we deserve by the time we retire. So it's a crappy situation all around. Luckily, we made everyone's day a little brighter by providing pizza and the students did their part by signing the petition to Congress saying they need to address the problems facing Social Security and give us Personal Retirement Accounts. BOOYAH!!
"The federal government's mammoth, and growing, forward-looking budget imbalance" has so far been met with yawns from capital market investors, the Financial Analysts Journal reports in its March/April edition (see abstract here).
The bulk of the article--titled "Do the Markets Care about the $2.4 Trillion U.S. Deficit?" and coauthored by a senior fellow at CATO and a Wharton professor--examines not whether markets do care, but rather why they ought to care. Some highlights (all emphases added):
"Programs such as Social Security and Medicare shift a large amount of resources between generations regardless of whether they are financed with a dedicated payroll tax or out of general revenues. Entitlement programs are financed by by transferring funds from young workers to older retirees, which reduces national savings, increases interest rates, reduces wages, and generates an important debate over generational fairness."
"[U]nless the growth in future outlays in soon substantially curtailed, future generations will be taxed dearly to pay for the nation's entitlement programs."
"If the U.S. federal government properly accounted for its explicit and promised liabilities, it would record a national debt of $64 trillion and a national deficit of $2.4 trillion in 2006."
"Under current OMB assumptions, health care costs per capita will grow significantly faster than GDP per capita through 2025."
S4 members and students interested in Social Security reform met with former Congressman Tim Penny on Monday for a discussion of the issue. After letting the students get settled in with some pizza and soda, Penny (pictured below in the University of Minnesota's Humphrey Forum) shared with us some of the knowledge he gained during his 12 years in the U.S. Congress. Thanks to Mr. Penny and everyone who helped make this event happen.
If you are a student at another school and wish to hold a similar event, please contact us: staff@secureourfuture.org.
