The real reason why the GOP wants to kill SS

[Norman Bernstein]

A few weeks ago, I was watching an interview with Rep. Byron Donalds (R-FL), who you may remember was the doppelganger faux candidate for Speaker of the House, in an effort to force McCarthy to bend over for the Freedom caucus.

The interviewer asked about the GOP’s efforts to cut Social Security benefits. Donalds’ response was to repeatedly bleat about the rise in the S&P 500... without connecting that fact to Social Security itself. No matter what the interviewer said, with relation to Social Security, he continued to sing the same one note song... as if there was some sort of equivalence between an investment in stocks, and SS itself.

It pissed me off mightily, because it perpetuates a GOP myth that has existed for decades. Social Security is NOT an investment program; it is insurance. The giveaway is actually in the formal name of the program: Old-Age, Survivors, and Disability Insurance (OASDI) program. It is no different than virtually any other kind of insurance; the insured person pays a premium for the policy over their working life, and in return, receives a defined benefit for the remainder of their life after age 66 or 67 (this can vary a bit, affecting the amount of the monthly benefit). The benefits are paid from (primarily) the premiums paid (I.e., the SS tax on wages), as well as from a trust fund set up to overcome a specific ‘hitch’ in the program. When you have an auto accident, it’s the same... the repairs to your car are paid by the current base of insured customers (and whatever interest is earned by reserves retained by the insurance company).

The program started in 1935, so it is now 88 years old, and it has been a resounding success, in terms of providing a cushion for most working people in retirement... and a lifeline to those with no other assets. 40% of all retirees depend on SS for some or all of their retirement income, and for 15% of women and 12% of men, it is their only source of income. Admittedly, living exclusively on SS benefits is hardly ‘living’, for most people... but it sure beats being homeless, hungry, and sleeping in doorways.

Rep. Donalds is not a stupid guy; he has been a financial credit analyst and a portfolio manager... but he’s also a Republican, and for those of that particular persuasion, the SS program appears as a ripe plum hanging on a low branch, and its color is green.

The move to ‘privatize’ SS is as old as the program itself, but what would that mean? The idea, according to the GOP’ers, is to have people investing in the stock market, and living with the consequences. Supposing that both the worker’s tax contribution to SS, along with the employer’s contribution, was given over to the worker to invest as he sees fit, then, ‘on average’, the worker’s retirement would grow in lock-step with the S&P 500.

In the real world, as opposed to the parallel universe the GOP lives in, only 42% of Americans own any form of stock, and that includes whatever they directly own, or what is contained in IRA’s and 401(k) plans. I don’t think that, of even the 42%, many are astute investors; most own stocks via managed investment plans, IRA’s, and 401(k) programs. This doesn’t mean they are ignorant or stupid; not everyone has the interest and experience to manage their own investments. My own daughter is CEO of a $20M PR firm... but still prefers that I manage her investments, because I have both the experience, and interest, that she does not.

Unfortunately, this means that most people are at the mercy of investment advisors, mutual fund managers, and IRA or 401(k) administrators... and this means that a portion of the earnings of those investments are diverted into the pocket of those folks. Worse yet, even if a person’s portfolio declines (like many have, in the past year), those fees are still being diverted to the managers.

Now just imagine the hundreds of millions of people who might be forced to give up the SS program. Like vultures slowly circling over a dying animal in the desert, the legions of investment managers will smell blood... so much money to be made, at the margins. 1% of trillions of dollars is many billions of dollars... and 1% probably wouldn’t be the maximum management fee, so it could be much more. Furthermore, even when managers are ‘fiduciaries’, who supposedly manage a client’s investments exclusively in the client’s best interests, the definition of ‘best interests’ can be easily abused.

Now, the GOP doesn’t mind, in the least, if investment managers make a lot of money... but that’s not the ultimate objective. The REAL motivation is the millions, or even billions, of dollars that those investment managers will pay to right wing politicians to even just try to destroy Social Security.

Does the GOP really care if destroying SS would be a benefit to the nation, or a catastrophe?

