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Finances & Money

Reader Counterpoint: Social Security is far from a good thing

Reader Eric Faith was so perturbed by my article “10 reasons you shouldn’t complain about paying taxes” that he just had to send me an article to argue why social security is bad. Actually, I saw his comment and asked him to write an article since I really enjoy learning both sides of an issue. Eric gladly agreed, and here is his counterpoint:

Social Security Needs to Be Fixed

To answer Clever Dude’s comment:

Social Security Benefits: Many people my age (20s-30s) complain about paying Social Security since they don’t think they’ll ever get to use it. However, my grandmother and, most likely, my parents will be highly dependent on Social Security as they get older. I’m financing my elders’ retirement, and I’m totally fine with that. Otherwise, I’d have to help them pay the bills another way.

I don’t want to stop social security for the elderly that have been promised the benefits for generations. Clever Dude is right; the vast majority of elderly is highly dependent on this income. However, we should demand a system that is more effective.

Let’s relate our social security to our personal finances.

First, when we save for retirement, we invest money for ourselves. We don’t depend on our kids to fund our retirement. The government should use the same standard. The money paid into the system should be stored and invested until the payee is ready to retire, not used to fund others retirements. This method would avoid the current problems with Social Security. In 10 years, we are going to be paying out more in social security benefits than we are taking in. There are not enough workers to cover the large, retiring baby boomer population.

Second, most of us are very capable money managers. We don’t need the government doing this for us. Imagine what you could do if you had 12.4% of your salary to invest in your retirement plan. (6.2% income deduction, 6.2% matching employer contribution) I guarantee it would surpass any social security benefits. In addition, since you own it, you know it will be there when you need it. Debt is rampant in America, so maybe not everyone can handle this task. However, we should have a choice; pay into either the government system or your own.

Social Security is a complex issue, but everyone knows the system is not working and needs to be fixed. Though not well received, the president’s plan to start developing private accounts seems like a step in the right direction. Having your own private account would be voluntary, would invest in higher rates of return, and best of all would be owned (so the government couldn’t borrow it for some other project) – just like a 401k.

Regardless of the fix, we should demand one.

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Thanks Eric! What do the rest of you think about the Social Security issue?

If you ever want your own article posted on Clever Dude, whether in response to one of my articles, or a brand new article of your own, feel free to contact me directly. I won’t promise it will be posted, but I love hearing your opinions and I want my readers to be heard too!

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Clever Dude

10 Comments

  • As a low earner, I see Social Security as a theoretically progressive but highly risky scheme.

    It is theoretically progressive because the formula returns a higher proportion of earnings to low earners than to high earners. It is risky because you have to live long enough to enjoy sufficient retirement benefits to recover the money you paid in, or have qualifying survivors to collect benefits (spouse and minor children) based on your earnings.

    Low earners, especially men, have low marriage rates and thus the survivor benefits of SS are for them on average a poor proposition. Similarly, the retirement benefits are also actuarily a poor proposition, since low earners have higher death rates and lower life expectancies, resulting in a Roach Motel effect: their money goes in, but it doesn’t come back out. (Some have noted that SS is a particularly bad deal for black men, eith life expoectancy just months beyond the age to collect SS retirement benefits.)

  • actually the president’s plan was horrible.

    think about it.

    allowing people to invest their social security money in stocks is a recipe for disaster. what happens when the stocks go belly up…of course, they will have to borrow the money from somewhere so the people will not be left out in the cold, so everyone else will have to supplement the lost money, therefore, the average person would be making even less.

  • I’m going to respond to each of Eric’s points in order, then add a quick thought.
    1. Maybe Social Security should be the way Eric describes, but it’s not. It wasn’t initiated to be and currently isn’t an investment vehicle. It is social insurance. That was its intended purpose.
    2. Most readers of PF blogs might be capable money managers, but I think saying this about the general population is waaaay off base. If most people were capable, would we have the subprime mess or, as you point out, massive consumer debt? I think giving 12.4% of their income to invest to most people would be a recipe for disaster.

    Finally, I agree completely SS is a mess and will become a big problem in the near future. It does need to be fixed, but privatizing it is not the way to go about fixing it.

  • I’ve had numerous options to contribute part of my income into my 401k, but I didn’t. I decided that money was best used to get out of debt. However, I missed out on about 5% of “free money” in employer matching.

    Given the opportunity to contribute to my retirement or use the money for other purposes, I chose the latter (whether for good or bad in the long term).

