Social Security – Investment or Insurance?

W. A. Barrett, San Jose, CA

April 11, 2005, updated October 11, 2017


Global Business

 

 

 

In 2005, President Bush decided to make social security reform a key issue in his second term.  He had been jetting around the country, speaking to audiences large and small, with the message that the social security system is in trouble.  It needed “reform”.

According to his many speeches on the subject (for a sample, see Tampa speech), the system will have to draw on its reserves by year 2018, then by 2027, the system will be “$200 billion short”, and the year after, “$300 billion short”.

I put those figures in quotation marks, because it isn’t clear what he meant by that.  In fact, the system is projected to draw on its trust funds, which are adequate to carry the system without any change in benefits until 2052.  (This is according to the Congressional Budget Office.  The Social Security Administration takes a somewhat less optimistic view of the system’s revenues and expenses and predicts this shortfall will come in 2042).

 

Nowhere in his Tampa speech did he use the word “insurance”.   I speculate that George W. Bush has either never heard of insurance, or has only a very foggy idea of what it is.  He was raised in a very wealthy family, and wealthy families have no need for insurance of any kind, social or otherwise.

I was not raised in a wealthy family, rather was brought up in Grand Island, Nebraska, where my Junior High economics teacher spent three weeks explaining what insurance is and how it works.  This seems to be a lesson that our president has either never received or slept through.

 

The Social Security system is an insurance program, not an investment program.  The President clearly thinks it is an investment program, and is pitching it that way to his gullible audiences. 

And, incidentally, his audiences were carefully hand picked.  According to a recent news article, every person attending one of his “town-hall meetings” was carefully screened by his staff to ensure that no one would raise any objections to the President’s ideas.  People were turned away from his road show if they showed up with a bumper sticker for Kerry, or “No Blood for Oil”.  Those appearing with him on the stage were particularly docile, and almost never asked the hard questions that deserve to be asked.

 

His Tampa (2/4/05) speech (Tampa speech) reveals just how little he understands about the system.  This became obvious during the question and answer period – you can find his muddled thinking by looking for the bold face type in his speech.  The cartoonist Gary Trudeau picked up on his confusion in cartoon that ran in that time frame:  Doonesbury.

So What is Social Security, Really?

The best source of accurate information is in the contract that every citizen with a social security number can receive by mail at any time, called Your Personal Earnings and Benefit Estimate Statement.  You can order your own by visiting the SS web site.

I had been interested in this since I had a job at a Grand Island, Nebraska drug store jerking sodas for sixty-five cents an hour.  I didn’t have a computer or a spreadsheet then, but I could work exponentials and knew how to use books of actuarial tables.  I put in what I thought I might earn over my lifetime and looked at what I might have as a lump sum at retirement.  You have to assume that you’ll live to retirement, of course, and will have good enough health to enjoy it.  When I was 16, I thought retirement would be way off in the future, at the year 1990, when I would be 60.  Well, I passed age 60 and am still going, teaching and looking for various sources of income.  I also have SS benefits now, way more than I expected as a 65 cent/hour soda jerk.  And I have some investments that did well during the good market years of 1970-2000.

I did this sort of thing about once every decade, during my earning years, again not knowing what state of health I would be in at age 60 or 70.

Later, during my marriage, my family was visited regularly by insurance salesmen, and we listened to their pitches carefully.  I bought what I believed to be a rather large term insurance policy ($100,000) in 1967, mostly to protect my wife and two young children against the possibility of my death.  It cost about $1000/year, which I estimated was about right from my actuarial calculations, considering that it was for protection only (no cash value, ever) and it expired in 1995.  Fortunately, my family never had to use it, and it did expire in 1995.

Compound Interest

Now, I could argue, in hindsight, that it would have been better for me to have just invested that $1000/year in a mutual fund or stocks.  I would have had an investment worth $103,000 in 1995, assuming a uniform growth rate of 8% per year.  That’s 29 years of dropping $1000/year into a fund.  My contribution would have been $29,000, but the earned interest would have been $74,000.  That’s the magic of compound interest!

