Not sure how this could be done. Social security is an insurance program, not an investment program. How do you auction one's social security disability insurance, for instance? Survivor's benefits, etc?

I doubt very much that the companies that insure my car, my house, etc. would be willing to pay out if I had "auctioned" away my coverage to another person on EBay.

greg

Couldn't one set up something like this basically just as selling a strange form of bond? The seller promises to pay a certain flat amount per month, starting at a certain date, and ending (I suppose) at his death. That this amount happens to correspond to their expected SS payment would not be part of the legal framework of the contract, would it?

Anyhow, given the popularity of various forms of incredibly awful loans (e.g., car note loans; loans against one's future tax refund), I must disagree with Zach's title. The non-fungibility of social security is a large part of its point as a program.

I doubt very much that the companies that insure my car, my house, etc. would be willing to pay out if I had "auctioned" away my coverage to another person on EBay.

Well, actually, you can assign the right to receive most insurance payments, although you can't assign the power to invoke them or trigger payment.

My point is that you can't really calculate a return-on-investment for an insurance program. I could die a day after becoming eligible for SSI payments, making all of my social security payments a total loss to me.

Or I could have died, with a wife and three young children, at the age of 27. In which case the returns on what I had paid into SSI would be SPECTACULAR.

I just have a problem with those who simplistically say "oh, gee, I paid $500 a month into SSI. If I had invested that money, I would have a crapload when I retired."

Because those people either deliberately or out of ignorance (or both) confuse the difference between an insurance program and an investment strategy. Gee, I'd love to be able to put the $300 a month I pay for house insurance into the market, the $100 that I pay for health insurance, the $100 that I pay for car insurance, etc.

And I'd like to be able to do that while still enjoying house, car, and health insurance.

But you can't have your cake and eat it, too.

greg

The insurance aspect of Social Security is a small portion compared to the retirement income aspect. I'd guess 10-15% at most of a worker's OASDI deduction goes to the survivor and disability benefits. (Couldn't find the data from a quick googling.)

So while it's not the whole picture, it's still valid to consider SS as chiefly an investment program. And if SS were to be privatized, the insurance portions could either be privatized along with it, or they could remain as mandatory government-issued disability and survivor income insurance.

The insurance aspect of Social Security is a small portion compared to the retirement income aspect.

The retirement income aspect IS insurance. Social Security is betting that all SSI participants will pay in more than they have to pay out while individual SSI participants are betting that, individually, they will benefit more from SS than it costs them.

They are betting you'll die young, you're betting you won't.

That's the definition of insurance: a thing providing protection against a possible eventuality .

Social security retirement benefits are guaranteed. They're not subject to how well the markets do, they're not subject to how well the social security administration invests its premiums.

"Sure," you might say. "But Congress could vote to cut Social Security payments, the trust fund could run down, etc." which is all true. But private insurance companies also can default, they can refuse to pay when they should (as is happening with some homeowners down south now), etc. But that doesn't change the fact that they are still providing insurance and that there are serious, legal, and other consequences for defaulting or otherwise not paying.

None of which is true for a pure "Wall Street" investment. I can invest $100,000 right now in a stock, or even a corporate bond, and tomorrow it could be worth $0 and there's not a damn thing I could do about it. That's not the case with an insurance program which is why it's not possible to compare returns on insurance programs to pure, speculative, investments like this guy is proposing.

Reward has risks, for very good reasons. There's no such thing as a free lunch, no matter how badly one want's to believe there is.

greg

I agree it's possible to consider the SS retirement benefit as a form of insurance. But it's a rather perverse type of insurance.

When I buy life insurance, both my insurer and I would like to see me live a long time. When I buy homeowner's insurance, both my insurer and I want to make sure my house isn't going to burn down. However, with SS it benefits the system if I die as soon as possible after retirement, whereas I'd like to live as long as possible.

Perhaps folks like Greg insist on describing SS as insurance because, perverse though it may seem, as an investment scheme it's more like gambling. You die right after retirement, you've poured tens of thousands of dollars down the drain; you live to 120 you get a great deal. Which outcome you reach is only partially under your control. And when you add everyone together, the mean return on investment (or "premiums" according to the insurance paradigm) will never exceed a paltry 3% or so.

I'd much rather have my retirement savings under my own control, where I can choose riskier but higher-yield investments while I'm young and then transition to more stable investments as I near retirement. And if I die the day after I retire, my heirs will benefit from the fruit of my labors.

I agree it's possible to consider the SS retirement benefit as a form of insurance. But it's a rather perverse type of insurance.

Only if you think an annuity is a "rather perverse type" of insurance.

Google is fun: http://www.savewealth.com/retirement/annuities/history/

greg

I'd much rather have my retirement savings under my own control

My retirement savings are under my own control and the investment scheme you've outlined is a sound one and the one I've followed for the past twenty-five years of my working life (with one small change: I'm shifting investment out of the United States, particularly dollar-denominated and based investments, as a way of decreasing risk).

What is it about the social security insurance program that prevents you from doing exactly what you said you prefer?

You're not counting on 100% of your retirement to come out of social security, are you? Because that's not what insurance is for.

I certainly don't plan on burning down my house when I want a new one.

greg

phil, do you mean in general, or do you think investing in a Manhattan apartment is a particularly bad idea?

Greg,

the $100 that I pay for health insurance

Isn't that kind of the thinking behind HSAs?

HSAs? I'm guessing that stands for Health Savings Account? Which I'm guessing is some kind of mutual assurance program?

That's as much as I'm willing to guess, right now. I'd do more Googling to find out except that I'm on a government train (Amtrak) tooling along at 100MPH and my private-sector cell phone GPRS connection is none-too-fast.

greg

greg,

How is an annuity a form of insurance? It may be offered by an insurance company, but it seems to me it's a savings tool. Are you telling me that if a person dies prematurely the insurance company keeps the unpaid portion of the annuity? The page you linked does not say that, in fact it contains this statement, speaking historically of annuities: These contracts guaranteed a return of principal.

Anyway, if there is a private sector analogue to Social Security I would indeed consider it, as an investment instrument, akin to gambling, and as an insurance element, rather backwards or perverse.

How is an annuity a form of insurance? It may be offered by an insurance company, but it seems to me it's a savings tool.

Annuities typically can't be outlived. I.e. it's possible for one to collect more from an annuity than one has put in in premiums (plus interest growth on those premiums). Thus an annuity is an insurance policy. You are insured a given monthly payment for as long as you live.

Companies offering annuities create them with the same actuarial methods with which they create other forms of insurance and payments to an annuity are termed premiums, just like insurance payments.

Are you telling me that if a person dies prematurely the insurance company keeps the unpaid portion of the annuity?

Yes, in the case of an a annuitized annuity (where the covered individual has chosen to have payments made to him or her until their death). In those cases, payments cease on death and the insurance company keeps whatever remains of the premium payments. If you die early, the insurance company wins. If you die late, you win.

greg

Well, then, if people choose to buy those kinds of annuities, that's up to them. I'm certainly not in favor or requiring anyone to buy them, which is essentially what Social Security does.

But this begs the question: if disability insurance, survivor income insurance, and annuitized annuities are all available in the private sector already, why is there such opposition to privatizing Social Security?