Thursday, August 18, 2005

When government makes people poor

"Millions of Americans get by on Social Security alone," laments USA Today, giving examples of retirees in hardship. If government hadn't stolen so much of their paychecks, they could have saved for their own retirement. If their own savings weren't enough, the proper thing for them to do is rely on the voluntary charity of others, rather than abusing the power of government to help themselves to others' money.

"Voluntary charity" seems superfluous, but that's to distinguish it from the misnomer of "government charity." I've written a few entries on "government charity" that explain its moral as well as utilitarian failings, and how with all its wasted resources it could never hope to be as effective as private charity:

"We want to get them enrolled"
What kind of "privatization" is this?
Entitled?


There's no single problem with Social Security. You're compelled to give government a certain portion of your paycheck, but your "contributions" are not yours nor held in trust for you. The Supreme Court ruled in Fleming v. Nestor (1960) that you don't have a right to them (more properly, government stole your right to your own income). It pays for current retirees, and your only hope is that future workers can do the same when you retire. Because of the demographic shift in American society, even Paul Krugman admitted Social Security is a Ponzi scheme. Meanwhile, the surpluses may be "invested" in low-grade Treasury bonds, but they earn no interest: the "interest" comes from taxes, so we're simply paying interest to ourselves. You'd do so much better to invest that money in stocks.

For a thorough discussion of Social Security, I recommend my coverage of The Great Social Security Debate. Now, let's pick through the USA Today article:
Millions of Americans get by on Social Security alone

Mary Rathbun gets an $809 check every month from Social Security and an additional $100 in food stamps. The 74-year-old former nurse pays $550 in rent for her apartment in St. Helens, Ore. That leaves less than $400 for food, utilities and other expenses, including medical bills.
Now how would she have done if she'd saved for her own retirement, instead of depending on the government to give her a mere $909 every month?

I'm not pointing at Ms. Rathbun, since I don't know her circumstances, when I say that, at the risk of sounding callous, one problem is that many people retire too early for what they paid in. They no longer ask, "Have I saved enough to retire?" Now they just retire and expect the government to sustain them through the rest of their lives. To most it's no longer relevant, or even a concern, if they draw more than what they paid in.
"It takes a lot of management," says Rathbun. "I watch for things that are on sale and don't drink soda." She's fortunate, she says, because her treatments for colon cancer - which has spread to her lungs and liver - don't require a lot of costly medications. "I think the good Lord looks over me," Rathbun says.
Like everyone else, she's learned to economize.
When Social Security was launched 70 years ago Sunday, it was meant to be a supplement for retirees, not a full pension. But today, 10.6 million people, or 22% of the 48 million who will receive Social Security benefits this year, live on that check alone, the Social Security Administration says.
The problem with Social Security as a supplement is that it pushed many employers into eliminating their own pensions. And why shouldn't they have? First, "the government will now take care of retirees," and second, what business can afford to pay the "employer contribution" twice? This is another effect of incentive that government planners were too stupid to foresee.