They don’t. As the song says, ‘It’s all about the Benjamins’.

[Peerie Maa]

Our social security is just as you describe.
For those of us fortunate enough to have occupational pensions, they used to operate in the same way. We and our employers paid into an investment fund that paid out defined benefits. This was risky for the employers, who had to top up the pot if the investments did not cover the projected liabilities.
Then they switched to defined contributions, which put all the risk onto the retiree, that their share of the fund might not buy as generous an annuity as they had hoped when they cash in their pension pot. Which is a similar approach that your GOP has the hots for.

[Dan McCosh]

I would argue that the reason Republicans are nibbling at SS and Medicare is that FICA taxes represents about 40% of the revenue of the US government. The idea is to steer the money into something else. Offering another way of financing the benefits isn't actually on the table. The strategy is to dramatically reduce the government's role in the US economy, much like the depression of the 1930s.

[gypsie]

100% of the Australian workforce invests in the Stockmarket. It's compulsory. 10% of my wages is given (pretax) to an investment company of my choosing (or my employers default if I don't).
It works, but it's compulsory.

Our Right Wing dingbats hate it, but it's so hard to argue against something that demonstrably works.

[Too Little Time]

It pissed me off mightily, because it perpetuates a GOP myth that has existed for decades. Social Security is NOT an investment program; it is insurance. The giveaway is actually in the formal name of the program: Old-Age, Survivors, and Disability Insurance (OASDI) program. It is no different than virtually any other kind of insurance; the insured person pays a premium for the policy over their working life, and in return, receives a defined benefit for the remainder of their life after age 66 or 67 (this can vary a bit, affecting the amount of the monthly benefit).

From https://www.ssa.gov/history/churches.html

For Social Security benefits

Whether a worker is entitled to benefits, and the amount of his benefit and that of his family, is related to a record of his earnings.

For Medicare benefits

Insurance is the ideal answer for a risk to which all are subject but which falls unevenly on those exposed to the risk. If everyone pays something, the relatively few who have large expenses have their bills paid and everyone has the satisfaction of knowing he is protected if disaster strikes.

It is interesting that one social security program is claimed to be not based on need and one is. But the reality is that we get what Congress decides what we get, on the criteria Congress sets.

Social insurance is based on the recognition that economic insecurity in a money economy arises ...

Would argue that economic insecurity (need) should be an important condition in making a claim of old age benefits.

[Too Little Time]

100% of the Australian workforce invests in the Stockmarket. It's compulsory. 10% of my wages is given (pretax) to an investment company of my choosing (or my employers default if I don't).
It works, but it's compulsory.

Our Right Wing dingbats hate it, but it's so hard to argue against something that demonstrably works.

Here the Left Wing Dingbats hate it. They have good reason to hate it.

In booming markets retail investors (individuals) tend to buy high and sell low. Frequently. They lose a lot of money.

While the pension plans run by the Left Wing Dingbats underperform most professional money managers, the Left Wing Dingbats are more critical of the professional money managers.

[Canoeyawl]

Could you describe a "left wing dingbat" for us?

The phrase seems to have been coined by Burt Prelusky of the Patriot Post

"On the Defense of White Men"

[Peerie Maa]

While the pension plans run by the Left Wing Dingbats underperform most professional money managers, the Left Wing Dingbats are more critical of the professional money managers.

My pension fund was/is run by professional money managers answerable to Left Wing Dingbats (elected trades union reps). They always over performed. We never had to get Reasons in Writing.

[Norman Bernstein]

DSE

[Too Little Time]

Could you describe a "left wing dingbat" for us?

They are the ones who argue that Social Security must be invested in treasury obligations rather than stocks.

It follows from the comments by gypsie.

[Dave Gray]

Musk Jr?

[Too Little Time]

My pension fund was/is run by professional money managers answerable to Left Wing Dingbats (elected trades union reps). They always over performed. We never had to get Reasons in Writing.

