How to Save Social Security(for the rest of us)!

[Da Lone-Warrior]

Here is the idea, I've been cooking up recently. Instead of privatizing Social Security, we could have the US Government start up its own Mutual Fund using part of the Social Security Trust Fund. The Mutual Fund would take advantage of its economies of scale and target a 6% control of the predicted Total Market Valuation of the NYSE. It would circumvent its potential for corruption by basing its investments on a conservative investing strategy implicit in a simple algorithm that would only require 27 weeks of publicly available NYSE data. Almost everything would be based on simple but reliable statistics that could be verified by others. The goal would be to save Social Security, improve on the return to people’s savings therein, and to stabilize the NYSE and attract more long term investment in it. Prospect Theory ("][/url]

An example of the reliable statistics used is the total predicted NYSE market valuation. It would be based on the sum of the predicted total market valuations for all of its stocks that have been in the stock market for at least 27 weeks. The predicted valuation for each stock would be based on the median trends of their valuations from the previous 27 weeks. These predicted values would then be used as weights in the investment decisions and a simple panel-data regression that would be used to decide the weekly holdings of the mutual fund.

The secret to the algorithm, what would make it a conservative investing strategy, would be that all the stocks in the stock market would be valued on the basis of their weekly log-returns, the log of 1 plus the percentage weekly return in value for a stock. 26 weeks of data would be used in a simple mean regression to predict the next week’s log-return for each stock. The weekly log-return would have several advantages over the weekly return for the evaluation of stocks. It would fit with what has been shown to be human nature in [url="http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=RNWE,RNWE:2004-51,RNWE:en&q=%22prospect+theory%22+nobel+prize). People tend to be more averse towards losses in wealth than gains in wealth. The log-return would weight losses more than gains and mute the importance of larger gains while increasing the importance of large losses in value. To illustrate this:a 20% loss would have a log-return of -.097, a 10% loss would have a log-return of -.046, a 10% increase would have a log-return of .041, a 20% increase would have a log return of .079. This measure of value would reward stable stocks and penalize unstable stocks.

The fund would then each week invest two-thirds of its funds, based on the target of maintaining a 6% control of the predicted total stock market valuation, in buying long in the top 20% of the stocks (weighted by their predicted total market valuations) and the remaining one-third would be used to sell short(making money for the fund off of a decline in stock value) in the bottom 5% of the stocks. This would reflect a chastened optimism that would hedge well against a worst case scenario of a general decline in the stock market value. The higher concentration in the selling short would be to compensate for their higher volatility. The specific holdings of each company in both groups of stocks(the ones the mutual fund would buy long on or sell short on) for each week would be based on a standardized value of their predicted weekly log-return.

This sort of strategy could easily be tested using historical stock market data, including the 1987 stock market crash, or even the Great Depression. Although the Mutual fund would likely perform better due to its considerable market power. I am convinced that if it targeted 6% control of the NYSE that it would save Social Security and provide more stability for the US Stock Market. It would maybe force out some of the more volatile stocks, discourage stockbrokers from trying to time the market, and reward long-term investment strategies like that of Warren Buffet and Berkshire Hathaway. I also think that the overall reduced volatility of the market would then attract more capital away from hedges like bonds so that it can be allocated more productively.

If this issue were paired with requiring companies to list compensation under employee option plans as a direct business expense, it would make a decent rallying point this fall for economically progressive candidates, perhaps especially against the economically conservative Democratic Incumbent Joseph Lieberman in Connecticut.

dlw

[Da Lone-Warrior]

Well, the transformation from return to log-return or (ln(1+return)) doesn't change the value that much. It varies depending on how far the return is from zero. Try setting up -.3 to .3 with .05 increments on an Excel spreadsheet. Then in the next column take the =Ln(1+A?) to get the log-return. The log-return is progressively less for higher positive and negative values. I think it still makes sense to use the log-return to assess stocks, but am less certain just how much of a difference it would make by itself in terms of how stocks were ranked and the overall stability of those rankings.

