No. of Recommendations: 4

I was hoping that it would not be necessary for me to respond to this thread. I find it necessary because there seems to be much confusion about what is actually being proposed. These are the general guidelines for the changes in the social security system:

1. Everyone would be able to opt out at any time.
2. At least initially, no one would be able to invest less than a couple of decades. If you are over 45 years old, forget it. You are not eligible.
3. You could only invest a fraction of your social security contributions (i.e., taxes). The rest would be in the normal social security system and it would provide an ultimate safety net.
4. You would not be able to invest in individual stocks.
5. Most likely, your investments would be limited to index funds similar to those in the Federal Government's Thrift Savings Plan (TSP).
6. The issue of ownership is highly important. Investments are to be owned by individuals.
7. There would be a phase in period during which the general fund supplements the social security system.

In terms of your concerns:

1. Periodic investments (similar to dollar cost averaging) in the overall stock market over long periods of this case decades...has always been a good investment choice. We are not talking about the kind of two or three year stretch that bothers you.
2. The Thrift Savings Plan currently consists of (a) the G fund, which is very much like a money market fund but with a very high interest rate (currently around 5%), (b) the F fund, which is a bond index fund and (c) three stock funds, the C fund, the S fund and the I fund. The C fund tracks the S&P 500 index. The S fund tracks a small cap index. IIRC, the Russell 2000. The I fund tracks an international equity index. IIRC, the EAFE equity index. Money in the G fund is guaranteed to increase. Dollars in the other funds fluctuate. At times, they decrease.
3. The biggest problem with defined contribution plans has been because people choose not to invest or they invest very little. Because social security contributions are mandatory (i.e., they are actually taxes), individuals would not be allowed to make this mistake.

In terms of the kinds of issues that need to be resolved:

1. Exactly what happens when someone opts in the private investment program in some years and opts out in other years? This is much more complex than it might seem at first since the social security payouts are very high (relative to contributions) for lower income people and they are much lower (on a percentage basis) for higher income people.
2. Many people over age 45 would like to invest. This cutoff age during the transition period is an obvious source of contention.
3. Many people would like to invest more than about a quarter or a third of their social security contributions. (This is about one sixth of the total contribution. The employer pays the other part.)
4. Many people would like a wider selection of funds to choose from. Almost every mutual fund company would like to offer all of its funds. There is a lot of money to be made.
5. Many politicians would like to have the Government own the investments. This would allow them to introduce policy decisions into investment choices and it would allow them to influence corporate management decisions. (This is generally known as national socialism. But I am sure that there are a host of fine grain distinctions with variety of different names.)
6. Tapping the general fund during a transition period has always been part of any change in social security including beefing up medicare and medicaid. For political purposes, it is often claimed that current retirees would be in danger because social security revenues would be diverted. What actually causes a bitter contention is that money from the general fund would come from current discretionary programs (plus some deficit spending). There would be many spending cuts during the transition period. (Some of these would be actual cuts, not simply a reduction in a projected rate of growth.)

I hope that I have increased your appreciation as to what is involved, why it is a good idea and, at the same time, why it is so difficult.

Fool On,

John R.
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