Social Security reform - myths and reality

December 26, 2004|by Donald Currier

The No. 1 myth today is that President Bush is proposing to destroy Social Security. Nothing is further from the truth, but those who want to create alarm keep on saying it. Why? Because they believe in government control and management of a significant part of your retirement finances. It is something they don't want you to have a voice in, even though it's your money.

They just don't believe you are capable of making your own financial decisions. They claim they want to insure your retirement. But what they don't mention is the price they want you to pay for that insurance. Let's examine a few of the myths and counter them with the facts.

First of all, the "government" isn't going to "privatize" anything. The proposal is strictly voluntary. Wage earners may choose to participate or not. If they don't, the current deal continues for them unchanged. If they do want to accept the program, they get to choose, within carefully controlled limits, to allocate 2 percent of the 6.2 percent of payroll taxes they now pay into the Social Security fund to a personal investment account.


The reason for offering this option is to improve the financial condition at retirement of the younger generation of workers while keeping the system solvent for the long term.

There are two key limitations on the current Social Security system that many people overlook. The first is that Congress sets the rules governing what you get and when. Today you can collect Social Security at 65, or at 62 at a reduced rate. It is also indexed for inflation under a government controlled indexing system. Both of these numbers can be changed by a future Congress. They are not guaranteed.

The other feature that is less well-known is that you have no right of inheritance to any funds you have paid into your Social Security account. Suppose you die after paying in for 25 years. Obviously you paid in a lot over that time, but your heirs have no right to the money. It reverts to the fund.

The 2 percent of current Social Security taxes that one could elect to put into a personal investment account reduces the amount of Social Security payout one gets at 65. By how much? A wage earner now pays 6.2 percent of wages into the trust fund. Employers contribute an equivalent amount, so the total Social Security taxes are 12.4 percent of wages.

Taking away the 2 percent leaves 10.4 percent, or 84 percent of the Social Security payments still available at retirement from the trust fund. Thus, the real risk at worst is 16 percent of your future Social Security payments

What is the reward? It depends on the risk of the investments chosen. There will be many options offered from regular purchase of stock mutual funds, index funds, bond funds, money market funds, etc. The net investment gain from the funds invested in the Social Security Trust Fund today is less than 1 percent. Depending on the investment mix chosen, the gain from private investments might be several times that.

The key point of the proposal is the time period for investments to grow. This is a young workers' plan, not for those nearing retirement. For the young, the time could be as much as 40, or even 50 years.

Last year I saw a chart of the stock market returns by year from 1928 to the present. For any consecutive 25 year period chosen over those 75 years, the market was always higher at the end of the 25 year period than it was at the beginning. This is not a certainty, but it sure represents a darn good bet!

The other point is that you own your own investment account and it is yours to use or pass on in posterity. It's a permanent part of your estate.

The naysayers will argue that some will take their retirement savings as a lump sum and spend it unwisely and the rest will have to take care of them. It doesn't have to be. Provisions can be put in to require annualization of the payouts, just like Social Security does today.

And remember those choosing the investment accounts will still be entitled to 84 percent of their Social Security benefits no matter what they do with their investment account.

Finally, there is the question of cost - many use the number $2 trillion, although it is impossible to know how this figure is calculated. I suppose it is the estimate if every young wage earner chooses to participate all at once. But there is no ultimate cost to the Social Security Trust Fund. Eventually the reduced payout to Social Security recipients choosing the new plan will equal the lesser payments into the fund by them. This is a bookkeeping transaction - something we've been doing for years by every administration from President Johnson on. What's new about that?

Donald Currier is a Smithsburg resident who writes for The Herald-Mail.

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