An earlier version of this idea involved using predicted median returns rather than mean returns, along with the predicted standard deviations. I think something along those lines, perhaps substituting log-returns for returns might be ideal. In the previous idea, there would be 3 options for people, one option would pick stocks based on an index of value that would weight the predicted standard deviation twice as much as the predicted median return, the second option would weight the predicted median return by twice as much, and the third would be some combination of the two.

At any rate, the economies of scale of the US Mutual Fund and its level of diversification and the low overhead would have a serious impact on the stability of the returns to the mutual fund by itself, regardless of the way the funds were ranked and picked. The median tends to be a more stable or robust statistic than the mean and so using it to determine the weekly holdings of the US Mutual Fund would keep its holdings stable and add more stability to the overall stock market, perhaps mitigating the ability of bubbles to form.

I think the median log-return with one lag would do a more reasonable job of prediction than the mean log-return or return with one lag. But that could easily verified using historical stock market data.

dlw

[Da Lone-Warrior]

There is another publicly run mutual fund of CalPERS...

http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=RNWE,RNWE:2004-51,RNWE:en&q=CalPERS

dlw

[Tladatsi]

There is another publicly run mutual fund of CalPERS...

http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=RNWE,RNWE:2004-51,RNWE:en&q=CalPERS

dlw

It is actually quite simple. Right now, if you earn more than a certain amount, I think it is around 100K per annum, you don't have to pay into SS. If you lifted that cap and had everyone pay, the SSTF would be solvent indefinitely.

On the other hand, the worst thing you could do is deport the millions of illegal aliens who are now working and paying SS taxes. They pay in billions and are unlikely to ever collect (being illegal, they don't have a real SS#).

[Shadow Phoenix]

Here's my plan DLW.

Work hard and save my money and invest properly so that when it comes time for retirement, I can make it without the government having to pay me a cent.

Kind of a lost concept today isn't it?

[Da Lone-Warrior]

Thanks for the subtle reminder on the need to keep it stupid for the simpletons.

Here's my plan DLW.

Work hard and save my money and invest properly so that when it comes time for retirement, I can make it without the government having to pay me a cent.

Kind of a lost concept today isn't it?

It's a good plan to work hard and save. The problem is that it isn't easy for small individual investors. There is far more stability with larger institutional investors. The US Mutual Fund will transform our economy. It will let all USAmericans benefit from the best most stable performers in the New York Stock Exchange and it will reduce the volatility of the market to help our smaller and medium sized companies in raising the capital they need to do business/create jobs and more opportunities for more people.

I'm reminded of those glorious words...

WE get by with a little help from our friends,
Yes we get by with a little help from our friends,
With a little help from our friends.

and also...

Sometimes in our lives we all have pain
We all have sorrow
But if we are wise
We know that there's always tomorrow
Lean on me, when you're not strong
And I'll be your friend
I'll help you carry on
For it won't be long
'Til I'm gonna need
Somebody to lean on



Please swallow your pride
If I have things you need to borrow
For no one can fill those of your needs
That you don't let show

Lean on me, when you're not strong
And I'll be your friend
I'll help you carry on
For it won't be long
'Til I'm gonna need
Somebody to lean on

If there is a load you have to bear
That you can't carry
I'm right up the road
I'll share your load
If you just call me

That's really all that US Mutual would be, citizen-friends helping each other together to benefit more from the greatest economy in the world!

dlw

[Da Lone-Warrior]

It is actually quite simple. Right now, if you earn more than a certain amount, I think it is around 100K per annum, you don't have to pay into SS. If you lifted that cap and had everyone pay, the SSTF would be solvent indefinitely.

On the other hand, the worst thing you could do is deport the millions of illegal aliens who are now working and paying SS taxes. They pay in billions and are unlikely to ever collect (being illegal, they don't have a real SS#).