Norman had unkind things to say about money managers in the initial post. They echo his comments in previous posts going back years. Pension fund results indicate a lot of underperforming money managers.

The best money managers in the US tend to put their clients' money into broad market index funds, get rid of their research staff, and spend their time fishing. The service they provide is keeping their clients invested - not buying high and selling low.

Personally my daughter pays a money manager. She is happy with the results. My wife and I have mutual funds that a professional manages. After expenses he produces better returns than I do. We are happy with the results.

[gypsie]

Here the Left Wing Dingbats hate it. They have good reason to hate it.

In booming markets retail investors (individuals) tend to buy high and sell low. Frequently. They lose a lot of money.

While the pension plans run by the Left Wing Dingbats underperform most professional money managers, the Left Wing Dingbats are more critical of the professional money managers.

Here in Oz it was the union movement who set it up, by negotiating with employers. It was not an uncommon situation and demonstrably very effective at giving wage earners a higher standard of living in retirement.
The Labour Party took it up to make it law in 1992.

without exception the not-for-profit funds (industry funds) outperform 'professional' (banks/insurance companies etc...) by a country mile. Much to the chagrin of the conservative politicians who are ideologically against telling people what to do with their money (even when it can be shown they and the country are better off) and really really hate that the 'normal' capital institutions perform so freaking badly. They perform badly mostly because their fees are high because they are paying returns to their shareholders. Industry funds only pay returns to members/contributors.

Professional? The NFP funds are highly professional. Being a not-for-profit doesn't mean your staff are volunteers.

Every chance they get the conservative government try to hinder or dismantle the system. A crystal clear case of ideology over actual results. They can't stand this shining beacon of how wrong they are.

[Too Little Time]

.. without exception the not-for-profit funds (industry funds) outperform 'professional' (banks/insurance companies etc...) by a country mile.

I don't follow world markets. So I might as well ask questions.

Just a preface to show what I do know about the US market.

The S&P 500 over the long term - 30 years, seldom returns under 10% annualized. Public Pension funds try to get but often fail to get 7-8% annualized on their long term investments. (Yes, they report on the return on their long term investments as well as on the short term investments used to pay their obligations.) Mutual funds and ETFs that attempt to match the returns of an index are reasonably successful - after expenses they return to investors close the return of that index. I am happy with my investments matching the 10% return of the S&P 500. I would be unhappy if they did not come close.

You will note I more or less compared not-for-profit funds and "professionals" to a national index. And also to each other. I have left out the exceptions.

What returns do your not-for-profit funds achieve? How do they compare to whatever index you prefer? What returns do your "professionals" achieve? What return would you expect on money you invested for the long term?

[Peerie Maa]

Norman had unkind things to say about money managers in the initial post. They echo his comments in previous posts going back years. Pension fund results indicate a lot of underperforming money managers.

The best money managers in the US tend to put their clients' money into broad market index funds, get rid of their research staff, and spend their time fishing. The service they provide is keeping their clients invested - not buying high and selling low.

Personally my daughter pays a money manager. She is happy with the results. My wife and I have mutual funds that a professional manages. After expenses he produces better returns than I do. We are happy with the results.

U S Exceptionalism?

Our fund managers invest with a range of funds, property, Gilts and so on, spreading the money around several investment houses, monitoring performance and moving the money if the investment house underperforms. It has worked well so far.

[sandtown]

It is important to understand that the US SS is not just funds for retirement income;

As Mr. Norman points out it is also insurance should one become disabled BEFORE retirement - and in such events one's dependents often get some support as well.

In fact, around 30% of SS payments go to the disabled who are not of retirement age.

Some pension funds have indeed been freed up so that the beneficiaries can take it all as a lump sum and do with it what they wish.

Lots of those folks have lost most or all of it - very few people are as good at investing as they think they are.

[Too Little Time]

U S Exceptionalism?

Our fund managers invest with a range of funds, property, Gilts and so on, spreading the money around several investment houses, monitoring performance and moving the money if the investment house underperforms. It has worked well so far.

