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Author: MikeBuxton Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Social Security Invested Right Date: 11/7/2000 2:15 PM
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Here's an article I wrote called "Fools Gold" just for Fool.com.
It's something to think about.....Let me know what you think.....

Fools Gold:

I want to start off by saying this writing is not meant as a political slant to the Democrats or Republicans. It's just called having common sense and wanting my government to provide me more money at retirement. I think that's a political party we all want to belong to.

I was amazed and actually angered by the fact that a national "journal" that's supposed to be written for investors, (I won't mention their name), and the so called "best minds in the country" (eight of them collectively) couldn't figure out how to invest the 3.6 trillion dollars worth of Social Security in a manner so as to make better returns and yet continue paying as much (or more) in current social security benefits.

I'm just a simple investor. But let's try a little simple arithmetic.

Let's say we have $10,000 in a Social Security Trust Fund. It's been getting two percent return a year. That's $200 per year it's earning. That, on a much smaller scale, is what our Social Security today is earning.

Now, let's say I am the trust fund manager, and I borrow an additional $10,000, at an annual rate of six percent, to add to the funds' principle. (I issued government bonds in other words). Let's also assume, most of the original trust fund must be kept liquid for payments, or at the very least, invested at the two percent rate where it currently is. That's much more than reality requires, but for the sake of argument, let's just go along with that. I now can invest the $10,000 I borrowed, at a relatively safe rate of return of ten percent. (This is based on the premise that for the last 60 years, common stocks have returned an average of 12 and ½ percent a year. Some years more, some less, but for 60 years, that's the return). We can conservatively get 10 percent, because we will assume we're investing in only the most conservative of investing strategies). And, what if we only got eight percent or seven percent? That's still more than we're paying in interest on the borrowed money. And we may even get 12 ½ percent. But, let's just assume the conservative 10 percent for the sake of this discussion.

Now, we never touched the original Social Security Trust Fund, and we now have four percent more in returns than we have in interest payments on the borrowed money. Four percent of $10,000 is $400. And remember, our original $10,000 is earning $200. See, we've already tripled the amount of interest coming into the Social Security Trust Fund with very, very little (if any) risk to the original fund.

Now, using the staggering 3.6 trillion numbers. In proportion, let's say we issue only 100 billion dollars of government bonds. This could even be staggered over several years if needed so as not to inundate the bond market. And we also use 500 billion out of the 3.6 trillion. (With what comes into social security every month from payroll deductions, less what goes out to social security payments, the 3.1 trillion left untouched is way more than required to meet any/all obligations for many years). We would then be earning 4 percent more on 100 billion dollars than we're paying out, (from the bonds), and 8 percent more on 500 billion, (from the SS trust fund). That's 44 billion dollars more interest just for the first year. Roughly, this is the equivalent of about 1.1 million more people putting maximum social security taxes into the trust that would never take them out; year after year. Now, from here, you do the mathematics if you have a computer large enough. Let's say you want to see what effect this has on a 40 year old today that will retire at 65. Take an investment of 600 billion dollars compounding at a rate of roughly 7.3 percent a year for 25 years. (Remember, this is only what's in addition to what the trust fund is earning today). It doesn't take too long to add another trillion, and another trillion, and so on.

I am perplexed as to why most Americans, any fool if you will, can invest their savings to grow into a nice retirement, but the government, investor journals, and the "best minds" in the country can't figure this one out.
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