Clearly, the illegals are helping out with SS, but I don't think that's fair to them. I would rather make all illegals guest workers who have to register in the US and pass an english test after 4 weeks of gov't provided training. If they fail to pass the english test then they will be transported back to their home country at Mexico City, at the expense of their country. If they did pass then they would then be given some state protections in return for paying higher income taxes. I would let them collect the Social Security taxes. I also would deny all guest workers the Income Guarantee that all US citizens shd receive as part of the Basic Income Guarantee plan (http://www.usbig.net/). But I would let them become elgible for citizenship after say 15 or 20 years, provided they've been productive and have kept out of trouble. I also think we should help them to participate in upcoming Mexican elections. In this past election, many of them did not participate because of their illegal status. That could change a good deal in the coming years...

I also don't see any good reason to force people to pay into Social Security. I think that with US Mutual more people would be willing to pay into Social Security and everyone would get more at retirement. It would also make the US Stock Market more stable, making it easier for smaller individual investors to pick stocks, without the "help" of private mutual funds. Most mutual funds don't perform so well, mine didn't. Its too tempting for mutual fund managers to pick stocks for the wrong reasons.

dlw

[Tladatsi]

I did not say it was fair, but it works out great for the rest of us.


Clearly, the illegals are helping out with SS, but I don't think that's fair to them. I would rather make all illegals guest workers who have to register in the US and pass an english test after 4 weeks of gov't provided training. If they fail to pass the english test then they will be transported back to their home country at Mexico City, at the expense of their country. If they did pass then they would then be given some state protections in return for paying higher income taxes. I would let them collect the Social Security taxes. I also would deny all guest workers the Income Guarantee that all US citizens shd receive as part of the Basic Income Guarantee plan (http://www.usbig.net/). But I would let them become elgible for citizenship after say 15 or 20 years, provided they've been productive and have kept out of trouble. I also think we should help them to participate in upcoming Mexican elections. In this past election, many of them did not participate because of their illegal status. That could change a good deal in the coming years.

I also don't see any good reason to force people to pay into Social Security. I think that with US Mutual more people would be willing to pay into Social Security and everyone would get more at retirement. It would also make the US Stock Market more stable, making it easier for smaller individual investors to pick stocks, without the "help" of private mutual funds. Most mutual funds don't perform so well, mine didn't. Its too tempting for mutual fund managers to pick stocks for the wrong reasons.

dlw

[Tladatsi]

Here's my plan DLW.

Work hard and save my money and invest properly so that when it comes time for retirement, I can make it without the government having to pay me a cent.

Kind of a lost concept today isn't it?

It never worked that way. Before SS, more people did not live long enough to retire (in 1900 the average life span for an American male was 48, now it is 75). Before SS, ordinary people who lived long enough to retire, retired into poverty. Only a small portion of Americans before SS retired comfortably. This is why SS was such an enormous success.

It is a lost concept that deserves to be lost.

[$cirisme]

Here's my plan DLW.

Work hard and save my money and invest properly so that when it comes time for retirement, I can make it without the government having to pay me a cent.

Kind of a lost concept today isn't it?
You HAVE to plan that way, there is no way in heck you or me will ever see a dime from social security when we are old. Which really sucks because the amount they take out of my pay check (that I will never see again) is a major drain.

[$cirisme]

Here is the idea, I've been cooking up recently. Instead of privatizing Social Security, we could have the US Government start up its own Mutual Fund using part of the Social Security Trust Fund. The Mutual Fund would take advantage of its economies of scale and target a 6% control of the predicted Total Market Valuation of the NYSE. It would circumvent its potential for corruption by basing its investments on a conservative investing strategy implicit in a simple algorithm that would only require 27 weeks of publicly available NYSE data. Almost everything would be based on simple but reliable statistics that could be verified by others. The goal would be to save Social Security, improve on the return to people’s savings therein, and to stabilize the NYSE and attract more long term investment in it. Prospect Theory ("][/url]

An example of the reliable statistics used is the total predicted NYSE market valuation. It would be based on the sum of the predicted total market valuations for all of its stocks that have been in the stock market for at least 27 weeks. The predicted valuation for each stock would be based on the median trends of their valuations from the previous 27 weeks. These predicted values would then be used as weights in the investment decisions and a simple panel-data regression that would be used to decide the weekly holdings of the mutual fund.

