“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness,” Charles Dickens
Do me a favor fellow American. I’m a licensed financial advisor and I’d like you to take ten percent of your paycheck and mail it to me. I’ll invest your money in U.S. Treasury securities and when you’re ready to retire I’ll give you back some of the money you gave to me.
Does the idea of handing ten percent of your paycheck over to a total stranger sound ludicrous?
It does to me and I’m the one handling your hypothetical money. There are very few people I would trust with my money because they’re not me, they're not familiar with my personal financial goals and I used to work at a full service brokerage firm. I know how caring and concerned some of the people holding the licenses are. They care an awful lot about their commissions and very little about you or your money unless you and your money can be used to introduce them to people with more money than you yourself have.
So, what does this have to do with anything? Initially I considered posting this under the Deterrence node because in my opinion the United States government is practicing deterrence of a non-military sort and the very last words in that first writeup are what led me to further investigate this topic.
“So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Franklin D. Roosevelt
Some people nearing retirement age are living in fear. They don't have faith that the government will continue to support them during the time they need it most. I myself have no confidence that my rich Uncle Sam will be around by the time I'm ready to retire. Every time I get paid the U.S. government takes a portion of my money. They invest it in their own securities and I disagree that the Social Security system is little more than a Ponzi Scheme only because there is no guarantee that I'll ever see any of the money I put into the system. I do not believe that fear of the Social Security system breaking down is unjustified and it may not be a paralyzing fear but it is a legitimate one as it is only a matter of time before the system itself must reform or collapse.
Some Americans take Social Security as a given. Perhaps even a contractual obligation. They’ve paid into the system and they expect to collect a check when they retire. The following is an excerpt from the Supreme Court Case Flemming vs. Nestor. I submit this quote because in 1960 the Supreme Court upheld a decision to deny Nestor Social Security benefits even though he had been contributing to the plan for nineteen years.
(B) TO ENGRAFT UPON THE SOCIAL SECURITY SYSTEM A CONCEPT OF "ACCRUED PROPERTY RIGHTS" WOULD DEPRIVE IT OF THE FLEXIBILITY AND BOLDNESS IN ADJUSTMENT TO EVER-CHANGING CONDITIONS WHICH IT DEMANDS AND WHICH CONGRESS PROBABLY HAD IN MIND WHEN IT EXPRESSLY RESERVED THE RIGHT TO ALTER, AMEND OR REPEAL ANY PROVISION OF THE ACT. PP. 610-611.
There it is in black and white folks. Regardless of what Congress “probably had in mind” Social Security benefits are not only NOT guaranteed they may be altered, amended or revoked at ANY time. I don’t know about any other Americans but that’s a phrase that scares me and it scares me not so much for people such as myself (the Social Security system favors the single wage earning household) but there are people out there who have no other retirement plan other than Social Security and chances are that these are not the people who are eager to read about why Nestor was denied his Social Security benefits.
Given that Social Security as a system is flawed what can be done about it?
To put it simply there are three basic options for Social Security as a failing financial system.
1. Payroll taxes can be increased.
2. Benefits can be reduced and or eliminated.
3. Some combination of higher taxes and reduced benefits could be set into place via legislative reform.
These options are the ones available within the current system but there is another possibility out there.
The 6.2 Percent Solution
The way the system works now employees are required to pay half of the Social Security tax. The employee pays half, the employer pays the other half, the Social Security Administration pools these contributions and invests them. This influx of cash is what keeps the system afloat and if proponents of The 6.2 Percent Solution had their way employees would be able to take the money they’re currently paying into the Social Security system and set up individual private accounts where they would have the freedom to choose which securities they’d like to purchase. This radical departure from the conventional plan would allow employees to bypass the Social Security system entirely giving them control over the money they've earned.
What would happen to the Social Security system under The 6.2 Percent Solution?
Good question. I'm glad you asked. Those in favor of The 6.2 Percent Solution are seeking reform. They would not abolish the current Social Security system entirely. Their plan would use the 6.2 percent employers contribute to the Social Security plan to fund the revamped system. Those who opt out of the system under The 6.2 Percent Solution would receive a voucher to trade in the secondary markets for the plan contributions they've already made. This would sever their ties with the Social Security Administration and leave the investment of their money entirely up to them. People who still wish to contribute to the Social Security plan could continue do so and whatever benefits they receive are the benefits that they receive.
What are some of the arguments against The 6.2 Percent Solution?
Detractors of The 6.2 Percent Solution are quick to point out the enormous expense of converting the Social Security system. Another argument against privatization of employee funds is that under The 6.2 Percent Solution financial institutions benefit leaving John Q. Taxpayer to the questionable mercies of potentially unscrupulous investment advisors. So far nothing I've read has mentioned online investing as an alternative to avoiding the high fees traditional brokerage firms charge but this is another gray area. Anyone who wants to open an account with a traditional brokerage firm is required to fill out an application. Financial goals, risk factors, employment and investment objectives are covered in that application and the benefit to that over the online firm is twofold. A broker can be sued for selling high risk investments to unsuitable clientele but on the flip side a broker can inform and educate someone who may not fully understand market volatility or that some investments carry more potential risk than others.
