“It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”
You are 20 years old. You are about to take your first post collegiate job. You are minding your own business watching a football game on a Sunday afternoon when all of a sudden there is a knock on your door. You reluctantly go to the door and open it, where on your steps stands a tall lanky gentleman, with grey hair, a long beard, holding a briefcase.
“Hello, my name is Sam, I am from the BigGov Investment firm and I am here to start your special BigGov retirement plan.”
You politely tell Sam, that you are not interested in what he is selling and start to close the door when a swift kick props the door open and subsequently scares the hell out of you. Sam looks you straight in the eye and tells you…
“You, my friend do not have a choice.”
We have reported and alerted the public on countless investment scams and rip-offs over the years. Let’s talk about one of the greatest investment scams of them all, Social Security…
If in my capacity as a financial planner I were to first show up at your door when you were 20 years old and demand 12.4% of every paycheck for your entire working life. Second, if I were to take those funds and invest them in an undiversified manner, in instruments yielding no more than 2%. Third, if I was to implement the amoral untimely death caveat of this investment plan. For example: you pay into this system your entire life and you happen to meet your demise at 60. You wish to give all that money you saved for 40 years to your grandkids. Sorry… read the fine print, I keep it. Another fact that is ignored regarding Social Security is ownership. Benefits are not guaranteed! In two major cases, Helvering v. Davis (1937) and Flemming v. Nestor (1960), the Supreme Court ruled that individuals have no legal claim to Social Security. As a result, Congress can reduce Social Security benefits at any time, which it already has by raising the retirement age (leading to fewer benefit checks) and imposing a special tax on benefits. Workers have no projected right in Social Security benefits simply because they have paid Social Security taxes. If I were to present this investment plan to people, they would lock me up and throw away the key.
In the 1930’s, our country was doing everything and anything it could to shake off the Great Depression. Our elderly citizens suffered greatly during this period due to the double whammy of lost income and assets coupled with little to no time to recoup. President Roosevelt started a program that would take a portion of everyone’s paycheck and redistribute it to anybody over the retirement age. The demographics of our nation allowed this pay as you go Ponzi scheme to work for a long time. In the 1930’s there were 41 workers for every one retiree. The payroll tax was about 2% back then for the first $3000 of earnings. That is a great deal for people retiring in 1940. Their return was about 114%. Not so good today, where the return is 2% and you are taxed at 12.4% on the first $87,900 in income.
On January 17, 1935 in an address to Congress President Roosevelt foresaw the necessity to change the pay as you go financial scheme of Social Security. He stated that “For perhaps 30 years to come funds will have to be provided by the states and the federal government to meet these pensions.” But after that, he explained, it would be necessary to move to what he called “voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age.” Roosevelt was talking about the need to update and change the Social Security system around 1965 to what we would now call today “personal accounts.”
We do not claim to have all the answers when it comes to fixing an incredibly faulty system. However, I do believe that some dialogue is in order. When certain groups like the AARP/Teamsters/Democratic party begin running another campaign of lies and half-truths, all dialogue stops. Harry Reid, Nancy Pelosi, Ted Kennedy, are on the record on many different occasions, coming out for Social Security reform during the 1990’s. For example, in 1999 on Fox News Sunday, Harry Reid declared, “Most of us have no problem with taking a small amount of the Social Security proceeds and putting it in the private sector.” Magically, they have all done a 180 now that we have a Republican president. The fact is that Social Security is going to go bankrupt. This entitlement program that accounts for nearly 22 percent of all federal spending is facing demographic and fiscal pressures that threaten the future social security of today’s young workers. When crafting a financial plan for young Americans today I warn them not to count on Social Security to be there for them when they retire. I tell them to consider it a tax, nothing more, nothing less.