The secret to the algorithm, what would make it a conservative investing strategy, would be that all the stocks in the stock market would be valued on the basis of their weekly log-returns, the log of 1 plus the percentage weekly return in value for a stock. 26 weeks of data would be used in a simple mean regression to predict the next week’s log-return for each stock. The weekly log-return would have several advantages over the weekly return for the evaluation of stocks. It would fit with what has been shown to be human nature in [url="http://www.google.com/search?sourceid=navclient&ie=UTF-8&rls=RNWE,RNWE:2004-51,RNWE:en&q=%22prospect+theory%22+nobel+prize). People tend to be more averse towards losses in wealth than gains in wealth. The log-return would weight losses more than gains and mute the importance of larger gains while increasing the importance of large losses in value. To illustrate this:a 20% loss would have a log-return of -.097, a 10% loss would have a log-return of -.046, a 10% increase would have a log-return of .041, a 20% increase would have a log return of .079. This measure of value would reward stable stocks and penalize unstable stocks.

The fund would then each week invest two-thirds of its funds, based on the target of maintaining a 6% control of the predicted total stock market valuation, in buying long in the top 20% of the stocks (weighted by their predicted total market valuations) and the remaining one-third would be used to sell short(making money for the fund off of a decline in stock value) in the bottom 5% of the stocks. This would reflect a chastened optimism that would hedge well against a worst case scenario of a general decline in the stock market value. The higher concentration in the selling short would be to compensate for their higher volatility. The specific holdings of each company in both groups of stocks(the ones the mutual fund would buy long on or sell short on) for each week would be based on a standardized value of their predicted weekly log-return.

This sort of strategy could easily be tested using historical stock market data, including the 1987 stock market crash, or even the Great Depression. Although the Mutual fund would likely perform better due to its considerable market power. I am convinced that if it targeted 6% control of the NYSE that it would save Social Security and provide more stability for the US Stock Market. It would maybe force out some of the more volatile stocks, discourage stockbrokers from trying to time the market, and reward long-term investment strategies like that of Warren Buffet and Berkshire Hathaway. I also think that the overall reduced volatility of the market would then attract more capital away from hedges like bonds so that it can be allocated more productively.

If this issue were paired with requiring companies to list compensation under employee option plans as a direct business expense, it would make a decent rallying point this fall for economically progressive candidates, perhaps especially against the economically conservative Democratic Incumbent Joseph Lieberman in Connecticut.

dlw
It doesn't have to be that complicated. We've already congress mandates like Roth IRA's, 401k's, and Roth 401k's. I'd continue the social security tax, but use something like 80% of the current incoming funds just to keep the pay as you go system afloat for the next 40 years. The 20% that's left can be used as a matching fund as extra incentive to contribute to a 401k, and to make up for those of us whose employers don't match 401k contributions.

After the 40 years is up and we've entirely phased out the pay-as-you-go relics, folks can opt out and invest the money as they see fit. If they don't opt out, the money can go into a highly conservative retirement account they can use when old or if they become disabled.

It's dumb to have a pay-as-you-go system when you have the magic of compund interest at your side. It's also dumb to have a one-size-fits-all risk portfolio, 20 somethings should have a mix of risky investments, whereas 40 somethings will need something more conservative.

While this system would not be my ideal, it would carry us through what we have, and give us something better. It allows folks the freedom to take their retirement matters into their own hands (a recipe to cure apathy) and yet still allows a retirement for the dolts who are too apathetic/stupid to opt-out and care.

[Da Lone-Warrior]

I did not say it was fair, but it works out great for the rest of us.

That's not good enough.

We need to be agents of change in Mexico rather than helping to support the status quo there.
dlw

[Da Lone-Warrior]

You HAVE to plan that way, there is no way in heck you or me will ever see a dime from social security when we are old. Which really sucks because the amount they take out of my pay check (that I will never see again) is a major drain.

Don't be so pessimistic.

