What does privatizing S0cial Security mean? There’s lots of talk about a looming government shut-down. What’s at issue of course is the budget. Some people argue for increasing taxes and others talk about reducing expenditures. Part of that discussion includes talk about changing Social Security. As a way to reduce government spending, some people argue that Social Security should be made private or at least somewhat private. But what does that mean?
The current proposal by Representative Paul Ryan suggests that workers under 55 have the option of investing a third of their Social Security taxes as they see fit in their own personal retirement accounts. So it would mean that you control how a portion of your Social Security taxes get invested just like you control your IRA investments.
You’re going to see the financial services industry back this proposal big time. That’s because if this law is passed, there will be more demand for their services – yours truly included. The interesting thing about the current proposal is that people participating in this program will still have minimum guarantees. That’s pretty hard to do since everyone is going to invest as they sit fit.
This plan offers six choices: five index funds and a life cycle fund. (Once the account exceeds $25,000, more options become available.) The guarantees come into play when you retire. At that time you can opt for a lifetime annuity income (issued by the government). It would provide monthly tax-free income for life.
The plan works as long as investors stick with long-term investing, but that might be a pretty tall order. Long-term averages are great, but investors often react to short-term stock market cycles. The reality is, people who have the freedom to decide how to invest their own money don’t always invest wisely. And having that freedom doesn’t guarantee they won’t react unwisely during challenging market periods. Offering guarantees might encourage people to invest to aggressively knowing they won’t suffer from poor investment choices.
Is Social Security privatization a good idea?
If nothing changes, the Social Security fund is not going to be able to pay all its obligations after 2037, so it makes sense to consider changes now. If privatization goes forward, it will cause an immediate deficit of up to $2 trillion during the first 10 years after enactment. But over the very long term, even the Social Security Administration admits the idea of private accounts could help strengthen the structural weakness in the system.
Even though I’m a capitalist, I’m not convinced the current proposal is solid. I need to see more details. I don’t see how the government can offer guarantees if the person makes bad investment choices. My sense is the idea of introducing private control and responsibility over Social Security is a very good idea. I’m just not sure that this is the right plan. What is your take?
financial retirement planning says
Social Security is nothing more than a pyramid scheme. It was since the begining. Initially, about 40 workers supported the monthly payment to one retiree. By the early 50’s, it was down to about 17. Now it’s down to about 2-3 workers supporting one retiree. The original plan was that is was only to be a “safety net” along with a pension. But over the years, people came to think of it as a “retirement” program. Never was, never could be!
Ronald Dodge says
Here’s my thought on this whole FICA issue.
The part of it dealing with SSDI, it’s a no touch situation cause that is insurance as some may become disabled and others may not. On the other hand, the other part of FICA deals with retirement years and I will only talk about the funding part of it, not the Medicare portion of it as the Medicare portion is a no touch type issue as well.
This retirement portion, I think I should have a say in regards to part of it in how it’s funded, though up to a limit.
Do to the fact many people act out of emotions rather than out of business sense, I think 50% of this retirement portion should remain in the current system cause after all, this program is intended to help keep societal cost down low compared to the alternative of if people were given the option to do 100% of the direction of their retirement money in this program.
However, given the peril of the current system, and how much money we do put into it, we should still be able to choose how we direct our funds, though again up to a limit with the other 50% of the retirement funding. The limit would be put into funds with very low management fees (note, when I say very low management fees, I mean total performance of such funds should be no less than 0.5% lower relative to their respective market benchmarks unlike the funds within the 401(k) plan at the company where I worked at prior to getting laid off was consistently performing 2% annually BELOW their respective market benchmarks, which I figured was their management fees of such funds. Of course, that’s why I pulled all of my funds out of the 401(k) plan and put into a traditional IRA myself given my other stuff outside of the 401(k) plan had been performing 1% ABOVE their respective market benchmarks. I excluded last year results from the trend cause it was an outlier year with my stuff performing 10% ABOVE their respective market benchmarks.
Now, in regards to Neals concern, I would think this 50% of the funding, we should be subjected to the risks. However, to address the concern of low income individuals, maybe there should be a graduating type deal relative to age ranges given younger people obviously wouldn’t have had as much time to build up the funds as the older generations had to build up such funds.
What do I mean by this? Maybe you need to have a certain amount of money put into it with a projection of your supposed earned wages in future years to see if you going to fall into that low income and if you don’t, then up to the lower of either 50% of that retirement funding or up to the percentage of the funding that is over and beyond that low income situation, then you would be allowed to dictate how to have those funds invested within the limited scope and rules as allowed to invest those funds.
These are just my thoughts on this whole issue. As for my own retirement planning process, and on account of the peril of SSA benefits, I exclude SSA benefits from the planning process even though I think SSA benefits will still be there, but rather on a limited basis. But then for that matter, given provisional income limits has not risen in decades on such SSA benefits, by the time I retire (assuming 2040), I think at least 75% of the retired workers getting SSA benefits might as well count on having 85% of their SSA benefits taxed cause of these very low provisional income limits. Even in 1990, my income including Child SSDI was subjected to the $25,000 provisional income limit, which back then, a single person could very easily live on, but today, $25,000 annual income is not so easy to live on as a single individual or $32,000 as a married couple for that matter.
