Why You Hate, and Like, Social Security

Last month, I wrote an article titled "Why I Hate Social Security," which could be summarized as follows:

  • I pay thousands of dollars a year in Social Security taxes. All that money is going to a program that, soon after I retire, will be unable to pay for all the promised benefits. I would be better off investing that money on my own.
  • Social Security is about more than just retirement. It might also provide your family with income if you die or become disabled.
  • Some people never receive a penny from Social Security because, like a family friend of mine, they die before retirement and don't have any dependents. This friend had adult children, but they won't get that money because Social Security benefits can't be bequeathed.

  • On the other hand, since we're not a nation of savers, perhaps it's smart of Uncle Sam to make us save for retirement and pay for insurance. Two-thirds of Social Security beneficiaries rely on that monthly check for 50% or more of their income. For one in five, Social Security is the only source of income.

  • Finally, I mentioned a proposal by Congressman Paul Ryan (R-WI) to allow workers age 55 and younger to divert some of their Social Security to personal savings accounts. The plan's supporters say it'll increase benefits, reduce payroll costs, and guarantee that retirees will receive at least as much as they would under the current system.

I asked readers for comments, especially regarding whether we should believe the math behind the "The Social Security Personal Savings Guarantee and Prosperity Act of 2004." I'm sure the Labor Department will announce a slowdown in the economy for August as thousands of workers stopped laboring to send me their responses. In this article, I'll summarize the most common comments, followed by a few quotes from readers. I don't agree with all these responses; I include them to show the diversity of opinions on this issue.

But first, let me tell you what we do know about Social Security: It never has been, and never will be, enough to provide the retirement you want. The average benefit is just $11,000 a year. Whatever reforms are enacted, the biggest determinant of the quality of your retirement will be how much you save now. If you don't know where your current retirement will lead you, it's time to find out. Fiddle with several online calculators. Find out how much you can expect from your pension and whether it'll still be around. Increase your contribution rate to your 401(k), 403(b), or IRAs. Learn like mad. (A 30-day free trial to Rule Your Retirement is a good place to start, if I do say so myself.)

Now, on to your comments...

Support for change
There are certainly a lot of people who have great animosity toward the Social Security program. They resent thousands of dollars being taken from them every year, and think they'd be far better off having control over that money. It's very Foolish; after all, we've said for years that you are the best person to handle your financial affairs. Here's what some of you said:

"An incredible lengthening of people's lifespan lies ahead, doubling even tripling what we experience today.... Certainly our grandchildren will live far, far longer than we do today. Under such circumstances the present system of Social Security financing will rapidly become untenable. We must move to a system of individual savings like the one offered by Representative Ryan. Nothing else will do the job."

"As a 20-something financial planner, I've always said I'd be willing to just take a cut in the Social Security rate -- say to between 2.5% and 3.5% -- and agree to never receive benefits."

"Your article on social security and personal accounts was a good start. Unfortunately, you failed to note the biggest advantage of private accounts. Politicians would no longer be able to spend your social security savings, while replacing it with noninterest-bearing government bonds that will have to be repaid by increased tax revenues. Enron got in a lot of trouble for doing this type of accounting."

"I am 56. I support scrapping the system as we know it, even though it means I will lose what went into it. Better that than burdening my children and grandchildren with what is coming."

"I have been begging for privatization of Social Security for years! My father (who has now passed away) was an accountant and told me that he once analyzed his own account. If he would have achieved only 6%, he would have received far, far more than he ever received from Social Security."

Social Security is not about individual wealth
On the other hand, many readers support Social Security. It's a crucial safety net, immune to market fluctuations.

"I collect Social Security, and while I don't really need it, who knows what might happen to my other investments. The Enron situation and the various accounting firms who are supposed to be watching over the quality of the financial reporting -- and who are just not doing their jobs -- create major concerns for me, my wife, and the rest of my generation."

"The name of the program is 'Social Security,' not 'Individual Security.' I don't view my payments to the fund as an individual investment or saving, but as a means for providing, literally 'Social Security.' It's... not having millions of people who are too old to work and earn money starving and freezing to death. I wouldn't like to live in a country where that could happen. So this is something I'm willing to pay for. And I believe it is something that everyone should be willing to pay for, like national defense. "

"Social Security is the only leg left in that 'three-legged stool' that is supposed to be the model for retirement. Sadly, I know too many people who need that boat."

