Prof. Antony Davies: Social Security vs. Private Retirement 

The best argument I have heard for abolishing Social Security is that it's immoral to force me to pay for someone else's stupidity.

I understand the argument for disability insurance and old age insurance but can't wrap my head around why I shouldn't be able to opt out of the old age insurance. I am 22 years old and have just begun paying into the system. Why should I not be able to simply sign a waiver declining old-age benefits in exchange for opting out of the 63% portion of the program that goes towards forced retirement savings. I don't understand how in a "free country" with "capitalism" the government should be able to force me to save? Can someone please explain?

Liberate the paychecks of hard-working Americans from the convoluted tax code and dictates of politicians on how to save for retirement.

in Australia we already have private retirement it's called superannuation and it works

In Australia we have our own scheme called "Super superannuation." It pools the assets as an optional program into super funds which fund private industries, which create investment in the economic sector you want and are competitive. The average savings then grew to about 9% of income (over it now) so it really makes me wonder why the States won't attempt something like this and have a forceful social security tax with no choice in your investment at a return of only 1%.

Millions of people rely on food stamps because THEY CAN GET AWAY WITH IT. I know a family personally that does this. Neither parent works, they have a PS3 and bigass flat screen TV and several computers/tablets and buy whatever they want pretty much. Food stamps aren't a supplement for most people, they're the only or main source of income. It's an abused system that I don't want to fucking pay for. Neither do you. And we need a better one.

Keep it mandatory to have a retirement account but you decide the way it gets invested.

To those of you who argue that ever Social security dollar spent creates X amount of growth elsewhere in the economy, let me ask: Where did that Dollar come from? What would it have been spent on? That dollar could have been invested in a small business, a small business that would have both produced actual wealth in the form of goods and services and provided jobs for the people in that community. where does this dollar go instead? It goes into consumer goods, while it may still result in the production of jobs these jobs have been displaced from where they would otherwise have been, they were not created because of social security. Further the money is being spent on the consumption of goods rather than the production of goods, so rather than adding to the pool of goods and services available to society it is merely taking from it.

I can't believe I've stumbled upon an economics professor with some gray matter between his ears. I remember going through my MBA program and an economics Ph.D. tried telling me that SS is a good deal because we get our money back in a couple of years. Sure we do, if we ignore opportunity costs and the time value of money. It was my last class before graduation so I figured that discretion should outweigh valor. Regardless, if a bunch of actuaries tried to sell this scam in the private sector, they'd be thrown in federal prison. Is there a point where the rate of return on a set of cash flows is so bad, you'd have to label it as being unconscionable and a dumb investment? If so, what would that rate be? Well, I actually did take the time to calculate the IRR in Excel for the SS-related cash flows associated with my labor (6% + 6%). The results were absolutely horrible. I would have gladly embraced the abysmal returns of a passbook savings account over the social security system. At least I'd be able to leave the principal to my kids when I die. I didn't get to a positive rate of return until approximately 17 years into the plan. My best hope was to retire at 70 and live to 100. At that point, I'd actually make 1.9% on the outflows associated with my labor. If people were allowed to invest their money in highly diversified, risk-averse portfolios, they'd be able to retire in relative comfort.

Pro / Con Social security: +Everyone is covered. +Gov savings are much more stable than private. +It has a national effect which lowers desperation and crime. -Its depended on amount of current tax payers.You pay for your dad,your son pays for you.The payout may therefor be adjusted for this level. Private: +/-Statistically you are more likely to earn more than Gov savings, but then again you may not. +You have more personal control of your savings and its pay out. -Its a high risk investment.

But if social security taxes were abolished, how do you know employers would pay their employees more and not just keep it?

You are totally missing that when you die your spouse does not get to keep collecting your social security retirement nor does it go to your adult kids, which a private savings account would.

"70% of seniors lived in poverty prior to Social Security." Do you an official source for that? The earliest record I can find from the US Census Bureau is 1959.

