Privatizing Social Security isn't the answer
Over the past 10 years I have been looking at discussions concerning Social Security changes, both as a consumer and a financial professional, and have come to the following conclusion. If a politician is trying to convince you that privatizing Social Security is a good thing, don't walk away from that person, run.
First of all, I don't see Social Security as an entitlement. It is now and always has been completely funded with employee and employer contributions. There has been so much extra money in the system that our federal government has raided the fund to pay for programs that should have been paid for through the regular tax system. Calling Social Security an entitlement program, in my opinion, is comparable to calling your employer/employee funded health insurance a welfare program, because they are funded exactly the same way.
When the federal government takes money from the Social Security system, they use U.S. Treasury bonds for collateral. Most economists consider this the safest investment in the world. In fact, over the past 10 years, Treasury bonds have grown at 7 percent per year. Compare that with a blue chip mutual fund (which would be in your private Social Security account), which grew at 3.4 percent per year. Two years ago you would have actually lost money in this fund over 10 years.
Social Security is receiving almost a trillion dollars in contributions per year. They have 63,000 employees who administer the program for less than 1 percent of those contributions. This is because they are salaried employees who have made very few mistakes since the program was enacted in the 1930s. Surprisingly enough, I don't believe any of those employees have ever given themselves a multi-million dollar bonus, like the Wall Street managers do even if their company goes bankrupt.
In my opinion, the only group that will benefit from privatizing Social Security is the companies managing the money. First of all you will get an annual fee for the privilege of putting your money in one of their accounts. Second, you will need to pay the fund manager an average of about 1 percent per year for his vast knowledge of the markets. One percent of a trillion dollars is money that comes right off the top of your Social Security check. Third, you will not get an estimate about what you can look forward to for a monthly benefit because if the market goes down, with these higher risk investments, you will get less money. If there is no more money in your account, you get nothing. Fourth, the federal government will continue using a percentage for administration because money managers would have no idea how to run the disability part of the program. The bottom line here is that the program administration will be increased 2 or 3 times (that is 30 billion dollars instead of 10 billion). This extra money won't go to create 120,000 more middle class jobs but will be concentrated in the hands of a few people who are already millionaires. The last point, which requires a professional debate, is what would be the impact on the market of an extra trillion dollars a year to invest. There are several fund managers that refuse to take new money into their funds now because they are not sure where they will invest it.
Investing in the market is a smart way to increase your savings, but people who invest need to know the risks involved and do not use money that they require for regular living expenses. We need to keep in mind that under current savings rates, 25 percent of retirees will be completely dependent on Social Security for income. A large percentage of future retirees are saving at a woefully inadequate rate in IRAs and 401Ks, so Social Security will be required to live a decent quality of life. The latest studies have shown that the bottom 80 percent of wage earners in the U.S. account for only 15 percent of total wealth. Do we really want to risk putting a huge percentage of our retired population below the poverty level if the market takes another 50 percent drop like it did in 2008? -- Donald A. Johnson, Detroit Lakes