How the Social Security System is Cheating you out of your Money and your Liberty
By Peter and Helen Evans (07/10/06)
The debate rages again. This weekend July 9th President Bush spoke about social security reform. "If we can't get it done this year, I'm going to try next year. And if we can't get it done next year, I'm going to try the year after that because it is the right thing to do," Mr. Bush said in a speech in Washington hosted by the Manhattan Institute think tank. "Now is the time to solve the problems of Medicare and Social Security and I want your help." Nancy Pelosi said, "Democrats are working to strengthen Social Security and address the real concerns of everyday Americans."
We've all heard of the inefficiency of the Social Security system and its very poor rate of return-on-investment. So, we decided to figure out exactly how bad it is.
We're not economists, nor are we financial advisors, but that's part of the point we're making. Ordinary people like us, using readily available calculators, can easily figure out how much they can save for retirement in a private account and compare that to what the social security system is promising them. It's truly amazing to realize that, starting at age twenty, by voluntarily investing only what we're forced to invest every year in the Social Security system, we could retire as near millionaires. Think about a nation where people learn discipline, learn to save, learn to manage their money and become truly free and independent of the government!
How can this happen? Here's a link to show how we made these calculations and the websites that are available to you to help you make your own. What we did is take the most basic, most conservative approach. We based the calculations on the current 15% "contribution" into the Social Security system. That's right, if you're an employee, you think you're only paying 7.5%, but the government requires your employer to "contribute" an additional 7.5%. Those of you who are self-employed are sure to know that 15% number.
We decided that our hypothetical 20 year old is making $20,000 a year; that's only $10.00/hr for a typical 2000-hr year. We've assumed that his earnings don't increase for 10 years but then they jump up to $30,000. We follow this $10,000-per-decade raise until age 60 when he is earning $60,000 for the next 5 years; and we assume he makes his 15% contributions in a lump sum only once a year. Also, we've kept the interest rate at only 5.5%. He probably could get a better rate from some Certificates of Deposit, but we wanted to explore a worst-case scenario. Right off the bat, you can probably see ways that he could increase his return on investment, for instance, just by making weekly or monthly installments of his annual contribution. In fact, the Heritage Foundation, http://www.heritage.org/research/features/socialsecurity/SSCalcWelcome.asp has used different assumptions for their calculations but their results show the pattern of a much greater benefit from private investment compared to the social security system.
The first 10 years his savings are only $38,881.62. That's $30,000 in direct contributions and $8,881.62 in accumulated interest. Not too shabby for 10 years, but after 45 years the retirement nest egg will have grown to $850,691.14. After 45 years of contributions into the current Social Security system, our hypothetical (now) 65-yr-old would be eligible for $16,696 in annual benefits. This, of course, is based on the current system and in fact, he may not "qualify" to get that until age 67, or older. See these interesting calculators and facts on http://www.socialsecurity.gov/retire2/AnypiaApplet.html. Now, let's see, if he keeps his savings of $850,691 and only collects 5% interest on it, he will receive over $42,000/year versus the $16,696 from Social Security. Which alternative seems like a better choice for a free, independent individual?
Now, some of you may think that $850,691 is not a lot of money to retire on but, considering that the total lifetime earnings of this individual is only $1,700,000, a nest egg equaling almost one-half of that lifetime earnings is not bad. That 50% "pay raise" was generated by setting aside only 15% of the income. Also, consider this is not in addition to the deductions that we've all experienced in our working lives; we're only redirecting the same amount of money into a more effective investment vehicle. By doing this, we have equity, we can borrow against it, we can even bequeath it. Consider also that most people will own title to their homes by their 65th year and have cars in addition to the nest egg. If Congress can be made to see the light, our contributions will be tax-exempt, too.
Again, we hear those that say, "what about those that didn't plan for this?" It's true that a lot people have learned to just wing it and trust that their lives will work out magically somehow. That's the unfortunate consequence of thinking that "the government will take care of me." That unfortunate thinking will start to change when people see what sort of "security" the current structure of Social Security actually is promising, especially when they can compare it to the opportunities that come with ownership of their retirement account. People will begin to learn to manage their money as well as earn it and to plan their financial lives.
Now, we'll also take on that idea that if we save for ourselves, those who don't know how to save will be out in the wilderness. When we begin systematically saving like this, we (and the government) will be in much better shape to give assistance to those few who will inevitably need it. One part of President Bush's plan is that the deduction is not voluntary, but that you can choose where the funds will be invested. Really think about what would happen with this plan. Make the same "contributions" you're making now but, instead of paying thousands upon thousands of government employees to administer it, have it in your own name and guess what, you could retire a millionaire. Why not give the young people of this nation the new plan that allows them to truly be free. Tell Congress to allow private social security accounts. It's more than time for reform. Let's give President Bush our support.
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