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Chadwick: Social Security — Still the Third Rail of Politics

The Federal budget deficit cannot be brought under control or meaningfully reduced without addressing the looming insolvency of Social Security.

The heart of the problem lies in demographics. More than seventy five million baby boomers will be retiring over the next eighteen years. That is approximately one quarter of the entire U.S. population today. As they depart the workforce, they will immediately go from contributing to the funding of the program to taking from it. And thanks to medical technology, life expectancies continue to improve. Since the first baby boomer was born in 1946, life expectancy at age sixty-five has risen by nearly five full years. Good news to be sure, but it up-ends the arithmetic of funding. It is both logical and essential to raise the eligible retirement age for social security, even more that what has been done to date.

Most major corporate and government pension/retirement plans in this country are required by law to be safeguarded and managed separately from the operating finances of the company or government entity. The Social Security taxes received by the Federal Government, by contrast, are not segregated. There is no “lock box” into which Social Security payments are made and invested for future retirees. The system is truly “pay as you go” which means that the burden of funding the growing liability associated with the baby boomer generation will increasingly fall on their children and grandchildren.

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Social Security legislation was signed into law by President Franklin Roosevelt in 1935 as part of the New Deal in the midst of the Great Depression. The law’s intent was to provide a social insurance program during a period of massive unemployment and poverty in this country. It certainly wasn’t intended as supplemental income for the wealthy.

Forty years ago, when I was hired for my first “real” job (which I define as one with a salary and not an hourly wage), I was excited at the offer of an annual salary of $10,800. I remember believing I was on the path to a career that would allow me to make enough money to forego Social Security when I retired. That was my goal.

Today, with the magical age of “retirement” and Social Security within sneezing range, I am pleased to have attained that objective. I neither need Social Security nor should I receive it. However, the system will not let me even opt out, much less allow me to register that I do not need it. And therein lies a big part of the problem. Social Security should be provided on the basis of need. The money withheld to fund social security is a tax pure and simple; it is not a savings plan. It is not my money, despite much rhetoric to the contrary. Means testing would be complicated no doubt. There are many who might appear to have adequate retirement income but in fact may be caring for children and grandchildren. But simply because the solution might be complex does not mean it should be eschewed.

I realize that I have already uttered what is heresy to many, so let me add more fuel to the fire. If a portion of the 6.2% of gross income that an employee pays into the Social Security system were instead put into a private personal savings account and invested over the forty years of her working life, it would generate a level of assets by retirement that would be able to supplement and possibly even exceed the social security benefits provided today. And most important of all, that money would belong to the person who saved it, not to the Federal Government. That means it could be passed on to the family in the event of death before retirement. It is a ”no lose” solution for workers. You can do the arithmetic yourself. Even if you use a conservative 4% annual growth rate for investment return, you will be amazed at the power of compounding. For minimum wage earners or those making too little money during their working years to build up a sizable private savings pool, they could still be provided social security through the contributions made by the employer.

The fiduciary oversight of those assets would need to be addressed. In the wake of the decimation of many 401(k) plans during the stock market decline of 2008/2009, there is much skepticism about private savings as a secure means of generating retirement income. But even if the private accounts invested only in Government bonds, they would be far ahead of the system today.

Social Security has been tagged as the “third rail of politics”: touch it and die. And since the “courage deficit” exceeds our budget shortfall, this growing fiscal crisis has been shunned and cast aside for some other lawmakers to address some other day. And now we face the next twenty years of having to pay the piper – well seventy five million baby boomer pipers lining up to be paid back after having contributed for forty years.

Here is the good news – it is not too late to solve this problem so long as there is a will to do it. Social Security can be fixed. It will take courage to change. The solution will almost certainly include raising the age of retirement, means testing and partial privatization. Let’s fix it for our children’s children.

Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.