"As a Social Security recipient and an online investor, I can tell you right away we'd be fools to privatize any part of Social Security. I've been investing since 1991 and doing it on my own online since I retired in 1999, and have seen the full spectrum of stock market ups and downs. I adore, love, cherish my monthly check. It is the only certainty in my financial life. My company pension plan bombed out in 1992 in exactly the manner that United is trying to do now. So, don't think that you can count on very much in this world when it comes to money."

"The beauty of Social Security is that it's a no-risk plan. You qualify for benefits? Great, here's some money. The money doesn't change if the market goes sour, nor if you chose your investments poorly. One thing to remember, though, is that the cost of a no-risk plan is significant, with very little in terms of return."

"Contrary to the core of your case, you do receive something from Social Security even before you retire. Remember why it was started. There were elderly (won't call them retirees, because they didn't retire -- just got too old to work) literally going hungry. Anyone who couldn't work anymore and had outlived their assets fell back on charity or, more commonly, on family. What happens if someone's younger relatives are also broke? The number of people in such a situation rose sharply during the Depression. The need for old age pensions was immediate. That's why it's a pay as you go system. What did workers gain from this, except an extra tax to pay? The same thing you get. If grandma has an income, her children and grandchildren don't have to take resources that may be quite meager, and choose between the aged parents or the children. Grandma's food doesn't have to come from grandchild's mouth."

"If there were no social security, I hope that this country would still take care of the poor, infirm, and weak. And that means some other tax would have to be raised."

"My mother lived to be 97. She would have long outlived anything she could possibly have saved over the years, and in fact since her main earning years occurred during the Depression, she had a hard enough time making enough to live on, never mind saving."

Many don't trust the numbers supporting personal saving accounts
For personal savings accounts to work, many assumptions would have to play out favorably: Corporations would have to benefit from the increased investment in the private sector, investors would have to manage their money relatively well, the government would have to use other money to pay benefits for retirees and near-retirees, and the markets would have to cooperate. Can all this really happen? Many of you are dubious. Furthermore, it is clear that the Wall Street scandals of the past few years have seriously weakened support for privatizing Social Security.

"I like the idea of the personal accounts. However, the plan will work only if tomorrow's politicians behave responsibly and look a generation ahead instead of concentrating on their re-election campaign."

"According to the bill's supporters, this plan would guarantee that no one will receive less than what Social Security currently promises. So, by my reading, there seems to be a safety net built in to allowing private retirement accounts. What funding provides for this guarantee? Would such a guarantee not encourage irresponsible risk-taking? How can solvency claims be reconciled with such a promise? I realize the devil is in the details, but I feel like this claim is blatantly 'too good to be true.' "

"So, you think you can trust the government to manage personal savings accounts? Why don't you ask the tribal members who cannot get an accounting of the trust funds managed (or should I say, mismanaged) by the Bureau of Indian Affairs? And you really trust the government to control spending growth to the estimated percentage? As you pointed out, look how the numbers changed on the Medicare bill. Until Congress reforms the way they appropriate money, to disallow totally unrelated spending authorizations to be added to other guaranteed-to-pass legislation, I have no confidence whatsoever. Or until they quit playing games with the budget and disallow borrowing against the Social Security trust fund. We should consider Social Security a tax -- not a retirement savings program, and consider it our civic duty to help those in need."

"I liked your column, but you are quoting an ideologue as if he is an authority. He basically told the Chief Actuary [of Social Security, who 'scored' the plan as sustainable] to run the projections using naively optimistic projections. Well, guess what? The Social Security System stays in balance. Duh. His projections are fundamentally flawed because they assume growth must come from increased savings, but does not account for the need for increased borrowing. He also assumed reduced government spending and increased revenue from corporations."

"At present, the government is spending every cent of our Social Security taxes and borrowing $400 billion a year beyond that. And that's a government that promised to eliminate waste and control spending. So before you can divert, say, $100 billion in Social Security taxes to private accounts, you'd need to come up with an extra $500 billion in spending cuts and tax increases. For four years the government has promised to keep spending down and rely on growth to raise revenue, and look what we have to show for it."

"In this post-Enron world, I don't believe 'corporations would benefit from the injection of capital that would come from all these private accounts, resulting in higher profits and thus higher taxes that would be devoted to Social Security reform.' I don't see any social consciousness on the part of corporations in the United States."