Want to try this yourself?  Click on this link for a compound interest spreadsheet: Compound Interest. 

Of course this doesn’t consider income taxes or the variable rate of return of typical fund investments.  

It also doesn’t take into account inflation, which was pretty high during some of those years.  If the inflation rate is (say) 3%/year, then you must be earning at least 3% on any investment, or you are getting nowhere – in fact are losing money because that 3% earnings will be taxed, leaving you with maybe 2 to 2.5% after-tax earnings.

 

Instead of having that nest-egg of $103,000, I was left with nothing.  Was that a bad deal or what?  Well, I don’t consider it a bad deal at all, even in hindsight.  What I gained for that outlay was a peace of mind that my family would receive a nice fat, tax-free check from the insurance company for $100,000 if I dropped dead of a heart attack.  I didn’t have that kind of money in the bank or in a trust fund to leave them; our savings were minimal and I only had my income to keep the wolf from their door.

It happens that my wife was a registered pharmacist, and could earn a reasonable living for herself and her children.  We took that into account, and considered that my death would still be a calamity, given that times would have been very hard for them through any adjustment period.

So an insurance policy made a lot of sense to us, in terms of our condition at the time, our uncertain future, and my interest in keeping our family reasonably secure.

How Does Insurance Work?

This may be a digression, but let me explain, using a spreadsheet model, just how life insurance works.  This is a subject that is apparently no longer taught in school.  If it were, we would see many more searching questions asked of our President, even from his staunch Republican allies.

 

Insurance requires a financially stable insurance organization, i.e. one with sufficient capital to pay its claims in a reasonable way, and a pool of insurance policy owners.

Let’s consider the pool of insurance owners.  These will be people of various ages and different job functions.  Some may be in poor health, others “fit as a fiddle” as my grandfather might say.   Some will carry a policy through to the end of its life, others will drop their policy, and still others will die and their beneficiaries will collect the policy’s value.

Let’s assume that the only policies sold are pure term insurance, and that the pool of owners all have the same age and health when they purchase their policy.  Of course, the older you are, the higher the premium you will pay, all other things considered equal.  That’s because, on the average, older people will pay fewer premiums before their heirs collect the insurance. 

Also, if you are in poor health, as judged by a physician, then the insurance company will either deny insurance coverage, or will demand a considerably higher premium.  You can’t get an insurance policy without a medical examination. 

Let’s also assume that the insurance company is willing to break even over time, on the average, and that there are no sales expenses.  In fact, of course, every private insurance company wants to make a profit, and its sales expenses may be considerable.  These added costs usually amount to the entire first year’s premium plus some 10-20% of the future year’s premiums.

We also need to assume that premiums paid in excess of the payouts can be invested by the insurance company.  We’ll assume the company can earn 8% per year on the average on these funds. 

Note that although the initial capitalization of the company will also be earning, those earnings would have been earned anyway with no policies sold – it’s called a reserve, and it’s there just to pay off policyholders if too many of them die before they are supposed to.  So we can’t figure in that capitalization income as providing extra income to the policy-holders.

Mortality Rates

Given these simplifying assumptions, what should be the premium for a $100,000 term life insurance policy issued at age 20?   For this, we need a table of mortality rates.  My spreadsheet mortality table is taken directly from US government statistics for the year 1999.  Many more can be found in their website, http://www.cdc.gov/nchs.

From the mortality table, we can figure the death rate, given in this spreadsheet.  In this table, the Drate column gives the probability that a person of that age will die within that year.  For example, a person of age 20 now living will have a 0.146% probability of dying before age 21.  Put another way, given a million persons of age 20, the table claims that about 14,600 of them will die before reaching age 21.

