Sunday, February 06, 2005
An Explanation of Social Security
President Bush, during the State of the Union address, suggested to the nation (as well as those in both houses of congress and Supreme Court) that Social Security is in danger of going broke (in about 75 years) and that something must be done to securely extend the program. To preface this with my view of Social Security, I believe that over the next 20 years it ought to be phased out from the general public. With the advancement of our national economy, there is absolutely no reason for anyone to have not invested in any number of retirement plans (nearly all of which pay out in much higher returns than Social Security). After it is phased out of the general public, you must apply for it, a sort of welfare for the retirement aged. But, as it stands, that will never happen because the philosophy of the program is so ingrained in the public mind that the program can be easily manipulated by politicians (which earns them instant scorn from myself, not that it matters). I absolutely agree that something must be done now, rather than later. Yet, I am not ready to support the President's plan, for various reasons. I have heard, through opponents, that 75 years is a long way down the road, why must we fix it now? This, on the whole, is flawed thinking. Trends in longevity are showing that by the time social security is bankrupt, I will possibly still be alive. I realize these attacks are merely political, but how can I respect an opposition that is against forward thinking, and whose primary argument is that it's not happening now, so it doesn't need fixing?
But here's an actual argument for you. These personal accounts, as suggested, are handled by the government. All federal employees, instead of paying into social security, buy into personal accounts. The problem with this program is that, if enacted, I will have the option of redirecting 2% of my FICA taxes (under the Federal Insurance Contributions Act, 12.4 percent of your earned income up to $90,000 is paid into Social Security, and an additional 2.9% is paid into Medicare, which has no earned income cap) into a "private" mutual fund instead of a social security account (which I will describe momentarily). This redirection, as calculated (assuming I earn more than $90,000) will be a mere $2,232 annually. Let's say that this government handled mutual fund returns 20% (I'm willing to say that, realistically it will have a 5% return, which will not even cover the rate of inflation), over the course of 30 years I will have amassed $80,352. That isn't even a year's worth of work for me. But this is only part of what I will be worth in social security, adding back the 12.4% I've paid in to (over 30 years at $90,000), I am worth at 65 $348,192. That is a fairly impressive number to me, a 22 year old. However, let's say that I die when I 65 and 1 day? That's right, it goes straight to the federal government. Isn't that just great? If I have opted to the 2% personal account, that potential $80,000 will be inherited by my wife or heir. How is my wife going to live off of that? And we haven't even gotten into the taxation of that $80,000. I wouldn't be surprised if all my wife ever receives is a $50,000 check. That will probably be 1/10th of what she will get from my life insurance. If that's not depressing, I don't know what is.
Indeed, so depressing that I don't even feel like going on. Yet, moving forward...this private account will not be managed by me (whom I can almost definitely say will be a better investor), but a government office, another nameless bureaucracy. Thankfully, I am going to be prepared. My advise to everyone is to put somewhere between 5% and 13% of your earnings (do not cap at $90,000) into any number of retirement funds and stocks. Over the course of 30 years, investing 5% of $90,000 into a mutual fund that earns 8%, you will have made $145,000. Seems pretty meager, so try and increase the percentage you buy into these mutual funds. Also, you will more than likely be earning more than $90,000 as time goes on. Lastly, this figure will increase as the rate of inflation increases.
As a private investor for your retirement, you can easily expect much higher returns than you would through social security. An added benefit is that the money earned through your private retirement fund will be inherited by your heir, instead of by the government. And I still wonder why people aren't saving for retirement, and instead expecting a few hundred dollars from the government every month (where you will have to be 85 to see all the money you put into Social Security). It's too big of risk not to invest in your retirement and only rely on Social Security (I'm sounding like a broken record, but how many times must it be said before people realize this?). However, and I failed to mention this in the first paragraph, if you haven't put any more money into your retirement than the required FICA tax, don't expect me to pay for your stupid mistakes, because that isn't taxation, that's robbery.
But here's an actual argument for you. These personal accounts, as suggested, are handled by the government. All federal employees, instead of paying into social security, buy into personal accounts. The problem with this program is that, if enacted, I will have the option of redirecting 2% of my FICA taxes (under the Federal Insurance Contributions Act, 12.4 percent of your earned income up to $90,000 is paid into Social Security, and an additional 2.9% is paid into Medicare, which has no earned income cap) into a "private" mutual fund instead of a social security account (which I will describe momentarily). This redirection, as calculated (assuming I earn more than $90,000) will be a mere $2,232 annually. Let's say that this government handled mutual fund returns 20% (I'm willing to say that, realistically it will have a 5% return, which will not even cover the rate of inflation), over the course of 30 years I will have amassed $80,352. That isn't even a year's worth of work for me. But this is only part of what I will be worth in social security, adding back the 12.4% I've paid in to (over 30 years at $90,000), I am worth at 65 $348,192. That is a fairly impressive number to me, a 22 year old. However, let's say that I die when I 65 and 1 day? That's right, it goes straight to the federal government. Isn't that just great? If I have opted to the 2% personal account, that potential $80,000 will be inherited by my wife or heir. How is my wife going to live off of that? And we haven't even gotten into the taxation of that $80,000. I wouldn't be surprised if all my wife ever receives is a $50,000 check. That will probably be 1/10th of what she will get from my life insurance. If that's not depressing, I don't know what is.
Indeed, so depressing that I don't even feel like going on. Yet, moving forward...this private account will not be managed by me (whom I can almost definitely say will be a better investor), but a government office, another nameless bureaucracy. Thankfully, I am going to be prepared. My advise to everyone is to put somewhere between 5% and 13% of your earnings (do not cap at $90,000) into any number of retirement funds and stocks. Over the course of 30 years, investing 5% of $90,000 into a mutual fund that earns 8%, you will have made $145,000. Seems pretty meager, so try and increase the percentage you buy into these mutual funds. Also, you will more than likely be earning more than $90,000 as time goes on. Lastly, this figure will increase as the rate of inflation increases.
As a private investor for your retirement, you can easily expect much higher returns than you would through social security. An added benefit is that the money earned through your private retirement fund will be inherited by your heir, instead of by the government. And I still wonder why people aren't saving for retirement, and instead expecting a few hundred dollars from the government every month (where you will have to be 85 to see all the money you put into Social Security). It's too big of risk not to invest in your retirement and only rely on Social Security (I'm sounding like a broken record, but how many times must it be said before people realize this?). However, and I failed to mention this in the first paragraph, if you haven't put any more money into your retirement than the required FICA tax, don't expect me to pay for your stupid mistakes, because that isn't taxation, that's robbery.