This guy is the best. If there had been an econ professor like him at my alma mater, I may have considered majoring in econ. Please keep posting, these videos are superb.

Your video is fantastic. Keep making great informative videos like this one.

Would this negatively affect the market with all these people investing?

The issue I have is that the government takes money from workers to pay of retierd people, instead of holding onto the money the government origionaly collected.

Are you referring to the Social Security Trust fund? This is what my source says: "Funds not withdrawn for current expenses...are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust fund." ssa (dot) gov/OACT/ProgData/describeoasi.html SS taxes go into the SS fund. SS benefits are paid out from the fund. Any surplus is invested (SS tax minus SS benefit). The SS taxes are not invested directly.

2011 CNN Poll... Question 24: 54% of respondents favor at least a partial privatization of Social Security. i2 . cdn . turner . com / cnn / 2011 / images / 09 / 29 / rel16f . pdf

The only thing I would be interested in knowing is whether this accounted for compound interest on personal retirement savings. It doesn't looks like it did. If that's the case, the personal retirement numbers would be much, MUCH better than SS.

it doesn't. the key issue is "push for big government"

I agree with much of what you say, except the following: 1) you're forgetting that Reagan and Volcker were inflation hawks. Interest rates got as high as 22(!!)%. No chance Bernanke will raise rates to even 5%. That gives investors no reason to buy dollars. 2) Romney will not cut spending. Don't kid yourself - no matter who wins, deficit spending will continue. You yourself said he's no conservative. As long as there's heavy deficit spending and dollar debasement, gold will continue to rise.

I live in the Czech republic and I calculated the loss of my money by using governmental social security at about 50%. Of course when I pay my social security payments, there is no savings account in the state, it just gives my money to someone else. It is far from being fair and wise saving for the retirement, because I'm giving about 1/4 of my money to the retired people for about 40 of the productive years, but when I retire I'll get only about half of what I earned for 40 years. Of course it is mandatory to participate on the social security program in the Czech republic keeping this inefficient nonsense alive.

The fact so many people still believe we all "pay into" the system, rather than see it for what it is - a tax - just kills me. It's related to how we see our annual tax refunds as a "gift from the government," rather than overtax the government is obligated to send back to us, so long as we can prove we deserve it.

If you want to protect against dumb or irresponsible people investing their SS retirement funds wrong or not at all, just have the system automatically invest it in treasury bills if people don't request otherwise. It's essentially foolproof, since the default would be a safe, fiscally feasible option.

The front page says that it is a telephone poll among American adults plus 917 registered voters. Random selection among these two sets is implied. If the selection weren't random, then the subsets (adults Americans and registered voters) would be misstated.

social security.... the pension for slaves

I do believe it is an annual percentage yield; the interest calculated yearly. If you calculate just off of the raw input and output figures, you need a higher percentage to get the final amount because you don't have the interest compound itself.

Gold backed IRAs or you're just playing the feds game.

Be careful about applying poverty rates to senior citizens. The Census' definition of poverty includes only income, not wealth. For example, if you retire at 65 with $500,000 in the bank and you have the money in Treasury bills (paying 3% interest), your income is $15,000 and you are counted as poor. The $500,000 in the bank isn't included in the poverty calculations -- just your income.

Relying on Social benefits are one way of relying on socialism, one step closer to communist!! No! there are no old age insurance!! Though I am not saying 401 k funding is capitalism either!! It is like comparing a future patient to received free health care from his investment in an investment firm that could have invest in a private hospital, not exactly the real thing as an investor receiving future discount from his investment in a hospital.

This all sounds great if you are young or 55+. I'm 48, my wife is 47. We both worked full time in college so we have been paying for a combined 59 years. All I hear when solutions are discussed completely screws my age group. Change to private, I'm all for it, right after you return all the money we have paid in.

TAKE THAT BERNIE SANDERS! VOTE CRUZ/RUBIO/FIORINA FOR A BETTER AMERICA.

I'm still in school, but when I start earning money , do I HAVE to pay social security? Can I just opt-out of it?