Another way to look at this is by considering a bet placed between you, at age 20, and an insurance company.  The bet is that if you die before your 21st birthday, the company will pay your survivors $100,000.  You pay the insurance company $1,460 up front on your 20th birthday in any case. 

Would you take this bet?  According to the mortality table, this would be an even bet – for a large number of persons at age 20 in the US, male or female, white or other, the insurance company would just break even at the end of that year.

In fact, the insurance company would come out somewhat ahead, because it has the premium money upfront from all those policies and can invest it.  For 1,000 persons taking this bet, the company collects $1.46 million; at 8%, it can earn $117,000 on its policies, assuming that it pays out the benefits at the end of the year, and not as the deaths accumulate.  Each death during the year costs the company $100,000.  Out of the 1,000 persons, the company expects 14.6 deaths, and that will cost it $1.46 million in premiums.  That whittles down the company’s assets to zero by the year’s end, but in the meantime, some of it could be invested, and the earnings kept as profit.

Of course, this is statistical, not accurate.  Out of the 1,000 persons, there may be 15, 16 or 20 deaths, or perhaps 8, 10 or 13 deaths instead of the predicted 14.6.  More deaths than 14.6 mean the insurance company will lose money; fewer deaths mean it will make a profit.  Part of what makes all this work is the law of large numbers, which states that as the number of policyholders increases, the distribution about the mean tends to decrease.  Insurance companies also protect themselves against adverse statistics by charging more than a minimum premium, enough more that a statistically bad crop of policyholders will not bankrupt the company.

Real Life Insurance Policies

A much better bet all around would be for you to agree to pay them $X/year upfront, starting at age 20, to maintain a policy.  The policy promises to pay $100,000 to your survivor if you die before your 60th birthday, on condition that you continue the annual policy payments until your 60th birthday.   If you die, your survivors need no longer pay into the policy, of course.  If you survive, you and your survivors get nothing back (other than your precious life). 

 

What do you think X should be?  Make a guess before you look at this spreadsheet. 

 

Did you guess $1460?  You are wildly off.  The calculations show that an annual premium of just $220.02 will make it just possible for the insurance company to pay all claims to its policyholders under this particular contract (start at age 20, continue through age 60).  A discussion of this spreadsheet, and how to try out different scenarios can be found here.

An insurance company that provides such cheap term insurance would have to be crazy, of course.  Where is the profit?  And where is the extra reserve in case their class of policyholders has a worse mortality record than the US average?  So don’t expect to find an insurance agent ready to sell you a policy this cheaply.

Who Gets Left Out

Except for Social Security and a few other governmental insurance programs, life and other forms of insurance in the US are sold through competitive private companies.  Aside from the obvious fact that they each want to grow their business and be profitable, they can refuse clients with a poor medical record.  [This has changed with the recently passed medical health care reform act of 2009].

Anyone who’s taken out a life insurance policy knows that he/she must pass a medical exam.  This is administered by a company doctor (or someone chartered by the company).  That doctor will be looking for any signs of poor health or medical conditions that suggests that you won’t have a long and happy life.

You are also expected to sign a legal document – your policy – that says that you have not knowingly concealed any adverse medical condition.  So maybe you have been diagnosed through your DNA or a special blood test that you are likely to have Parkinson’s disease.  You will not likely be able to buy a life insurance policy.

 

Being refused a life insurance policy can be really damaging to a father with small children.  For one thing, the insurance company is not obliged to reveal why he was refused a policy.  For another, if one company has refused the father, nearly all will refuse him (they share records, whether the public likes it not).  And, of course, his children are now left unprotected.  Dad must just hope that he can survive long enough to launch his kids.  Their fate otherwise rests with their mother or the family.

 

Refusing unhealthy clients is of course important to maintaining an insurance company’s financial condition.  The company doesn’t refuse someone because it’s mean, it refuses someone because it knows that (on the average) it will lose serious money on that person.

