I’m really saddened by how political the social security issue is. Its too bad we can’t take this problem away from politicians that are more worried about their votes next election than about fixing the problem.
I usually don’t agree with President Bush. But his willingness to tackle this issue during his second term is valiant. Second term presidents have the opportunity to tackle the tough issues because they are unencumbered by future elections, and its great to see this 2-timer get to this phase of his Presidency.
What is Wrong With Social Security?
Well, the basic problem is that each year, we take a bunch of money in, and pay it out immediately to the benefactors. This works as long as the number of workers paying in greatly exceeds the number of folks taking out of the system. Unfortunately, our census studies show that the number of retirees is going through the roof compared to the number of workers, and there will be a shortfall. There are no politics to consider here – its just plain accounting.
Time Value of Money
What President Bush has been trying to say is that Private accounts inherently have the advantage of the time-value-of-money. Here, each individual paying into the system puts his money in the bank. Each year it collects a modest amount of interest or gains, and, after doing so for 30-40 years, that small initial investment is a sizable retirement asset.
The current system cannot take advantage of time, and will always have the problem of needing a growing population of workers.
“Means Testing” Out – Can’t Trust Government Anyway
Last night, President Bush introduced the notion of decreased benefits for the wealthy. I’m not surprised by this at all, and I’ve been expecting it for some time. As a 34year old ‘worker’, I pay into Social Security each year, but I have no illusions that I will actually get anything from the government when it comes time to retire.
The fact is that Social Security will be out of money. Taxes will either have to be raised, or some people won’t get any benefits. If, during any of the next 30 years of my life, the government “changes its mind”, I could be screwed. If I were counting on Social Security for my retirement, I would be financially irresponsible. These politicians are whimsical, and we just have no idea what they will do.
Private Accounts Provide Protection
Given that many of us are already being means-tested out, why shouldn’t we have a federally sponsored system which allows us to use the time value of money for our retirement savings? Doing so helps social security problem, because those individuals saving for their own retirement means that they will not need other government services when they get old. Further, it means that these people will be immune to political winds that could otherwise touch their retirements.
Some people say “well, what if the stock market crashes”? This is a fair question. But, when I weigh my own risks for retirement, I still think its more likely that I’ll get screwed by Uncle Sam than that the stock market will crash so intolerably that I’ll lose all my money.
It does mean that individual retirement planners need to be smarter than ever before. We need to understand asset-allocations and how to shift assets to reflect the amount of risk we want to take as we near retirement. Oh my goodness – do you mean we need to take responsibility for our own finances?