Let me start by saying that I like the idea of Social Security. I don't mind the low rate of return on investment. The promise of a guaranteed monthly income in the future compensates for however better I might have done by placing my FICA deductions into an index fund instead. In other words, solvency issues aside, low reward is balanced by low risk.
I've always considered my eventual Social Security payout as an excuse to concentrate on more growth-oriented instruments while I'm in my relatively younger years. However, whether you like the Social Security system or not, the current political climate indicates that a change of some sort is on the way. There's just one aspect to the dialogue I find irritating.
Please, no private accounts!
I can't stand the idea of private accounts. We already have 401(K)s, IRAs, Roth IRAs, and more. What we don't need, in my opinion, is another account, especially one that is limited. Although the prospective legislation has not taken any definitive shape, my best guess is that some percentage of FICA deductions will be distributed to a taxpayer's private account, and he or she will have the opportunity to invest in government-approved "safe" mutual funds or bond funds with perhaps an option for a money market as well. As far as I can tell, there won't be any option for direct ownership of individual stocks.
I don't like it.
Why? Because for all the talk of "private" accounts and happy, feel-good thoughts of "ownership," if I have to stash my money into a "safe" index fund or bond fund, well, guess what... I'm already doing that! I currently invest in an S&P 500 index fund, I own stocks in an individual brokerage account, and I have a Roth IRA -- and I have total control over everything. I really don't like the notion that I have to be told how to allocate my money.
This may sound contradictory, since I said I don't mind Social Security, but when the government takes my money and converts it into an IOU, I don't have much choice as to where and how I allocate my investment. As far as I'm concerned, the argument for changing this important institution hinges upon choice and empowerment; the individual will have the power to do with his or her money what he or she wants, providing the opportunity to do better than the government. The only way I know how to do better is by exercising complete control, which, for me, would mean buying stocks.
Remember -- and again, I'm setting solvency issues on the shelf for the sake of focusing on this one topic -- if we wanted completely "safe," we wouldn't be doing "private" accounts now, since such accounts also provide the opportunity for substantial losses. I also own some high-yielding equities as well that are, by definition, a bit riskier but full of upside reward potential. I wouldn't be able to use my new private account to buy a mortgage REIT -- a real estate investment trust that borrows money to invest in mortgage-backed securities, hoping the spread between the costs of leverage and the rates on the securities ensure a profit. I'm almost certain the government would consider it too risky.
That's why I believe we should eschew the proposed private accounts and instead make better use of what exists now: IRAs. We should simply allow a greater percentage of the FICA taxes that would otherwise be placed in the Social Security fund to be diverted to an individual's IRA.
For starters, people will be encouraged to open these important accounts. (Every time I hear that someone doesn't have a Roth but is eligible, I am utterly dumbfounded.) Second, people who couldn't previously afford to fund their IRAs up to the maximum will have an opportunity to deposit more money. For me, this kind of consolidation might make better sense than having to keep track of separate private accounts and separate IRAs. In addition, fees associated with the creation and management of private accounts can be averted.
Third, it offers complete choice not only in terms of how to invest, but where to invest. Why should people be forced to deal with Institution A when they want to deal with Institution B? If someone wants to hold an IRA at either E*Trade
The bottom line
My bottom line is simple: let's use the existing IRA accounts as repositories for any diverted FICA monies. The populace will make all the decisions, and that's how it should be. If people want to buy Microsoft, Procter & Gamble, or Shuffle Master, give them the freedom to do so. Yes, there is the danger that some folks will make bad decisions. But those who don't understand stocks and don't care to research them can simply do what they probably are already doing in their IRAs -- buy into funds, or even certificates of deposit.
In the end, the country can and will do what it wants. I'm just hoping that involves steering away from the current proposal of private accounts and more toward IRAs.
- Retire Early With Dividends
- Golden Years, Golden Wealth
- Why the Roth Rules
- On Social Security: Fun With Numbers
- Why I Hate Social Security
The government might have more influence than you realize with "private" accounts. How so? Check out this insightful Bill Mann piece.
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