If one insurance company decided (through some community-minded spirit) to accept all comers with no medical tests, it would over time acquire all the unhealthy clients that the other companies refused.  Its financial future would be bleak indeed, and it would find itself unable to pay all claims after a few years of operation.

A federal law that requires every insurance company to accept a life insurance applicant regardless of condition sounds good, on the surface.  But insurance companies would then be flooded with applications from people who know they are going to die soon, and want their survivors to cash in.  If an insurance company can discover the fate of an individual from their DNA/blood test or whatever, then so can the individual.  Such a law would soon bankrupt the insurance industry.  What’s also needed is a requirement that everyone buy a basic form of health insurance protection -- and that’s also part of the health care reform act, though this provision will not kick in until 2014. 

Some states require a pool of insurance companies to provide at least one reasonable policy for any insurance applicant.  These required policies will typically carry a high premium and certain other restrictions, such as no payout for at least five years after issuance.  This helps somewhat, but it doesn’t get at the root social need to provide everyone with some measure of protection against personal medical disasters.

Medical Insurance

Medical insurance policies are subject to the same statistical estimates as life insurance, except that the statistical data is much more complicated, and the payout may occur not once but several times in a person’s lifetime.

There’s also a certain problem with free enterprise, which is that private insurance companies can and will refuse those considered to be high risk clients.  This typically means that those who are in the greatest need of medical insurance are also least likely to obtain any from a private insurance company.

This, in my opinion, is a strong argument for a nationalized medical insurance program.  The last serious effort to establish such a program, with insurance coverage for every American citizen, was made by Bill and Hillary Clinton, early in Clinton’s first term.  It was effectively shot down in Congress through a barrage of commercials aired paid for by right-wing Republicans and the medical insurance industry.  The Republicans didn’t like it because it smacked of “creeping socialism”, and the insurance industry obviously had much to lose if Clinton’s proposal were enacted into law.

President Bush seemed to think that private medical savings accounts would solve the problem.  They won’t, because a private savings account is really no different than an ordinary savings account.  An individual might build up an appreciable account over time, but what is a young father to do to defend his family against a medical catastrophe in the meantime?  That’s what insurance is for, not savings accounts.  The prudent father will want both insurance and savings, unless he, like Bush, is fortunate enough to be born into a really wealthy family.

The 2009 Congress managed to pass a comprehensive health care bill that promises to alleviate at least some of our health care woes.  It is not a “single-payer” solution, rather a complicated compromise between conservatives forces, the health care insurance industry and the health providers.  Providers have now generally agreed that a government-operated single-payer solution is the only reasonable way to control health care costs and provide adequate care for everyone.  How the new program will shape up, and whether it can survive conservative attacks, remains to be seen.

Retirement Insurance

Your retirement problem comes down to saving money during your working years, so that you have enough assets to be able to pay your bills with no earned wages as income.

Before retirement, your problem was accumulating enough assets to “retire”, along with protecting your family against some catastrophe illness or your death. 

After retirement, the issue becomes “will my assets run out before I die?”, or “will I need expensive medical care that I can’t afford?”, or “can I continue to earn enough to support myself (and my spouse) until I die?”.

Here are some rather frightening facts:

·         Most employed Americans are not saving much for retirement, even those with high incomes.  The overall savings rate in the US is less than 2% of wages.  That is an issue that President Bush was spot on about -- we do need to learn to put aside more money in the form of savings and investments, and to resist the temptation to blow it on expensive cars, houses, travel and what not.

·         Instead of savings, Americans seem to be relying on credit.  By borrowing instead of saving, the possibility of building up retirement assets becomes even more remote.  And note that the interest on credit card accounts are typically much more than the interest paid on savings accounts.

·         If you choose to retire at age 60, the mortality tables show that you have about a 50% chance of surviving past age 81 (= survivors at age 81 divided by survivors at age 60), and about a 13% chance of surviving to 90.  That not-so-small chance of living 30 years beyond your retirement age of 60 can lead to plenty of worry.  Your peak earnings will likely be 25-60, which is 35 years.  Will you save enough in those years to cover your expenses for 30 or more years of retirement?

