The privatization of any social program always brings a hot debate between conservatives, liberals and, well, anyone in the middle. Many free market minded individuals think Social Security should be privatized while liberals say no way. Who is right and is it even possible to privatize such a huge chunk of the Federal pie?
First, let’s answer whether or not Social Security could be privatized. The answer is simple, it cannot be and privatization will never, ever happen. Why? Anyone who has been alive for more than 15 years knows that the federal government takes a nice chunk of your paycheck for FICA, basically Social Security and Medicare/Medicaid, but what they do not know, usually, is that the Social Security portion does not go where you might think. There is no actual account for your Social Security benefits instead you build up credits and your payout is determined by what age you retire. The size of your check will vary some depending how long you have worked and who much you put into the system. This is a very 30,000 foot view.
You receive credits into your Social Security account and not a “cash balance” report because there is no cash actually in your account. Believe it or not the government borrows against Social Security assets all the time and gives you an I.O.U. instead – the Social Security Administration is now cashing in some of those I.O.U.’s because they are now broke. You should know this because it means that if the cash flow into Social Security was ever stopped the whole house of cards would come crashing down. In effect, your entitlement program is the largest Ponzi Scheme in the history of scams. It is for that very reason Social Security will never be privatized because all of the lies would be exposed. But, what if we could privatize it?
Is it a good idea to privatize Social Security? That is a complex question and I am inclined to say yes, but with severe limitations. I do not think it is a great idea to put it into an account with only equities because people do dumb things when equities are involved. In my opinion I believe that using a deferred income annuity product would be the best option or some other type of account that has guarantees attached to it. An income Annuity would give the investor much higher lifetime income than you might think. I am also inclined to believe that insurance companies would create a product that would create a greater stream of lifetime income than what Social Security could ever provide.
However, I think some products should never be considered as an investment option. On my list I believe products that involve higher fees should be excluded such as equity index annuities and variable annuities. I am a believer in Variable annuities, but I feel that the current product fees are too prohibitive to make them a suitable option, a new one would have to be created. I am not a believer in equity index annuities, call me crazy but monthly or daily averaging which intentionally lower the rate of return is not a good idea and then throw on caps, yields or spreads and you have a product that is just not good. I am sure someone will disagree with me about indexed annuities, but that is their opinion and I have not seen a product I actually like. Plus when you exclude the dividends for these products it will drastically underperform the market rate of return. In short, these types of insurance products, which I am sure are valuable, are just too complex for a self directed Social Security account and I do not have faith in the government to choose the best products if they were allowed.
I think a hybrid product with a living benefit, which would payout 5% for as long as the owner lives regardless of account value, might be a decent option. They have a lower cost compared to a variable annuity, but provide similar lifetime income guarantees. These accounts also would mandate an asset allocation model that would have to be adhered to or all guarantees are off. Contrary to belief, asset allocation did work throughout the market crisis. Yes, you took a loss even in a diversified portfolio, but a balanced fund only lost 19% and has a standard deviation of 12.7, not bad.
If this were to happen, privatization of Social Security, it would lead to bad products being created since the government has no sense of what is and what is not a good investment for people. It would also lead to great confusion by investors since many have no idea how any type of guaranteed products work or their drawbacks. There is also the possibility that if/when we have another meltdown in the markets the losses incurred by investors would bankrupt insurance companies or whoever is offering guarantees. It is clear that traditional pension funds have not worked, the taxpayer is already making good on those guarantees, which leads me to believe that any type of equity investment options are simply a bad idea.
The only feasible option for privatizing Social Security would be using a traditional income annuity. The risk is manageable and the returns are predictable as well. However, this is all a moot point because it will never, ever, happen simply because if the government did not receive that income from your paycheck they would fold. While I think some investors would benefit from this the larger population would not and the only real winner would be Wall Street, as usual.
In an unusual twist from the US’s largest creditor China is demanding the release of Bernie Madoff and want him appointed either as Federal Reserve Chairman or Treasury Secretary immediately. The Chinese demand this to be done because it is becoming increasingly concerned that the current US government is unaware on how to properly run a Ponzi Scheme properly. It seems Beijing is perplexed on how US administration officials and the US media does not seem to understand the difference between annual budget deficits, which is the annual funding gap, versus the reduction of total national debt.
Obviously I am kidding, but there is a chance that the Chinese or other foreign creditors might actually feel this way. Considering the administration started talking about debt reduction and fiscal restraint only to come out with a spending freeze, after they increased those same budgets the year before essentially locking in the budget increases, which will only reduce the annual budget deficit by $250B over 10 years. Notice I said annual budget deficit? That means we are still bleeding red as far as the eye can see and we are doing nothing to reduce the national debt problem we have, which is the largest the world has ever seen, throughout history.
While the administration is at least acknowledging the problem and doing more than Bush ever did they are still doing what politicians do, playing with the words. When regular people hear budget deficit reduction many think this is great, we are paying off our national debt! Wrong. What our wonderful leaders are doing is telling us that they are still going to have to borrow hundreds of billions or trillions a year, but they are reducing the amount of their shortfall on an annual basis. Basically, it means nothing because we are still spending way more than we have. The biggest expenditure that we have is on entitlement programs which everyone admits we cannot cut, but Obama did reduce funding to elderly and disabled housing subsidies which may actually give some credence to the “death panel” argument during the health care debate. I mean if you’re willing to throw grandma out of her home or nursing home than why not have death panels, I am just saying now.