And I believe you can opt out of SS...

dlw

[Da Lone-Warrior]

It doesn't have to be that complicated. We've already congress mandates like Roth IRA's, 401k's, and Roth 401k's. I'd continue the social security tax, but use something like 80% of the current incoming funds just to keep the pay as you go system afloat for the next 40 years. The 20% that's left can be used as a matching fund as extra incentive to contribute to a 401k, and to make up for those of us whose employers don't match 401k contributions.

Well, 401ks still reflect the stock market and its volatility. I had a retired actuary share with me his approach.

I’m a retired health and pension consulting actuary. I have known how to fix Social Security for 42 years and more recently how to use the same financial/actuarial substructure for heath care as well.
To fix Social Secuirty we need to make it as real defined benefit pension system, instead of the Potemkin Village one (that is, fake) it is now.

You do this by (a) replacing the PayGo way of financing it, with actuarially advance funding, using an actuarial Cost Method known as Entry age Normal and (b) by adding strong laws with teeth to protect the assets and the past service benefits from being cutback.

No changes in the benefits need to be made, certainly no cut backs or increases in retirement age and avoid like the plague privatization–which is the exact oppposite of what a defined benefit system is.

This approach enables the continuation of defined benefits and the investment of Social Security funds in something like US Mutual. US Mutual may seem complicated, but it's not that complicated. It comes down to using 28 or 29 weeks of publicly available weekly data on stock values and median statics of the log-returns and their standard deviations, AR(1) regressions to form an index to rank stocks with and determine the weekly holdings in a manner that would be stable. US Mutual would use its heft to add greater stability to the overall NYSE and to put a firewall around SSTF and allow it to grow and give a somewhat higher guaranteed benefit.

The current privatization approaches have the failings of most mutual funds. Individual accounts are not reliable, compared to the strength that comes in numbers.

After the 40 years is up and we've entirely phased out the pay-as-you-go relics, folks can opt out and invest the money as they see fit. If they don't opt out, the money can go into a highly conservative retirement account they can use when old or if they become disabled.

It's dumb to have a pay-as-you-go system when you have the magic of compund interest at your side. It's also dumb to have a one-size-fits-all risk portfolio, 20 somethings should have a mix of risky investments, whereas 40 somethings will need something more conservative.

Ideally, yes. But if the return goes up for people's SS savings then they may be able to live with it and invest the rest of their savings in more risky portfolios.

While this system would not be my ideal, it would carry us through what we have, and give us something better. It allows folks the freedom to take their retirement matters into their own hands (a recipe to cure apathy) and yet still allows a retirement for the dolts who are too apathetic/stupid to opt-out and care.

I think under my idea that people with higher incomes could still opt-out from SS. The thing is that under my idea, I believe that there is a reasonable chance that the volatility of the NYSE could be reduced by like 20%, which would make individual investing far more feasible and help our economy to grow.

There is a reason I belabor the algorithm so much. It is meant to ensure greater stability in the fund's holdings and to protect against the corruption of the fund managers that exists as a threat for all managers...
dlw

[$cirisme]

Don't be so pessimistic.

Right, I'll live without a care for tomorrow and know that the government will provide for me in my golden years.

Nothing can possibly go wrong.

:ahem:

And I believe you can opt out of SS...

Not once you're in it:

http://en.wikipedia.org/wiki/Social_Security_(United_States)#Opting_out_of_Social_Security

[$cirisme]

Well, 401ks still reflect the stock market and its volatility. I had a retired actuary share with me his approach.

He knows how to save social security? And he says it like it's a great secret. Of course the problem with social security is the fact it's a pay as you go system, anyone can see that. Your friend hasn't shared anything new.

Ideally, yes. But if the return goes up for people's SS savings then they may be able to live with it and invest the rest of their savings in more risky portfolios.

I think under my idea that people with higher incomes could still opt-out from SS.

Well, I quite disagree with that. I think anyone should be allowed to opt-out of Social Security if they feel like it.