·         Inflation is a cruel hit on anyone trying to save for retirement.  Your savings are in cheap dollars, and your retirement years will be in expensive dollars.  Unless your invested savings can earn more than the inflation rate, you will lose money in the end.

·         As you get older, you will need more medical care, and possibly extended nursing home care.  Both of these services are becoming more expensive.

·         Prescription drug usage will escalate in your senior years, and they will cost more.

·         The chances of a major medical crisis in your senior years is dramatically higher than in your youth.  One day in an intensive-care ward in a city hospital can cost you $5,000.  That’s in addition to any surgery required, which may run two to five times that much.

So how much should you save to cover all that through your retirement?  The answer – you need plenty of dough.

Or can you protect yourself through some kind of insurance program?  Yes, after a fashion – you can purchase an annuity with the money you’ve saved up.

Annuities

The private insurance companies are aware of these retirement concerns, and have a plan for you.  It’s called an annuity.  An annuity is a kind of upside-down insurance policy.  You pay the company a lump sum, for example, $100,000 at some advanced age, for example, your retirement age of 60.  It then agrees to pay you (and perhaps your surviving spouse) $X/month until you die.

As with ordinary life insurance, you are expected to pass a medical exam.  However, this exam is also upside-down – although the doctor is looking for special conditions, a person in very good health will get the minimum monthly payment, while the company may authorize a larger payment to someone on death’s door.

Since this is a competitive business, a shopper for an annuity needs to look around for a policy with the largest X.  But you can also estimate the largest possible X by using a spreadsheet and the mortality tables.

Examine this spreadsheet, please.  It compares two programs, one in which you purchase an annuity with a face value of $100,000 at age 60, then live on the proceeds paid by the insurance company, which will (ideally) be $11,068/year.  It assumes that the insurance company can earn 8% on its investments, and that it will continue to pay you $11,068/year until you die, even if you live to age 110.  This model and the annuity payments are adjusted so that the insurance company comes out even with a large number of such policyholders – it ends up with zero assets when your age would be 110.

In practice, the company will agree to pay you less than $11,068, because it needs to make a profit, must pay its insurance salesmen, cannot depend on earning that 8%/year, and must not assume that the mortality tables will accurately predict their annuitants lives.  You need to shop around for the best deals, which can pay you anywhere from a few thousand up to nearly this ideal amount.  Companies with the lowest overhead, the best investment bureaus, and with the largest pool of annuitants can pay the best annuities, in general.

 

This model is similar to the social security model, with the federal government as the insurance company.  The main difference is that you, as a wage-earner, pay into the system during your earning years to effectively build up a “trust fund” in the form of an annuity that you can then draw upon when you choose to retire.  Social Security agrees to pay you that annuity income until you die.  Social Security has a great advantage of not requiring a profit, of having the US Treasury back up its promises, of having the whole population of the US as its annuity pool, and finally, of having very low overhead expense (no salesmen, investment advisors, etc.)

Social Security literally works out of a file cabinet, plus a bank of computers to print out checks and statements and maintain its database of clients.

 

The second spreadsheet program (SELF-INVESTMENT COLUMNS) assumes that you invest your $100,000 yourself, it can earn 8%/year (just like the insurance company does), and you pay yourself $11,068/year out of that fund.  Notice that in the first year, your fund loses more than $3,000, so you have less money in your investment fund for the next year.  And that continues until age 77, when you are BROKE.  After that age, you will have to depend on Medicaid or your children to pay your expenses.  As we’ve noted above, those expenses may go up appreciably due to medical problems and the need for nursing care.

The problem, of course, is that you are spending more than your investments are earning.  If you drew out only $8,000 (the amount earned on your investment), your assets would not decline.  But that doesn’t change the basic issue here, which is that a suitably-chosen annuity can make larger payments to you (all other things equal) than you can make to yourself.