According to the AARP Public Policy Institute, Social Security puts $1.80 into the economy for every dollar of SS spent. This makes it a highly effective and economically stimulating program. The facts say that social security is beneficial to the economy, so it's crucial to remember that before you vote to gut it along with the majority of middle and lower class families' retirements.

The thing about private investments is that they may be risky over the short term, but over an entire lifetime the risk is extremely low. Over a 50-year period, you could still earn a good return on a portfolio of stocks even if there was a Great Depression or two in the middle of the period. If we have three or four Great Depressions over one 50-year period then it doesn't matter whether you were counting on social security or a private retirement fund because that's the end of civilization.

Mathematically you are correct. However, statistically most people are not financially savvy, do not study the stock market, do not track the stock market, will not spend the time watching the stock market and reacting to its changes, and over 30 years of doing tax returns, I have seen gobs of people lose money in the stock market following their skill of investing high and selling low primarily based on hyped BS statements from others. Only a small % of people have made huge gains. So, though SS is not the best investment vehicle, right now, it is one of the safest for most folks (well...we hope).

Re-watch it again. A T-bill is a govt bond. If it is rescinded then it doesn't really matter if you have money in SS because it would probably be gone either way. its the same risk with a bigger return. Or you can go the stock route (S&P) which is way overvalued right now and will be for quite some time in the future. so i catch your drift.

Bullshit and no thanks. I worked for 25 years and paid into social security, but I'm not working now. I imagine there are a lot of people in my boat. Unless they want to refund my contributions plus interest I better get my damned social security checks when I hit retirement age or heads will roll.

Gold doesn't tank when the economy improves. It's merely a reflection of current value of money. It will slow growth after improvements in the economy however. Investing in gold is basically like investing in a basket of commodities (INCLUDING oil and food) but without needing to participate in the market. Also, the Ryan plan doesn't do nearly enough. From what I understand it doesn't even cut existing deficits, only how quickly the deficits will expand.

This is clearly right wing politics. The whole reason social security was put in place was not for percentage returns, or for the wealthy to make more money, it was to protect the lower to middle class for when they couldn't properly save enough to retire. The elderly in the 40's had a significantly higher poverty rate than their is now, and that is because of social security. People don't invest as much on their own or might not be able to, so this is a safety net program.

Part 2 I'm sorry if I'm using complicated language, but this isn't money taxed by government and returned to you in a pension 40 years later. Superannuation funds hold your money in trust and provide investment statements every year showing how the money has grown, and you tell them how to invest it, or if you're not happy, rollover the money to a new fund or start your own Trust to manage it. Money is not taken by government, apart fro15% tax on fund earnings and 10% in some capital gains.

Social security is not meant to be an investment vehicle, it's meant to force people to save for old age. That's all. So stop evaluating it like an investment product.

So, would you expect to be able to take out a mortgage or have a credit card and pay no interest? If I were the lender in that situation, why would I want to lend money to you if no interest were to be paid to me. It isn't greed. There isn't anymore greed than to have a mechanic work on your car or a plumber to work on your leaky faucet and charge you an hourly labor fee.

No. It doesn't assume that every American is "soundly knowledgeable", just that every taxpayer is "knowledgeable enough to know to save for retirement instead of wasting their money". The stock market is just ONE TINY PORTION of a retirement plan. There are many different ways to do it without "forcing" people to have retirement plans. (CDs, pensions, bonds, savings etc.) BTW, everything you need to learn about the stock market, or any other investment, can be found FOR FREE on the Internet.

Save in gold and silver but play with the fiat.

I kind of just accepted that social security isn't going to be around in 25 years but I recently read these articles saying that it would... now im a bit conflicted... is the idea that SS is going bankrupt/going to be insolvent a misconception?? your thoughts?