Whenever people are vague and say "It has worked well so far." I get curious.

I found average pension returns for the UK from 2015 thru 2021. I compared those to investing in the S&P 500. Investing equal amounts in both at the start of 2015 would have led to the total at the end of 2021 of the S&P 500 investment being twice the pension fund investment - 331% v 162%.

A significant difference. But the pension returns are in line with US pension fund returns - 7% annualized.

[Too Little Time]

It is important to understand that the US SS is not just funds for retirement income;

As Mr. Norman points out it is also insurance should one become disabled BEFORE retirement - and in such events one's dependents often get some support as well.

In the past one could buy insurance if one was concerned about those.

Knowing that SS taxes are invested poorly for the long term, I would suspect that the insurance for those issues is mispriced.

[Dikhaut]

“Killing SS” or proposing it would be political suicide. To believe that “the GOP” wants to kill it you would have to believe that they want to commit political suicide. Whether or not you agree with their politics, one would have to be pretty foolish to believe they would attempt this. The statements made by Democrats claiming that the GOP wants to do this have been pretty thoroughly debunked by GOP leadership.


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[Peerie Maa]

Whenever people are vague and say "It has worked well so far." I get curious.

I found average pension returns for the UK from 2015 thru 2021. I compared those to investing in the S&P 500. Investing equal amounts in both at the start of 2015 would have led to the total at the end of 2021 of the S&P 500 investment being twice the pension fund investment - 331% v 162%.

A significant difference. But the pension returns are in line with US pension fund returns - 7% annualized.

It works well for BAE Systems. But they are an enlightened company. Hence, a trustee board with half of its members elected by the TU membership, and a TU Pensions Negotiating Committee. I cannot comment bout other employers. And then there was the Maxwell scandal, that changed UK Law. The Pensions Act 1995, followed by Pensions Act 2004

The main features of the Act include:

• The abolition of the Occupational Pensions Regulatory Authority and its replacement by the Pensions Regulator, with wider powers to intervene of its own volition;
• New powers for the Pensions Regulator to intervene where employers, directors and majority shareholders were perceived to be avoiding their responsibilities to pension schemes and where employers were insufficiently resourced to support the pension scheme;
• New notification requirements;
• The establishment of the Pension Protection Fund to provide benefits for pension scheme members where a pension scheme had gone into winding-up with insufficient resources to fund scheme benefits and no employer to make good the underfunding;
• The abolition of the minimum funding requirement and its replacement with scheme-specific funding requirements;
• Modification of the protections for existing pension scheme benefits and of the requirements for pension schemes to have member nominated trustees.

[Norman Bernstein]

(Yawn)

the rational folks here will recognize that the compound annual return from the S&P 500, over a long period of time, only occurs when the funds remain invested… retired people, on the other hand, need to draw from their investments to live…

…which is why SS is insurance, not investment… and it is also why any surplus funds in the SS system CANNOT be invested in anything other that US Treasury instruments… because they are the safest investment in the world.

But, I’m talking to a wall…. So feel free to ignore me.

[robm]

that the GOP wants to do this have been pretty thoroughly debunked by GOP leadership.

And you actually believe what they say? Do I have a deal for you....

[Dikhaut]

And you actually believe what they say? Do I have a deal for you....

What do you believe they would gain by eliminating social security?


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[Too Little Time]

(Yawn)

the rational folks here will recognize that the compound annual return from the S&P 500, over a long period of time, only occurs when the funds remain invested… retired people, on the other hand, need to draw from their investments to live…

…which is why SS is insurance, not investment… and it is also why any surplus funds in the SS system CANNOT be invested in anything other that US Treasury instruments… because they are the safest investment in the world.

But, I’m talking to a wall…. So feel free to ignore me.

I think most would do well to ignore you. You have made some really poor stock recommendations in the past. And you insisted that last year was a bad year for recent retires. I am waiting for some support for that position. The S&P500 was never below the 10% annualized return for any period longer than 3 or 4 years short term for investors. Even the 30% down for the NASDAQ was insignificant for any time period of interest to investors. You can do better than echo the newspapers.

