Dubya wants to "save" Social Security

6.07.2005

In a effort to teach the young ones a bit more about the issues this country faces for the future, today I want to tackle the Bush Administration attempt at Social Security reform. First let me say, yes Social Security needs to be reformed. This country can no longer survive in the way Social Security has worked for the past 60 some odd years. The Bush plan is not the solution, and I will illustrate why. First let's discuss how Social Security works.

What is Social Security?
Social Security is a Old-Age, Survivors, and Disability Insurance (OASDI), provided as a government social service, and is the primary source of income for most workers and their families upon retirement, death, or disability. One third of the beneficiaries of Social Security are not retirees. There are 4 different types of benefits: Retirement, Early Retirement, Disability, and Survivorship.

Currently to earn a full retirement benefit, one must have paid into the system for 10 years and work to the full retirement age (65 or 67 if born after 1959). Social Security pays a high percentage of your average wages for lower money earners than higher. It is a earned benefit (i.e., you can only receive benefit if you have put into it), and is guaranteed. Benefits are paid as long as a beneficiary needs the benefits (Social security is not a investment program but a social insurance program) . This is the benefit I will focus on for this entry.

How is Social Security financed?
Social Security is a pay-as-you-go system. Social Security taxes paid by you and your employer today, are used to pay for today's retirees and beneficiaries. Social security adjust based in wage Indexing to keep pace with cost of living.

Benefits are funded from three sources:
1) Payroll Taxes
2) Trust Fund Interests
3) Taxes Collected on some benefits.

The majority comes form payroll taxes (6.4% for both employer and employee) up to a ceiling of $90,000 per year. Earnings above that are not taxed (see it pays to be rich). In attain if you make enough money per year from Social Security that is also taxed (nice huh?). Social Security also invest monies paid into trust funds (managed by the treasury department), and to ensure monetary gain they are invested in bonds.

The Problem
As you can see the issue is this, the Baby Boomer Generation. It is twice the size of the generations that followed combined, in attain Baby Boomers will live much longer as the generation before it. At the regular rate of retirement, there will be a major funding shortfall, in 15 - 25 years, and bankruptcy of the system will soon follow(2041).

Dubya's Plan
First, I need to stress, that this is very scary. There is a lot of info about this out there, do your own research; but I will try to break this down as simply as possible. What Dubya wants to do is scrap the whole system for anyone under the age of 54.

First, they plan on indexing Social Security benefit growth with the price index, instead of wage index. Prices tend to increase much more slowly than wages, thus reducing the benefits, and the benefits increase much more slowly than the cost of living.

Secondly they will allow workers to place 2 - 4% of their Social Security benefits into private accounts, up to a certain capped amount. How this works is essentially, the government will give you the percentage up front to invest, then you will pay the government back (with interest) and anything left over is yours. Now get this, the taxpayer will be responsible for monitoring that account for solvency, paying what ever fee setup there is for these private accounts, and be ultimaltety responsible to make sure those accounts actually make money. In addition, there will be a limited choice of options available for those monies, mostly stock based. Upon retirement workers would receive there already reduced Social Security benefit, and a monthly benefit from these private accounts.


The Issues
Ok, think about the majority of people in the world . . . How many of them do you think are knowledgeable enough to invest correctly into this system. To come out ahead in this plan, one would have to earn 3% real rate of return on the investment per year (real means after inflation and brokers fees), anyone earning less than that will make less in retirement that they did in the regular Social Security system. In addition this would put ones financial future at risk for loss in the stock market, and if you hadn't noticed, the market has not been particularly good.

Upon retirement the government will cash out the private account in the form of an annuity, which will be effected by the volatility of the market. Example, if using this plan, a person who retired in March of 2000, would have third more of a nest egg, than someone retiring in March of 2001 using the exact same investment strategies. Again, how does one expect John Q. Public to invest properly when professional monet manangers usual underperform the indices of the market. How many of you know the difference between a growth stock and an income stock? How many people realize than went interest rates rise, bond prices go down? This is all simple stuff, imagine the stuff you will need to learn, or pay someone else to know?

It currently cost $0.06 per dollar to maintain Social Security, it will cost much more to maintain private accounts, further increasing the national debt and burden of the current Social Security System. In fact, under this system, Social Security will be bankrupt by 2030.

There are better solutions to this . . . The government still has yet to pay back the money it borrowed from the system to get into a arms race with the Soviet Union. Why is money over $90,000 not subject to the tax?

The government wants to mortgage your future. They want to line to pocket of the banks, brokers, and the rich. Call you representatives. This needs to be stopped.