Economist Steve Landsburg once wrote a fictional story about the federal government determining that the average family of four consumed two boxes of cereal each week. It decided that it wanted families to consume twice as much cereal, so it started giving every family an appropriate stipend to buy the additional cereal. What happened? The families simply stopped buying cereal with their own money and used the government's stipend to buy the same quantity they always did.
Living on only Social Security isn't a happy prospect. It means stretching every dollar, depending on a patchwork of family, charity and state programs to pay for what Social Security doesn't cover - and sometimes doing without. Those living on nothing but Social Security are often single women and minorities. AARP, the senior advocacy group, says 25% of retired women, including 46% of unmarried Hispanic women, have no income beyond Social Security. AARP also says 33% of retired African-Americans live on Social Security alone.
I'm sure many would take this the wrong way, but that's the incentive to work as much as possible, as long as possible before retiring. If you must rely on government or the charity of others, by what right should you live well?
Those numbers could grow as the baby boom generation enters retirement. Currently, 53% of people in the workforce have no pension, and 32% have no savings set aside for retirement. The number of traditional pension plans - the kind that guarantee a set amount of money for life and that have propped up many of the pre-boomer generation - has fallen to 29,651 in 2004 from 112,208 in 1985.
Again, that's the incentive of Social Security as a "supplement." It became a replacement for private pension programs.
President Bush has proposed overhauling Social Security by allowing private investment accounts and indexing benefit increases to changes in consumer prices, rather than wages. But proponents and opponents disagree on how those changes would affect people who are totally dependent on Social Security.
This is wrong on two counts. President Bush has said that privatization will not affect those who are 55 or older, including those currently receiving benefits. Then, the purpose of private accounts is to give people superior returns by investing in stocks, leaving them less dependent on traditional Social Security.
Private accounts would give workers the potential to earn more on their savings than they would get from Social Security, proponents argue. And while tying increases to consumer prices would slow the growth of payouts over time, the bottom third of income earners would be exempt from that provision, says Michael Tanner of the Cato Institute, a conservative think tank.
What ignorance! Cato is libertarian, not conservative. Michael Tanner had to correct the moderator at the Great Social Security Debate for making the same mistake.
Opponents argue that people would have to get a return of more than 3 percentage points above the inflation rate to benefit from private accounts. "The president's proposal would reduce benefits for people living on Social Security and subject what was left to substantially greater risk," says Jason Furman, senior fellow at the Center on Budget and Policy Priorities.
That comment about the "greater risk" of stocks is the kind of fearmongering we can expect from the CBPP. Don Luskin first mentioned them here, but he's given them too much credit in referring to them as "liberal." They're outrightly socialist. Take a look at their website, especially how they propose to save Social Security. They don't actually offer anything, instead warning that private accounts would destroy benefits for millions of people. But that's precisely the idea, after all: to put them in a true retirement savings program so they won't have to rely on government-paid benefits.
How do you wind up with nothing but Social Security? Cindy Hulsey, a case worker for the Area Agency on Aging of Northwest Arkansas, says about half of her 65 clients live on nothing but Social Security. "They tended to have lower-paying jobs in their working careers, the ladies were homemakers or the husband was a farmer," she says.
That's unfortunate, but didn't they think they should have worked more and saved even harder, instead of relying on the government to give them money taken from others' earnings?
"I've been a jailer, a deputy sheriff, owned a taxi and drove it, too," says Faye Hickman, 79, of Harrison, Ark., one of Hulsey's clients. She also worked 30 years for Tyson Foods, the giant meat-packing company. "You could go into the pension or the stock," she says. "I went into the stock." Tyson stock fell to $7.28 in March 2003 from nearly $25 in 1997. Her money soon evaporated. Today, she lives on $888 a month, $146 of which goes to her mortgage. She gets an additional $20 in food stamps. "It is tight," Hickman says.
She received very bad investment advice. A properly diversified stock portfolio would have remained just fine even if one stock collapsed, and one big point about private Social Security accounts is ensuring they're diversified.

Besides, what does she think companies do with pension fund contributions...stick them in regular savings accounts?
Rathbun had retirement savings. She got a lump-sum payout from the hospital where she worked. "I went through that when I first got sick," she says. "It didn't take long."
Then she must rely on the charity of family, friends and strangers -- which wouldn't be as difficult once they're no longer taxed to death.
Kenny Fewell, 63, of Leesburg, Va., was just hitting his stride as a heavy-equipment operator when he fell into a diabetic coma at age 49. That ended his career driving dump trucks and other big equipment: For safety reasons, the state took away his license.

"We never did have much savings," he says. Being laid off took care of the savings he did have, and diabetes took care of the rest of his working career. Now, he and his wife, Nancy Ann, 56, also a diabetic, get by on his $998 Social Security check. They pay $188 a month for their subsidized housing.

"People say you can work with diabetes," Fewell says. "Some can and some can't. I've got a real bad case." Fewell has neuropathy that affects his hands, causing numbness, pain and weakness.

For a while after he was laid off, he reconditioned lawn mowers, getting $30 to $35 apiece. But he can't do that anymore. He mainly stays in bed, trying to avoid getting diabetic sores.

"It gets boring sitting at home, staring at four walls," Fewell says.
I would certainly like to be bored "sitting at home," but I can't afford it in the long term, so I work.