Even under your system, if I could take $500/month worth of what would have gone to Social Security and place it in a 401(k) that my employer matches, I "magically" get a 100% return. That's an extra $6,000 of free money that I didn't have to scrounge up, or make any sacrifices to get.

Under your system, I'd have to live with the small return on the Social Security system then find some way to put a little money into my own plans. It doesn't make any sense for me to be forced to contribute a huge amount of my income to a black-box I have no control of and get almost no return from, when I can do it all myself.

I know you believe people are incapable of doing things for themselves, but you can always keep the (voluntary) SS system for yourself. :tongue:

Seriously though, I don't care what happens to Social Security so long as it becomes voluntary. It doesn't make any sense to have one size fit all, nor does it make sense to compel me to take away my money "for my own benefit".

It can't be voluntary while it's pay as you go, those suckers at the bottom of the Ponzi Scheme always have to pay up, but as soon as we move away from that scheme, there really is no need to make it mandatory.

The thing is that under my idea, I believe that there is a reasonable chance that the volatility of the NYSE could be reduced by like 20%, which would make individual investing far more feasible and help our economy to grow.

Deal with the volatility of the stock market elsewhere, not in retirement accounts.

If it's a small side effect, fine. But if it's a major selling point, then it's a really dumb one.

Besides, I think Warren Buffet's suggestion of limiting the lifetime number of stock trades is a much better idea anyway. (but he's a genius)

[Da Lone-Warrior]

Right, I'll live without a care for tomorrow and know that the government will provide for me in my golden years.

Nothing can possibly go wrong.

:ahem:

Not once you're in it:

http://en.wikipedia.org/wiki/Social_Security_(United_States)#Opting_out_of_Social_Security

I never said that we shd be sanguine about the problem...

I also don't see any good reason why people shd not be able to opt out later on so long as their current savings remain in the SSTF...

dlw

[Da Lone-Warrior]

He knows how to save social security? And he says it like it's a great secret. Of course the problem with social security is the fact it's a pay as you go system, anyone can see that. Your friend hasn't shared anything new.

He shares the proper actuarial principle that would allow both guaranteed benefits and stock investments.

Well, I quite disagree with that. I think anyone should be allowed to opt-out of Social Security if they feel like it.

People are not naturally good savers, this has been empirically verified. We abuse credit cards too easily and use Christmas savings programs that provide no interest but keep us from spending the extra funds we will need in December. This is the empirical justification for why only those who can demonstrate that they will be able to easily save for their retirement may opt out of Social Security.

Even under your system, if I could take $500/month worth of what would have gone to Social Security and place it in a 401(k) that my employer matches, I "magically" get a 100% return. That's an extra $6,000 of free money that I didn't have to scrounge up, or make any sacrifices to get.

Well, under my system the variability of the return to that 401(k) is going to be reduced. And can you be sure that your employer won't Enronize those savings? It sounds like you're counting your chickens before they hatch.

Under your system, I'd have to live with the small return on the Social Security system then find some way to put a little money into my own plans. It doesn't make any sense for me to be forced to contribute a huge amount of my income to a black-box I have no control of and get almost no return from, when I can do it all myself.

Well, you'll get a better return under my system than the current system and it would still be guaranteed. It may not fit optimally with your risk-preferences, but it'd still be an improvement over the current system. And if it works as planned then it would be easier for your invest your other savings on the NYSE equities market on your own or in a group without the unproductive assistance of mutual fund managers.

I know you believe people are incapable of doing things for themselves, but you can always keep the (voluntary) SS system for yourself. :tongue:

I don't believe people can't do things for themselves, but I do believe that together we are better at doing somethings. When it comes to investing for retirement, I think that there is strength in numbers and a general need for more risk aversion.

Seriously though, I don't care what happens to Social Security so long as it becomes voluntary. It doesn't make any sense to have one size fit all, nor does it make sense to compel me to take away my money "for my own benefit".

I think some additional options could be set up. I think the one size fits all and compulsory giving reflect the fact that most people are pretty risk averse and bad savers and there are economies of scale in investing.

