August 27, 2004
DON'T HATE IT, OWN IT:
Why I Hate Social Security (Robert Brokamp, August 19, 2004, Motley Fool)
Dang, he did it again. Just take a look at that. I work all week, slaving over a hot keyboard, and Uncle Sam has taken 6.2% of my paycheck to fund someone else's Social Security check. The Motley Fool, as my employer, had to kick in an additional 6.2%. My wife, who's just starting her own business, will have to pay the entire 12.4% of her income.In case you didn't know it, most of those taxes taken out of Americans' paychecks don't go to a piggy bank. They go to today's beneficiaries. Sure, some of it goes into the so-called trust funds, but the Social Security Administration says they'll be depleted right after I retire.
Have you ever thought about what you could do with that 12.4% of your income? As for me and my wife, we'd use our 12.4% to fund a mighty big nest egg, and we'd make sure it would last as long as our retirement.
OK, so those taxes aren't just for retirement. We also get life and disability insurance (sorta). If you die and leave behind a family, your kids will receive monthly checks, as might your spouse. And if you become disabled, you and your dependents will get a monthly check.
Clearly, the folks in the government don't trust that you can buy your own insurance and invest for your own retirement. So they do it for you. Which is why I hate Social Security. [...]
According to the Census Bureau, the average household earned approximately $50,000 in 2002 (the most recent numbers available). Including an employer's contributions, such a household adds $6,200 a year to Social Security. Would that household be better off having that money, buying its own insurance, and investing the rest?
To answer that question, first ask yourself this: If Social Security were eliminated and every family's after-tax income instantly jumped several grand, would families rush out to their neighborhood Allstate (NYSE: ALL) agent -- or would they rush out to their neighborhood-sized Wal-Mart (NYSE: WMT)? What do you think most of us would say: "I'm going to max out my 401(k)!" or "I'm going to Disney (NYSE: DIS) World!"
Double-dang. Maybe Uncle Sam is right.
That's why the solution is to gore the ox of both sides of the political spectrum: privatize the accounts but require people to contribute to them and give them a fairly limited range of choices of what to do with the money they invest. Posted by Orrin Judd at August 27, 2004 10:01 AM
Not just that though. The other problem is defined-benefit (Social Security and Pensions) vs defined-contribution (401k and IRA).
The stock market is a good investment, if you have 60 years. What if your retirement comes during one of the 10-15 year Bear markets? What happens when Baby Boomer retirements after 2010 sees millions of dollars come out of the stock market and the market begins to tank?
The masses know nothing about finance, and they'll learn some pretty painful lessons. But not before they go screaming for a return to Social Security and ask for a 2nd New Deal.
Posted by: Chris Durnell at August 27, 2004 11:58 AMSplit the difference. Make a deal that if you allocate x% of your 12.4% to U.S. Govt.-backed TIPS or the like, Uncle Sam will raise or eliminate the taxation threshold when it comes time to withdraw the $$ in retirement.
Posted by: John Resnick at August 27, 2004 12:28 PMEliminate any tax on income, savings and investment. Tax consumption. Problem solved.
Posted by: Tom C, Stamford,Ct. at August 27, 2004 12:39 PMThe problem with limiting investment options is that it has the effect of directing massive cashflows into the same market, overwhelming the normal supply/demand dynamic based on risk & return. So you get a bubble.
Posted by: Robert Duquette at August 27, 2004 3:28 PMFirst, the problem Brokamp characterizes is worse than he thinks. There is no trust fund. The excess in taxes goes directly to the Treasury for non-progam uses, and is offset by an IOU. Making good on those bonds once Social Security goes from surplus to deficit (in a few years) would mean general tax revenues will have to flow in the other direction. That isn't going to happen.
As to the investment options, there are stuctural ways to address the investment horizon problem. If you're familiar with the annuities market, there are investments which provide a form of insurance that is "paid for" by investing varying proportions of assets in very low-risk securities. It's actually a manageable problem. It helps to visualize this if you think of the population of people participating in the new, privatized system as akin to co-owners of a giant mutual insurance company.
Posted by: Dave Sheridan at August 29, 2004 2:19 AMDave Sheridan is correct. Annuities, although a generally expensive way of saving, are ceratinly less so than the current syatem. They provide a death benefit as well as a potential income stream which beats the current system by a wide margin. Government would no longer have access to the funds which works against their interests. In the battle of interests, the state always wins.
Posted by: Tom C, Stamford,Ct. at August 29, 2004 1:30 PMYour ultimate video on demand solutions
Posted by: at September 9, 2004 2:47 AM