By Alan Gorlick
Part One
When I ask my students about Social Security, the most common answer is along the lines of, “A program that won’t be there when I retire.” That pessimistic forecast not only displays a lack of confidence in what is arguably one of the most successful US government programs, it’s probably wrong.
If we strip away Social Security’s unique jargon, we see that it’s a welfare program loosely tied to a tax. FDR established the link between the tax and the benefits so that participants would see it as their money. He wanted to ensure that Congress wouldn’t cancel the program once the depression ended. We don’t know what Congress might have done, but we do know that participants continue to view the funds as their money.
This three part series will bring readers up to speed on this popular program. Part 1 (this article) will look under the hood. What’s working smoothly and what might need some preventive maintenance. Part 2 will review the basics for applying, including Social Security calculators. Part 3 will present some of the lesser-known features that may be worth significant dollars to retirees.
Social Security came into this world with over 30 workers for each retired person. Moreover, the average retired person started collecting at 65 and died before reaching 70. Keeping the system afloat didn’t require any advanced math.
Today there are fewer than three able bodied workers for each retired member, and those retirees are living a lot longer. A married couple in their 60s has a 50/50 chance that one of them will see his or her 90th birthday.
Around 30 years ago, the federal government realized that serious modifications were required. A task force led by Alan Greenspan (yes, that Alan Greenspan) did the math, which wasn’t trivial because they had to estimate salaries, benefits, interest rates, retirement ages, and tax receipts for at least 50 years in the future. Their model predicted that increasing the payroll tax above current needs, with the excess deposited in a trust fund, would maintain solvency over that period. They expected the trust fund to keep growing until around 2017, when distributions would begin to exceed contributions. The great recession brought that date forward, but they weren’t off by much.
All that dough sloshing around in the trust fund (actually multiple trust funds), currently just shy of $3 trillion, had to go somewhere. Even Washington doesn’t have a mattress that big. The investment of choice is US Government bonds, virtually the same as the bonds favored by the Chinese, the Japanese, many pension funds, and risk averse investors. That decision, considered benign in many quarters, created the first great fear: politicians are spending our money. That fear was a jumping off point for Al Gore’s famous Lock Box.
However, that’s what bond issuers do. Bonds are a way to borrow money. The borrower then uses the money, paying interest and promising to return the funds at maturity. If they didn’t need to use the money, they wouldn’t borrow it in the first place. One could argue that the investments would seem more tangible if they were in, say, German bonds. The Germans could then place their pension Euros in our bonds.
The second ramification of that fear was the notion that we beneficiaries could do better in the stock market than in low interest government bonds. The rallying cry was to privatize Social Security. We might never know whether hypothetical stocks would have beaten government bonds, although the great recession certainly gave pause to that argument.
The more critical issue is that arguing for privatization ignores three important points:
- The insurance factor. Those dying young leave more in the trust fund for those who live longer. If the system were privatized, everyone would have to save more because unused benefits would not remain in the trust.
- Investment expertise. Even if some beneficiaries had the skill and the luck to beat bonds, others might not. What would happen to them when they retire? Would the government still have to take care of them?
- The trust fund could do it. If we are simply looking for greater diversification, change the rules for the trust fund. Let the fund hire the best money managers and let them choose the equities.
For now the trust fund is solvent and paying as promised. It grows from three inputs: payroll taxes, interest on the bonds, and income taxes assessed on Social Security benefits. It pays three kinds of distributions: retirement benefits, disability benefits, and death benefits.
The debate on the long-term implications has begun in earnest. Meanwhile, beneficiaries can expect their money. Stay tuned for Part 2 to learn how.
Alan E. Gorlick, AAMS, is CEO of Gorlick Financial Strategies. An Air Force Veteran, Gorlick is also a University of Phoenix faculty member, where he teaches MBA and undergraduate finance and economics. His academic research interest, as well as his focus with clients, is risk management. He can be reached at alan@gorlickfinancialstrategies.com.
… [Trackback]
[…] There you will find 43047 more Infos: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] There you will find 84181 more Infos: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] There you will find 82473 more Infos: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Informations on that Topic: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More Infos here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More Infos here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Read More here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] Find More Informations here: ubaldireports.com/social-security-isnt/ […]
… [Trackback]
[…] There you will find 84483 more Infos: ubaldireports.com/social-security-isnt/ […]
how to get quality backlinks 2011
eoqbqlihl byhvl tjidawm sucd fcgejxykjrqqbxm