According to the 2003 report of the Social Security system’s Board of Trustees, in 2018, just 14 years from now, the Social Security system will begin to run a deficit. That is, it will begin to spend more on benefits than it brings in through taxes. Anyone who has ever run a business, or balanced a checkbook should understand the very simple concept that when you are spending more than you bring in, something has to give, you need to start either earning more money or spending less to keep things balanced. For Social Security, that means either higher taxes or lower benefits. We are constantly hearing from certain politicians that Social Security is the only large federal program that has been free of corruption and scandal so we shouldn’t change it. Yet, our esteemed politicians have treated Social Security like Harry and Lloyd from the film Dumb and Dumber, spending the money like a couple of idiots and replacing the funds with IOU’s.
If Social Security’s financial difficulties could be fixed by raising taxes or cutting benefits, the system would still need to be reformed because it is a bad deal for most Americans. Social Security quite simply costs way too much and pays much too little. Social Security’s rate of return on payroll taxes is dismal (about 2 percent) and declining. Workers deserve a retirement system that will make the most of their money. Imagine if you started working in 1960 at 20 years of age to retire at 65 today. Imagine if all that money you sent to Washington in FICA taxes was instead invested in a balanced portfolio of stocks and bonds.
When former Democratic Senator and Governor of Nebraska Bob Kerry asked the late Democratic Senator from New York “Why are liberals so reluctant to consider changing Social Security so that it guaranteed wealth as well as income?” He replied, “It’s because they worry that wealth will turn Democrats into Republicans.” I don’t know whether or not the assessment is accurate, however George Bush did beat John Kerry 58% to 42% in Galveston County, Texas.
Why do I mention Galveston County, Texas?
A CNS News story by Jeff Johnson showcases an example of reform that has worked in Galveston, Texas. Privatized Social Security has been utilized by municipal employees in Galveston since 1981. Nearly a quarter century ago local government workers voted overwhelmingly to opt-out of Social Security in favor of a locally controlled system that has been nothing short of an overwhelming success. Under federal law at the time, municipal workers had the option of not participating in Social Security program by replacing it with a private system. Due to overwhelming enthusiasm for these alternative plans Congress eliminated the freedom in 1983. The private system is also subject to payroll deductions and employer matches in the same manner as the federal system. In Galveston, Texas the county withholds 6% of each employee’s salary along with a partial match from the county. Those funds are invested in personal accounts for each participating employee. The remaining match from the county is used to cover the costs of disability and life insurance for employees who pay considerably more than Social Security. Both the employee/employer funding formulas are nearly the same under Social Security and Galveston’s “Alternative Plan,” the results however, are not.
Social Security buys U.S. Treasury Bonds that yield in the neighborhood of 2%. The rate of return in Galveston is in the much richer neighborhood of 8.6%, more than 400 times greater. Data from First Financial Benefits which administers the Galveston plan shows that county workers earning slightly more than $17,000 a year can retire at age 65 with a monthly payment of $1,285 compared with $782 under Social Security. Workers earning $50,000 a year retire at 65 with a monthly benefit of $3,486. Under Social Security the benefit would be $1,540.
Charles Jarvis, CEO of USA Next-United Seniors comments on Galveston’s plan. “They have never lost money. They have gone through double recessions in the 1980’s, recessions in the 90’s and a tech boom and bust in the 1990’s and into 2000. They’ve gone through another recession, an attack on this country and wars in Afghanistan and Iraq, yet they have steadily provided income for people.”
The problems with our nation’s Social Security program are not going away despite the efforts by many to ignore them. We happen to believe, like Adam Smith that individuals will always be better stewards of their money than the government. However, we also do realize that with increased economic freedom, comes greater responsibility. We need to do a much better job in educating our children about money. Public schools need to take some serious time away from “diversity training” and start teaching kids about interest, the markets, and the economy. As financial planners, we alert all clients in their 20’s to 40’s to plan on not receiving Social Security at all. In its present form Social Security is a ticking economic time bomb for our nation. If not reformed, taxes will have to be raised to growth stifling levels. Does the President have the right formula for fixing this mess? I don’t know. What I do know is that by brushing the problem under the rug and pretending it’s not there will not make it go away. Tackling a problem that has been described as the “third rail of American politics” involves courage. We will soon find out who in Washington has a spine, and who does not.