Privatization of Social Security - Insanity or Genius?

Privatizing Social Security - Insanity or Genius?
The View from the Middle

In case there is any confusion about how I feel about our federal government, let me make my position perfectly clear. I believe it is a “waste, fraud and abuse” machine. During her presidential campaign, Carly Fiorina suggested that our government is too big, too costly, too complicated, too corrupt and too inept and that it is crushing the dreams and aspirations of our people. I’m a Carly Fiorina fan.

In the governmental world of $100 hammers, shrimps on treadmills and bridges to nowhere, what makes you think that it would be any more effective at managing your retirement funds? Social Security may have begun with good intentions, but as with anything connected to big government it has been perverted and mismanaged through the years. In the beginning, for example, SS funds were to be put in a “lockbox” and to be protected from the greedy hands of politicians in Washington. But in true government fashion, these funds have been spent leaving nothing but US treasury IOU’s behind.

Today, our government is spending those funds faster than they are coming in and has to admit that the SS trust fund will be insolvent by 2035. At that point, I predict that our federal government will simply raise taxes to cover the difference, not because it is right, but simply because they can.
If we really want the concept of “Social Security” to be recognized, why don’t we take these funds out of the greedy, unscrupulous hands of our government officials and put them in the hands of financially astute managers who can invest that money for the participants? Let me help you with that decision by making a comparison that our government is counting on no one making.

Let’s look at a Jane or John Doe who began working in 1970 at the age of 21, and retired at 66 in 2015 making America's median income every year. The Social Security trust fund will guarantee (not really – remember that this fund will be insolvent in 2035) a monthly income of $1,874. This is certainly not enough to live on unless you plan to live in a tent and eat PB&J sandwiches for the rest of you life. It is intended, however to supplement any personal savings or retirement programs you may have or be eligible for.

There are a number of flaws in this system. First of all, if Jane or John dies a month after their 66th birthday, he or she will have contributed to the trust fund for 44 years and received a whopping $1,874 in return. That kind of sucks! Even if they lived to age 79 (current life expectancy in US) SS would deliver only $292,279 in their lifetime.

Now, if they had made the same payments/investments (personal plus matching employer contributions) into an S&P 500 index fund, Jane or John would have retired with $935,978 given the 8.1% average return of the S&P 500 over their working lives. The benefits to this approach are abundant.

First, if you died the next month, your beneficiaries would inherit almost a million dollars vs. a big goose egg from the current SS plan. Next, that money could generate a monthly income for you. Let’s say that your investments continue to produce the same 8.1% return that it did for Jane and John’s lifetime, this would produce a monthly income of $6,318 or more than three times your Social Security payment PLUS you still have your $935,978!!! These are not projections. This is reality, and given this reality, who would choose less than a third of the monthly income and no nest egg vs. the simple privatized plan described above.

Let’s be honest, the government has totally perverted the idea of Social Security. First, by spending your hard earned money to buy votes instead of putting into the “lockbox” they promised to get the SS bill passed. Then Washington dramatically underperformed the private market and in effect stole hundreds of thousands of dollars from every American that has retired under their plan. If Washington were a person, it would be in jail fighting with Bernie Madoff for the title of “scammer of the century”.

If politicians really cared about the American people they would develop a program that could deliver the results I described above. They could provide the disciplined investing by taking the money out of all our paychecks every month as they already do (this may be the only thing the government is good at). They could also offer a few investment plans (high, low and medium risk) that we the citizens could choose from. Believe me, the financial industry would fiercely compete for the opportunity to manage these funds. Even a tiny fee of .25% (that’s a quarter of 1%) would yield them billions in profits every year.

I’m with Carly. Why would we trust a government that has proven itself to be both corrupt and inept (a deadly combination) when we could invest in America and create a retirement income with real buying power? If we can’t even call Washington on this con, there may be no hope for us until they take all of our dollars and they give us back 30 cents worth of services in return while THEY live in mansions, feast on $300 burgers (yes they do exist) and guzzle $1,000 bottles of wine. Have you seen The Hunger Games?