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Wealth Virtues Journal: November 13, 2010

Replace Social Security with a current U. S. Government program that actually works!

Filed under: Saving and Investing — Tags: , , , — James Ward @ 5:15 pm
© 2009 Poor Richard Web Press, LLC

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Let’s play a game. I give you 4 dollars, then you pay someone 5.  You are the government. How long do you want to keep doing this? Oh, you can print more money. So that is part of why the value of our currency is diminishing.

Right now social security pays out more than it takes in. That is a rock-solid fact. Social security is dying.  Right now, the money we pay in does not go to an account with our name on it. It is paid out instantly (plus more form other contributors) to another recipient.

However, what happens when the government uses its proven retirement system for federal employees as a model for a new social security program where the individual makes more money, keeps it in their own account, and can pass it on to future generations? The answer – Americans achieve a greater individual prosperity than at any other society in recorded history.

For 2010, the maximum monthly Social Security retirement benefit for a worker retiring at the full retirement age of 66 years is $2,346. ($28152/year)

Under my proposed new social security program, if only $3500 is taken out of your paycheck annually for 50 years (working age 18 to 68) with an average government guaranteed 4% rate of return, your savings divided evenly over 30 years would be $30,368. Not everyone will live to be 98, but their account should be able to transfer to survivors, thereby increasing the wealth of following generations. Instead of making the contribution tax deferred as in the case with many U.S. savings bonds, make the contribution part of taxable income, but the earnings tax exempt like the current Roth IRA to allow maximum use of a retiree’s money into the market. In many cases, current social security benefits are taxable.

What if the government could guarantee a six percent rate of return on my new social security program? This could result in the total amount of savings for an individual at age 68 to be over $1.8 million. That would be a nice tax-free pot of earnings. Do you think that the rate sounds unreasonable? The Thrift Savings Plan (similar to a 401K) for federal employees uses something called the G fund to allow those employees to make tax deferred contributions towards their retirement.  The average rate of return since inception is 6.15%, however the past 10 years shows only a 4.62% rate of return. So why not allow more choices – the same as government employees. The F fund, or Fixed Index Investment Fund, has had a 7.10% rate of return since inception. The C fund, or Common Stock Index fund, has had a 9.55 % rate of return. If you allow citizens to select between any or all of these three government managed options, the savings can be enormous. Consider a person who placed their $3500 annual taxable contribution to my new social security program into a C fund where the total earnings over 50 years averaged 8%. The result would be over $2.1 million in tax-free savings, over and above any 401K, Roth IRA, or IRA earnings.

As mentioned before, the maximum social security contribution is $6,621. As that is a rate paid by those earning over $106,800 in 2010, not many Americans would be able to contribute that amount. Just for fun, let’s say that an individual is allowed to determine their yearly contribution above the minimal percentage-based amount in my new social security program. The results could be staggering. For example, an individual who normally now contributes $5,000 to the current corrupted social security program instead uses it within my newly proposed system, the results after only 40 years of contributions at an 8% return would be $1.3 million. That is tax-free income at the age of 58. Not bad, and a heck of a lot more solvent and productive than the current system. 

Social security in its current form is dying. The government already has a federal retirement system that cannot be touched by Congress. If this same model used by Federal Employees is applied to how we manage social security, and we derive new limits for when you can start receiving your social security (minimum 60 years perhaps), this will allow Americans greater freedom in determining their own financial future, keep Congress from pilfering the social security account, and increase the overall wealth of the United States with a tremendous retiree consumer class.  The U.S. government is lousy at managing social security, but has proven to be great with the TSP for federal employees.  If the government can get back to its roots of maintaining a level playing field rather than trying to dump taxpayer money into a failing system of entitlements, America will have a continual regeneration of wealth based on free-market principles, and not the failed model of socialism.

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