I could make the claim that most would make: Until one is retired that 100% stocks is much better than special government bonds.

I could make the claim that Bill Bengen's paper and book indicate that 100% bonds in retirement is about as bad as one can do and still be invested. Most professionals recommend at least 50% stocks and all of those who do outperform a portfolio of special government bonds.

100% in the S&P 500 prior to and after retirement has never been a poor investment. Even back when the S&P500 was called the S&P.

[George Jung]

Well, lessee..... who has more 'credibility' ... on this issue? On any issue?

I'm voting for Norman.

[Dikhaut]

Well, lessee..... who has more 'credibility' ... on this issue? On any issue?

I'm voting for Norman.

Norman’s financial advice posts seem to be designed to impress those who know even less about the subject than he does. I am not surprised that this includes you George. Not knowing anything about him beyond what he posts here, to me his posts have the distinct whiff of “all hat, no cattle” as they say.


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[George Jung]

Funny - I have the same opinion of you, 'dik'!

[Norman Bernstein]

How about a little thought experiment?

First, let’s establish the ground rules. I’m talking about retirees exclusively, NOT people in their working years.

How much would a retiree have to have, invested exclusively in the S&P 500, to be able to not be affected by the periodic market downturns? Remember, the investments will be needed for their income during a retirement that, for many, is likely to last two or even three decades. In fact, even if less is needed during the early years of retirement, then people invariably need a great deal more when senior care, up to and including nursing home care, is, if not inevitable, then at least highly likely.

There is a controversial rule of thumb which suggests that an annual withdrawal of 4% of one’s assets is a reasonable amount… some, including me, think it can be more, some don’t. But bear in mind that the commonly accepted growth of the S&P 500 of 10% or more does NOT account for periodic withdrawals, nor of the compounding that this growth assumes.

So, what do you need invested in the S&P in order to maintain an annual withdrawal needed for life’s expenses, as well as conserving your assets to pay for that nursing home? One million? Two million? That’s only $40-80K per year, at the 4% rate… but when there’s a 20 or 30% drop in the market lasting 18 months (not a rare occurrence), maintaining that withdrawal rate shoots that apocryphal 10% annual return to hell. You can’t just depend on the dividend yield, which is a lousy 1.7% or so… that’s part of the overall yield, as well. Sustaining a flat withdrawal rate through a market downturn negatively affects future earnings, and inflation just makes the situation worse.

Yes, it all works if you live at an economic level Best described as ‘sparingly low’, which, except for a very few people, is far below what they may have hoped for, in retirement. Very few people have anything close to $1M invested at retirement, and no matter how it is invested, they are not going to yield even the 4% rule-of-thumb amount, let alone have enough in reserve to pay for a decent nursing home in their old age.

So, what’s the smart thing to do? Invest exclusively in an index fund whose assets (assuming the fund is weighted by market cap, like the S&P 500) are highly volatile? Remember, in retirement, the long term performance of an investment over multiple years to multiple decades is the LEAST important factor… what matters is 1) whether you can reliably withdraw enough each year to meet living expenses, and 2) how well insulated you are from periodic downturns. Yes, there are SOME stocks in the S&P which can provide the necessary characteristics for a retiree… but not all of them… not by a long shot.

You can’t take it with you… at best, you can hope to live comfortably for the remainder of your life, and have enough to pay for the expensive care you’ll likely need for a while before you shuffle off this mortal coil… and if you are VERY lucky, leave enough behind for your grandchildren’s education.

[John Smith]

Sadly SS isn't enough money for seniors.

[Norman Bernstein]

Sadly SS isn't enough money for seniors.

True enough… and killing it, like the wingnuts in the GOP want to do, will make things worse…

…except for bankers, money managers, and the politicians who depend on their contributions.

[sandtown]

What do you believe they would gain by eliminating social security?

They would gain trillions of dollars for their hedge fund overlords to steal.

The same way they are using Medicard (Dis)advanrage to loot the Medicare trust fund.

