The term makes Seniors crazy and makes politicians run the other way. The Democrats media have successfully demonized the word so that no rational discussion can be had. That has to change. The Presidential commissions answer to this part of the problem is to raise the age and tax people more. This only puts the program at odds with the demographics of the country. If there is an inescapable truth, it is that you can’t beat demographics. The answer lies in 6th grade arithmetic.
First some facts:
1. The Social Security Trust fund is not real and has not been for 40 years. President Lyndon (Great Society) Johnson decided, and all the Democrats went along, that FICA tax receipts should get added to all the other tax receipts and get spent. The SS trust fund contains IOUs from the government promising to pay itself the Social Security contributions of the population. Suppose you put $100 a week in an envelope for your retirement; you take it out immediately, replace it with an IOU to yourself for $100 and spend the money. After working for 40 years, how much money is in the envelope? Right, and that is where we are.
2. The return on the Social Security Trust fund is 0%.
3. All your Social Security contributions, the ones that the government has already spent, are not yours.
4. Social Security Contributions that come out of your paycheck each week are matched (100%) by your employer.
5. There is no plan for privatizing Social Security that calls for making any specific investment that “helps” Wall Street. These plans have limitations on what investments can be made to limit speculation (same as IRAs). You can’t buy baseball cards, stock options, Picassos, etc.
6. Back to the arithmetic. Put $1,000 a year into a CD/Municipal Bond that pays 5% (hard to do now but certainly not historically great return). Do that for 40 years. At the end of 40 years, your total contribution has been $40,000. However, thanks to the effect of compound interest, you have an account with about $120,000. Three times what you put in.
The people who object to any privatization plan first make an effort to scare people who are currently on or close to receiving Social Security. No privatization plan changes their benefits. The only issue remotely impacting these people (I am one of them.) is funding to.
Another objection is that it gives money to the Wall Street guys. Wrong. Under any of these plans, Social Security contributions are your property, all plans call for it to be a voluntary program and under your basic control. What you do with the money is your business, again, within safety and soundness restrictions. There is absolutely nothing in any of the proposals that says it must be in the stock market. As with IRAs, precious metals, CDs and municipal/corporate bonds are all valid investments.
Look at the arithmetic again. Money triples over 40 years at 5%. Current FICA levels are about 13.5% counting employee and employer. Someone making $50,000 contributes a total of $6,750 a year. Doing that for 40 years at 5% gets you just over $800,000. It is yours. The interest that throws off would be more than your get from Social Security, even without touching the principal. You can do what you want with it. Give some to your kids. And you would not contribute one more penny that you are contributing now. By the way, the guy who makes $25,000 winds up with about $400,000. If you actually get a raise someday, the return is even better.
Now why does this happen. The comparison between the current plan and privatization is easy. One gets a 0% return and one gets the marvelous impact of compound interest.
The only real issue to doing this is funding the current system until it is replaced. The flippant answer to that is that we can’t fund the current system now. Not helpful but it shows what are options are. We have to do something besides continually raising retirement age and contribution levels. The effort needs to be put toward figuring out how to do the transition, not continually bandaging a system that was fraud when Bernie Madoff did it.