Since I don’t include SSA benefits and I factored in various other risk factors (which one of them I am currently facing, unemployment), that’s why I have put in the rule, 25% of “Actual Gross Earned Income” must go to countable savings.
I would love the opportunity just to opt out. I’d happily part ways. Let my employer still contribute their ~6% just give me my 6% and we walk away friends!
I’m not a financial wizard or planner or anything like that but this whole Social Security thing seems like a big Ponzi scheme. If you happen to call Social Security and are on hold for any length of time you will be told current payees are funding current retireees. There is no savings account for us in the future. We are not setting aside retirement monies for ourselves. As the population is decreasing, there will be fewer taxpayers available to fund our retirements. I don’t hold out any hope for social security to remain “solvent”, whatever that means, unless drastic, realistic measures are taken. If our government is “investing” our social security tax monies in government before paying it out, how can it make a profit? The government produces neither goods nor saleable services. Since there is no way to actually make a profit this way, the only option government has is to pay out social security in inflated dollars (which is produced by physically prinitng more money.) You can’t get blood out of a rock. Five bucks in will still be five bucks out.
No problem Olivia- let the illegal workers become legal! We need the workers to put in the money.
Unfortunately, SS was robbed many years ago and the federal government is holding the papers to prove it!
If anyone thinks I won’t be screaming for my share- after putting in for 35 years—-they are crazy!
Ronald Dodge says
Yes, I also have a problem with the FICA system setup as Descendents paying for their Elders. That’s how we managed to get these huge peaks and valleys with regards to our benefits. While that was all they had to work with when the system was setup, they should have had the foresight to gradually transition the system over to a Pay yourself system such as over a 40 year time frame due to the huge cost for a such transition, but instead we have a system that some generations are greatly hurt by the system while other generations are not hurt by it. I’m not even factoring in the argument government dipping into it, but rather just in regards to population/economic fluctuations and aging issues.
Social Security is a sore subject for me. 13%/yr (between employer and employee), yet a $75K earner will get a benefit of about $25K. And then only at full retirement age. Someone saving this much working 45 years would have enough in their retirement account to more than replace their incomes. This is barely a supplement. If I had just 10 of those 13%, I’d be retired by now.
Kay Lynn @ Bucksome Boomer says
I think social security is a forced savings plan for workers. The fact that so many people rely on it to live proves that people aren’t able to save adequately on their own.
I’m against privatizing this program, but I do believe Congress shouldn’t have the power to be changing it at their whim.
Neal Frankle says
Kay. Valid point. If people were able to save on their own, I suppose there would be no need for SSI. The question remains, are the responsible people on the hook for those who fail to take care of business? Not so black and white of course. You bring up an excellent point. I’ll have to ponder this further. Thanks.
Ronald Dodge says
In regards to the forced savings, I agree with you, but in regards to not being able to have a say with any of the forced savings, I’m not with you. I think I should be able to have some say with some of the money in it. But yet, cause FICA is still an insurance with regards to not just retirement, but also with regards to disabilities, obviously, we can’t have complete say in all of the money we put into it.
It’s just the one single biggest problem I have had with the FICA system, it’s under the philosophy Descendents pay for Elders rather than everyone pay for themselves. Yes, they had to go with this philosophy when it was first set up as that was all they had to work with, but it should have been transitioned over to every one pay for them ownselves (at least with the retirement portion of this insurance program), so as to minimize the huge peaks and valleys created by the current philosophy. But yet, I know for a such transition to take place, it would be a huge cost, so such transition needed to take place over like a 40 year time period so as no one generation had to bear all of the cost on it’s own self.
There are so many people out there who don’t understand how investing works, which is really what social security is for, no? To do the investing for us? Well, maybe it’s just to force us to “save” something.
I’d be a fan of being able to pick my own investments, but I’m pretty involved with knowing what’s going on with my 401(k) and IRA plans already. A lot of people out there are going to be overwhelmed if they have to pick this too.
Ronald Dodge says
With what I had seen, people would be given the option to either do it themselves, or let the government do it for them by staying in the current plan.
I’m also a fan of doing all of my own work, but then again, I suspect I’m in the 0.5% of the population that does all of the necessary work including using depreciation on long-term assets and converting pre-tax amounts to after tax dollars so as to be able to compare apples to apples rather than apples to oranges. So many other people just give off excuses as to why they won’t do it or they they won’t even do a cash flow management worksheet. But then not many people have the computer software experience to do some of the things that I do in Excel either, nor do many people have the accounting knowledge that I have from my years of learning it in high school and college.
As for the forced savings, yes, FICA was setup that way to force us to save cause of people like my mom who don’t attempt to help themselves out but rather only rely on others or who only think about today and not about 20 years down the road.
The biggest problem with Social Security is the Federal government is not investing the money instead they use it elsewhere. What ever happened to the “lockbox”? I have very little faith in legislators to do what is right for us.
