tag:blogger.com,1999:blog-7334408760351487944.post1210546765459714937..comments2023-11-12T06:43:00.060-05:00Comments on Notes on Social Security Reform: New paper: “Stock Market Fluctuations and Retiree Income: An Update”Andrew G. Biggshttp://www.blogger.com/profile/16617460431856611873noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-7334408760351487944.post-80532838913883772172008-11-04T13:31:00.000-05:002008-11-04T13:31:00.000-05:00Good posts by both of you, but I would offer the f...Good posts by both of you, but I would offer the following assertions regarding how best to 'fix' Social Security:<BR/><BR/>(1) The FICA tax is paid by workers, all 12.4% of it. The entire amount should be available for private accounts.<BR/><BR/>(2) If people dont' want to opt-out, they shouldn't be forced to. Probably 20-25% of the public will want to stay in traditional Social Security. If the American people were allowed to 'opt-out' of Social Security, they would en masse. Politicians know it, which is why the best reform should include an opt-out. If some lunkheads want to give their money to Washington, DC in exchange for a 1-2% real return (or less), let them. As long as it doesn't impact my 12.4% contribution, they can do whatever they want with it.<BR/><BR/>(3) Private-sector annuities, backstopped by government guarantees of minimum returns, would also be a better alternative than traditional Social Security. These guarantees could also be applied to personal accounts, since it is highly unlikely any balances at the time of retirement/annuitization would be below danger levels.<BR/><BR/>(4) Since Social Security is largely an unfunded, can-be-broken-at-any-time promise, I question the assumption that 'risk adjusted' returns on stocks or balanced accounts are NOT better than traditional Social Security. How much risk are we taking sending the government thousands of dollars every year in exchange for a 'promise' that can be altered multiple ways ?<BR/><BR/>(5) Government-approved balanced accounts could minimize risks. Individual bonds and stocks would not be permitted under my plan.<BR/><BR/>(6) Stock allocations should not be below 20% since below that threshold historically you are exposed to other risks (inflation, reinvestment risk of low interest rates, etc). Only deep into retirment does it even pay to consider an equity allocation below 20%.<BR/><BR/>(7) Most of the return assumptions done by Brookings and others fail to take into account global and international stocks and bonds. The risk premiums on high yield bonds, too, has recently exploded upward. Does anybody think that buying junk bonds yielding 12-18% at today's prices won't provide a great return over the next investment cycle ??<BR/><BR/>True Social Security reform has to focus on a 100% opt-out of the entire FICA Social Security contribution. Anything less is too Rube Goldbergish in design complexity, as witness the Bush plan in 2005. <BR/><BR/>If reform advocates are going to be demagogued and demonized, they may as well make the prize for reform supporters among the American public worthwhile. I don't know too many Americans who will be too enthusiastic about getting 4% back from FICA, but the entire 12.4% -- which for the average American amounts to the value of a Roth IRA contribution, about $5,000 (employee+employer) -- would certainly cause alot of people to take a look and see what the merits of the opponents of reform are worth.<BR/><BR/>My guess is they'd come to the same conclusion I have: not much.Anonymousnoreply@blogger.com