I am writing today about retirement even though it is 35 years away. For a long time I have believed that it is very important to put money away for when I retire. I have a 401K and am contributing to it faithfully like I am supposed to. I am also paying the non-voluntary payroll tax. This is 12% of each of my paychecks (including my employer's contribution). This goes to Social Security which many people use as their primary retirement income. Well just this week I found out what a crock Social Security is and how Lisa and I and many people our age and younger are getting the shaft when it comes to Social Security.
Social Security is a "pay as you go" program. That means that funds being put into Social Security aren't being stowed away for when you retire but are instead being used to pay for the benefits of current retirees. Then it is hoped that there will be workers around to pay the benefits for you when you retire just like you have paid for others throughout your working career. Right now this is functioning relatively well because there are enough workers paying payroll taxes to support the benefits that are being paid out to retirees. As that blasted baby boom generation begins to retire however things will change quickly. By 2016 Social Security will begin paying more in benefits than it is receiving. Now you might ask, "If we are going to be paying more into Social Security than is being distributed to retirees why don't we save the surplus and use it to cover future claims against Social Security?" If you did ask this you would be asking a great question. Social Security has what is called a "Trust Fund" where all the excess funds are being "invested" so that money will be available in the future. Here is where the real problem begins. The investment being made with this money is in government bonds. That means the government is taking the extra money paid into social security that is in excess of what needs to be spent on current benefits for retirees...purchasing bonds from itself...then spending the money through regular budgetary channels with a promise to pay itself back with interest in the future. Think about that for a minute. The government is loaning itself this social security money in return for government bonds that amount to little more than IOUs. When it comes time for the government to pay this money back to the Social Security Trust Fund...with interest...where is it going to get the money? In 2016 when millions of ex-hippies from the 60's start retiring we are going to have to dip into the trust fund for money to pay their Social Security benefits. That means the government will have to come up with the money it borrowed from itself (are you getting a headache yet?). Where could the federal government possibly come up with the billions of dollars it will need to pay this fund back?
There are several options and none of them are very appealing. For a fascinating look at repercussions of this situation check this article from The Cato Institute called "The Dismal Scientist". The long and short of it is...they are going to have to take more money from the American people in the form of taxes to pay this fund back or they are going to have to start cutting the promised benefits of Social Security! Over a period of 30-50 years this amounts to tens of TRILLIONS (yeah...that's trillions with a "T") of dollars. The Democrats right now are freaking out about a pidly 1.6 trillion dollar tax cut that is spaced out over 10 years...this Social Security situation is BIG money.
There is an answer to this issue. It is a proposal that is hated by Democrats, Greens, and the AARP (Anti-American Retired People) but I believe it is the only realistic and fair way out of this hole. We need to switch from a Social Security Trust Fund system to a system with individual private savings accounts. We should still be paying a payroll tax but instead of having that money go to pay current retiree benefits it should be put in an investment account that is owned by the person paying the tax and that can be invested by them. Not only could you get a better return on this money than you would ever get from Social Security but the money is your property...not some benefit you have to depend on the government to pay you each month. This is tons better than Social Security...even if you don't invest it in something as "risky" as the stock market.
I went to the socialsecurity.org website and used their calculator to figure out about how much money I could have at retirement if a completely privatized system like the one described above were put into place. Assuming I will always make the same amount of money I am making now per year (which really isn't that much)...if I directed my own Social Security account to be invested strictly in U.S. Treasury securities (money is guaranteed safe by U.S. Government) starting now until I retire I would have $497,435 (2000 dollars) saved up. If I put this amount in a 12 month CD that generated 5% interest I would be making more per year than Social Security is paying in average benefits per retiree per year. Best of all...this whole wad of cash would belong to Lisa and I as soon as we retired. We could have some serious play time at age 65. If we were to mix the investment in bonds and stocks our take would be $815,609 (even better) and if we invested strictly in the market (average nominal 20 year rate of return 10.6% since 1926) we would be retiring with 1.4 million on hand not counting our 401K.
What are we waiting for? Why don't we start this system up day after tomorrow? Well there are some issues that need to be carefully planned out. A good page that has a great plan for a private alternative to Social Security is here: http://www.socialsecurity.org/alternative.html
Don't let the Democrats and AARP get you down. This is a good idea and now is the right time to do it. Social Security is still running a surplus and we can afford to switch to private retirement accounts. The situation has never been better for getting rid of Social Security than it is now. Lobby your local politicians to take action on this!!! If you don't want to do it for yourself...do it for me! I really want that $1.4 million!!!