Tuesday, April 13, 2010

Social Insecurity

Social Security was established in 1935 as a part of President Roosevelt's "New Deal" program. With it's passage came the promise of a secure financial future for America's retired workers. It promised them respite from the financial hardships associated with reaching old age and being disabled.

And thus America was saved by Social Security - the promise of a better retirement for all Americans.

Yeah, more like Social INsecurity.

Every American is entitled to a retirement, there's no doubt about it. There are many people who simply can't work when they get to be older, and need that income in order to survive. So, isn't it the governments job to provide that? Is a public system the best system?

Not only are public systems inefficient but they cheat us, taxpayers, out of huge chunks of our paychecks and ultimately do not provide the money necessary for people to truly live out their golden years.

Social Security is a pay-as-you-go system, wherein the taxpayers pay the tax and then it is used to pay the retirees. Any left over tax is reinvested in government bonds, which is then matured until the next year and then brought back into the social security fund. The system used to work, back when the ratio of workers to retirees was about 16:1 (circa 1950). Now, the ratio is closer to 3:1, and is ever closing in on 2:1. This system is not sustainable, it will not have the funds necessary to keep paying out benefits. Inversely proportional to the ratio of workers to retirees is the the SS tax rate, which used to be 2% back when that ratio was sustainable. Now it's 12.4%, and it is very likely that it will increase again sometime soon.

SS is doomed to fail. It has always been on a downward spiral when it comes to benefits and taxes. Soon, the SS will not take in enough taxes to pay those in the system. You know what's going to happen? Higher taxes: someone is going to have to cover those losses. Of course, poor people don't pay taxes, so the middle class will have to bear most of that weight (which, if you aren't retarded, is most of us). Now, you may say that the rich pay the most in taxes, but I say nay. The maximum taxable amount for SS is $62,700. Nothing over that has the SS tax applied to it. Rich people won't even feel the sting, nor will the poor, but the largest class of Americans will.

In reality, SS also doesn't actually pay out much in benefits. All in all, if you made an average earning while you worked (about $50,000), you will get roughly 1300 a month in benefits. Great, hope you don't have a fucking mortgage. Oh, and God forbid you want to eat. 1300 a month is not a whole lot for many people to live off of (Though, for some it's WAY too much. The government is real good about "waste management", catch my sarcasm?).

What is the solution to the problem of Social Security? Privatization.

Galveston County, Texas (which I normally can't stand), is an excellent case study. In 1979, county workers saw that the SS system was not sustainable and thus set out to fix it. What did they come up with?

A banking model, rather than an investment model. You see, normally with an investment model of retirement funding (like a 401K) fluctuates with the market, and clouds the future for many workers.

A banking model using IRA's, however, are not subject to the fluctuations of the market. Worker's contributions in Galveston County were put into a conservative, fixed-rate annuity, with impressive results: a steady 6.5% annual return over the last 30 years.

So, under this system, that same person who made 50,000 dollars a year will not make $1,300 a month, but rather $6,843. That's about 3 times the payout of the SS system. The best part about this system? You can opt out, you don't have to use it.

That's the biggest problem I think with SS: it gives us no choice. Whether or not I use it when I retire doesn't mean jack shit when I get paid. I should have the freedom to opt out of the public system and move my 12.4% into a private IRA. I can make more money, decide how much I save, and have a better retirement.

Social Security is not a bad idea, it just doesn't work; it is not sustainable. I can earn more monthly, and have the freedom to save whatever I want for my retirement if I was allowed to invest that 12.4% on my own.

The government should be focusing on letting its citizens opt out of the tax and let them invest in IRAs. Can anyone give me a rational reason for not doing this?

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