An annuity with a major insurance company carries another benefit, which is easy to overlook.  That 8% investment earnings may work for some of your years.  Other years, it will be 4% or even a loss.  Insurance companies typically quote lower earnings rates that they guarantee, for example 4% or 5%.  That shields you against investment fluctuations, which an individual will have to bear, whether from stock, bonds or real estate.

Why Social Security

Social security is an insurance plan, not a savings or investment plan.    It’s different from private insurance in that every wage-earner is required to participate, and the program is administered by the social security administration.  That means that the pool of insurance holders is the entire American public, effectively (except for a small percentage on special private plans, or who never work for a living).  Of course, the “insurance company” is an agency of the federal government.

69% of the beneficiaries are retirees.   As a retirement insurance program, it is available to any American citizen – you can’t be refused on the grounds of some unfavorable medical condition (or lack thereof).  

There’s no discrimination based on race or sex.  Mortality tables show that there are significant racial and sexual differences in our population -- these can make no difference to your social security payments, but a private insurance company would have to take those into account in setting your premiums and benefits.

But there’s more – 17% of the beneficiaries are disabled workers and their families, through a little-known Social Security program.  You don’t have to be retired to make such a claim, and it’s available to anyone who can show that they are truly disabled, and need the assistance.

Another 14% is paid to survivors.  These are typically widows of workers who received benefits in the past.

 

It’s also a pay-as-you-go program.  Both the social security tax and the benefit schedule are controlled by Congress.  Both are reviewed and changed every few years upon recommendations made by the social security administration.   Congress has a strong incentive to keep the tax low and the benefits high, but if the two aren’t reasonably well balanced, the system will go into debt.  It would then have to be bailed out by special appropriations from the general income tax revenues, a course of action that Congress typically does not like to take.

When social security was started in 1933, it immediately began paying out benefits to the elderly, in spite of the fact that they never paid in a nickel.  The wage-earners of course paid into the system, but that first generation received more in benefits than they technically were entitled to from their contributions.

That unbalance should have been rectified by now through accumulating a large reserve.  Instead Congress chose to keep the tax low and the benefits high.  The overall effect has therefore been to ask the current wage-earners to mostly pay for the retirement of the nation’s current seniors, rather than those seniors having first paid into the trust fund, then retiring on the trust fund. 

I was long aware of that discrepancy.  On the other hand, I had an aged mother and several aunts and uncles depending on the system.  Without social security, they would have been destitute, and I would in all good conscience have had to help them out directly.  I was in a position to help them out, but there are many wage-earners who are not.

 

The SS retirement benefits were never intended to cover all your retirement costs, but they are sufficient to keep you from wandering the streets pushing a grocery cart.  The payments do not depend on whether the market is up or down, or whether you’ve had a booming investment portfolio or a losing one.  (Most Americans playing the market end up losing money or earning very little.)

 

The disability insurance is worth about $353,000 to a family, and it’s free (paid through the SS deductions, of course).  That’s what you would have to pay a private insurer to cover yourself against a catastrophic disability.  And that’s assuming that you could qualify for such a policy.  You will discover that you need that protection when you need it – and then no insurance carrier would touch you.

The survivor’s benefits are equivalent to a $403,000 insurance policy, assuming that you could qualify for a private one.

 

Aside from the obvious benefits to individual employers, one must consider the social benefits to American families, and in particular, children.  If a wage-earner with small children is disabled for any reason, and his/her spouse is unable to fill the breach with a job, the extra SS income becomes a god-send.  They may no longer live the high-life, but their children can be fed, sent to school and have a roof over their heads.   From my perspective, that is real protection of family values, and I am puzzled about why the so-called “family-value” Republican politicians fail to see this.