[Too Little Time]

How about a little thought experiment?

First, let’s establish the ground rules. I’m talking about retirees exclusively, NOT people in their working years.

How much would a retiree have to have, invested exclusively in the S&P 500, to be able to not be affected by the periodic market downturns? Remember, the investments will be needed for their income during a retirement that, for many, is likely to last two or even three decades. In fact, even if less is needed during the early years of retirement, then people invariably need a great deal more when senior care, up to and including nursing home care, is, if not inevitable, then at least highly likely.

There is a controversial rule of thumb which suggests that an annual withdrawal of 4% of one’s assets is a reasonable amount… some, including me, think it can be more, some don’t. But bear in mind that the commonly accepted growth of the S&P 500 of 10% or more does NOT account for periodic withdrawals, nor of the compounding that this growth assumes.

So, what do you need invested in the S&P in order to maintain an annual withdrawal needed for life’s expenses, as well as conserving your assets to pay for that nursing home? One million? Two million? That’s only $40-80K per year, at the 4% rate… but when there’s a 20 or 30% drop in the market lasting 18 months (not a rare occurrence), maintaining that withdrawal rate shoots that apocryphal 10% annual return to hell. You can’t just depend on the dividend yield, which is a lousy 1.7% or so… that’s part of the overall yield, as well. Sustaining a flat withdrawal rate through a market downturn negatively affects future earnings, and inflation just makes the situation worse.

Yes, it all works if you live at an economic level Best described as ‘sparingly low’, which, except for a very few people, is far below what they may have hoped for, in retirement. Very few people have anything close to $1M invested at retirement, and no matter how it is invested, they are not going to yield even the 4% rule-of-thumb amount, let alone have enough in reserve to pay for a decent nursing home in their old age.

So, what’s the smart thing to do? Invest exclusively in an index fund whose assets (assuming the fund is weighted by market cap, like the S&P 500) are highly volatile? Remember, in retirement, the long term performance of an investment over multiple years to multiple decades is the LEAST important factor… what matters is 1) whether you can reliably withdraw enough each year to meet living expenses, and 2) how well insulated you are from periodic downturns. Yes, there are SOME stocks in the S&P which can provide the necessary characteristics for a retiree… but not all of them… not by a long shot.

You can’t take it with you… at best, you can hope to live comfortably for the remainder of your life, and have enough to pay for the expensive care you’ll likely need for a while before you shuffle off this mortal coil… and if you are VERY lucky, leave enough behind for your grandchildren’s education.

Apparently, you have never read Bill Bengen's analysis. It is not intended as a retirement rule. I will agree that those who apply it as a 4% retirement rule are wrong. Very wrong. It does appear to be a lower limit on the worse case for retirees. I believe the worse case for 30 years began in 1967 or so for that 50-60% of stocks and 4% plus inflation is near the lower limit that does not run out of money. His analysis gives an various worse cases for different withdrawal periods. Perhaps 25 to 35 years are most important for retirees.

You make a serious mistake as an investor. You want to argue about the short term. For transition from short term to long term is around 15-20 years. History has shown a minimum annualized return of 7% at 20 years and 10% at 30 years. If one is retired, one has been invested for at least 20-30 years and has gotten the long term returns. This talk about 1 year returns is foolish. There have been periods where the S&P 500 has been down for 10 years.

But it is worthy to note that the periods preceding a "downturn" has always been sufficient to make a long term investor more than happy. Prior to the "downturns" in 2008, 2022, and even 1929 the market was up enough to make 20 and 30 returns that include those years nothing special.

[Too Little Time]

Well, lessee..... who has more 'credibility' ... on this issue? On any issue?

I'm voting for Norman.

He does dazzle with his footwork. But there is little substance.

[sandtown]

He does dazzle with his footwork. But there is little substance.

Your own knowledge of many economic issues, student debt was one I recall,

is skimpy.

[Tom from Rubicon]

Destroying FDR's New Deal at all costs. What else you want to know?