It can't be voluntary while it's pay as you go, those suckers at the bottom of the Ponzi Scheme always have to pay up, but as soon as we move away from that scheme, there really is no need to make it mandatory.

Deal with the volatility of the stock market elsewhere, not in retirement accounts.

If it's a small side effect, fine. But if it's a major selling point, then it's a really dumb one.

Besides, I think Warren Buffet's suggestion of limiting the lifetime number of stock trades is a much better idea anyway. (but he's a genius)

We agree on the need to change the pay-as-you-go system.

I don't see why guaranteed benefit insurance plans cannot be used to invest in the NYSE with a conservative strategy to reduce the overall market volatility.

A reduced volatility in the stock equity markets attracts more investments, which helps to grow the economy and makes it easier for smaller investors to benefit from the stock market and for small to medium-sized companies to raise the capital they need.

A less volatile stock market where more volatile stocks are in danger of being sold short by US Mutual will give less incentives for folks to try and buy/sell stocks frequently to time the market.

I mailed my idea to Warren Buffett. We'll see if he replies.

dlw

[Da Lone-Warrior]

Here's what my friend the actuary Andy Lang wrote for me (http://sodsbrood.com/antimani/2006/07/04/how-to-save-social-security/#comment-3844).

when done right, a very good retirement can be had at very low cost–surprisingly low–when done right.But individuals will never get those returns because they (a) Are lousy investors, especially in stocks; (b) Pay far too much in commissions and fees, and typically enormous amounts in transaction costs (because they buy into the mantra from the retail sector of the financial service industry, that speculation and ‘trading’ is the way to easy riches); and(c) Many lack the disposable income, the time and the necessary knowledge of finance and economics, along with the basic contrarianism (and skepticism of basic human nature) to make intelligent long-term investment decisions. Lastly, the use of individual accounts places everyone at great risk of retiring at the wrong time, and also of having to buy overpriced and unnecessary annuities in order to get a lifetime pension.

The way to do the investment is collective, avoids all of the above and was invented 150 years ago, used for the first time for a pension system in 1923, and then in the early 1950s, began to get rid of the insurance industry as the sole provider of retirement ‘products’ and began to use ‘Fully Trusteed’, self insured defined benefit pension plans (http://www.google.com/search?hl=en&lr=&rls=RNWE%2CRNWE%3A2004-51%2CRNWE%3Aen&q=self-insured+%22defined+benefit+pension+plans%22), which invested a significant portion in stocks–because the mathematics of good retirement planning both demanded it and it was perfectly safe for the participants, as well as quite safe financially in the long run when done right.

Apparently, one of the best kept secrets of the insurance industry is that once you get about 1000 folks in a self-insurance plan and can reasonably prevent adverse selection (http://financial-dictionary.thefreedictionary.com/Antiselection), the plan can perform quite well with less overhead, and without agents commissions.

dlw

[Da Lone-Warrior]

Here's another letter from Andy Lang on how gov't public mutual funds can be incorporated with better financing of social security to save social security and our health care system.

I am a retired health care and pension consulting actuary, and have known what was wrong with Social Security since I took an actuarial exam on the subject in NY City in 1964; the way it is financed is bogus.

Pay-As-You-Go (or anything remotely similar) must be replaced by a process known as Actuarial Advance Funding (AAF) and, more specifically an actuarial cost method known as Entry Age Normal (http://www.google.com/search?client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial_s&hl=en&q=%22Entry+Age+Normal%22&btnG=Google+Search).

PayGo gets far too little investment returns to help pay the benefits, while Entry Age Normal (EAN) permits a significant part of the assets to be invested in long term investments, such as stocks.

Because the plan would remain a defined benefit pension system, no individual is at risk; they continue to get the promised formula benefits, including the lifetime pension, but because the investments are made by experts chosen for their tasks carefully in accordance with a well thought out long term investment strategy, centered on asset allocation, the investment returns--the key asset class being stocks--will pay more than two-thirds of the benefits, thus reducing the cost substantially.

