by Archie M. Richards, Jr., CFP^®
February 14, 2005

Social Security is breaking up. But don't be afraid of the fix.

If you're approaching retirement, you'll continue receiving Social Security benefits. Nothing will change for you.

But if you're young, you'll be better off after some of your tax money is required to be diverted to an investment program.

The current Social Security system is called insurance. But it isn't insurance, because no cash is invested for future use. Social Security taxes not needed to pay current retirement benefits are spent on whatever Congress favors that day. Social Security money gets thrown in with the other Congressional vote-buying boondoggles.

Current workers are taxed to pay retirement benefits to current retirees. The money transfers from young to old. This works fine providing the numbers of workers and retirees are balanced.

The balance used to be wonderful. Seventy years ago, there were 42 workers for each retiree. But medical advances are enabling people to survive longer. Now, only three workers pay for each retiree.

In just a few years, after the baby boomers quit booming, the ratio will be down to two workers per retiree. But when a Congressman tries to raise Social Security taxes on workers high enough to cover half of someone else's income, his constituents will say, "Get lost, buster. You're outta there." And he'll be voted out of office.

Yes, the Social Security Trust Fund holds government bonds that say, "Uncle Sam owes money to Social Security." But no one in his right mind thinks those bonds will be paid. Social Security is the grandest and most egregious Ponzi scheme the world has ever known. If people in the private sector tried anything like it, they'd be jailed.

The reason Congress has allowed Social Security to continue failing for so long is because they're not in it. Those pompous professional princes set their money aside in an investment program, called the Thrift Savings Plan. Federal employees can contribute up to $12,000 into a personal account they own and control. They can choose between five investment funds: government bonds, a fixed-income fund, a stock fund, a small-cap stock fund, and international investments.

Nearly 3.5 million federal employees participate in Thrift Savings Plans. The investments are worth $120 billion. The returns have outpaced those of Social Security for the rest of us peons.

Those Congressional blowhards really tick me off. More than ever, we need term limits on U.S. legislators. The longer they stay in office, the worse they get.

The current Social Security tax of 12.4 percent is applicable to the first $90,000 of pay. Under a privatization plan, some of this money - preferably all of it - would go into investments similar to those used in the federal Thrift Savings Plan. The employees could choose the investments they prefer, with the funds managed by investment companies.

On retirement, the account would be drawn down to supply retirement income. Employees would own their accounts. If a retiree dies before the funds are exhausted, the account passes to heirs.

This isn't the case today. Social Security income stops when retirees die. The program therefore disadvantages blacks, because whites live longer than blacks. This is one more example of the Richards Principle of Big Government: Actual results are opposite to the intended results.

Any funds paid into investment accounts for employees will leave the feds short, because less money will be available for other federal spending. Congressmen are squawking about this. Maybe it'll occur to them to cut the boondoggles.

Any investments you make in privatized Social Security accounts will be long term. Long-term investments are safe, even in stocks. If you'd placed money into the stock market at peak prices in 1929 and kept it in for 25 years, you'd have made 6 percent a year, despite the Great Depression and World War II. And we're not going to have another depression now - no way.

Oh yes, one more thing: The money invested in private accounts will stimulate economic growth and make stock prices rise all the more.

Privatization of Social Security will be good for you and good for the nation. Tell your senators and congressman to get off the dime.