People on this side of the Social Security debate would argue that raising payroll taxes (80 percent of Americans pay more in payroll taxes than they do in real estate taxes) is a better way to shore up the crumbling Social Security system but this has been done before (Social Security taxes have been raised 40 times since the inception of the program) and the Social Security Administration is still facing financial uncertainty.
So far we've heard what the detractors of The 6.2 Percent Solution have to say. Here's what proponents of the plan counter with:
1. Every year no action is taken the Social Security system loses more and more money.
2. The Social Security portion of the payroll tax would not be increased.
3. Benefits would theoretically not be reduced.
4. By giving employees control over their money they will enjoy greater autonomy.
5. This 6.2 percent is a massive amount of money that could be stimulating the economy through regular systematic investment into the open market.
6. Faith in the Social Security Administration and by extension the U.S. government may be restored.
In my opinion The 6.2 Percent Solution addresses some of the problems with the current Social Security Administration. The 6.2 Percent Solution is a viable solution if an expensive one. There will need to be a transition period and there is going to be a tremendous uprising among the people currently receiving retirement or disability benefits but if those people step back from their personal situations I think that they’d see reform of the system is in their best interest as the healthier the system is the more likely recipients are to continue receiving benefits.
I believe that the current Social Security system is a hindrance and a deterrent to retirement planning and individual investing because it simultaneously ties up income that could (and probably should) be privately invested while perpetuating a myth of safety and security that the United States government will provide for you in your old age. Something needs to be done about this and I’d encourage every American out there to think very carefully on this before they cast their vote at the polls this election.
I don't believe that Social Security will be around for me when I retire. What should I do?
I can't give anyone any specific investment advice but there are a wealth of retirement plan options above and beyond the Social Security system. Those options are worth checking out and this is merely my opinion but accountants are a vastly underutilized resource. Stockbrokers and insurance agents get paid to sell you products but tax accountants get paid to process tax forms and depending on your individual situation certain investments may carry some complicated tax ramifications.
I realize that not everyone is wildly enthusiastic about tax laws and financial strategies but this is one of those necessary evils in life. The only person you can count on for your retirement needs is yourself. The wheels of justice grind slowly, legislative change takes time and right now there are some laws in place that allow people to catch up on some of the retirement investing they may have forgone in the past. It's a good idea to remember that these laws are temporary. They were passed under an administration that will no longer be running things when these laws expire and a return to less generous retirement contribution limits is theoretically possible.
Earlier I spoke of the fear that some people nearing retirement face. Discussing things like money and financial security can be uncomfortable. Unfortunately it’s also something that all too many Americans overlook when planning for the future. It’s my sincere hope that none of you or anyone you know is ever faced with the realization that you’re going to outlive your money and money certainly isn’t everything but you are living in a dream world if you think that somehow things will all magically work out without investing your time and effort into building a sound and sensible financial plan.
“But in this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin
Social Security taxes are a way of life for most Americans. Systematic reform is possible, desirable and achievable and The 6.2 Percent Solution is offering Americans a glimmer of hope on the retirement horizon. It’s been said that no one plans to fail but there are those who fail to plan and for those Americans who are failing to plan they are putting their faith and trust in the federal government and its ability to pay the bills it has acquired.
The United States was founded on concepts such as rugged individualism. It's one of the things that made this country strong and I believe that every individual should have a say when it comes to their retirement monies. It is time to move beyond fear and for all I know the threat of obliteration via nuclear war is a larger and more formidable one than the prosaic retirement poverty the Social Security Administration provides but I for one am not going to let the government hinder or deter me from planning for the future in whatever capacity I can. Every American out there ought to take a serious look at retirement planning and what they can do in the event that FICA turns out to be just another four letter word.
Bulls Make Money, Bears Make Money, Pigs Get Slaughtered: Wall Street Truisms that Stand the Test of Time Book by Anthony M. Gallea
Americans live in a time of unprecedented wealth and the key word in that phrase is time. Time is of the essence and time in the market is more important than the timing of the market. Make retirement savings a goal of yours. Make it a priority and don't worry if you don't have vast amounts of money to invest. Anything is better than nothing and there are so many plans out there for the small systematic investor. Check into payroll deductions and dividend reinvestment plans. Go online and see which financial institution is offering an account and investment products that meets your individual needs.
I don't pretend to have all of the answers to all of the problems out there. I haven't always invested when and where I could have and part of this writeup is hopefully allowing you to learn from some of the mistakes others have made. Don't let yourself be a victim of the system. Pay the taxes you're required to pay and if you're not already contributing the maximum amount you could be to a corporate or an individual retirement account make that a goal of yours. Every penny, every dollar you save today is one less penny or dollar you'll have to come up with when you're retired and no one knows who said the following but it's a thought I'd like to leave you with as you go about your individual financial journey.
“There is no better time than now. The time to live is now. The time to dream is now. The time to imagine and forget the past is now. The time to shine is now. The time to bleed, sweat, and determine yourself for the things you want most is now.” Anonymous
Now is the time. What will you as an American do with it?
Beating the Street Peter Lynch
Bulls Make Money, Bears Make Money, Pigs Get Slaughtered: Wall Street Truisms that Stand the Test of Time Anthony M. Gallea
The Cato Institute www.cato.org
Social Security Online www.ssa.gov