Prof Davies I like the analysis and the many videos you've posted here. My question for you on privatization is how does the govt manage cash flow as the program phases out? Its a travesty that this is the case, but the fact remains that SS is little more than a Ponzi scheme; we need new contributions to pay current benefits. If new contributions went away, how would current beneficiaries get paid? Don't get me wrong I loathe pay as you go but we have to answer the question on how to phase out

Informative video, do you a source where I can find all the evidence graphs for a school project I am making?

They are currently paying SSN from the general fund anyway, there is no lock box. A partial answer to your question is; as time passes, as people start withdrawing to retire. People will now be earning more since they had better returns, so gov;t revenue would see a boost from there. Also this way the account would be owned and could be inherited or passed to children, this might help supplement other aid programs. Ideally everyone could self insure late in life.

Isn't it unfair to compare social security to the return from an investment? If we were to shift all money going into social security into treasury bills (or something with a similar security to the U.S. Government) wouldn't that shift the supply/demand curve of the treasury bills to a level less than 1.7% return? Possibly even less than 1.2% return?

Tony - have your research team do some research on how to raise revenue - generally it can't be done beyond 18 to 20 % taxation. As the taxes go up the productivity goes done. Beyond that the tax system encourages corporations to do unproductive work - expending effort jumping through loop holes to avoid taxes. The best way to increase revenue would be to make flat tax of below 20%, if it is competitive enough, companies may return back to the united states.

You didn't answer my question, they will still be able to retire, except with a larger amount of their own wealth from higher returns in the private sector. How is that going to lower the return of stocks??? There was something more deceptive done in the video to draw a larger difference between SS and private returns, but that wasn't it.

In Chile we have private administration of the pension funds. In theory they may get higher returns than government could, they´re more competitive and they let you choose the risk of the fund (A, B, C, D, E). The thing is, if you don´t put any money on your fund (ie. while unemployed), the fund will not grow and eventually when you retire, the State will not guarantee a certain pension like the american SS does. You´re on your own. It is a problem, but, it will not make the SS fund go bankrupt.

You are wrong, though. Those high rates were NOT effective. For example, if, in 1970, if you simply made the top rate 25%, AT THE LEAST, the same amount of revenue would be collected. Why I mention this, because the AMT was introduced in 1969 to target some 155 high income households who paid NO INCOME TAX. There is NO data to back up your claim that highly graduated incomes spur economic growth.

Yes, I read it, but I applied that thinking (constrained by argument's scope, being retirement income) to the current system, which puts all power in government hands. The video does not discuss whether the private retirement sector needs more or less government regulation. It simply provides appropriate information on what would happen if we had a private option under current and past terms over a lifetime period. Again I fail to see the relevance of your argument.

This is the best, most concise explanation of private retirement savings accounts EVER! It would be neat if you could show what the early bird seniors got. I'm sure that they got a far better deal than private savings. But, of course, that is to be expected for a Ponzi scheme, right?

You have forgotten the fact that the investment companies that manage your investments will charge a minimum of 2% off the top line; and once you retire you have to buy an annuity, which after charges will pay less than SS.

The question is would people put aside 12% of their check for the rest of their working years to get that return. If not, the benefit of ss is the convenience of automatic withdrawal, so the person never sees the money.

should their bad decisions be subsidized by those that make good ones? Don't fool yourself into thinking that what you pay into social security is what you get back. If you live to the average old age and pay in from the age of 18 (meaning have any sort of job) and retire at the average age, the numbers say you're likely to take close to 25,000 more than you put in. any ideas on how to pay for that?

Actually, if I'm not mistaken, a return of 295,500 after paying in 216,400 gives you a 1.3655 VALUE (not percentage) of return on the amount payed in, which would be a 36.55 PERCENT return. Am I right?

This video doesn't take into account the changes to the market from $2.5T+ rushing into and out of the private markets. You can't simply use historical numbers, because THIS changes the entire market.

It's not a tax, it's just 9% of your income set aside and invested rather than handed to you to be spent immediately. The 15% tax rate is what that 9% of income is subject to, as opposed to taxing that money at your marginal rate. All people have to have superannuation in a fund, and the fund isnt government. There is a rate of saving (concessional contributions) to the fund that applies a higher tax rate, yes super rich people pay a higher rate saving over the concessional contribution amount.