Regardless, what we know is that there is no way any politician will do what is necessary to cut the annual deficit down for real, which means higher entitlement taxes, longer waiting periods for benefits or reduced benefits in general. Instead they will merely grandstand against each other while they slowly, or not so slowly is some projections are correct, destroy the entire country. I do not mean this to be partisan, most know I blame both parties for this mess and pray for a real third party to create some competition in politics, come on 2 parties is not a democracy it is a choice between dumb and dumber. Well, technically we actually live in a Republic anyhow so this basically shows us how limited our politicians are in their actually knowledge when they claim we have the greatest democracy in the world.
The bottom line is that we are adding to the national debt everyday and there is no way to stop it without serious action. The action I speak of will never be taken, not yet at least, but eventually they will happen, if we make it that far. The numbers are simply staggering when you think about it, $14T debt ceiling, $107T in unfunded liabilities and the numbers just get bigger and bigger. The entire US mutual fund industry is $15T so the government could confiscate every mutual fund asset in the US and we would barely payoff our debt, think about that for a minute. In a couple of years that $14T will be much bigger and a large reason that the debt ceiling will have to continually be increased, before the repeal the debt ceiling language that is, is to pay the interest on our debt. The crazy thing is we actually have to borrow money to pay the interest on our debt, talk about insolvency?
To steal a line from Dick and Jane; “Dick, I think were in a bit of a pickle” is completely appropriate right now. We are in the midst of the greatest debt bubble ever created and I have no idea how it will end, but I do know it will end and it will more than likely be very ugly. On an interesting, slightly off-topic, have you noticed the public-private lending facilities being set up with the TARP proceeds? I predicted that would happen a few months ago, I just wanted to say I told you so. Anyhow, there have been lots of interesting happenings lately in politics which I will be writing about very soon. I was incredibly sick for the past 5 days so I apologize for not humoring you with my tasteless jokes, or whatever you call them. In the meantime I am still very bearish, expecting unemployment to be particularly ugly and GDP, well we knew it would be huge, but 5.7%? Expect revisions down to 3%, but if you believe the 5.7% please contact me about fabulous leasing opportunities in Pakistan.
The “Friends of Angelo” strikes again and the self righteous do-gooder Democrats still maintain that this V.I.P. program from Countrywide was no big deal. Look, the Republicans are no better and bear as much responsibility as anyone else for this mess, but at least they are not pretending that they did nothing wrong, well to the degree that the Democrats are. So far the Friends of Angelo program has caught up Senator Chris Dodd, Senator Kent Conrad and now, apparently, Representative Edolphus Towns all who got mortgages through Countrywide all with the special code identifying them as being part of the Friends of Angelo program.
Now, to assume there are no special favors associated with the Friends of Angelo program would be making the same assumption as the Sun revolves around the Earth, it simply can’t be true. Rep. Towns says that this V.I.P. program, only available to politicians, HUD officials and Fannie, had no special features other than faster processing times is just plain stupid, there I said what every other newspaper wanted to say, but can’t. Are we simply dumb enough to believe that mortgage companies offer, as Representative Towns claims, a “frequent flier” type programs for mortgages? Listen, Mr. Politicians, the average American, which we are well aware that you think you are not, get 1 mortgage during their lifetime, 1, so to assume there is any type of frequent mortgage program for people is laughable at best.
I know, the “ethics” committee cleared Senators Dodd and Conrad, of course they did, have you met an ethical politician yet? It’s a freaking joke, the numbers were right there in Dodd’s case he saved $75K over the life of his mortgage because the interest payments were reduced to magically attractive levels. I know math is not Washington’s strong point, but they could have called in TurboTax Timmy to run them for him, well maybe he isn’t the best person, but still Wall Street owes Washington a favor or two so they could send a bean counter up to sort out the problem.
Anyhow, Rep. Towns is so sure he is innocent that when Rep. Issa called hearings on this issue he and all the other Democrats walked out the backdoor like a bunch of 5 year olds, and that is insulting to my 5 year old. Instead, Rep. Towns threw his spokesperson to the wolves and is avoiding the issue altogether which about sums up or representatives in Washington. Now, here is what she says:
“He went to his local mortgage guy and got a normal mortgage,” she said. “The guy’s from Brooklyn and doesn’t have much money and wasn’t prominent enough to be considered a V.I.P. Whether it was later transferred through the V.I.P. program, I don’t know. But he didn’t receive any favors.”
Seriously? Not a guy with a lot of money? How does a guy with not a lot of money afford a home in Brooklyn and in Hillsborough County, Fla.? Rep. Towns also wants to get to the bottom of all of this fraud so badly that he will not even subpoena Countrywide, why? Because he knows a lot of unflattering material will come back, maybe not about him, but perhaps some other people, hint, hint Senators. Perhaps maybe some other potentially embarrassing names may pop up as well that are new to the game, for the love of God, Barney Frank forgot to file a $107K bank account in his annual financial statement.
The bottom line is this, we are not stupid and we know that our politicians are bought and paid for by big business. We know they looked the other way while they sold bad loans to people, but the citizens need to take some responsibility as well. If you made $800 a week you should have known that under no circumstances could you afford a $500K house. However, Congress is making an ass out of itself by chasing ghosts because if you want to catch the real crooks you need to get a panel of real people, like me, with Bernie Madoff leading the charge, hey hate him all you want, but you need a crook to catch a crook, and let’s go after every politician who screwed up. After we are done, I move to pardon Bernie and make him Fed Chairman or Treasury Secretary because the man knows how to keep a Ponzi Scheme going and that’s what the US needs long-term.
So, go on Rep. Towns, Sen. Dodd, Sen. Conrad and get your deals with Countrywide and pretend you did nothing wrong. Pretend that you did not know what V.I.P. meant, you are either incredibly stupid or you are lying, I will flip a coin because it is about a 50/50 shot at this point, but either way you gotta go! I think we have all just about have had enough of the BS from Washington. We wanted change and we got, I don’t even know what we got anymore.
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