Posted on 12/08/2004 9:52:34 AM PST by Extremely Extreme Extremist
Time to Personalize Social Security
While we have all heard of the Enron scandal, along with other fleecing of employees and the public by large corporations, we often forget to consider the great pyramid scheme run by our own government, which would make even Charles Ponzi green with envy. That is today's Social Security "plan." There have been rumblings from the administration about aggressively moving forward, changing the character of SS to personalized accounts for younger workers. That's a big step in the right direction.
Now I'm not a "gloom and doomer," believing that SS will go bankrupt or be discontinued. But unlike Jim Hightower and other pundits, I believe we need an entire facelift that changes the character of SS, rather than tweaking an obsolete model.
The original Social Security charter gave participants reason to believe that they would be contributing to an interest bearing personal savings account, and that withholding tax would never exceed 3 percent. Today we see a confiscatory tax exceeding 12 percent, when counting both the employer and employee contributions. The money supposedly held in a separate trust fund, has been commingled with general revenues and replaced with IOU's that are liquidated as needed to pay current benefits.
The justification for revamping SS is not based on some ridiculous proposition that older people might have done better investing their money in a risky Internet stock. Rather, it is seen in the realization that a younger person could do much better over the course of their life investing in something as benign as a long-term treasury bond.
If the partial or complete "personalization" of SS is such a bad idea, then it seems to me that we ought to all relinquish the funds we manage for ourselves in IRA's and 401k accounts, giving them back to Uncle Sam for management (can you say sink hole?). Heck, then we could wipe out the national debt at the same time. When you retire, the government can pay you what they can "afford."
Of course people will object, saying that some will lose all their money investing foolishly or at a bad time. That seems practically unlikely when you consider that the money would be invested at regular intervals over a lifetime, rather than lump sums at a specific point in time. Why is it that in a country that spends so much on public education, we can't expect people to have the most rudimentary skills in handling their own financial affairs? And why is it that the same folks who militantly argue for the "right to choose" concerning reproductive issues, rally against the same right when the theme is personal money management?
If only we had a model, supplying empirical proof that personal accounts invested in securities will work. Actually, we do. Have you never heard of the Galveston plan? In the early 1980's municipal employees in counties surrounding Galveston, Texas, had the opportunity to opt out of SS in favor of their own personal accounts, which could be invested in those "nasty" equity securities (stocks). A funny thing happened on the road to financial ruin. Current retirees under the Galveston plan are getting annuities amounting to several multiples of what their projected SS benefit would have been. How was this possible? A rate of return only a few percentage points higher results in an astronomically greater accumulation of funds over a lifetime.
Now, of course, I am not arguing that the government shouldn't insist we save for our retirements, only that they are a poor fiduciary. If for no other reason, the Social Security program must be altered to compensate for changing demographics. In earlier years we had 17 or more workers for each recipient. Today we are at 3 to 1, headed for 2 to 1. That is, if we keep the current system. Over time, this will mean an overwhelming burden to those who must fund the system. Without a structural overhaul, this will mean that there will eventually need to be a means test, a reduction in benefits, increase in the age necessary to collect, or perhaps all the above.
I favor personalized accounts. One big advantage, besides the extra money that can accrue, is that these accounts could be used to pass money on to heirs. Under the present situation, a person could die after receiving their first check, and the heirs would get nothing. I found this out the hard way. When my older brother passed away this spring, I served as personal rep. I looked at all the money he paid into SS, and since he was single, it was simply absorbed by the system. Our immediate family got nothing back for his years of contributions.
Many elderly people have been scared into thinking that they will lose their benefits if a new system is adopted. But everyone under a specified age gets a choice to remain under the old system or go to the new system. Those at or near retirement age will likely be unaffected.
OK, but where does the money come from to fund this, since there will be less funds in the pool for beneficiaries? First of all, only a portion of the money will be eligible for the private account, so it won't reduce the pool dramatically. Remember also that there will be less money presently, but less will also be needed for withdrawal in the future. It is something like what happens when you make a lump sum payment on your mortgage. You no longer have the money to make a down payment on a car, but you reduce your mortgage principle and all the additional interest that would have accrued over the years. You will have less to pay off later, and you will be done paying sooner. Yes, the start-up costs will be necessary, but we either pay now or we pay a lot more later when unfunded liabilities must be paid out.
So often, people rail against indebting the next generation. The current SS model does that in its operative capacity.
Any savings system must be able to generate a rate of return much higher than the rate of inflation, and equity investment is necessary to do that.
BUMP
Could we clean up some of the fraud while we're at it? It just might pay for some of the cost of the needed changes.
Yes, indeed. Fraud, greed and carefree spending are our biggest robbers.
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