I googled "number of seniors living in poverty before social security". The first thing that came up for me was something from Congressman Xavier Becerra's office, stating that "Prior to Social Security, over 75 percent of the nation's senior citizens lived in poverty." Let me know if you need something more concrete than that, and I'll see if I can track it down for ya.

If Social Security is such a good deal...how come they have to force people to participate?

so what was the goal for the SS? highest return was not at all part of the goal. and you're complaining about it.

I have a question re: the graph at :50. How were these average salary's for full time worker's calculated, because I find it highly suspect that the average full time 22 year old starts his working career at $30k, especially since that's right around the median salary for all workers. Then we're led to believe his salary will increase by 120% by his peak earning years. This hardly seems like the average worker's case at all, and it would inflate total contributions and returns vs SS's average

i don't think the treasury bills in which social security is invested would be worth anything in an ice age. what do you think?

Xoviat - you may be right. Forgetting about the moral issue of forcing others to do what you think is best for them: It's STILL better to put citizens money DIRECTLY into T-bills instead of into SS, getting a .5% better return and having the same risk. AND, there is NO risk that Congress will change the rules (which they HAVE). Some 'free-market' advocate's solutions involve privatizing the control of the money, but the programs still exist. Like School Vouchers. Gov tax, YOU spend.

A good argument that is adopted by the "nanny state" operators. "People don't know how to do it, therefore they should forfeit their own rights and liberties in leau of someone who is a 'specialist'." - The specialist being somebody who may or may not have the people's best interest at heart. Social security is a prime example of that. It was meant for people who were not saving up. However, a significant portion of the funds were detoured for side projects by various offices of government.

I would like to add on to this great point. With the rise of the Information age with things like the internet and social media on the internet. Communication between the charitable and those that seek charity is easier than ever. It is easier to find a charity to give to and request assistance from.

The "unified budget" occurred in 1968 under the Johnson Administration. Also, keep in mind, The AMT was enacted in 1969 because, AGAIN, when top rates were at 70%, the "rich" effectively paid LESS than now, some, among 155 top earners PAID NO INCOME TAXES.

Best alternative to what?

Ha okay thank you, i'm french so i don't know the american social security system very well. But in 2010 for example, social security spent 710 billion for 54 million people, so the average pension should be around 13 000$ no ?

I didn't think of it like that, I agree you can be on the safe side with investments but even still not all the people can safely invest so much money to live just from the anual return, do they? I mean is it realistic for a low to midlde class American to invest 1 000 000 $ and get a return of 5,2%?

This is very biased. Ending social security will cause old age poverty to skyrocket and if the government can endlessly go to war and maintain it's military arsenal at unfathomable costs then it can provide a social safety net for the elderly. The American government needs to expand social spending, not cut it. Wealth comes from educated, healthy, capable people, natural resources, infratructure.

so who decides and on what basis?

If private funds are investing the same volume of money that the SSA otherwise would have, how does inflation increase? Even if it did create an inflation problem, many other countries have had privatised pension systems for quite a while now and there haven't been any significant issues in the long run, apart from increased risk during severe recessions like the one most of the world recently endured.

What a brilliant and erudite comment. Please enlighten us further with your many years of astute scholarship and wisdom.

Its hard to get a fix on the "real" numbers, but, if correct, private prisons hold about 100K inmates, with the remaining (approx) 2.15 million inmates in state or federal facilities. San Quentin, for example, is at something like 125% capacity. So while it may be true that companies like CCA might lobby for harsher laws, its a drop in the total bucket. Private prisons would still have plenty of inmates if laws were more reasonable and many state and federal facilities were shut down.

