Economics & Finance

I’m not a fan of big government. Being an honorary Chicagoboy, I think given any task, chances are, the private sector will do it twice as well for half the cost. So obviously, I think Social Security is a joke, and that private accounts are the way to go. Since it’s the Christmas lull, I put some ink to paper, which me being a financial analyst, means putting it on Excel. I did a simple spreadsheet to see how a private account for a baby boomer household retiring in 2004 would have fared against the government. This is based on commonly available information, so is not a fine tuned model, but it’s enough to make my point.

I took the Census bureau’s household income from 1967 to 2003. I assumed 2004 income levels are the same as 2003 for simplicity sake since it’s not available yet. I assumed the current 6.2% Social Security tax rate is the same from 1967 to 2004 also for simplicity’s sake. The assumption is that the 6.2% tax would go into a government administered private account instead of the general pot. I then took the Dow Jones Industrial Average from July 1, 1967 to July 1, 2004, and calculated the compounded annual returns for the private account. I picked the July 1st mid-year point to correct for year-end fluctuations. I based the returns on the DJIA because it’s available. I would have preferred the S&P 500, or a broad market index such as the Wilshire 5000, but they aren’t available. The good is that the DJIA represents the best of American industry such as GE, Coke, and Boeing. The bad is that it doesn’t truly reflect the technology revolution as say the S&P 500 would. But it’s life.

Assume also that after retirement the account shifts to a low risk interest bearing account earning 5% a year on the unused account balance.

According to their website, the current, unfunded, maximum payout for 2005 Social Security payments is $869 a month; which translates to $10,428 per year.

Assume someone had a stroke of genius in 1967, and enacted the Social Security Reform Act of 1967, shifting all contributions to private accounts and invested the accounts in the DJIA.

Assume further that Incognito’s worker bee household began contributions to the account at age 25 in 1967, retiring in 2004 at age 62. If Nito’s household has always been in the mid-tier household income bracket, his final 2004 household income would be $54,453 a year. Under the plan, his monthly payout from the plan would be $1,417 a month, or $17,000 a year. This is 63% more than the current Social Security payout. The huge difference is that the private account is funded for 20 years of retirement, or to age 82.

Say Nito’s household is in the top income bracket for all or most of his life. His final 2004 household income would be $154,120 a month. His household payments for retirement would be $3,583 a month, or $43,000 a year. Again, this would be fully funded for 20 years of retirement.

Second tier 2004 household income would be $86,867 a year. Monthly payments would be $2,167 a month or $26,000 a year.

Say Nito wasn’t very successful in life. Fourth tier ending 2004 household income would be $34,000 a year. Social Security payments would be $950 a month, or $11,400 a year. Fifth tier ending 2004 income would be $17,984 a year. Social Security payments would be $504 a month, or $6,050 a year. Again the big difference being that it’s fully funded.

So the only time you’ll be below the current Social Security maximum is if both husband and wife make minimum wage all their lives.

Change the number of retirement years from 20 to 15 or 10, and you’ll be living well.

What-if numbers amount to exactly zero ($0). But it makes you think.

Maybe 37 years from now we’ll still be talking about reforming Social Security. Maybe someone will say wow, wouldn’t it have been a great idea to put it in private accounts?

Here is my Excel.

More thoughts: Based on the Census Bureau, there are 112 million households in the U.S. If you take the current annual mid bracket Social Security contribution of $3,376 a year as the average, that’s $378 billion a year. Investing private accounts for Social Security in a broad market index would imply putting 98% of the amount back into the economy (index funds charge about 1% for management fees, going by my rule of thumb for government implies a 2% management fee for lazy bureaucrats.) You can argue that putting $370 billion back into the economy would create a tremendous amount of new jobs, which in theory would cascade into more income, more contributions, etc etc. lifting all boats.

Update: Looks like good ol’ Cato Institute was way ahead of me:

For example, assuming historical rates of return, if individuals born in 1970 were allowed to invest in stocks the amount they currently pay in Social Security taxes, those individuals could receive nearly six times the benefits that they are scheduled to receive under Social Security, as much as $11,729 per month. Even a low-wage earner would receive nearly three times the return on Social Security.

Update 2: Thanks to Cole for pointing out the correct historical rates.

I’ve updated the excel and the numbers blow away the current Social Security payments. Even the lowest bracket is comparable to the current unfunded maximum payout:

There’s vending machines in many schools across the United States. The kids can buy sodas, candy, chips. The school gets a cut of the profits. Works out well for everyone concerned.

Lately, though, school administrators have been worried about public pressure. Parents have been complaining about the high calorie snacks that the kids have been buying while at school. They wanted the selection to be changed to a more healthy mix. (Why this is the school’s problem instead of an example of lax parental supervision is something I can’t answer.)

So the schools got rid of the really tasty stuff and replaced it with, I dunno, organic fruit and soy energy bars. You know, stuff that no one buys for the taste.

And the obvious happened. The kids stopped buying stuff from the school vending machines.

Now the schools are upset. The money they got from the sales of all that sugary stuff has dried up. In some areas the loss is staggering, with schools in the San Fernando Valley losing $100,000 USD a month from soda sales alone! (There can’t be that many paper routes, so the parents there must really pass the cash out every morning. I wonder if they’ll adopt?)

Supporters of the junk food bans say that they knew that there was going to be a loss in revenue for awhile, but that sales would pick up eventually. I suppose they figure the kids will get used to the crappy taste or something. Looks like they aren’t parents who ever had to convince a child to eat their carrots.

In an era of general acceptance of deregulation and privatization, Mr. Spitzer has introduced the world to yet a new form of regulation, the use of the criminal law as an in terrorem weapon to force acceptance of industry-wide regulations. These rules are not vetted through normal authoritative channels, are not reviewable by any administrative process, and are not subject to even the minimal due-process requirements our courts require for normal administrative rule making. The whole process bears no resemblance to a rule of law; it is a reign of force. And to make matters worse, the regulatory remedies are usually vastly more costly to the public than the alleged evils.

–George Mason law school dean emeritus Henry Manne

Nothing to see here, folks. Move along.

In this post, Lexington Green talks about the Retro-Left’s infatuation with old-style labor organization and law. Unions are a 19th and early-20th century solution to the problem of protecting workers and enhancing overall social and political stability. One can argue whether they represented the best solution in the past, but I don’t think that in the modern economic climate anybody can argue that they remain the best solution going forward.

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