Wednesday, February 09, 2005

Some Thoughts On Social Security Reform

I had recently stumbled across this article about FDR’s thoughts on the future of Social Security and forwarded it to some friends of both political persuasions. The reactions I got back ran the gambit from Bush is evil to interesting. Yes, I know some of those people and aside from our political views, they are good people.

One of the more thoughtful responses I got back actually pointed out what the person thought were flaws in the President’s proposal. Now read that last sentence and focus on the last two words, President’s proposal. It is only a proposal folks not the bottom line.

My friend pointed out three reasons why the plan is going to fail in the Democrats eyes.

1) The risk involved with investing money in the stock market.

2) The plan’s focus is to reward Republican constituents, ergo banks, stock brokers, experienced and professional investors, over concern for the individual.

3) The supposed 1.2 trillion dollar price tag.

What follows is my reply with a couple pieces of additional research. The last line of the email to me was “What do you think?” So that’s where my response picks up.

I think the article was just another example of the Democrats forgetting their roots. I also think that if nothing is done to fix the problem, 1.2 trillion dollars is going to look cheap in 5 or 10 years, assuming that the cost is that high. If we fail to act now, while we have this opportunity, we will only earn the resentment of younger generations for leaving the task to them.

The fact is that the cost of the conversion will be phased in over a number of years. I also think that there are plenty of democrats working in banking, as stock brokers or investment advisors, so who's going to make money off the plan is a moot point from that stand point. I sincerely doubt that membership in the Republican Party is a hiring requirement on Wall Street nowadays. The bottom line is that the participants make money not the fund managers, stock brokers, bankers, or investment advisors. Although one can hardly expect them to perform their duties for free, we do live in a capitalist economy, it will be important not to follow the British mistake and let the fees and other costs eat away at the money

The fact that the amount a contributor can divert to this private account will start small and rise to a maximum of 4%, to me this is very comparable to a 401K that any good company offers, not to mention the plan will be completely optional. If one does not wish to participate, then they don't have to. The risky nature of the stock market is one that people like to bring up as a core reason for their opposition to any modification of Social Security that involves the stock market. This is risk diminishes the longer the investor stays in the market, historical returns prove this. One could also say that the reason why risk is always brought up by the Democrats is the simple fact that they don't believe the average American is capable of making wise investment choices.

The issue is bigger then any one party or political affiliation. The bottom line is something needs to be done and the longer we wait, the more it will cost and the more of our children and grandchildren that will face the same retirement that our generation faces. One completely funded by ourselves with no hope of recovering the money we already paid into the system. Doesn’t make you angry when you get your Social Security statement and know that you will never see a dime of that money if things are left the way they stand now?

Both parties had a golden opportunity to fix the system back during the Clinton Administration and blew it. I would like you to read this statement:

The next point I’d like to make is that I think we have to face honestly some long term reform issues. Maybe there ought to be a special commission the Democrats put together with people beyond our elected officials. When I left office, there was enough money to keep Social Security going till 2053, enough money to keep Medicare going tail 2027, through half the life of the baby boomers. I don’t know what the latest numbers are going to show but they won’t be good. If we don’t modify the tax cut to have more tax cuts now but we reinstate fiscal responsibility over the long run, we’re going to be in real trouble there. So, what’s our option? If you don’t like privatizing Social Security and I don’t like it very much, but you want to do something to try to increase the rate of return, what are your options? Well one thing you could do is to give people one or two percent of the payroll tax, with the same options that Federal employees have with their retirement accounts; where you have three mutual funds that almost always perform as well or better than the market and a fourth option to buy government bonds, so you get the guaranteed social security return and a hundred percent safety just like you have with Social Security.

Here the full link: Hat tip to Tom Alday, Chairman of the RAS. Thanks for your continuing service Tom.

That statement was made by Bill Clinton back in 2002 in a speech to the Democratic Leadership Council. The plan he suggested is almost identical to the proposal the President has put forth. The Democratic leadership of the House of Representatives and Senate in declaring their steadfast opposition has cut their throats. I have no doubt that the quote from FDR and the above speech from Clinton will be brought to the forefront in the coming battle.

One fact that might give us a reason for the lack of concern by those in Washington could be that they never paid into the system themselves until Reagan forced that change upon them in 1982, thus their lack of urgency. The President is completely right to take his argument for Social Security reform to the people. After all it is our money and if we ever hope to get it back, it will be up to us to pressure the House of Representatives and Senate to act, not the President. Enjoy the research links and have a great day everyone.

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