Not to be too critical, but I've known several diabetics who live healthy, productive lives. Why can't he? Well, apparently his "neuropathy" wasn't severe enough to inhibit his work on lawnmowers at the start, but something happened. He's the rather "large" fellow in the picture at the top of the hour -- frankly, he should have put in more effort to control his weight.
Nancy Ann Fewell worked for a doctor, doing filing and domestic work. She paid her own Social Security, but until she's declared disabled, she won't get any payments. "Her feet swell up, and she has tendonitis," he says.
Another superiority of private accounts is that they're yours, and if you need the money, you can cash out part (or all).
Getting by on nothing but Social Security isn't easy. "Unless you're living with relatives, it would be very difficult," says Alexandra Armstrong, a Washington, D.C., financial planner.
Obviously. It was, after all, just meant to be a supplement, not a guarantee of good living in retirement.
The Fewells get a box of groceries once a month from Reston Interfaith, a local charity, although some of the food isn't suitable for diabetics. Eating at charity dinners isn't much of an option. Fewell's neuropathy makes his hands shake, and he says it's embarrassing to eat in public. "We went to a potluck dinner, and my shirt looked like I was a pig," he says. "We don't go out much."
I would think the charity would try to meet their needs, particularly if it's religious in basis. It doesn't make sense that the Fewells couldn't say, "Thank you, but we're diabetic and can't eat it. Can we ask for a substitution?" I've helped before at food banks, and they were never confined to specific arrangements. A family with children might get a little more milk, for example.

Now as far as the charity dinners...beggars can't be choosers. Haven't they already swallowed their pride by being there in the first place?
Hickman is fortunate because she beat cancer. "Whatever can be cut off has been cut off," she says. But the 79-year-old also has heart problems and asthma. Hulsey arranges for her to get her heart drugs free from the manufacturer, although Hickman frets that the program might end this year.
It's never easy nor stable to rely on the charity of others, particularly when they're taxed to death.
Fewell, too, gets some of his drugs from the manufacturer, although he says it can take two months or more to get them. But because he needs as much as 75 units of insulin twice a day, he puts up with the wait and keeps his $600-a-year Medicare drug allowance for emergencies.
He and his wife already receive $810 per month for everything but housing. They get another $50 per month through Medicare, which they're supposed to spend, but instead they save it, despite already receiving a guaranteed income and subsidized housing. Private charity would never give so much to recipients that they can save some, because that's not fair to the donors.
If [some elderly] get Medicaid, they can't have much else. Johnson says that in Oregon, if you go on Medicaid, the state can get reimbursed by your estate when you die, leaving your heirs with little. "People want to leave an estate when they pass on," Johnson says. "They hold on to the desperate last."
Isn't this fair, though? If you receive $x more than you paid in, then after you die, shouldn't your estate repay that to the taxpayers?
Many seniors are split on Bush's proposal for letting workers invest a portion of their Social Security taxes in private investment accounts in the hopes of earning more. Because of her losses in Tyson's stock, Hickman is skeptical of that plan. "That's crazy," she says.
That's because she doesn't understand how to invest properly in stocks. If you invest in a simple S&P 500 index fund, you could have a few stocks completely collapse and still be fine in your portfolio.
Charles Goss, 75, of Leesburg, Va., isn't enthusiastic about the idea, either. He and his wife, Annie, live on an $840 monthly Social Security check. He says he wouldn't want to risk getting any less. "It pretty well takes what I get to live," he says.
Where have they been getting their information? Bush has said repeatedly, including during the debates, that Social Security privatization will not affect those who are 55 and older.
Rathbun thinks future generations will need some help. "If they're planning on Social Security, they will need an investment account of some sort to help them," she says.

Those who are getting by on Social Security have some advice for those who haven't retired yet: Save. "Try and save all the money you can," says Kenny Fewell. "When you're on Social Security and disability, it's hard to get anything else."

Be cautious in your spending. "You've got to manage close," Hickman says. "You're going to have to pinch pennies."

And don't kid yourself. "It's rough living on nothing but Social Security," Fewell says.
Very true advice -- and isn't it better to save for ourselves, instead of letting the federal government confiscate the money, tell us we have no right to it (which includes a guaranteed level of benefits), and ensure our poverty in retirement?

1 Comments:

Blogger Mike said...

I don't understand how people are that ignorant. Invest in just ONE stock??? Good lord, the 1920s called, they want their investment strategy back.

Friday, August 19, 2005 7:42:00 PM  

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