The returns on Social Security are dismal. Spend just a little time with an interest rate calculator and you’ll find that you should be getting five to ten times each month in benefits from Social Security if it were invested as a proper pension fund than you get under the current system. In fact, if your Social Security contributions were invested in a private account in a target date retirement fund, you would not need to put any other money away for retirement. But if you did try to live on the payments Social Security provides currently, somewhere between $1000 and $2000 per month, you would be living in poverty.
People would be far better off investing themselves in a target date fund. The issue with the existing system is that the money is not invested. The government takes your contributions, pays out money to those already retired, and then spends the rest of the money however they wish. Despite the terrible returns, the system is still going bankrupt because there are more people retiring today than in the past, plus there are lots of people on perpetual disability. The disability portion is already set to run out of money this year, but has been given a little more life by a shift of funds intended for the retirement portion over to Social Security disability with the latest budget deal going through Congress. The retirement portion isn’t in that great a shape either, being set to run out of money within a decade unless benefits are cut or contributions increased still more. Shifting money from the retirement portion to the disability portion will cause this demise even faster.
The issue with trying to get to a private system is that there are people currently receiving benefits or who are close to retirement that would get really upset if those benefits were eliminated. But if everyone started putting money into private accounts today, there would be no money available to pay benefits. (Why can’t we just open the lock box Al Gore talked about? The trouble is it is just full of IOUs, and without a source of funding to redeem those IOUs, they are just a bunch of theoretical paper.) A transition would be needed.
We could actually transition by allowing people put a portion of their money into a private account based on their age. Someone who was 55 or older, say, could put 100% into a private account invested entirely in bank CDs, meaning that the individual would have a few years worth of Social Security payments sitting there for them to withdraw when they reached 65. The regular Social Security system could then take over from there if they lived beyond 69 or so. Someone between the age of 40 and 55 might be able to put half of their money away into a target date retirement fund and send half into the standard system to pay for the benefits of those who were older. They would then have a decade or more worth of payments in their private account when they were ready to retire. This would continue until you reach people in their twenties who might put 25% in a private account and 75% in standard Social Security. Even at this amount, they would have more for retirement in their private accounts when they were ready than they would have had under the current system. In fact, they would likely have nothing under the current system, given that it is going bankrupt. Once everyone has a big enough private account to replace Social Security payments, everyone would then get to contribute to private accounts only and the transition would be complete.
Now understand I haven’t done the detailed calculations to verify the percentages above. The details would need to be worked out, but I guarantee there is a payment scheme that would allow us to ween people off of Social Security within about 30 years. But what if you wanted to move people off faster? Well, here is a way to accelerate things.
What if you could agree to continue to pay into the system at your current rate, and not withdraw anything from the system in the future, in exchange for letting your children invest their money in private accounts? If you are currently retired but have a good pension or ample retirement savings, you might be willing to give up Social Security if it meant a child or grandchild could invest privately. If you are in your forties at this point, you have already paid in a lot, but you can see the writing on the wall and know that Social Security won’t be there for you now anyway. If it is there, it will only be because the contributions are raised still more, meaning perhaps you’ll be contributing 10% of your salary and your boss will be contributing another 10%, such that 20% of your paycheck will be going into the system. You will also probably need to work longer before you can collect, meaning you’ll be contributing more for longer and receiving less. So giving up your benefits would probably save you money in the long run, plus it would let your children avoid having to contribute money that would be lost.
So what do you think? Would you pay the ransom to set your children free?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
