Friday, February 11, 2005
Thoughts On Social Security, Retirement, And The Stock Market
I've had some thoughts brewing in my head for a few days regarding the whole Social Security debate now and I thought I'd try to get them written out as coherently as possible, although what I have to say isn't so much about the particulars of the Social Security program/reform as it is about the general phenomenon of baby boomers retiring soon.
To start with, lately I've been trying to read the blogs of some conservatives who aren't fanatical ideologues, or in general, people who make sense even if I don't agree with them. I think I mentioned this in my last post. Anyway, the subject of Social Security has of course been mentioned by just about everyone in the country over the past month, and one thing I've heard mentioned several times, most recently by the President himself, is that there is no Social Security Trust Fund. The idea put in place in 1983 by the Greenspan Commission to reform Social Security was that we would raise payroll taxes and set the surplus aside in a trust fund for when members of the baby boom generation retire, so that when they do and the amount we have to pay out in benefits is greater than the amount we take in in taxes, there will be an existing amount of money available to pay the benefits with.
The conservative argument is that this doesn't exist. Although in theory it's separate, in practice the trust fund has been lumped in with the rest of the budget so that thanks to our budget deficits over the majority of the past 20 years, the money's all really been spent. So when everybody retires and demands Social Security, we will be forced to raise taxes in order to meet the demand. Now whether or not this is an accurate assessment of the trust fund is up for debate, and Josh Marshall at Talking Points Memo has more to say about this, but let me assume for the sake of argument that it is the case that the trust fund is a myth and that workers have been paying extra taxes over the past 21 years just to make the deficit look less bad. This is both reprehensible on the part of Republicans and at the same time, rather revealing. Let me explain why.
It is reprehensible for a few reasons. First, it shows just how much raising taxes is anathema to these people. The very idea that Social Security might become a drain on the Federal budget to the point where it demands an increase in taxes brings about a full-scale crisis and all the hoopla we've been seeing over the past couple of months. Second, if the trust fund doesn't exist and the Social Security surplus is just part of the regular budget, Bush and the Republicans in Congress have been essentially pissing away that surplus for the past four years, making no effort at all to guard what is effectively our retirement savings. And finally, while obsessively slashing taxes for the rich over the past four years, the Social Security taxes have been over 100 billion dollars in excess of what is required to fund the program. The extra money is apparently not being saved for the future in any kind of trust fund, so you would think that that's the people's money, right? Don't the people know how to spend it better than the government? Apparently that's only the case for the top tax brackets, and when it comes to cutting taxes, even taxes earmarked for a specific program running a surplus where any extra money will not be saved for the future, the government can keep that money.
At the same time though, the idea of the trust fund being fictional brings something to mind that I've wanted to discuss for a while, which is the impact that the retirement of baby boomers in the future will have on the country and the economy. Effectively, Bush is saying that the crisis begins in 2018, when the taxes coming in to Social Security aren't enough to cover the benefits that must be paid. At that point, with no trust fund in place, money will need to come out of the general budget to fulfill those obligations, which will either force other programs to be slashed or force taxes to be raised, both having negative effects on the economy. Furthermore, this is unavoidable if there is no trust fund, unless we cut Social Security benefits, which creates problems of its own (and the possibility of that happening is another post on its own).
You can look at the phenomenon of a large segment of the population reaching retirement age as being a drag on the economy in a number of ways. First, you can imagine an army of old people, formerly productive employees doing productive things at productive jobs, descending on the beaches of Florida, demanding that younguns like myself bring them mai tais and rub their bunions. A loss of a significant amount of the work force plus the remaining members of society's having to support them in one way or another must have some negative effects on the economy. But it's the effect on the stock market that I've been thinking about most recently.
Before I begin talking about the stock market I must preface this by saying I know nothing about what I'm about to talk about. I have no formal economics training, nor have I ever taken a class on the subject. So I may be talking out of my ass here. In fact, if anyone wishes to correct me on anything I'm about to say, I would be happy for you to post a comment detailing what I got wrong and why it's wrong.
Anyway, right now there are roughly 3.3 workers to every retiree. Furthermore, since the phenomenon of the majority of Americans saving for their retirement in the stock market is relatively new, I would guess that the ratio of people putting money into the stock market for retirement versus people taking it out to pay for retirement is even larger - at least 4 to 1. In the future, the ratio is forecast to drop to 2:1, and I would guess that just as those two workers will be investing in their IRAs, the one retiree will have investments of his own that he's cashing out in order to finance his retirement.
