Social Insecurity

Looks like it's Social Security Day here at S.S. S.S. asked me, as her resident economic expert, to do a piece from a financial planner's standpoint addressing why we should fight for Social Security. I may overlap with her earlier post a little, but here goes anyway…

It seems as though the Bush Administration’s main rationale for a switch to private retirement accounts is that they will give us ordinary folks more access to the large returns offered by the stock market. That they will also grant us greater exposure to the merciless vicissitudes of the equity markets is a fact that they conveniently gloss over. They way they tell it, you simply cannot lose, and only an idiot would turn down the opportunity they’re offering. In fact, why on earth did we bother inventing this whole Social Security malarkey in the first place?

Well, here are a few reasons:

Social Security is idiot proof: it requires no special knowledge or financial savvy; you hold down a job, you pay into the program and you receive your benefits.

It is completely risk free, unless of course, you count the risk of some idiot republican being elected and dismantling the program.

It is mandatory, so no matter how profligate and irresponsible your behavior, something will be there for you upon retirement.

The Bush plan, on the other hand, possesses none of these qualities. Investing in the equity markets requires at least a modicum of financial knowledge, and is risky even for the experienced financial professional. A bear market while you are on the cusp of retirement will be devastating, and will force you to either delay retirement, or start making withdrawals from your nest egg at the least advantageous time.

I also wonder how many low-income people will actually be in a position to take advantage of the program, or even want to. Effectively what will happen is that the social security deduction on your pay check will disappear, and you will be given the freedom to stow away more dollars in tax sheltered accounts. Right now you can sock away $4,000 per year in your IRA ($4,500 if you’re over the age of 50), and under the Bush plan this number would increase. Terrific for people who have large incomes and want to hide as much of it as possible from the taxman, meaningless for those of us living pay check to pay check. If you could not afford to put $4,000 in your IRA this year, what difference would it make if next year you could put away a maximum of $40,000? Sure, your pay check is a little fatter, and you could take out the money previously set aside for Social Security and increase your IRA contribution, but little Johnny needs new shoes and your credit card payments are killing you, so screw it, you can worry about retirement later.

As far as I can tell, the most likely outcome of the Bush plan will be this: rich people will get to keep even more money out of reach of the IRS, middle and low income families will take that social security money and spend it on big screen TVs and SUVs, and then rely entirely on their shitty 401(k)'s for retirement. Net result: lots of impoverished old folks come 2030, or in other words, back to square one.

Oh, and we mustn’t forget that in the mean time, all the poor suckers who’ve been paying into Social Security for 20 or 30 years will suffer reduced benefits, since the money that was supposed to pay for their retirement will now be getting diverted to private retirement accounts.

I’ll leave questions about the political whys and wherefores of the Bush Administration to others, but from the viewpoint of a financial planner the Bush Plan sucks. Although, I suppose it does have the potential to increase my commission income considerably.

Oh okay, now I get it – PARTY ON!!!

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