Dick Armey, Social Security, private accounts and the Dutch-Aussie solution
As already noted, I'm loving these Dick Armey posts on Swampland. In his latest, he writes:
Social Security is not a retirement system. It is an intergenerational transfer program. Our 21st century economy is marked by a global economy and multiple zigs and zags in the typical career path. Today's 401(k) funds, diverse mutual fund market, and the low cost of access to financial information is fundamentally different than even a generation ago. In 1937, Social Security collected a combined two percent of an employee's income; today it collects more than 12 percent.
Until we move toward ownership of large personal accounts, “reform” of the current program requires one of two responses. Congress will raise taxes or reduce benefits. Neither is politically palatable. Over time, personal ownership would transform the program's $12 trillion unfunded liability into individually owned assets. This would be the single largest debt reduction in history.
Armey is onto something here, although perhaps not exactly what he thinks he's onto. The two best national retirement systems of any size (that is, the only two really good ones in countries that have more than four or five million inhabitants) are those of Australia and the Netherlands. Both countries start with government old-age payouts that make no pretense of being any kind of retirement account; they're smaller as a percentage of GDP than Social Security, funded out of regular income tax revenue, and highly progressive (if you're poor, you get a significant payout; if you're not, you don't).
On top of those come much larger retirement savings plans. In the Netherlands they're structured as pension funds and in Australia as personal accounts. But in both cases they're invested in stocks and bonds and other such things (private equity, timber, toll roads, whatever), managed by professionals, and portable from job to job.
So the idea of a Social Security that gets smaller and more progressive over time, coupled with some sort of large, government-mandated private retirement accounts (or "opt-out" private accounts, where money is deducted from your paycheck but you can get it back at tax time if you're willing to jump through a few hoops) isn't crazy or regressive at all. The concern of lots of Social Security supporters in the U.S. is that if you make the program any more progressive than it is now it will begin to be perceived as welfare and shortchanged and neglected. Which strikes me as a valid worry but not necessarily a deal killer.
There's also the issue of how the money in the retirement accounts would be managed. Armey appears to be okay with the limits imposed by the federal Thrift Savings Plan. The TSP is essentially a really well-thought-out 401(k), so it's not the worst thing in the world to emulate. But there's pretty strong evidence that professional pension fund managers get higher returns over time than individuals managing their own 401(k)s. So we probably ought to be discussing if there's any way to get the people who run TIAA-CREF and CalPERS and GM's pension fund involved. Or maybe we should just put David Swensen in charge of the whole thing and forget about it. What we absolutely shouldn't do is put the for-profit mutual fund industry in charge. Not quite sure how we'll manage that.
(Much of the reasoning above is borrowed from pensions guru Keith Ambachtsheer. Don't blame him for any mistakes, though.)
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1
Justin, great job with the posts...while I don't always agree with you, at least you're willing to respond to Armey and his version of the facts. Keep it up. Now if only more of your colleagues on Swampland did the same.
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You neglect to mention the defined benefit portion of the federal retirement system (Federal Employees' Retirement System (FERS). The Fed's retirement system, since they discontinued contributions into the social security system under Reagan, consist of two major programs, FERS and Thrift Savings Plan (TSP).
FERS is the defined benefit part of the plan, and TSP is the defined contribution part, which is, within limits, employee managed. This would be the equivalent in private industry as social security as defined benefit, and 401k or 427 as defined contribution. You are being disingenuous in neglecting to mention the defined benefit FERS as the major program guaranteeing a secure retirement, regardless of the fluctuations of the market.
An explanation from OPM about federal civil service benefits:
~
In contrast to the TSP, the FERS Basic Annuity and the CSRS annuity are defined benefit programs. This means that the benefits you receive from your FERS or CSRS annuity are based on your years of service and your salary, rather than on the amount of your contributions and earnings. Most contributions to these annuity programs are made by your agency on your behalf. Your contributions are mandatory and the amount you contribute is defined by law. Your contributions are made by payroll deductions that your agency takes automatically from your paycheck. The FERS Basic Annuity and the CSRS annuity are administered by the Office of Personnel Management.Your TSP benefits are in addition to your FERS or CSRS annuity. If you are a FERS employee, the TSP is an integral part of your retirement package, along with your FERS Basic Annuity and Social Security. If you are a CSRS employee, the TSP is a supplement to your CSRS annuity.
~Armey is only telling you the part that serves his purpose.
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Justin....
Are the Netherland pensions and Australian "private account" plans "defined benefit" plans? Or are they just a legalizd form of gambling in the stock market?
My problem with these kinds of "compulsory investment" plans is that they tend to resemble pyramid schemes --- and are especially risky if population growth is not steady.
The big problem is that the amount of money going into "investments" is greater than the actual supply of "good investments". As a result, rates of return go down in general, making "safe" investments a not very good deal, and "risky" investments the only way to get a decent rate of return -- if you are lucky.
Even with steady population growth, given greater longevity, there will inevitably come a point where the money for retirees "harvested" by selling on investments is going to be less than the money being put into retirement funds, creating downward pressure on stock prices, and upward pressure on bond interest rates (which, of course will have a negative impact on economic growth, which in turn means fewer jobs.)
What is to prevent these systems from eventually imploding?
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The Australian personal accounts have always been defined contribution; the Dutch pension funds just made the switch from DB to what they're calling "collective DC." That is, the risks are shared by all those contributing to and receiving payments from the pension fund.
I agree that more money flowing into investments might depress returns, but that doesn't mean they're gonna go to zero. Plus, it's not as if the Australian and Dutch plans are investing all of their money in Australia and Holland.
What is to prevent these things from imploding? Adequate annual contributions and thoughtful matching of assets and liabilities. Which is the same thing that keeps DB plans from imploding.
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"I agree that more money flowing into investments might depress returns, but that doesn't mean they're gonna go to zero. "
of course, they won't go to zero. The problem is one of expectations -- and the economic and social impact of not meeting those expectations.
For the wealthy, it won't be a big deal -- they might have to cut back to one cruise a year instead of three. But for the people on the other end of the economic ladder, the impact could be devastating...
" Which is the same thing that keeps DB plans from imploding."
given what has happened in the airline and auto industries, I'm assuming this was meant to be ironic...
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In the Netherlands, government old age pay-outs aren't linked to income or wealth in any way (even the queen gets the same amount as everyone else).
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what about that group of people that are falling between "the Wharf and the Ship"
the ones that did not get the chance to start super timely, e.g, by being retrenched and in the age group where a new job is hard to get, the divorcees that started out new and did not get a share of the ex spouse's super, as that was not compulsory at the time.
no one seems to worry about them and these people are struggling like hell and have no chance to get anywhere.
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