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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76390  
Subject: Re: Social Security Tax Date: 8/27/2003 2:15 PM
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"If we don't force our politicians to get their act together, you can certainly count on: increased SS taxes, increased retirement ages, and reduced SS benefits in the future. The demographic train wreck is coming whether we like it or not." - Frankwomble

I used to think the same thing. But, I have changed my mind concerning the future of Social Security and it's viability. I have come to understand that it may well be under control...or close to it.

I do the income taxes for two elderly women who are both retired. Both receive Social Security. The first was always middle class with modest savings who paid for a house through hard work. She has ended up with an estate of about $350,000 all of which is invested and she lives exclusively off of the income from her investments which yield about 8% ($28,000) plus Social Security of about $900/month. This lady has paid no income taxes in the past ten years...she breaks even year after year. I manage her investments for her. If she becomes ill, her estate will be depleted rapidly and she will then rely on Medicaid to exist.

The second lady has an estate of about $3 million and receives about 3.5% on her investments ($70,000) which are 2/3 of her estate. Her Social Security is about $1500/month or $18,000/year. Each year she ends up paying back between 90% and 95% of her Social Security to the Government. She breaks even year after year. If she gets sick, her estate can pay for almost any illness. She will never rely on Medicaid.

Now, what I think I have figured out is this. As time passes, more and more people will be defined by the second lady than the first. Private accounts would surely speed up the process of building estates in America to allow more folks to be self-sufficient and fund their own social security. It seems to me to be inevitable.

As the GDP grows in the future, wages will increase and everyone will be pushed into higher and higher tax brackets. The folks who know that Social Security will not be there to fund their retirement will be forced to save more money and invest for their own self-preservation. It is a survival thing. They will demand fully funded retirement programs from their employers. These, of course, will become income that is taxable at retirement. Also, they will be saving on their own to make sure they are covered...the income from those investments will be taxable at retirement even if they are sheltered by an IRA/401-K today. Thus, the younger folks will become more and more like the second lady I described and they will be paying their own social security in 30 years.

I am open to discussion on this. Since I just changed my mind on this a week ago while I was talking to lady number two about her investments. So, if I am seeing something unclearly here, I need my attitude tweeked back to a more realistic mode. However, it seems to me that the politicians may actually understand Social Security far better than we think they do.

Now, I still like the idea of private accounts instead of sending the money to Washington to be abused. I firmly believe that an individual can better manage his or her own funds through a properly designed program that cannot be abused by the investor nor by the investor's fund manager. Surely, letting compound interest work for us is preferable to trusting the government to do the job...with them involved, we pay anyway and get back less for ourselves.

But, maybe Social Security is not going to collapse as I previously thought when I looked at the $44 Trillion total debt in lieu of the $7 Trillion we are told the government owes. The $37 Trillion unfunded difference may not be as unfunded as I originally thought. That is, if we will all save like crazy starting right now. We can bail out the government with our own tax payments at retirement.

Have I missed something?

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