Social Security has so many facets to its convoluted design that one can't help but feel a sense of confusion that serves only to paralyze most "participants" into thinking there is no way of changing or improving it. The national debate that is currently underway may be one of the best ways of proving this is not the case. If positive change is to occur then let the will and words of the general populace be the ones to make it happen. Congressmen take heed, for the present course Social Security is on will only lead to a bailout of such proportion as to make the Savings and Loan rescue appear to be nothing more than a fireman saving the old lady's cat from a tree.
Social Security, or more specifically, OASDI claims to be a "not for profit" organization that boasts administrative costs of only 1% of the total take, and employs 65,000 people. According to the figures for 1997, these employees were able to generate a whopping return on our money of 7.5%. This was for just one year, and represents the return on investments made into long-term treasury bonds. However, a better representation of the true rate of return must be looked at from an historical perspective.
According to one of the leading financial market research companies, Ibbotson and Sinquefeld, the returns on long-term government bonds (debt) has turned in a stellar return of approximately 5% during the period of 1920-1990. Add in inflation for the same period of time of 3.1% and you get an inflation-adjusted return of 1.9%! Monkeys throwing darts at a board could do better.
Regarding the issue of "not for profit", the SSA (Social Security Administration) feels that a "for profit" organization would represent a potential for increased administrative costs, and possible conflicts of interest. It is hard to digest this tripe when one considers the average rate of return for a well-diversified portfolio of common stocks historically has returned 10 % during the same period from 1920-1990. Since a well-managed mutual fund company can achieve these results, and do so for administrative expenses that are right at, or in some cases, less than 1% (many index mutual funds fall in this category), the argument for avoiding "for profit" investment companies is disingenuous at best.
Certainly, selecting a quality mutual fund company or diversified portfolio of stocks may require a bit more research on behalf of everyone involved, but the rewards for doing so would be well worth it. For example, if one assumes an average working life of 35 years and 12 monthly contributions per year, the total contributions one would make would equal 420 payments. Under Social Security this is currently achieved via the FICA withholding from gross pay. For sake of argument assume the monthly amount withdrawn is $200.
Now, invested in the SSA's long-term bond vehicle, one can expect an average annual return of 5% less 3% for inflation, leaving a 2% after inflation rate of return. After 35 years, the total amount "invested" grows to $121,509. If one annuitized this amount, assuming an 8% annuity, one would be able to generate $9,721 per year. Probably not enough to live on, but at least it is something.
Now take the same time period, the same monthly investment (or contribution) and place it into a mutual fund (or diversified stock portfolio), with an average rate of return of 10% less 3% for inflation, leaving one with a 7% after inflation rate of return. After 35 years, the total amount invested grows to $360,211. Again, assuming an 8% annuity, this would generate an annual layout of $28,817. This amount could certainly make it easier to enjoy one's retirement years rather than worrying about the next rent payment.
For those who prefer not to be invested in stocks, the opportunity to select bond funds or a portfolio of long-term corporate bonds could also net the saver/investor returns that would beat the SSA's retirement plan. Finally, even for those timid souls who like the money invested the way it is, they could buy into the long-term treasury bonds, just as Social Security does, via another type of mutual fund specializing in this investment vehicle. The only hitch is, the money would be in their control, and not that of the SSA.
Of course, this is essentially the point: all the aforementioned choices of investing for retirement, save the current status quo, means private ownership of our retirement dollars. This is anathema to the SSA. But isn't it ludicrous that we should pay in for all the working years of our lives into a retirement plan that doesn't allow us to even decide who our beneficiaries are, or penalizes us if we decide to keep working past the age of 65.
But wait, perhaps Americans should stop looking at Social Security as a way of saving for retirement. According to the SSA, the full name for Social Security is really Old Age and Survivors Insurance and Disability Insurance Trust Fund, or OASDI for short. Now it makes more sense! We really are paying "insurance premiums", not investing or saving for retirement. Who cares what the return on investment is? It's insurance just in case we live too long, or die too soon and have dependents that need support, or get disabled. Wow, what a relief!
In fact, the SSA likes to compare Social Security to fire insurance; you really need to own it, but aren't you glad if you never have to use it? As for the conditions of disability in order to make a claim for coverage, the SSA has written this nice little description: "a qualifying disability must be one that prevents a worker from doing any gainful work, and is expected to either last for at least 12 months or end in death." To top it off, there is also a 5 month (150 day waiting period) before any benefits can be paid. This is the kind of coverage brought to you by "not for profit" thinking.
Once again, if one wants to be covered for disability, it will require a bit more digging. But the rewards are worth the effort. Several hundred private, for profit, insurance companies abound that provide far superior disability insurance. The key factor being coverage for your own occupation. This means if you can't work at your current job, you can qualify for coverage after a waiting period (typically ranging from 90 to 120 days). The disability may be partial or permanent, but nothing so severe as requiring a person to have to expect they will die as a result of their disability. Mainly, the coverage each individual selects will be privately owned and tailored to their needs.
So where is all this argument heading? A privatized system would allow individuals freedom of choice, with some constraints to force people to make some kind of contribution towards their retirement. Privatization would prohibit the government from future misuse of our retirement money. Chief examples would be the Johnson Administration diverting Social Security funds to finance the Vietnam War or the co-mingling of Social Security funds with the general fund so as to conceal the true size of the federal deficit.
One of the largest reasons for privatization is the simple fact that there will not be enough Generation Xers in the work force to support all the Baby Boomers retiring over the next 30 years. The time is now to start a phase-in of a privately owned system.
Instead of the FICA amount currently being withdrawn from our gross pay, a graduated portion of this money should be transferred into private plans that allow for investing into mutual funds (stock or bond), insurance annuities, disability and life insurance policies, and long-term care policies. Think of it as a complement to the already immensely popular 401-k plans or Cafeteria plans that thousands of employers across the land already have in place. There are several other options that are available, but these would be ideal products to start with. They would also help to insure that every American would have the kind of retirement plan or retirement insurance they would need to see themselves comfortably into their golden years.
The sooner we wean ourselves from the present Social Security system, the less traumatic will be the consequences. The people who are already retired or about to do so within the next 3-5 years would need to be paid from the existing structure. But the rest of us need to face the fact that a change must be enacted in order to keep the dream of a comfortable retirement alive. Change is always a difficult thing, but it becomes less of a thing to fear the longer one has to prepare for it and then turn to face it head on.