Ive read Friedman's books, I'm well aware of his stance on the matter. But you cannot simply "that wealth creation cancels out inflation's devaluation of the dollar.". How much growth? How much inflation? What will happen to savings? Because growth is unpredictable, inflation, which is controllable, should not be. Thus Friedman advocated deflation prevention, but also a slow, even trickle of inflation.

"That is rule number one in any system of exchange; costs are passed to the lowest rung" Not necessarily, that depends largely on the elasticity of demand. If the goods a firm sells are "elastic," then, a given % change in price will lead to a greater % change in the quantity demanded. Thus, if firms that sell elastic goods increase their prices to pass the cost of taxes, they will actually lose more in revenue than they would if they didn't change their prices.

I'm an Investment Advisor who's only 22. I'm totally showing this to clients

Can you please explain the 20-30 phase plan with a little more detail, it sounds awesome.

I know multiple small business owners in Maryland, I'm employed by one. And I'm seeking to start my own.

Its about control...not security....its about dependency...not liberty....I LOVE THIS VIDEO!!

"over the past 50 years the S&P 500 has generated a return 5.1% greater than inflation". And over the past 10 years it has generated a return of 2.4%. And now Goldman Sach is shorting the S&P 500.

SS is income transfer, a subsidy from working to retired and disabled. No more, no less. It bears little resemblance to an insurance or pension system.

You know, the people who say that taxes (in this case FICA) or the minimum wage prevents "less productive" people from getting hired typically have no clue just how out of whack the wage to productivity gap is. In the service sector, the only way that employers would REALLY turn down people who are less productive would be if the minimum wage was around about $29 an hour. Seniors are, for the most part, retired. Social Security is the sole reason why they weren't hit so hard.

That's not really how it works. There is no new supply of money. The amount of US dollars in circulation can only change if money is printed by the federal reserve. So, everyone doesn't have more money. Efficient use of money, however, allows more investment in production, which helps the overall economy, as more goods and services are available.

Thank you for correcting me. That is one of those things that no matter how many I see it, I'll never remember how to spell it correctly. Like the word recieved, or Zues.

Being that a good portion of the population is completely unable to plan, save and prepare for their own future, it falls on the rest of us to not only pay towards various social programs like social security, but to also save and set aside money for own financial goals. If we were able to transition out of social security, it would firmly pressure future generations to plan and prepare their own future.

I hope you know why we stopped doing that because it is impossible to use gold to represent how many trillion odd dollars that are circulating in the economy today.

Well, you can tax high earners, that's not the problem, it's just that there are negative incentive effects as the rates increase.

Putting your money in a private fund is far better. I think we need to build a free market solution to a public retirement fund, for people who do not invest their money properly, and if you donate your money into it, you should be exempt from social insecurity. This agency should have assets backing up the money, with various outside free market regulation agencies, to ensure that the money is maintaining value with market based interest.

The crappy thing is that if they do decide to change social security to a private model. It probably be when the market is at its highest. They should off done this back in 09.

Wait, so if we invest in treasury bills, we not only become safer but earn more money?

I live in Chile, we have mandatory private retirement saving accounts, it is a disaster. people that were able to refuse switching to this system in the early 80's (a minority) still use the government system that it is not an option for us. I had an aunt that retired in the old system, paying exactly the same percentage of money that everyone pays, she retired with a pension of around 1200 USD, died of cancer but was able to aqquire no debt and leave money for her funeral and family.

I'm not being snarky, I actually really want to know if that's the case. If the average worker actually earns far less over his lifetime, his contributions are less, but if the average benefits are what they are and do not change, then his rate of return is actually higher than 1.2% annual rate of return claimed. I love this video and show it to many people, but if there's flaws in the methodology then I'm the one who looks like the fool.

i'm not saying get rid of it. i'm saying it should be a choice. people should not be forced to pay for old people who weren't wise enough to save themselves because they listened to a government that couldn't keep good on its promises. as far as the being injured on the job, that's a different discussion and perhaps instead of paying for 100's of government agencies that don't work that money could be used for those unfortunate individuals. you dnt need to force ppl to pay more.