The alternative of no protection, or inadequate protection, would place our society somewhere back in the nineteenth century.  Then, factory workers could be discharged for no good reason.  Factory work was dangerous, and likely to kill or maim a worker, but the factory managers never accepted responsibility for that.  Wives and children found themselves on the street or wandering from village to village.  High crime, especially among the young, and a lot of suffering, was the price paid by society for the lack of any reasonable protection against disability and disease.

George Bush and Personal Accounts

It isn’t yet clear just what changes president Bush had in mind for social security, but he has been talking about “private” or “personal” accounts since the beginning of his second term in office.   During his nationwide tour in 2005, he claimed he wanted to divert about 20% of the social security revenues to private accounts (40% of the employee’s contributions, none of the employer’s contribution).   Later, he claimed to have put “all the cards on the table”, and made no definite commitment one way or another.  He laid down certain ground rules – benefits are not to be cut for current retirees, and there were to be no tax increases.  He never explained how his privatization plan is supposed to work without massive tax support, or how it could control rising health care costs. 

As we’ve discussed above, there’s a serious problem with pulling out 20% of the revenues and putting them into private accounts – the benefits to current retirees must either shrink by that amount, or taxes must be raised to cover it, or the government must borrow the money to cover the current benefits.  Every reputable analyst agrees with this statement.  Only president Bush seemed not to “get it”.

 

More recent speeches suggest that Bush still thinks of social security payments as a “tax”, rather than an insurance premium.   He was fond of calling any tax as “your money”, and that “you should be entitled to use your money as you like”.  To me, this shows that he had a profound ignorance of the financial basis of the social security system, and the purpose of taxes.  Taxes are not “your money” – they are funds that by law belong to the government, and to be used for government purposes.

 

Private retirement accounts are no substitute for insurance – study the annuities spreadsheet if you aren’t yet convinced.  

The Social Security Trust Fund

A friend of mine, whom I met on a recent sea cruise, insisted that “there was no social security trust fund”.  I told him that of course there is.  The system has built up a surplus over the past decade.  The estimates are that by 2018 the system will have to start drawing on the trust fund to make its payments, but the fund would be sufficient to cover the shortfall until 2042.

He refused to listen to this.  I finally discovered that what he meant was that the system holds government bonds as its trust fund, and that the government “has already spent that money”.  I agreed with his analysis, but I disagree with the notion that there is no trust fund.

If you think about it, how should the social security system invest its trust funds?  On the one hand, astute market investments might pay off better than government bonds.  On the other hand, they might not. 

There are good models of public or semi-public trust funds that have worked out well over the past few decades – Calpers and TIAA/CREF.   Calpers holds the retirement funds for all California state employees.  It invests in a variety of instruments, including stock, bonds, real estate, and – yes – government bonds.  Its overall rate of return on investments has averaged about 7%/year, which is good considering the market dips in recent years.

TIAA/CREF manages retirement investments for a large number of colleges and universities.  It’s a private organization, but organized as a nonprofit, with a board comprised of many academic members.  Like Calpers, it invests in real estate, stock, bonds, and government securities.  Since it manages both institutional and private funds, it provides a variety of investment options to its members ranging from high to low volatility.  Over the past three decades, the CalPers return on its investments has been considerably better than the yield on government bonds.  Considering that, a proposal to invest part or all of the social security trust fund in something other than government securities makes good sense to me.  Note that that’s different than setting aside SS payments and dropping them into private accounts.

 

President Bush seemed to have the same idea as my friend, that the SS trust fund is phony.  In one of his speeches, he pointed to some filing cabinets and told everyone that the trust fund is “just some paper” in those drawers.  That would seem to make them next to worthless, but was he also saying that no government security can be trusted?  Is our currency just “some paper” – also not to be trusted?  What sort of president could possibly make such an irresponsible claim?

When he suggested that our government cannot be relied upon to meet its social security obligations, which will start coming due in 2018, he was also undercutting the strength of all federal securities.  When our president makes such disclaimers in speech, how can we expect the Japanese, Chinese, Europeans, or even average Americans, to continue to buy Treasury securities?

