Wednesday, March 08, 2006

Social Security (Feb 2005)

President Clinton, in a major policy speech delivered in February 1998 at Georgetown University, warned about "the looming fiscal crisis in Social Security" that "affects every generation. He also stated "if you don’t do anything, one of two things will happen. Either it will go broke and you won’t ever get it, or if we wait too long to fix it, the burden on society … of taking care of our generation's social security obligations will lower your income and lower your ability to take care of your children to a degree that most of us who are you parents think would be horribly wrong and unfair to you and unfair to the future prospects of the united states.” This was an acknowledgement of the impending doom by the highest ranking democrat of that time. Three national panels had already been commissioned during the Clinton administration to review Social Security reform options: the Bipartisan Commission on Entitlement and Tax Reform (1993-1995); the 1994-1996 Advisory Council on Social Security; and the 1997-1998 National Commission on Retirement Policy.

All three of the Clinton commissioned panels offered long-term reform plans that included individual accounts. Now, no one from the left will even acknowledge there is a problem. Their only rebuttal is that the stock market is too "risky". If the stock market is so risky, why does virtually every union pension fund in America invest the bulk of their assets in the “risky” stock market? According to the Federal Reserve, state and local government employee pension funds have nearly $3 trillion in assets, 66 percent of which is invested in corporate equities (i.e.: stocks). So if majority of us hedge our financial futures based on the stock market in one way or another, why the sudden disdain for doing the same with a portion of social security.

The theory behind Social Security is that it's a form of insurance, while in practice it's nothing more than a pyramid scheme. In such a scheme, early investors can only be paid off by adding an even larger number of participants. To keep the status quo is unacceptable, Social Security is going bankrupt and sooner or later this pyramid scheme will collapse.

Currently, we are in a situation where many people depend on Social Security for their retirement and it cannot be funded indefinitely. It is unrealistic to think that rapid economic growth will provide enough taxes to sustain benefits at current levels. Today, retired Americans get benefits two to five times greater than the amount they and their employers paid in. Whether its tomorrow or 20 years from now, it will go broke and I for one am planning my retirement on that theory.

President Bush in his address to the nation suggested something like the system currently in place for federal workers, the Thrift Savings Plan (TSP). This would allow U.S. workers to shift some of their payroll taxes into personal investment accounts. The TSP is a $148 billion-401k type program that lets government employees save for retirement by investing pretax dollars into funds that mirror the market. Three of the funds are based on stock indexes, one is a bond index and one is government securities fund. The highest 10-year annual compound return on investment was 11 percent. Is it a mere matter of coincidence that this fund with the highest return on investment was the U.S. Company stock fund?

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