Thursday, March 03, 2005

BLOGGIN WALL STREET is another of the informative sites I enjoy. The following is a response I posted to a thought provoking article about Social Security.

The change being proposed is not to do away with social security. Social security will still provide a safety net. Allowing the young to invest 4% of their payroll taxes as they wish and the other 8% in the social security "annuity" will simply reduce the sting.

The sting is that the fund has been over-promised and over-spent. The young are the ones who are destined to pay the difference. Social security was sweet for my grand-parents. They paid minor amounts into the system for a year or two or three (one made only one lump sum payment that he got back the very first year). They received payments for as many as 33 years. They did not need the payments but they were freely given and accepted.

My parents each paid in for about 30 years. The pay rates were very low; as best as I can remember about 2% in their early years. Dad made enough that his with-holding stopped by mid March. Social security was a good deal for them; Mom and Dad collected for 19 years and Mom is continuing to collect a handsome dollar relative to what she paid. The rest of us are faced with the fact that the value of the current balance and the estimated inflows are not enough to provide the same benefits to the next generations.

Yes, the system can be “fixed” in any number of ways. My favorite is to leave the initial payment as the current formula but to index benefit payout growth to the inflation rate. This method spreads the reduction in benefits very thinly to all over the entire time each person receives benefits. The pain would be almost non existent.

The only real problem to the indexing plan is that it starts slow, picks up steam and eventually leaves the politicians with another huge windfall! Give the congress a windfall and there is little doubt that it will be spent wastefully. The congress operates like the fellow who wins the lottery. It is amazing how quickly the winner of a $30 million lottery is broke. Found money is always worth far less than earned money.

.Americans are generous people. We believe in the “social” side of social security. Many of us contribute as is needed to food banks, shelters and many other charities. Leaving 8% of ones income in a safety net system is plenty. Many families who routinely contribute 10% of their income to churches or charities find that 18% is a big number.

The irony is that the wealthy, who understand the power of compounding long-term returns in stocks and bonds, avoid allowing the poor to invest. As smart, wealthy investors, we proudly insist that the little guy needs our help. Therefore we “force” him into making massive payments into a low performance “safety fund”.

Massive is the correct word. A high school drop out, who never made more than minimum wage, but put 12% of his pay into stocks and bonds for 40 years would retire at 58 years of age as a wealthy man. Instead we force him into a retirement of less than minimum wage.