WILLisms.com: Social Security Reform Thursday: Week Sixty -- Declining Rate Of Return.

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Social Security Reform Thursday: Week Sixty -- Declining Rate Of Return.

Thursdays are good days for reform, because they fall between Wednesdays and Fridays. And reform is a long-haul process, not a fleeting event. So we're going to keep plugging along with the case for reform, even as the issue goes off the political radar screen.

That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.

This week's topic:

Social Security Has An Increasingly Abysmal Rate Of Return.

Just a quick reminder about Social Security's underlying demographic crunch, from Heritage's 2006 Candidate Briefing Book:

More retirees. Fewer workers. People are living longer. Benefit increases have outpaced inflation. Long-term structural forces have contributed to an untenable entitlement system. To fix Social Security temporarily, Congress-- at various points in time-- has pushed the retirement age back, raised the tax rate, and expanded the tax base.

Social Security's problems go much deeper than that. The fix is not as easy as soaking the rich... or the middle class.

Social Security needs structural reform. It needs strengthening. It needs modernization. It needs a radical transformation. Social Security needs to move beyond 1935. It is outrageous-- and a bit awe-inspiring (and not in a good way)-- that the shortsightedness of policymakers more than a century before my retirement could continue to have such a deleterious impact over so many trillions of dollars.

It's even more outrageous that we now, in 2006, are missing a clear opportunity to transform Social Security from a malfunctioning Depression-era relic into a wealth-generating powerhouse for Americans of all income levels.

It's sad that so much of America's Gross Domestic Product is being siphoned off into such an inefficient boondoggle. It's a shame that so many dollars of American income (1 of every 8 dollars earned, for many working Americans) are being footled into a program with such a poor investment return:

Those dollars ought to be growing. Compounded. Into real wealth. Into significant, substantial, Republican-creating wealth.

Americans deserve a better deal. We deserve a modern Social Security system. In a global economy, we can't afford anything less.

It's time for reform.

The clock is still ticking:

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

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Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).
-Week Twenty-Four (KidSave Accounts).
-Week Twenty-Five (Latinos and Social Security).
-Week Twenty-Six (AmeriSave).
-Week Twenty-Seven (Cost Of Doing Nothing).
-Week Twenty-Eight (Chile).
-Week Twenty-Nine (Entitlement Spending Out Of Control).
-Week Thirty (Reform Better Deal Than Status Quo).
-Week Thirty-One (Social Security As A Labor Cost).
-Week Thirty-Two (Social Security And Dependence On Government).
-Week Thirty-Three (Social Security, Currently A Bad Deal For African-Americans).
-Week Thirty-Four (Longer Life Expectancies Straining Social Security).
-Week Thirty-Five (Howard Dean & Salami).
-Week Thirty-Six (Growing Numbers of Beneficiaries Draining Social Security).
-Week Thirty-Seven (The Crisis Is Now).
-Week Thirty-Eight (Disability Benefits).
-Week Thirty-Nine (Broken Benefit Calculation Formula).
-Week Forty (German Social Security Disaster).
-Week Forty-One (Crumbling Pyramid Scheme).
-Week Forty-Two (Overpromising, Globally).
-Week Forty-Three (Demographic Wave).
-Week Forty-Four (The Jerk Store).
-Week Forty-Five (Defined Benefit Plans).
-Week Forty-Six (Even The Empty Promises Are A Bad Deal).
-Week Forty-Seven (Our Aging Population).
-Week Forty-Eight (The Tax Increases Required To Cover Social Security's Costs).
-Week Forty-Nine (Much Longer To Get Your Money Back From Social Security).
-Week Fifty (A Vote, At Last).
-Week Fifty-One (We Can Do Better).
-Week Fifty-Two (Socialist Security).
-Week Fifty-Three (China Has The Same Problem, Only Worse).
-Week Fifty-Four (Potential Crisis Size).
-Week Fifty-Five (The Crisis Moves Closer).
-Week Fifty-Six (Big Brother Social Security).
-Week Fifty-Seven (Personal Accounts Are Awesome).
-Week Fifty-Eight (Private Accounts and Presidential Proposals).
-Week Fifty-Nine (The False Promises Of Social Security = Unwise Investing/Saving).

Posted by Will Franklin · 10 August 2006 12:00 PM

Comments

Social Security reform is way past due! It creates false hope for induividuals thinking that the Gov. is going to be there providing security for old age. WRONG...

Posted by: Zsa Zsa at August 10, 2006 12:44 PM

Historically, the S&P 500 has earned an average rate of return of 10% for oh, about the last 100 years. Now that includes down cycles and up cycles, but averaged for any decade, it is right at 10%.

Let's take a hypothetical worker earning $10 per hour. Let's eliminate inflation and assume that the person earns $10 per hour for their entire life just as a simplistic explaination. One invests 7.5% of his income into a plan earning 3% returns and the other invests in the stock market earning 10%. That works out to approximately $1,500 per year for the 40 years from age 20 to age 60.

At the end of the 40 years, one person has $660,000 and the other has approximately $110,000.

What we are doing is spending my contributions into Social Security today and making promises to provide an annuity in the future that exceeds the actual future value of the net contributions if the person lives over 10 years. And the average lifespan is well over 77 years now. So the net present value of my contributions exceeds the net present value of the payouts that I expect to receive based on a 3% return. Based on a 10% return, it is the opposite.

Poor investing by the government of my money means that the net present value of every single payor is less than the value of the benefits they will receive if they live to the current average age. And sooner or later, that difference plus the fact that the "surplus" does not really exist, has to be dealt with.

If Social Security were a business, all of the "surplus" calculations would have to be based on the NPV of both the current income and the future payouts when compensated for the rate of return and inflation, etc. It is not even close. We are writing checks today that are going to come due in the future. Either the taxpayers make up the shortfall or the beneficiaries are going to get shafted.

Posted by: Justin B at August 10, 2006 01:33 PM

http://www.lewrockwell.com/rozeff/rozeff90.html

Posted by: lester at August 10, 2006 04:25 PM