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The Bush proposal will siphon off hundreds of billions of dollars in a variety of fees that will be applied to the newly created private accounts: administrative fees, management commissions, advisory fees, custodial fees, etc. This is what was done in Gen. Augusto Pinochet's Chilean model of social security privatization, imposed by Shultz's "Chicago Boys" economists. There, fees gouged 15-30% of the workers' private accounts. Indeed, a recent study puts the cumulative amount of fees to be collected in U.S. privatization at a rate only slightly lower than that in Chile.

http://www.larouchepub.com/other/200...l_st_memo.html

In Chile, the administration costs are about 1% of assets. How can 1% of assets lead to a 30% reduction in returns?

Fees in the US Private Account proposals have been estimated to be about $50 per account per year. That is much higher than the SSA cost of $10 per account per year, but is easily absorped by higher returns. Over a 30-year period, even somebody making as little as $10,000 annually, would still be better off with a 4% return and $50 account expense then a 2% return. The total portfolio is $33,000 vs. $25,000. 2% is not even realistic under the current system, but if it was, PRAs could still absorp the higher administration costs and come out ahead.

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None love freedom heartily, but good men; others love not freedom, but license.
- John Milton

Perhaps, I am seeing numbers, and a plan for something that will do nothing to solve the social security problem. I guess it might be discussed with more accuracy when there is a plan on the table.

There are lots of plans on the table.

See for instance
http://www.socialsecurity.org/pubs/ssps/ssp-32es.html
http://www.house.gov/ryan/Summary_Ry...perity_Act.htm
http://www.house.gov/apps/list/press.../040722ss.html

On the latter, you can see more information here:
http://www.granitetower.net/sscalc.html

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None love freedom heartily, but good men; others love not freedom, but license.
- John Milton

Thanks for the links I will attempt to digest these proposals, I still have a hard time understanding how diverting funds from the existing system that is "in crisis" even begins to address the problem. Not that private accounts are necessarily a bad idea, there seems to be an element of risk that is not associated with the existing program and the proposals seem to offer no real solution to the existing problem.

I also wonder just how much of the money being "invested" will be going into the pocket of brokerages.

Hey, here is a plan put forth by Will Marshall from the progressive policy institute. What do you think?
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Fixing Social Security
By Will Marshall



Table of Contents


Democrats are right: President Bush has conjured up a phony crisis to justify his push to "reform" Social Security. But as they fight the president's misbegotten plan, Democrats shouldn't miss an opportunity to offer the nation a better one. Just saying "no" to Bush may appeal to paleoliberals who are in denial about the need to modernize the 70-year-old retirement program. But simple rejectionism is a loser for Democrats, substantively and politically.

Social Security's financial problems seem manageable now, but the baby boomers' impending retirement will overwhelm the current pay-as-you-go structure. Doing nothing to prepare Social Security for the coming age wave is the surest way to bring on the crisis that White House Cassandras now foretell.

Besides, the public expects reform. Most Americans (including most Democrats) worry that Social Security won't have enough money to pay their benefits by the time they retire. Because people trust Democrats more than Republicans to protect the system, Democrats may well be able to block Bush's partial privatization scheme. But if they don't offer an alternative reform, they'll reinforce GOP stereotypes of Democrats as die-hard defenders of the status quo.

There's no need, however, for progressives to couch reform in dreary, take-your-medicine terms. With the responsibility to fix the system come intriguing opportunities to make Social Security better for everyone.

The right kind of reform, for example, could virtually eliminate old-age poverty, spur economic growth, reduce inequality of wealth, and strike a fairer balance between the promises we make to older Americans and the need for public investment in families and children.

Specifically, Democrats should champion four goals for progressive Social Security reform:

First, raise Social Security's minimum benefit so that no American who works and pays taxes most of his or her adult life will live in poverty. The price tag for banishing old-age poverty is surprisingly affordable -- about 0.18 percent of earnings covered by the payroll tax over the next 75 years. We could pay for this change simply by using a more accurate measure of inflation in adjusting benefits each year.

Second, enable every worker to save and own capital assets. The Progressive Policy Institute has proposed Universal Pension Accounts that would give workers a tax break if they start saving from their first job on. For workers with modest wages, the federal government should also make matching contributions to their accounts, thus boosting the nation's anemic personal savings rate and building capital for investment. Making every worker a capitalist would also narrow the nation's wealth gap, which is actually worse than income inequality.

