Thursday, March 31, 2011

Social Insecurity: Not a Ponzi Scheme, Not Doomed, but Not Enough, Either

When I first started working on a regular basis, I noticed straightaway the little bite taken out, set aside for Social Security.  "Aha," thought I, "I'm saving for retirement.  Good."  How gullible of me.

Did you make the same mistake?  Did you think the benevolent government was taking a few bucks out of each paycheck, setting it aside in a box with your name on it, for your future use?  Don't be misled, it ain't so.

You might think your money is your money ad infinitum.  Well, before you start thinking that, ask yourself: whose name is on the money?  If your name isn't United States of America, then that's one mistaken concept down the tubes.  Where you work and live, the laws of the land define what happens to your taxes.  Strictly speaking, the money pulled out of your paycheck for Social Security is a tax and is funding an ongoing government trust.

Now let's digress just a little.  This is the point where a lot of people point to Social Security and say that it's a Ponzi or pyramid scheme, that it takes money from the rising generation to give it to the retiring generation.  Grossly simplified that is essentially true and is an element in common with a Ponzi scheme.  But that's where the comparison pretty much stops; there are transparencies in the Social Security structure that do not exist in a Ponzi scheme.  The Ponzi scheme's essential goal is to mislead and defraud in order to get hold of your money.  But there is nothing in the Social Security Administration's statements that promise you huge returns on your "investment."  It's not an investment and it's not a pyramid scheme.  A pyramid scheme tries to pass itself off as an investment and keeps its nature well concealed.  By its very nature however, the Social Security Administration tries to be very open about its workings; you can have pretty free access to the SSA via the Freedom of Information Act.  Your government is your government - you bought it with those very taxes bitten out of each paycheck.  Want to know more?  It's as close as this.  Don't be afraid, it's just the government.

You can and probably will wind up collecting more Social Security than you paid into the system.  That's a complication that probably wasn't fully appreciated by the original framers during the New Deal back in the 30s.  Roosevelt et al were anticipating continued growth of the American economy for the foreseeable future and for about the next forty years or so, they were right.  The rolls of workers grew and grew, and the coffers of the Social Security Administration were more than equal to the slowly growing rolls of retirees.  But here's where things start to collapse:  Baby boomers are retiring in droves.  There is a huge influx of folks who are stepping out of their jobs, and there aren't as many workers stepping into jobs to keep Social Security afloat, to keep those older folks in Icy Hot and fuzzy slippers.

Part of that problem comes from, I think, globalization.  Back in the day, American companies hired American workers and American consumers purchased American products.  But times change.  American companies have discovered the economic advantages of shipping work overseas to cheap labor.  That's tough on workers now, and tough on retirees later.  It's beginning to be tough on voters, as we try to muddle our way through the murky future.  Can we legislate our way through free enterprise following the path of greatest profit, while still providing social security benefits to retirees?  That's not a path I could chart, I don't think.

This is why good presidents surround themselves with smart people.  There won't be an easy solution, and there's no way to formulate one that will please everybody.  It's going to be a tough row to hoe, and it'll take a lot of smart people to figure out the best way to keep Social Security solvent in the future.

One of the ways to do that is to increase the FICA tax, also known as the OASDI tax.  That's Old Age, Survivor's and Death Insurance.  Pay more money into the trust now, so there's more money in the trust, period.  Pretty much all that's going to do is delay the inevitable.

What's the inevitable?  I think that the inevitable must be a reduction in benefits.  Social Security cannot continue to be the full-ride allowance that it's been.  Americans will have to step up and take more responsibility for their own fiscal liquidity as they enter retirement.

Before you start weeping and wailing and tearing your hair, look around.  There are many vehicles by which you can do this already: mutual funds, 401(k)'s in assorted flavors.  Just socking money away in the bank is better than nothing, but it has its own risks there - if it's in an open account, you can spend your future.

This is where the main problem lies, I think.  Americans expect someone else to do the heavy lifting for them, that at some point they get to put their load down, and someone else will pick it up.  You've done your bit, now you're going to be carried the rest of the way by the rising generation.  That's irresponsible.

Am I counting on Social Security to be there?  Yes - to a degree.  I can't reasonably expect that it will get the whole job done.  I'm socking money into 401(k)'s; if the house were paid off I'd probably be paying in about twice, maybe three times as much.  More now is lots more later.  So rather than thinking about how much you'd like to trade in that grungy old 2008 Chevy, why not reconsider that?  2008 is young.  You didn't trade in your three-year-old child, did you?  It's cheaper to keep it, not take another hit on the new car purchase.  Don't try to fool yourself with leases, either.  Pay the house off NOW.  Get an amortization schedule from your lender, find out how many principal payments you can pile together and knock off a few years' worth of payments.  Tighten your belt.  Don't eat out.

Social Security is running out of money, but it isn't running out of commitment.  It will continue to be there, but it won't be able to keep you alive, not anymore.  It's up to you to do that.  Take steps now to more fully ensure your future welfare.

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