I can't help but think that this will be a serious downward force on stock prices. Just doing the math, let's assume that each of the two workers invests $500 a month in the market, while the retiree sells $2000 worth of stocks a month. Right away you see that the retiree may have a problem finding a buyer for his $2000 worth of stocks, since the workers only have $1000 to buy with. These figures may be off, but given the abysmal personal savings rate of most Americans, I have to think that for the average worker/retiree they can't be too far off. Obviously there are other buying and selling forces on the market and I'm simplifying here.
Now the exact effect this will have on the stock market is probably unclear to an economist, much less myself. But right now I'm under the impression that there's a lot of buying pressure on the market, since everyone and their mother believes that it's the best place to save your money. I would imagine that there's a lot of money automatically put in each month into savings accounts, while the amount of money automatically withdrawn is much less. That would have to have the effect of making stock prices rise, and indeed they've done quite well over the past 20 years, much better than you would probably expect. If that pressure is taken away or reversed, I would think that you would see a collapse of those inflated prices. If stocks were worthless, they would plummet like a share of pets.com, but since a stock has intrinsic value thanks to its nature of being a share of ownership in a company and therefore its profits, they would presumably drop only to where the share is worth that value. In other words, where the price of the share makes sense based on the dividends a company pays out, or the earnings it makes. The price of stock relative to companies' earnings/dividends is historically quite high now, possibly thanks to all the buying pressure on the market. But as I've explained, I imagine the previously mentioned factors will come into play that will forcibly bring things back into balance.
I've speculated for some time now that one of the goals of the privatization movement is to create a huge tide of money coming into the market from every single wage earner in the form of their Social Security private account. In theory that could buoy prices or cause them to rise further, perhaps delaying the correction I spoke of. Except if that happens, so many people would be in the market fighting for return on their money that the rate of return they would get would probably be lower than in the past. And, of course, all those people are suddenly exposed to any drop in stock prices like I just mentioned, which would obviously have some pretty serious consequences.
I guess I'm not sure where I'm going with this, other than to attempt to explain why I'm skeptical of the stock market in general right now and to speculate on what might happen when this whole "crisis" comes to fruition. Since I've said virtually nothing about the President's plan I should mention in passing that I think it sucks and I like Social Security. A detailed explanation of why (not counting anything I've said in this post) will have to come later, since I've already made this post long enough as it is.
To start with, lately I've been trying to read the blogs of some conservatives who aren't fanatical ideologues, or in general, people who make sense even if I don't agree with them. I think I mentioned this in my last post. Anyway, the subject of Social Security has of course been mentioned by just about everyone in the country over the past month, and one thing I've heard mentioned several times, most recently by the President himself, is that there is no Social Security Trust Fund. The idea put in place in 1983 by the Greenspan Commission to reform Social Security was that we would raise payroll taxes and set the surplus aside in a trust fund for when members of the baby boom generation retire, so that when they do and the amount we have to pay out in benefits is greater than the amount we take in in taxes, there will be an existing amount of money available to pay the benefits with.
The conservative argument is that this doesn't exist. Although in theory it's separate, in practice the trust fund has been lumped in with the rest of the budget so that thanks to our budget deficits over the majority of the past 20 years, the money's all really been spent. So when everybody retires and demands Social Security, we will be forced to raise taxes in order to meet the demand. Now whether or not this is an accurate assessment of the trust fund is up for debate, and Josh Marshall at Talking Points Memo has more to say about this, but let me assume for the sake of argument that it is the case that the trust fund is a myth and that workers have been paying extra taxes over the past 21 years just to make the deficit look less bad. This is both reprehensible on the part of Republicans and at the same time, rather revealing. Let me explain why.
It is reprehensible for a few reasons. First, it shows just how much raising taxes is anathema to these people. The very idea that Social Security might become a drain on the Federal budget to the point where it demands an increase in taxes brings about a full-scale crisis and all the hoopla we've been seeing over the past couple of months. Second, if the trust fund doesn't exist and the Social Security surplus is just part of the regular budget, Bush and the Republicans in Congress have been essentially pissing away that surplus for the past four years, making no effort at all to guard what is effectively our retirement savings. And finally, while obsessively slashing taxes for the rich over the past four years, the Social Security taxes have been over 100 billion dollars in excess of what is required to fund the program. The extra money is apparently not being saved for the future in any kind of trust fund, so you would think that that's the people's money, right? Don't the people know how to spend it better than the government? Apparently that's only the case for the top tax brackets, and when it comes to cutting taxes, even taxes earmarked for a specific program running a surplus where any extra money will not be saved for the future, the government can keep that money.
