Thursday, February 03, 2005

President Bush and Social Security

Yesterday, President Bush presented his State of the Union message to repeated applause, purple fingers, and some boos.

One of the things he postulated was allowing us to set aside a portion of our Social Security tax contribution and investing it ourselves. His vision is to have the money invested in extremely conservative securities - bonds, or very safe stocks.

But President Bush didn't mention any provisions to absolutely prohibit you from using the money in that account. PERIOD. NO WITHDRAWALS.

But if this is to replace part of SS, it should be untouchable until you are eligible to collect Social Security.

Shall we see how much we could earn if we did that?

Let's look at someone who earns an average of $50,000 per year for the next 20 years. We'll call her Sarah. At today's contribution percentage (which Bush said he didn't want to raise), Sarah's annual Social Security contribution would be $3,100 (6.2% x 50,000).

Let's say that she is permitted to set aside 10% of her Social Security contribution. That would give her the whopping sum of $310 per year!

[I had a small amount like that in a client's IRA account - and the bank wouldn't let him move that from the Money Market account into ANY stocks or mutual funds. It was too small for them to bother with.]

But, let's say, under Bush's program, the investment houses are mandated to accept these minute sums. And they have been warned that their fees must be severely curtailed.

So, let's be optimistic and say, that on the average, over the next 20 years Sarah will earn 5% each year, after fees. [To see a really good analysis and explanation of the different plans on the table, read Andrea Coombes article]

Do you want to know how much money would be earned after putting $310 into the account for TWENTY years and earning 5%?

About $10,250.

Now, let's suppose this is your account. With that enormous sum earned in 20 years, in addition to your Social Security benefit, you'll get about and extra $42 per month...assumining you're still earning 5%. Double that if interest rates have reached 10%.

So this risky social experiment, if you follow the guidelines, you're apt to supplement your Social Security benefits by, maybe, just maybe, as much as a $100 per month.

But you will lose a similar amount because of the 10% you didn't contribute each year, so you'll be about even - except that you spent the last 20 years straining your mind, managing the account. Some few people will do a little bit better. But the average person is apt to do a little worse.

This seems like a waste of energy to me.

In fact, Janet Haynes sent a link to this New York Times article about what happened to the good people in Chile who instituted a similar plan about 25 years ago in the administration of Gen. Augusto Pinochet - The title of the article tells you how well it worked: Chile's Retirees Find Shortfall in Private Plan. Read it. You'll be fascinated.


Child Support

What about looking at all the things that the Social Security trust fund is used to pay for. I'd love to see our Congressional analysts or watchdogs, do a solid analysis of the various drains on that fund.

For instance, a big drain is money going to children. Did you know that when someone dies, their children are able to collect from Social Security until they are age 18, or even up to 24, as long as they are students.?

This is a wonderful boon for many college-bound youths. It's like getting an instant scholarship. In fact, my brother used this source of support to get through UCLA after my father died. So, I know how just how valuable this can be.

But, seriously, friends, why are we paying children out of Social Security?

Shouldn't that money come from some other source?

If we continue to pay children, can you imagine how much we could cut the drain on Social Security if we just changed ONE thing - limit the support payments to age 18, or whenever they complete high school.


Perhaps we could extend the support for another two years - not for college per se, but to cover some vocational training that would give the child a marketable skill so they could earn enough, working part-time, to get themselves through college.

Heck, why don't high schools provide the training? Why is that kids are getting out of high school and don't have the skills to get a decent paying part-time job? There are so many ways for a student to earn money. And today, with the Internet, people with strong Internet literacy are in strong demand - if only for data entry or site updates. Students could even do that from home.

[Heck, I live about two blocks from a major State University and can't find a student in that whole computer department who can do work on an Internet site that meets the level of some of the 10 year olds's sites I've seen. OK, I'm not asking for elaborate - but at least proofread your showcase site to make sure all your links work and the graphics are clean...sheesh]

Let's look at that old concept:

Don't just give them the fish so they can feed themselves today.
Teach them to fish so they can feed themselves forever.

Students Can Do it On Their Own!

With the proper skills, they could learn to work on cars, do plumbing or electrical work, or handyman work, or work in labs, or in offices, or hospitals desperately need good people... Businesses could get away with paying the students a bit less because they aren't quite as experienced and can't work full-time. But the kids could earn enough to get their educations AND learn a little bit about how the world works, outside the shelter of the university.

It won't hurt as much as you might think.

I know what it's like to be that age. You want to get all the growing up and educating out of the way so you can start your real life. It's so exciting. You're so exhilirated with all the opportunities you know you're going to have. To have to set your real education aside for a year or so, or to make it all take longer because you have to pay for it yourself... that hurts so much you can hardly breathe. But you do. Many of us did.

And we took it in stride. We never even thought of it as a hardship. There's a whole other world in college when you're a night student. Your instructors tend to teach you with more respect because you have a better understanding of the world. Your classmates are all in the same boat you are, some even juggling families - so you never feel any different. In fact, you can make some pretty good, lifelong friends. (I did that, too.) And you can have fun!

Talk About Win-Win

Let's face it, you have your own spending money, because you're earning it. You don't have to answer to anyone for it. You don't have to work for years, or decades to pay back the grants or student loans. So you'll never have to default. Just think what this does to your credit!

Not only would this relieve the Social Security fund of a substantial burden (4-6 years of child support), but we might be able to keep more support jobs in this country because there will be someone to fill them. AND we'd groom a new generation of adults who'd be apt to understand money and responsbility better than they do today.


I'd love to see your views on how to fix Social Security without raising taxes unduly, or cutting benefits for retirees. Please, your comments are very welcome. In fact, I'll try to collect them and pass them on for you.

Of course...if you'd like to make your voice heard directly, please feel free to contact your legislators and executives directly. Here are links to their e-mail and snail mail addresses:

TaxMama's Call to Action Page

TaxMama's TaxQuips Headlines