Are Most People Smart Enough to Invest Their Own Money?

I am a strong advocate of voluntary personal retirement accounts. I believe that in the long run such accounts will (1) solve the funding problem, and (2) provide a greater benefit than is available under the current system. This has been demonstrated in numerous studies. I refer you to Social Security: The Inherent Contradiction by Peter J. Ferrara or the updated version, New Deal for Social Security by Ferrara and Michael Tanner. Even at relatively low rates of return, workers in all income categories are projected to have greater retirement benefits than they will have under the current system. Another interesting paper is "Social Security versus Private Retirement Accounts: A Historical Analysis" published in the Federal Bank of St. Louis Review in March/April 2005.

Even if they accept that personal retirement accounts are theoretically able to pay greater benefits many people worry that individuals would make poor investment choices either because they lack investment education and experience or because they would make risky choices. This risk could be managed by limiting the investment options to a small number of conservatively-managed mutual funds similar to those offered by the Federal Employees Thrift Plan.

In future postings, I will address the issues of spousal benefits in case of the death of the earner and disability concerns.

Private Accounts

AARP, in the May issue of the Bulletin, http://www.aarp.org/bulletin/socialsec/sssaveit.html, provided an Editorial and an article entitled "Keeping It Afloat." by Thomas N. Bethell. The editorial favorably referred to the 1983 compromise in the US Congress which led to the current status of the program. The article proposed 8 ways to keep the system afloat. Of the 8, five would increase the amount paid into the system, primarily by working taxpayers. The proposals were to (1) raise the ceiling on the amount of payroll subject to the earnings tax; (2) raise the payroll tax rate; (3) raise the retirement age from 67 to 70; (4) preserve the limited estate tax and dedicate it to social security; and (5) increase taxation of benefits. The other 3 are (1) adjust the COLA to reflect the true rate of inflation; (2) invest part of the social security trust und in securities; and (3) reduce benefits for future retirees.

In 1983, Congress enacted provisions intended to fix the problem for at least the following 75 years - note that is long past the time any of them would be affected or their seats at risk. The problem is, it id not work. My concern is that any proposed solution which puts more money into the hands of the Congress will not solve the problem but will only provide more money for them to buy our votes.

A reasonable solution would be to permit taxpayers on a voluntary basis to direct that their share of social security tax payments be directed into personal retirement accounts. That money would accumulate during their working lives and become a personal asset upon retirement. It would be paid out as an annuity and, at the election, of the employee, any amount in excess of the amount needed to purchase an annuity equal to social security, could become part of the individual's estate.

Let's think about this.

Save Social Security

This is the first post on this blog. I intend to post occasional information and opinion regarding the need to reform Social Security and, in particular, the need to add personal retirement accounts to the mix. Social Security was a wonderful program when it was established during the 1930's. It did exactly what President Roosevelt intended it to do. It kept senior citizens from (1) falling into abject poverty and (2) kept them out of the work force so that younger folks could find work. Even so, it did not solve the fiscal crisis in the country at that time - the Depression. Only the Second World War solved those problems.

Subsequent changes to Social Security have made it financially unsound and impossible to sustain. There are any number of proposals offered to solve the financial problem. Most of them involve taking even move money from the pockets of workers and transferring it to people of retirement age (of which I am one). Why should I object to that you may ask? The reason is simple equity and common sense. Equity demands that we not make unreasonable burdenson demands on the younger worker and common sense tells us that at some point, the golden goose will rebel.

Let's think outside the box and try to come up with solutions to address this problem.