MD Sam says
The ‘lockbox’ guy didn’t get to be president, remember?
I think that privatization is a great idea. Like you I don’t know if this is the perfect plan it appears that it uses the funds of the Federal Employees Thrift Savings Plan, which isn’t too bad. The big thing is contribution requirements if you run 13% of 40K through an investment calculator at 8% for 40 years is $1,347,093.90 according to the retirement calculator on Bloomberg.com. According to mycalculators.com if you continue a rate of return at 6% you could draw over 62K the first year and continue drawing down your fund for 30 years. That amount would increase every year by 3.5%. I think it is workable…certainly it is better than what we get from social security.
Yes I know it doesn’t account for fees and returns aren’t guaranteed. But I like my chance there better than my guaranteed pittance from the government.
Neal Frankle says
@Ben, nice handiwork on the calculator man!
It would be immensely hard though to predict returns in the future though with this kind of drastic change. That money is currently invested in US treasury bonds. So there would be a shift of billions, or perhaps trillions out of the bond markets into whatever markets people choose to invest in, which would likely be for the most part US stocks.
The thing is everyone uses these dates of 2034, oe 2037 as a doomsday scenario for Social Security. The SS fund doesnt run out of money then. It is merely projected not to be able to pay 100% of benefits come that date. Ive read one study that suggests they could still pay out 90% of benefits after that date for another 30 years, or 75% of benefits indefinitely after that.
Neal Frankle says
@RT Fascinating. Does that suggest that if benefits were reduced by 25% there would be no problem?
They wouldnt even need to be reduced by 25% at this early stage. They could be paid in full up until D Day (Which has various dates depending on the study of between 2034 and 2037). After that date, a reduction by 25% extends the viability of the fund indefinitely.
Also people like to claim that there is no money in the SS fund and that it has been raided. This is also a misnomer. Surplus funds are invested in particular type of US treasury bond. There is no need to think that this money is gone, (Unless of course the debt ceiling is not raised)
So it would be okay for GM to invest the extra money they don’t need to pay retirees in “Special GM” Bonds as long as they could borrow some more money from themselves when it came time to bay the bill?
Ronald Dodge says
You are right in that SSA funding won’t be fully ran out, but you forget the FICA system is a Pay as you go with the philosophy of “Decendents pays for their Elders”, not with the philosophy of “Everyone pay for themselves”. As such, there will pretty much always be current workers paying into the system which then would be paid out to current beneficiaries (Those either in retirement or on SSDI). By SSA’s reports, the benefits would drop down to 73% of current benefit levels under the do nothing route. Me skeptical of people’s projections cause most people don’t realize how bad it really is until it’s really here as a result of human behavior, I’m thinking this number is more like 50%.
What really needed to happen with this FICA system, but they didn’t think of it, while they had to go with the “Pay as you go” system at the time of start up as that was all they had to work with, they needed to gradually transition it over to a system of everyone pay for them own selves, though with a bit of a twist to it cause it’s still insurance, as some may become disabled (rather it be during employment or even before employment years which in my case, I started disabled long before employment years, but then was able to have the laser brain operation done during my college years, that got me off of Child SSDI), so it can’t be truely 100% everyone pay for them own selves, but the retirement portion of it needs to be more or less setup like that. However, given the huge cost to transition from the current philosophy to that philosophy, it should have been setup to be done over a 40 year period so as only 2.5% of that cost would be incurred per year, which means no one generation would have to deal with the total cost. But yet, under the current system, there’s major peaks and valleys, which current generation is in a peak while our generation (though retiring 1930 and later) are likely to be in the valley part of the benefits.
Privatization is just one way of this issue, but even with my thoughts of this transition, it doesn’t necessarily need to be privatized, though I like the idea of privatized, but at the same time, I’m also with Neal, I think only a part of it can be given to us to make decisions while the other part would be controlled by government (yes, government mess things up majorly in many cases, but it’s either that or the cost by other people who don’t attempt to help themselves which they put onto society).
There should be some sort of minimum guaranteed amount of social security available for those who are unable to save on their own, like the homeless. I am not planning on social security and would really think that I won’t need it. I think you should be allowed to opt out. No taxes while working, but no benefits either. Make your own bed and lie in it.
Neal Frankle says
@Cashflowmantra. I am pretty much aligned w/you. Personal responsibility but some safety net. I am sure that if we are fortunate enough to get that far, such features would be included.
But you only get social security if you’re working and paying into social security, no? Someone who is chronically homeless probably hasn’t paid much social security tax either…
Ronald Dodge says
I don’t agree with the idea of being allowed to opt out. The reason being, if there is a such option, pretty much everyone will opt out. While this may not seem bad at first, but for people like my own mother (yes, I hate to say it, but it’s true), she relies too much on other people to pay for her expenses and even attempt to go so far as to control other people’s money.
I see SSA benefits as a means to help keep from such people causing society to pay a much larger price if a such program wasn’t in place. I wonder how much our society had to pay (on a relative basis as you have to factor in inflation differences and such) on such account before the FICA system was put into play by FDR as opposed to afterwards on account of such people.