Re: Feckless Pelosi

James Arthur wrote:
Martin Brown wrote:
James Arthur wrote:

Way back in 1996 the Los Angeles Times ran an article in
which they figured that a 32-year-old (the writer's friend),
who had then $46,788 paid into Social Security, could expect
$610 monthly in benefits upon retiring at age 67.

That roughly translates to an assumed annual interest rate of 4% after tax. These calculations are very sensitive to the assumed rate of return for compound interest over many years.

Incorrect, in that Social Security does not invest contributions,
so much as pay them immediately out to current retirees.

OK so the US system is the same hand to mouth Social Security system
as in the UK. The current working generation are paying the state
pension of the previous retired generation (an amount that depends on
how many years they have worked). This is fine provided that the
population in work never declines and has the useful property that it
is automatically inflation corrected by construction.

So, immediately on "investing" in Social Security, most of
your money is already spent and gone.

OTOH in the UK Equitable Life (a private pension company - a very old
and reputable one until it all went pear shaped) managed to lose half
of all the private pension contributions given to it by making an
insanely generous guarantee offer on some of its pension products. It
made sense to the innumerate marketting men, but was completely
suicidal in the light of ever increasing life expectancy.

Similar in kind to the buy a Hoover/6 bottles of wine get a free
flight to the USA promos.

The difference to be made up, the 'interest' as you put it,
is got from increasing taxes on the next generation: not
*your* taxes, but on those who follow.

Yes. But that is a valid way of funding a minimal standard of living
in retirement for those that do not have any other savings. Saving
should still be encouraged - but there should also be some kind of
safety net for the poorest in a civilised society.

If that same person took that same money and never added a
dime to it, invested it in dead-safe bonds, they'd get $2,498
each month on retirement 35 years later in /interest/, without
ever having to touch their principal.

This assumes an annual interest rate of 6.675% after tax - which seems a bit optimistic for dead-safe bonds. Junk bonds might manage it if you don't lose your shirt somewhere along the way.

Right. The L.A. Times assumed 7% yield in a tax-free retirement account from 30-year Treasuries, which is what they were yielding at that time.

But not now. So the assumption they were predicated on is invalid.

Investment decisions have to change with the times obviously.
Nowadays you'd plan differently--there are plenty of good choices.

I agree. But not everyone has the luxury of money to invest. And many
people cannot save a penny unless they are forced to do so. A lot run
up insane debts on credit cards at punitive rates of interest.

The highest interest rate I spotted for truly safe US bonds today was a shade under 5% which gives a monthly figure of $1075. Certainly higher than the Social Security pension but not by quite such a large amount.

But people are foolish, they noted, and invest foolishly.

So do bankers remember LTCM, and Enron...

It's hard to do worse than 'investing' in Social Security,
since the first thing they do is throw most of your money
away. The rest is warehoused at rock-bottom returns.

I thought they got something between 4-5%.
BTW: Can you spell dot.com boom?

Sure, people make mistakes. Are government people then,
less fallible than regular people? Do they make better
decisions? Do they handle their finances better?

The financial models of national governments are pretty good - the
problems stem from not understanding all the complex interactions. And
in particular the ability of the market makers to be irrational,
dominated by herd instinct, greed and fear in roughly equal
proportions.

In the UK at least I do not doubt the overall talent in the civil
service. Their entrance exam is pretty stiff and competition for the
top posts fierce. But if their political masters tell them to do
something they will (evenutally) do it. There is old UK comedy show
called "Yes Minister" that protrays this scenario more or less
accurately.

Does government employment make people smarter?[1] Does
life-time employment in the civil service union make them
more motivated?
Or do you perhaps think politicians will be more attuned
to your personal needs than you could be?

Actually the UK civil service has a very high standard of applicant.
They remain in place even when the politicians are swapped by
elections.

We have tried the US scheme of political appointees for the London
mayor (now blond bombshell Boris Johnson - former MP for Henley, a
vacuous self publicist and regular on various game shows). Already two
of his immediate political appointees have crashed and burned over
scandals and he's only been in office a couple of months.

In fact the evidence is that government can't be trusted
with your money at all--they co-mingle it with other
people's money, administer, squander, then give it away!

So do the banks - except they hope to get it back with interest.

([1] Possibly they are smarter--they have their own, separate,
more generous pension system. They're exempted from Social Security.)

The ruling classes always do that.

Only if they were able to get this magical safe investment bond that yields 6.7% every year for 35 years. And inflation may eat up the gains.

It's a fallacy to regard Social Security as any kind of
investment at all. That's not what it is.

It's a system where current workers support current retirees,
with the promise that they'll get the same, plus more.

Money paid in is mostly spent, not invested at all.

Yes. But it is a prefectly valid system provided that you never run
into seriously declining national employment. Then it breaks big time.

investment, it's a plan for the redistribution of wealth,
to achieve a particular social purpose.

To stop the destitute from starving to death on the street.

Regards,
Martin Brown
.

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