AAF is a highly disciplined and mathematically rigorous process done annually and, like the ancient mariners sextant, will self-correct and get you across the treacherous ocean, at low cost.

The EAN method was far and away the most popular such method used by private pension systems in the US, before they began their slow collapse beginning in the early 1980's. That collapse began because of failure to strictly adhere to the actuarial advance funding process, which the pension laws allowed, as well as because other laws passed supposedly to protect the plan participants did just the opposite. Today that system is a shadow of itself.

Pension actuaries, alas, have played a major role in it's near collapse--big bucks paid by major corporate plan sponsors will do it every time--and it has been helped along by the life insurance industry along with Wall Street brokerage firms. They have a major interest in seeing it's failure, along with their pushing of privatization of Social Security, both of which are scams to relieve the American people, and any other nation they can convince to do so of their hard earned money--though unnecessary commissions, fees and above all transaction costs. Chile, by the way, under the Fascist dictator, General Pinochet, was the first to privatize their Social Security system in 1981, and their system has been a disaster, despite claims that is has been a 'model' for the world.

The actuarial methodology is absolutely essential and the EAN method gets the level cost as a % of pay from the first day benefits begin to be earned by the participants and thus is essential to know if the system is affordable in the long run.

For defined benefit pension plans in private industry, before it's near collapse, I never saw a Normal Cost % above 5% and most were well below 4% of pay--and this was for plan with higher benefits that most Social Security systems.

Furthermore, the advance funded amounts will benefit the nation's economy greatly, since it is forced savings and long-term patient capital.

Lastly, the very same methodology can also be done for any nation's national health care system as well and is essential to hold down costs to a minimum.

In this regard, health care costs increase by age, exponentially beginning at ages around 45 or so and even more rapidly at the older ages. In addition, costs increase through time as well--in America they are increasing at 2-3 times regular inflation.

Because all developed nations have fewer children and people are living longer--generally good things for the planet--the demographic changes will literally drown any nation in high medical costs, including the richest one on earth, the US--and this is even of they can afford a PayGo Social Security system.. Greece will not only be swamped by rising sea levels due to global warming, if not stopped soon, but by rising health care costs as well.

The US, of course does not even have a national health care system (as every other developed nation has had, some for decades), but even if it had one, the system, in time, would become unaffordable. For us it is a necessary first step, but only a step.

This is the only way to make such systems, decent, stable and affordable.

The actuarial methodology--AAF--was invented way back in the mid-1800's and used in the very first pension system in the early 1920s--the NY State Employees Retirement Plan. AAF evolved into many actuarial cost methods, but only one, the EAN method should have been permitted; the rest were simply sued to manipulate the numbers, to the detriment of the employees.

The defined benefit system--both pension and health--is one of man's greatest inventions, provided they are done right. What other invention can you think of after all, that takes care of two of mankind's greatest needs, a decent worry-free retirement and decent medical care for all- at very affordable;re costs and also, as I mentioned before benefits the economy greatly at the same time?

Too bad we are not doing them right.

There are many reasons why you do not know about this process, but I hold actuaries responsible more that any other group. Too many conflicts of interest.

Also bad accounting systems by nations--all nations--has contributed greatly to the fiction that PayGo is appropriate for long term obligations, such as Social Security.

All nations use cash accounting rather than accrual (http://www.google.com/search?hs=JdV&hl=en&lr=&client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial_s&q=%22cash+accounting%22++%22accrual+accounting%22&btnG=Search), even though back in 1934, the SEC in the US concluded that the former was an awful way to account for public corporations (and resulted in part for the 1929 stock market crash) and replaced cash with accrual systems.

Until recently, when various government oversight agencies have fallen down on their responsibilities due to Trojan Horses sneaking in, accrual accounting has been extremely helpful both to shareholders and to top management. Their failure has given us a new term, 'Enronization'. But that failure is not something to blame on accrual accounting, but the bad Trojan Horses and their allies.

Cash accounting, on the other hand, is guaranteed to produce terrible decisions, decisions that appear to be ok in the short term, but which have awful consequences in the longer term.