The Social Security circus

If you haven't heard the debate about social security, you either live in a cave or on the moon, but I am going to disucss it anyway. The biggest debate has been over President Bush's plan to create private investment accounts as part of social security that workers would be able to put part of their social security dollars in to hopefully gain a larger return. If you know anything about investing, you know that risk and reward are related. In other words, if you want to make a bigger return you have to take bigger risks. Following that logic, it would make sense that in order to get larger returns then social security currently does (with it basically invested in government securities) you would also have to take more risks. That would mean the bond market to a limited extent but especially the stock market. No specifics have been released yet, but I would assume that if private accounts happen, we would get a choice of mutual funds, probably some created just for these accounts and professionally managed. You would also have index funds as well. You could do individual stocks, but that would be very hard to manage, and too many people would lose too much money.

I like the idea of private accounts, but that by itself is not going to fix Social Security. In fact it will actually make it worse for at least a few years because of the debt incurred to get private accounts up and running and to make up for that money being diverted out of the regular social security system. In order to make private accounts work and keep the system afloat, it might be necessary to have a sliding scale of sorts to determine how much money a given person is allowed to put in a private account. Perhaps with someone making, say $30k or less, they could put 75% in there and someone making $100k or more would be limited to 25%. If you wonder why I would suggest that, its for two reasons. First of all, allowing everyone to put all of their social security money into private accounts would be too expensive. Those making higher incomes likely already have 401k's, IRA's and mutual funds and their need to have private accounts is not as great as someone making $10 an hour with no benefits. People in that group may not have a 401k and even if they do have one, probably cannot afford to put as much money in there. Some in the higher income brackets might think that is not fair and your right it probably isn't, but it would make the system work. As long as you are getting at least a yield compared to long term Tbonds from social security, that would just allow someone making a higher salary to spend more of their own retirement investment dollars in riskier investments to diversify (already basically having gov't bonds in their portfolio).

Raising the payroll tax percent has been discussed, although I don't think anyone really wants to see that happen. We pay enough taxes already. However, I would raise the cut off on income taxed for social security from the current $90k up to perhaps $120k or so. Yes that does punish the wealthier, but something has to be done. I would also consider taxing again from say, $300k and above, but not sure if that would help enough or not.

Cutting benefits also may have to be looked at as well. No one wants to hear that, especially the AARP, but you either have to bring more money in, make alot more money on the investments or pay less out. In all honesty, the eventual solution will likely be a combination of those three things.

There are other measures that could be considered as well, perhaps more tax breaks for investments such as 401k's and IRA's to encourage people to invest more money and decrease the reliance on social security. Pension reform should also be apart of that as well, including stricter funding requirements for pension plans and more money for the Pension Benefit Guaranty Corporation to cover pensions of bankrupt companies. The rules covering corporations contributions are very lax and allow them to get potentially billions of dollars in the hole. If such a company goes out of business, then the PBGC makes up the shortfall. But the amount of money allocated to them is woefully inadeuquate to cover losses. One large bankruptcy or company going out of business can wipe that out.

I will post more on this subject once more specifics about private accounts are known, but we have not heard much on that yet. I think the President was hoping it would pass before getting into specifics, but it looks as if this debate will be fairly drawn out, with some leading figures in Congress suggesting it may not even pass this year.

One lingering concern that I have about private accounts is whether or not the average person, especially those of lower incomes that are often less educated, will be able to make intelligent choices with their investments and understand the risks involved with private accounts. I am sure such a system would be set up with a ultra safe investments like Tbonds or a Tbond fund as the default investment (although if rates are spiking up those are not really so safe unless you hold them to maturity). I can see it now, some old man or lady will have invested all of their social security money in a risky international fund, or even something like the S&P, and the marekt drops alot and they have much less money than they anticipated. That would lead to that person getting a smaller benefit where under the current system that benefit would be guaranteed.

Some other partial solutions would be to raise the early retirement age and regular retirement age by a couple of years or more, or maybe as much as five years. Between fewer current workers to support those that are retired than was the case 20 years ago, and people living longer, the system is getting stressed in ways we never thought that it would be stressed.

Feel free to post what you think about Social Security.