In contrast, President Bush's personal savings accounts would take money out of Social Security and likely require more government borrowing on top of what is already needed to finance his mushrooming budget deficits.

Third, take on the toughest part of reform -- getting Social Security back into long-term fiscal balance and restraining its growth rate. Thanks to the boomers' retirement, increases in longevity, and falling birth rates, the elderly population will grow much faster than the workforce whose taxes support them. Sooner or later, the system will go broke, and policymakers will face a bleak menu of options: deep benefit cuts, tax increases, or more government borrowing. Progressives ought to rule out increases in the payroll tax, which is a regressive levy on work, and instead look for progressive ways to trim benefits for future retirees. Yet such cutbacks would be considerably mitigated by the Universal Pension Accounts and other incentives for saving -- if workers start today.

Fourth, enlist the baby boomers' help in solving the problems their enormous numbers create. Putting off reform now means that the full burden of salvaging the system will fall on their children.

Boomers can do their part by working longer and saving more. Given advances in health and longevity, as well as a coming dearth of workers, it no longer makes sense to encourage people to retire as early as age 62. Instead of raising the retirement age, however, we ought to let workers themselves decide when it's time to quit, and stop penalizing those who want to continue working past 65.

If today's workers start saving and investing more in stocks and bonds, the returns they earn would allow us to trim their Social Security benefits later, without reducing their overall standard of living.

These four reforms would make our retirement policies fairer, more progressive, and more conducive to economic growth. They would put Democrats on the side of social progress by honoring the values embedded in Social Security, instead of defending outdated programs and policies. It's a political and policy opportunity that Democrats can't afford to miss.

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"I like that about the Republicans; the evidence does not faze them, they are not bothered at all by the facts."
-Bill Clinton

That is a valid concern. It's true that going to Private Accounts will add to the funding shortfall, in the short term. However, the critics that say this makes it a bad idea are wrong. This is like saying paying off your credit card is a financial mistake. That is only true if you measure the outlays over an extremely short time horizon.

Sure, if I pay off my credit card balance of $2,000 in a month, I will have incurred $1,950 more expenses over that month than if I stuck with the $50 minimum payment. Over the course of a decade, however, the $2,000 upfront investment gives me a much better deal.

Likewise with Private Accounts and Social Security. Going to Private Accounts, we would swap a $12,9 trillion unfunded liability with a $3,9 trillion unfunded liability. That is a great trade.

Furthermore, the reform would be sustainable. Private Accounts is a prefunded retirement system, as opposed to the Pay-As-You-Go system we are using today. With a prefunded system, we would never be back in a demographics-based crisis situation again. That is unlike any other solution I have seen, which are merely band-aids that defers the problem without really solving it.

__________________
None love freedom heartily, but good men; others love not freedom, but license.
- John Milton

I understand that these windfall style investments could create small amounts of wealth in the short term, they could also incur loses that would have to be covered from social security general fund.

If I could see a specific budget of where this "private investment" money I think it would make more sense. The idea of investing for the future is good, but the social security system was set up to protect people in old age not gamble their retirement savings. Life spans have changed which would seem to require an adjustment not a total change. As I see it the investors are gambling on the future and the only people who really have a guaranteed windfall are the brokerages that will handle this massive amount of money. No one has answered the question, how much do the brokerages get?

This might help:
http://www.socialsecurity.org/pubs/ssps/ssp13c.pdf

No doubt the brokerages will make out. Given the expense ratios of existing funds, the expected management cost will probably be about 1% of assets. That is pretty effecient, but still adds up to a lot of money in absolute terms. In a few decades, a Private Account system would accumulate $10 trillion in assets. A 1% fee on this would come to $100 billion.

That is a lot of money. I'm not going to tell you that brokers will not get a windfall; obviously they are. The question is, if everyone else also makes out, should this hold us back?

Check out this article on the TSP:
http://moneycentral.msn.com/content/P109805.asp
It is a good model on which Private Accounts might be based.

__________________
None love freedom heartily, but good men; others love not freedom, but license.
- John Milton

So why not give the money to retirees rather than the already wealthy brokerages. The percentages I am hearing are higher than 1 percent.

Since the Medicare system is in much worse trouble than the social security system perhaps money should be diverted there instead of into the wealthy brokerages, unless of course you see some intrinsic America value in greed.

And I will go out on a limb here and suggest that the brokerage that gets the windfall will be decided by the amount of contributions to the Republican party. I actually think that Bush's goal is to destroy social security; I think it makes him sick when he thinks poor American's who helped build this country might get a share.