    I personally don’t think the average American is capable of managing their own money, much less their future. If they were, the average saving rate of Americans wouldn’t be so abysmal today.

  • I think one of the reasons the average American doesn’t manage his or her money well is *because* of the implementation of Social Security.

    If so many people weren’t raised to believe that the government would fund their retirement, there would be more savings.

    I don’t think my generation and those younger have been raised to think that SS is anything we’ll really want to live on when we’re older. Hopefully this will eventually result in better savings. Then again, what would that do to the economy?

  • Nathania, you made an excellent observation in the difference between my generation (tail-end of Gen X) plus Gen Y, and our parents’ and grandparents’ generations. I know SS isn’t going to be there for me, but my parents are banking on it.

  • Below is my response to John Tierney of the NY Times who wrote an article siting the Country of Chile who has implemented a Privatization plan.

    Please read on:

    Social Security and NY Times

    John,

    There are a some things you didn’t reference in your article on Chile’s Soc Sec system. You and Pablo were looking at a specific point in time when comparing your SS amounts. Had the Chilean economy been downsized by a tech bubble, ie like the US, his pension would have been significantly less.

    Second, you included the mutual fund management fees in Pablo’s 12% deductions for his retirement plan. I don’t believe that is correct. The Chilean plan requires a mandatory 10%, per the CATO institute. These costs would run, in US dollars, 1 or 2% of the return. A recent figure on the Chilean pension fund return has been 10%. Subtracting the management costs of 1-2%, the return is 8-9%. The current US SS funds are returning 6%. Further, Warren Buffett has predicted Stock Market returns, over the next 20 years, at 6-7%. This was in his 2003 letter to his Berkshire investors at their annual meeting.

    The US SS fund, while not equaling the Chilean returns (at a point in time) are guaranteed by the US government. While Chilean fund will guarantee a minimum pension amount only.

    Fourth, the current Chilean government is spending $6 Billion dollars annually to ensure the minimum pension for its already retired workers. This represents 25% of it’s GDP. Our SS program cost represent 6% of our GDP.

    Fifth, President Bush is promoting “private accounts” and workers choosing their investments. Not really what is in the details. His plan is based on the Chilean plan so the workers investment choice is ONLY mutual funds. There are 5 companies in Chile authorized to manage the pension plan. The workers choice amounts to selecting one of these companies. The company then makes the investment choice.

    Private accounts, in the US SS plan, would add several trillion dollars to the US debt, in order to kick the program off. The country cannot afford it, and it does nothing to change the predicted shortfall of funds in 2042..

    Thanks for reading

  • Ron – what about the Australian System?
    Compulsory 9% contribution into a Superannuation account? Government Match for low income earners (admittedly more of a benefit to low income/wealthy family types). Choice of putting it anywhere (Self Managed Funds) or usings mutual funds, etc.
    Limits on risky trading – ie Fund is not allowed to use any form of leverage.

    At this stage – I’m reasonably happy with it. I wont keep all of my NW in there – although at this stage it does make up a disproportionate amount of my NW. (Mainly because I’m 22).

  • I think even giving workers the option of putting half of their contribution (3.2%) into a 401k would be better. Instead of the government taking it, have it put directly into your 401k (not optional). Of course, there is the problem of what to do with workers whose employers don’t provide a 401k program.
    At the very least, the government needs to stop lying to us about our “benefits”. Every so often, I get a Social Security Statement that details what my payments would be when I retire.

  • Rob-Not familiar with the Australian plan. I know the Republican plan (read Bush) in the US is based on a plan developed by the CATO Institute. That plan, in turn, is the basis for the Chilean plan. That means no true investment choice, only mutual funds and then you don’t have a choice of the fund.

    The only true beneficiary of this (US) privatization proposal will be the Brokerage Houses who manage the accounts. Conservative versus Liberal politics aside, the purpose of Social Security is to benefit the individual not investment firms.

    There are other alternatives to beef up the US Social Security system:(SS)

    Bring the over 1 million federal workers into the social security program.

    Put all members of Congress into the SS plan.

    Consider adding career Veterans into the plan.

    Remove the current cap on SS tax.

    Lastly, all the dire predictions of the SS fund running out of funds in 2042 are based on the declining birthrates in the US. To my knowledge these numbers do not include the increase in immigration rates over this same time period, in the US.

    Would be interested in on information on your plan. (Australian plan)

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