 

The social security bonds are no different than the savings bonds that people buy here and abroad, in large quantities.  In fact, the federal debt consists of all those bonds that are out there.  If you ask any banker about the safest possible investment that one can make, they will almost unhesitatingly say “government bonds”.   (Next to their own bank’s savings accounts and CDs, of course).

Both the dollar and Treasury securities are backed by the “full faith and credit of the United States”.  They used to be backed up by a pile of gold kept at Fort Knox, but that idea disappeared a long time ago.

National Medical Insurance?

Nearly all the industrialized countries have a national medical insurance program that protects their citizens from catastrophic medical expenses.  All but the United States.

President Bill Clinton made this a priority in his first term in office.  We know how that turned out – the medical profession and insurance industry came up with a huge media campaign opposing it, Congress was barraged with negative mail, and refused to pass the program.

The recent health care reform act promises to meet the challenge.  Whether it will or not remains to be seen.

The need for medical insurance is clearly there.  Consider these facts:

·         No person can really predict when he or she will come down with some medical problem, demanding lots of money in doctor and hospital bills.  Most of us are lucky enough to get through life without running into a medical wall, but there are also many Americans who become devastated by it.

·         A crippling illness can cost someone their job, further weakening their financial condition, and make it impossible to work again.

·         Someone with a history of certain illnesses, or with an unfortunate DNA pattern, will likely be refused private medical insurance.  So those who most need some medical protection are unable to get it.

·         Most of the large jury awards for “medical malpractice” would (in my opinion) never reach the courtroom if the victims received sufficient insurance payments to cover their medical bills.  When a family is afflicted with something serious, and acquire thousands of dollars in medical bills, they will get desperate and look for someone to sue.  Lawsuits are a terribly inefficient way of providing medical insurance.

·         Persons with recent or chronic medical problems are likely to be laid off and will find themselves unemployable.

·         Low-income persons typically have difficulty finding a job that provides a medical plan, because of the cost of that plan to the employer.  My daughter had a good job as a reporter with a local newspaper, but was fired after exactly three months – the paper gave some other reason, but the real reason was that after three months they would have had to start paying for a medical insurance plan for her.

 

Why didn’t president Bush propose a universal medical insurance plan that we all contribute to, that covers everyone from catastrophic expenses?  I would like that, and the country would benefit from it.  Trying to use private savings to counter a huge unanticipated medical bill is not just misleading the public, but irresponsible and ultimately damaging to our citizens. 

Instead, he proposed a “medical savings plan”, which cannot possibly protect any family from rare, but catastrophic, medical expenses.

We deserved much better than this ignorant man in the Oval Office, but we got who we voted for.

Summary

The social security system is not in crisis, as president Bush claimed.

It has sufficient trust funds in government securities to carry it through the year 2042, when the system estimates that its trust fund will be exhausted.  Benefits will then have to be cut or the tax raised.

The trust fund is in government bonds, the same kind of bonds that investment houses, the Japanese and others, have been buying for years.  President Bush’s claim that they are somehow different and that Congress will let them go into default is just irresponsible.

Social security is an insurance program, a combination of disability insurance and retirement annuity, not some kind of private investment or private savings account.

Saving money as an individual or a family with the hope that a savings account will somehow stave off an emergency is a fool’s errand.  I was taught that in public school years ago, but it strikes me that hardly anyone today understands this. 

President Bush seems not to have any concept of insurance, whether for retirement, life, or medical emergencies.  My feeling is that as the scion of a wealthy family, he has had no personal experience with insurance, nor does he feel the need for any.  He also seems oblivious to the plight of many struggling wage-earners who have lost their job through disability or disease, yet must somehow provide for themselves and their families.  Is it a “family value” for our government to turn its back on such unfortunate people by refusing to advocate an insurance program that could protect us all from life’s vicissitudes?