We have all heard that Social Security is running out of money and that by the time we retire there won’t be any money left. Have you ever wondered what the government can do about Social Security? Or Have you ever asked, “Why don’t we worry about Annuities and Insurance companies making their payments but we are always worried about the Government equivalent? In the following article, Steve Selengut will show you.
As an investor, I’ve always wondered why Social Security is such a problem.
What’s so difficult about managing this particular Trust Fund, and why is it so different from other investment accounts that pay out a constant stream of income?
The private sector does it routinely with defined benefit pension plans and fixed annuities, so what’s the big deal? Is Social Security failing because it hasn’t been invested soundly, or is there some other reason?
The most obvious explanation is politics…
But we’re running out of time for finger-pointing, and Social Security is solvable in a surprisingly painless manner. But it will require a whole new approach that uses old ideas and institutions in ways that most of us have pretty much given up on.
As hopeless as the Bush Administration’s Nicotine Patch for Social Security would have been, it has pointed in the right direction.
Now don’t panic when I refer to “privatization”, or when I mention one of my own most hated financial products, the “annuity”.
Both are needed to permanently fix the Social Security mess, to get it away from people who are neither managers nor investment specialists, and to make the whole system work more economically.
The purpose of this article is to get you to think about it… and to elect a hero with the guts to fix it. Unfortunately, Joe DiMaggio has left the building!
Did You Know there is no Social Security Trust Fund?
The first problem is that there is no trust fund to manage. As it stands now Social Security simply collects the money and spends it the same year.
Are you surprised that there is no “Social Security Trust Fund”… no investments and no Investment Managers? This is a gigantic Ponzi scheme designed and controlled by the government.
The real surprise is that it has worked incredibly well as long as it has, in spite of congressional tinkering and prohibitively high costs.
There was always a tax plan for funding the benefits, but never an Investment Plan. And as difficult as it is for me to admit, no sophisticated Investment Plan is really necessary.
All that is needed is a new (reduced) Social Security contribution plan, one that isn’t designed to fund every politically sensitive entitlement that comes along. We also need a simplified Social Security benefit structure that supplements privately funded (untaxed) retirement programs.
[Healthcare has to be a separate issue, perhaps an actual (managed) Trust Fund, and certainly something that should not be funded by private citizens until there is meaningful tort reform in this country.]
Phew! Back to the point… We can eliminate all the unnecessary bells and whistles simply by mandating personalized benefit funding. Let the politicians deal with homeland security while the private sector deals with things financial.
After the repeal of the Social Security tax and implementation of mandated Individual Retirement Plan Contributions, the Social Security bureaucracy would retain several important functions:
- Qualifying private sector companies and licensing them to provide Social Security Retirement Income Annuities (SSRIAs). Thousands of providers would be needed, but only, fixed income experienced, profitable companies need apply.
- Developing a computerized system for participant/provider matching… inspired randomness is essential.
- Proactive monitoring of compliance with the minimal rules, installation of fraud detection systems, and investigation of all violations by providers, participants, and retirees, etc.
- Keeping the plan sacred, simple, and principally unchanged by future legislation. The plan must be kept: simple and profitable for providers; painless and visible to participants; timely and comprehensible to retirees.
The SSRIA would be a new and improved version of the ancient Deferred Fixed Annuity Contract… a boring but guaranteed retirement benefit vehicle, funded by both mandated and voluntary payroll deductions, with a whole bunch of new wrinkles that make it an ideal Social Security replacement program.
For example, and unlike existing annuity contracts:
- Participants would be allocated to “qualified SSRIA providers” so there would be no sales commissions, no business acquisition or retention costs, no advertising expenses, etc.
- All SSRIA contracts (regardless of provider) would contain the same terms, interest guarantees, retirement benefit choices, and pre-retirement death benefits, thus eliminating any incentives for internal fraud and manipulation of statistics.
- Qualified providers would establish separate subsidiaries to manage and control SSRIA operations and to assure that only high quality, income securities are used to fund future benefits.
- All qualified providers would use the same mortality, investment earnings, and expense assumptions, and all benefits would be fully guaranteed by the parent corporations.
The SSRIA would be a supplemental retirement program, funded by a much smaller, yet flexible, payroll deduction, and it would be designed to be the foundation of a retiree’s total retirement package… a benefit floor. Participants would choose (annually, for the following year) to deposit from the required 2% up to a maximum of 4% of their Pre-Tax Income to their personal SSRIA, a contract that would follow them everywhere, from employer to employer, throughout their working years.
If someone died before retirement, a death benefit equal to the full cash value of the contract would be paid to the designated beneficiary.
At retirement, participants can elect either a Life Annuity or a Joint & 50% Survivor Annuity. No variable plans of any kind would ever be allowed; there would be no loan privileges, withdrawals, or dividends. Providers are expected to make a reasonable profit, which would ultimately be determined by their operating and investing abilities… hmmm, I smell capitalism.
Employer-sponsored benefit programs and individual savings and investments are expected to make up the bulk of private retirement programs. The SSRIA would assure that everyone has something, but individual savings and retirement plans, both company-sponsored and personally funded, would be encouraged by the new IRS policy. No retirement income regardless of the source would be subject to income taxation!
Neither employers nor self-employed persons would be required to make matching contributions of any kind to employee SSRIAs. However, they would be encouraged to use their improved cash flow to increase employment or to reduce prices, perhaps by a new system that would reduce their corporate income tax obligations as a reward for boosting the economy. Similarly, billions of dollars of discretionary spendable income would find its way back into the economy from consumers whose payroll deductions have been reduced.
Steve Selengut
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book That Wall Street Does Not Want You to Read!“, and “A Millionaire’s Secret Investment Strategy”