"I personally know some people who run large mutual funds. Whether the stock market is up or down, they still live like royalty. That is because there is no accountability. And, even when they are caught, there is no disgrace. The penalties are usually financial in nature, and they are easily absorbed by these people who sit on millions. If the entire wealth contained in the nationwide 'pension system' (which would include Social Security) were at the mercy of these types of unscrupulous characters, there would be even more cheating."

"As the last few years have shown us, the market is much too cyclical to be reliable, even among sure-thing bonds and bond funds. Many people who didn't cash out their 401(k)s before 2000 have seen their balances shrink drastically. Many have had to put off retirement. It makes a big difference if you retire at 59 or at 65, or even at 70. Point is, that such private savings accounts are similar to 401(k)s, and due to the nature of the product and the market, it's not very predictable, and for a retirement account, safety, reliability, and stability are important features."

While others note that it can work, and has worked in other countries
Some readers believe the numbers.

"[Studies have shown that] you could invest the same amount in stocks and bonds, have the market do a 1929 on the day you retire, and still do better than Uncle Sam. High and low income earners alike could retire to a pension greater than their salary and leave their children with millions of dollars. [One study] also found that the system discriminated against women (by the marriage rules) and African-Americans (by not recognizing their shorter life expectancy)."

"Did you know that they have a different scheme in England? It used to be much the same. In the late '80s it changed to allow you to 'opt out' from Social Security payments. You had to arrange a fund of your own choice into which the money was paid. The deductions from your salary were still mandatory.... The experiment has been... repeated (Sweden, Chile), and none of those countries has experienced anything like a crisis.... In fact, all of those countries' pension plans are doing quite well -- financially solvent, paying out benefits."

Americans don't know enough to manage their own money
Indeed, as a group, we're not financially literate. The Ryan plan allows people to stay in the current Social Security system, but how well will those who choose otherwise do with their money?

"Social Security is not the most wonderful system in the world, but until all working people are capable investors, and investments are all secure, it's probably the best we can get."

"When I was a student, I received no financial education beyond the existence of banks, what interest is, and how to write a check. We certainly did not budget, set financial goals, learn about investing (specifically or in general terms) or anything that would provide us with the skills needed to plan for retirement."

"One thing that you forgot is that the vast majority of people do not read Motley Fool nor have the education to do any respectable investing for themselves. Thus the security industry -- which you can NOT trust -- will be their fallback."

"Even if the government were to build in protections for the investor, can we really trust the government to give the citizen a fair deal? Consider how Illinois has devised its Section 529 program. It has limited investors to a subpar choice of funds with very high expenses and it denied tax deductions and tax exemptions for any resident of the state who buys under a plan from another state, even though the other plan makes better sense for the resident."

"The beauty of Social Security is that the market, Wall Street, or longevity can't take the benefit away from you. You can't outlive your check."

"You are correct in that most Americans are financially illiterate. A co-worker of mine and his spouse make $140,000 a year, but they are 'broke' when needing dough to fix something broken in the house. IRA, 457, six-month emergency fund? They never heard of them."

What would be the impact on the market?
Some folks had some questions about how all that money would affect stock and bond prices.

"For practical purposes, indexing is the only way to manage such a huge pool of funds, though even an S&P 500 index fund would soon run into trouble. The total capitalization of S&P 500 Index companies is more than $10 trillion. However, my back-of-the-envelope calculation suggests U.S. workers and companies pay $372 billion a year in Social Security taxes. Assuming just 25% of that is paid into managed accounts and the salary base increases at 3% a year, in 13 years the Social Security system could own more than 10% of the S&P 500. I cannot begin to calculate what effect that kind of concentration would have on the stock market."

"The legislation sounds great, but here is my question. How much money would be pumped into the market each month? Will there be too much money chasing too few valuable stocks? In other words, what is the impact on the viability and integrity of the market? Has anyone done the numbers? If so, great. If not, I fear fraud and a bubble that will only burst."

Keep it going
Despite the fact that, judging by what dominates the news, we care most about what our presidential candidates were doing more than 30 years ago, many Americans really do care about Social Security. Now, if we can just get the people in charge to do the same. In the meantime, jump on our Social Security Reform discussion board to debate the solutions.

Robert Brokamp is the editor of the Motley Fool Rule Your Retirement newsletter service. Try it free for 30 days and receive the "8 Ways to Supercharge Your Retirement" special report by clicking here.


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