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Author: ejclason Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19224  
Subject: Saving Social Security and Stocks Date: 5/16/2000 6:08 PM
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Before discussing how to fix Social Security, it's important to understand how it works. When a current worker pays money into Social Security, the money does not go into an account with his name on it. What actually happens is most of the money is paid out to current retirees. Today Social Security does take in more money then it pays out, so money is being accumulated in a trust fund. But basically the money today's worker puts into Social Security is for today's retiree and not for today's worker's retirement. When today's worker becomes tomorrow's retire, his Social Security benefit will come from tomorrow's worker and not from money today's worker previously paid. The reason Social Security seems to be such a lousy investment is that it is not an investment. It is important to understand this before discussing the future problems Social Security is facing and possible solutions. Only the trust fund, which is a small part of what workers contribute, is invested. The trust fund is invested in government bonds. The rate of return is less than you would expect if you invested in stocks. But it is considerably more than what you get if you try to calculate the rate of return by comparing your contributes to your expected benefits.

Why does Social Security have a problem? People are living longer. This means that the number of retired people is growing faster than the number of working people. Remember that retired people get their benefits from working people. So Social Security's problem is caused by a decreasing number of working people supporting each retiree's Social Security benefit.

So why not allow a worker to put part of his Social Security account into the stock market? Because there isn't an account with the worker's name on it that could be invested. But what about the trust fund, it doesn't have individuals names on it, but couldn't it be invested in the stock market? If the trust fund were invested in stocks, instead of government bonds, the government would have to borrow more money to make up for it. In effect the government would be borrowing money to invest in the stock market. Borrowing money to invest in the stock market is no better an idea for the government than it is for an individual. If in the future, the government manages to pay off its debt, then it may be a good idea to invest part of the trust fund in stocks. But I'm not going to hold my breath.

So how can Social Security be saved? One possibility is a three pronged approach:

First, raise the retirement age. Yes this is unpleasant but people are living longer so it is not unreasonable to expect them to work a bit longer.

Second, use the "real" rate of inflation to adjust future Social Security benefits. Many economist believe that the "real" rate of inflation is about 1% lower then the rate currently used by the government to adjust things like Social Security benefits.

Third, raise or remove the cap on Social Security taxable income (currently you only pay Social Security tax on income below a certain level). This cap exists to help perpetuate the myth that the money you put into Social Security is not really a tax because you will get the money back when you retire. It's time we bite the bullet and admit that Social Security payments are a tax and that your benefits are not completely proportional to your payments.
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Author: rensimer Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3945 of 19224
Subject: Re: Saving Social Security and Stocks Date: 5/16/2000 6:21 PM
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When a current worker pays money into Social Security, the money does not go into an account with his name on it. What actually happens is most of the money is paid out...

Didn't Charles Ponzi get into a lot of trouble doing that?

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Author: dgthepiper Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3947 of 19224
Subject: Re: Saving Social Security and Stocks Date: 5/16/2000 7:09 PM
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So how can Social Security be saved? One possibility is a three pronged approach:

First, raise the retirement age. Yes this is unpleasant but people are living longer so it is not unreasonable to expect them to work a bit longer.

Second, use the "real" rate of inflation to adjust future Social Security benefits. Many economist believe that the "real" rate of inflation is about 1% lower then the rate currently used by the government to adjust things like Social Security benefits.

Third, raise or remove the cap on Social Security taxable income (currently you only pay Social Security tax on income below a certain level). This cap exists to help perpetuate the myth that the money you put into Social Security is not really a tax because you will get the money back when you retire. It's time we bite the bullet and admit that Social Security payments are a tax and that your benefits are not completely proportional to your payments.


This is exactly the type of idea that inspires me to plan for myself and not count on the Social Security pyramid. I realize that means I'll be violating the first point above by retiring earlier rather than later, but it also saves me from the third point of paying in more (and longer) just to get nothing later.

I agree with your statement about Social Security being a tax. Unfornately, our government officials are not honest enough to admit it and most people believe what they want, not what they see happening.



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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3950 of 19224
Subject: Re: Saving Social Security and Stocks Date: 5/17/2000 2:32 AM
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<When a current worker pays money into Social Security, the money does not go into an account with his name on it. What actually happens is most of the money is paid out...

Didn't Charles Ponzi get into a lot of trouble doing that? >


At least Ponzi had his name immortalized.

I would not be as upset if the SS funds were all spent on actual benefits. Instead the funds above the paid out benefits have been looted and spent elsewhere. It reminds me of the story from Catch-22. Every time the soldiers needed supplies (medicine, parachutes), they found that they were replaced with a note from MM Enterprises. The notes said what was good for MM Enterprises was good for the soldiers. Of course it wasn't. For the workers today who have been paying into the SS Ponzi scheme their ROI is as valuable as the notes Yossarian kept finding.

BRG

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Author: billeemorris Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3952 of 19224
Subject: Re: Saving Social Security and Stocks Date: 5/17/2000 8:59 AM
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Perhaps by reciting how SS works, EJCLASON is limiting his options in proposing solutions e.g.:

"So why not allow a worker to put part of his Social Security account into the stock market? Because there isn't an account with the worker's name on it that could be invested."

What's wrong here is that individual accounts can be established by REFORM. (In fact that is what is being proposed.) Ejclason's proposals change only the parameters of the current structure and imply that the structure itself is sacrosanct. The operative word must be "Reform" rather than "change parameters".

If one looks at the SS history, it is clear that investment was by a much smaller population base. in the early 1930's (Only the rich) and the one scheme that really did work for a while was Ponzi's which was then emulated by our Gov't.

It is time to admit that the Ponzi approach will not work indefinetly, and a change to at least a partial investment structure is required. Congress had this opportunity in the early 1980's but chose to only change the parameters. Now SS needs fixing again (still).

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Author: r2d2t2 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3957 of 19224
Subject: Re: Saving Social Security and Stocks Date: 5/17/2000 2:06 PM
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how about this.anyone with $100,000 income at age 62 and up cannot draw ss. when they reach age 62 return the money to them that they have put into ss. anyone with $100,000 income doesnt need to be on an assisted program.(my opinion).some people on this board consider ss a form of welfare, so why be on ss if you dont qualify for welfare.

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Author: Shea60098 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3963 of 19224
Subject: Re: Saving Social Security and Stocks Date: 5/17/2000 7:04 PM
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r2d2t2 obviously has not read the parable of the little red hen.

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