At the same time though, the idea of the trust fund being fictional brings something to mind that I've wanted to discuss for a while, which is the impact that the retirement of baby boomers in the future will have on the country and the economy. Effectively, Bush is saying that the crisis begins in 2018, when the taxes coming in to Social Security aren't enough to cover the benefits that must be paid. At that point, with no trust fund in place, money will need to come out of the general budget to fulfill those obligations, which will either force other programs to be slashed or force taxes to be raised, both having negative effects on the economy. Furthermore, this is unavoidable if there is no trust fund, unless we cut Social Security benefits, which creates problems of its own (and the possibility of that happening is another post on its own).
You can look at the phenomenon of a large segment of the population reaching retirement age as being a drag on the economy in a number of ways. First, you can imagine an army of old people, formerly productive employees doing productive things at productive jobs, descending on the beaches of Florida, demanding that younguns like myself bring them mai tais and rub their bunions. A loss of a significant amount of the work force plus the remaining members of society's having to support them in one way or another must have some negative effects on the economy. But it's the effect on the stock market that I've been thinking about most recently.
Before I begin talking about the stock market I must preface this by saying I know nothing about what I'm about to talk about. I have no formal economics training, nor have I ever taken a class on the subject. So I may be talking out of my ass here. In fact, if anyone wishes to correct me on anything I'm about to say, I would be happy for you to post a comment detailing what I got wrong and why it's wrong.
Anyway, right now there are roughly 3.3 workers to every retiree. Furthermore, since the phenomenon of the majority of Americans saving for their retirement in the stock market is relatively new, I would guess that the ratio of people putting money into the stock market for retirement versus people taking it out to pay for retirement is even larger - at least 4 to 1. In the future, the ratio is forecast to drop to 2:1, and I would guess that just as those two workers will be investing in their IRAs, the one retiree will have investments of his own that he's cashing out in order to finance his retirement.
I can't help but think that this will be a serious downward force on stock prices. Just doing the math, let's assume that each of the two workers invests $500 a month in the market, while the retiree sells $2000 worth of stocks a month. Right away you see that the retiree may have a problem finding a buyer for his $2000 worth of stocks, since the workers only have $1000 to buy with. These figures may be off, but given the abysmal personal savings rate of most Americans, I have to think that for the average worker/retiree they can't be too far off. Obviously there are other buying and selling forces on the market and I'm simplifying here.
Now the exact effect this will have on the stock market is probably unclear to an economist, much less myself. But right now I'm under the impression that there's a lot of buying pressure on the market, since everyone and their mother believes that it's the best place to save your money. I would imagine that there's a lot of money automatically put in each month into savings accounts, while the amount of money automatically withdrawn is much less. That would have to have the effect of making stock prices rise, and indeed they've done quite well over the past 20 years, much better than you would probably expect. If that pressure is taken away or reversed, I would think that you would see a collapse of those inflated prices. If stocks were worthless, they would plummet like a share of pets.com, but since a stock has intrinsic value thanks to its nature of being a share of ownership in a company and therefore its profits, they would presumably drop only to where the share is worth that value. In other words, where the price of the share makes sense based on the dividends a company pays out, or the earnings it makes. The price of stock relative to companies' earnings/dividends is historically quite high now, possibly thanks to all the buying pressure on the market. But as I've explained, I imagine the previously mentioned factors will come into play that will forcibly bring things back into balance.
I've speculated for some time now that one of the goals of the privatization movement is to create a huge tide of money coming into the market from every single wage earner in the form of their Social Security private account. In theory that could buoy prices or cause them to rise further, perhaps delaying the correction I spoke of. Except if that happens, so many people would be in the market fighting for return on their money that the rate of return they would get would probably be lower than in the past. And, of course, all those people are suddenly exposed to any drop in stock prices like I just mentioned, which would obviously have some pretty serious consequences.
I guess I'm not sure where I'm going with this, other than to attempt to explain why I'm skeptical of the stock market in general right now and to speculate on what might happen when this whole "crisis" comes to fruition. Since I've said virtually nothing about the President's plan I should mention in passing that I think it sucks and I like Social Security. A detailed explanation of why (not counting anything I've said in this post) will have to come later, since I've already made this post long enough as it is.
