Tuesday, December 4, 2007

The Truth About Social Security

Social Security should not be abolished, but it should be overhauled and fixed. As the program stands today, it is not sustainable in the long term.

Thanks to our "nanny-state," many people do not have any retirement plan other than social security. To abolish social security for these people, many of whom are near retirement, would be disastrous. The government, rightly or wrongly, has made a commitment to these people and must keep it.

On the other hand, the country cannot afford to keep making the same commitment to future generations. Social security is a Ponzi scheme, in which retirees are paid out of the contributions of current workers instead of interest and earnings on their own accounts. Demographics show that social security, like any other Ponzi scheme is doomed to fail. Baby boomers are starting to retire and soon their SSI contributions will disappear. There are fewer workers in subsequent generations, called the Baby Bust or Generation X. At the same time, retirees are living, and collecting SSI payments, longer. Therefore, as social security payments increase due to more recipients living longer, the social security contributions of younger workers must grow larger and larger because fewer workers are contributing.

According to government data, in 1950 there were 16 workers supporting each retiree. Today there are only 3.3 (http://www.whitehouse.gov/infocus/social-security/) . As Baby Boomers retire over the next few years, we may reach a point where each worker is sponsoring his or her own retiree!

Social security is not a very good deal for retirees. A retirement plan administered by Galveston, Texas using nearly the same funding formula as traditional social security provides much different results. Both plans withheld approximately six percent of employee's pay, but the Galveston plan provides returns almost 400 percent better than social security. A Galveston retiree earning $17,000 per year would receive a monthly payment of $1,285 compared to $782 under social security (http://www.cnsnews.com/ViewNation.asp?Page=/Nation/ archive/200502/NAT20050203a.html). The results are even more dramatic at higher incomes.

Many Americans have learned limited lessons about investing through their 401k or IRA plans. While not guaranteed, the stock market has historically provided much higher rates of return than social security. By allowing private companies to administer social security alternatives, the government would give employees control of their own money, allow them to earn a higher rate of return, and allow them access to the investment expertise of professional money managers.
Government entitlement spending is a ticking time bomb. If current trends continue, social security and medicare will account for over 70% of the federal budget by 2060 (http://www.socialsecurity.org/quickfacts/index.html #11). While the government should honor commitments made to current and near-term retirees, it cannot continue to pay out benefits indefinitely.

Americans under fifty should not count on social security for their retirement. Save for your retirement using diversified funds in your 401k and IRA. Self-reliance is the American way, especially when our elected officials cannot be depended upon to resolve such an important issue.

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