SOCIAL SECURITY FOR DUMMIES

Social Security-------Investing is something I know more than a little bit about so here are my two cents on this one. Actually $2. I am a free market guy, but not some moron who just got off the boat. I know that most companies I’ve ever worked for were corrupt. We were always told to sell poor product to existing customers, say anything to move product, and in every case the people promoted to management were those that told the most lies to get the best results. Ethics are for other people. Especially in the financial markets.

So here’s how I view the Social Security “crisis.” There are two unassailable premises. Premise one is that we must do “something” or SS will be broke in ten to fifteen years. Second premise: there is no second premise.

The Left wants to do nothing other than raise taxes on the young and the Right wants people to be allowed to invest a tiny portion of their SS payroll tax so they all end up with a lot more money. The investment solution has not been examined in depth and I am going to take the opportunity to do so now.

Keep in mind there is always what is known as systemic risk with any investment. This means that factors inside our system like inflation, deflation, economic collapse, and a few other things will always affect results. I’ll cover below that part of our “system.” The proposed solutions from the Left are: raise the amount younger people contribute, which is a formula for revolt; raise the retirement age, which means people are going to have to work into senility; reduce the amount seniors are entitled to collect, a politically impossible solution; and use other tax money (income, sales, taxes on corporations) to keep on giving benefits, which means a huge tax increase on everyone.

The Right says they have a better idea. What is on the front burner now as a “solution” is that each of us be allowed to put a tiny amount (2-1/2%) of our monthly SS deductions into private savings accounts IF WE WANT TO. This means that if your SS contributions are $10 per month you will be permitted to put twenty five cents of that amount into a private account. This will solve everything.

We are supposed to believe that if we put twenty five cents each month into the bank on a CD or something like that with prevailing rates of returns at the time we contribute, the returns compounded and rolled over (re-invested) will mean the resulting cash over a thirty to forty year period will be enormous. This, in Ivy League lingo, is total bullshit. Any trip to the compound interest calculator will paint an entirely different picture. If your SS tax is $10 per month your contribution to your savings account (2-1/2%) is .25 cents per month. After thirty years at five percent interest you will have around $350—in 2030 dollars. If your SS tax is $100 per month and you are “allowed” to put $2.50 per month in the account for 30 years you will have nearly $2,000.

So a normal person will end up with $2,000. Jesus Christ, what are people thinking? You can live one month in poverty with that. You will have to live the rest of your life on even less SS than had you not invested. In order to end up with $100,000, which is less than ten years living barely above poverty you would have to cough up $125 per month for thirty years. The last time I looked $125 is two and a half percent of $5,000. Who the hell pays $5,000 per MONTH in SS taxes? I'll marry her in a nano second. Next, suppose the bank fails and the FDIC has to bail you out? FDIC is broke right now and could be broke once again. There is always an inflation risk (interest rates at 4% and inflation at 5%). Bank accounts are not risk free. Right now SS recipients are paid more money each year when inflation rises. I think this throws out a bank account.

Next “solution” is to be really smart and put your money in higher yield government bonds. Government bonds are risk free. That is only correct in theory and theories have a way of being very wrong. In theory a bumble bee cannot fly. What happens when demand as expressed in massive SS retirement fund buying hits small new supply? Bond prices would soar and interest rates plummet, not good for everyone. Remember that we are talking about eighty or ninety million people buying bonds. People who are unfamiliar with bonds (meaning 90% of the population) don’t understand that the bonds can always be “bought back” by the Government (or any issuer) and then re-issued at a lower current rate. How many people are bond traders? Next, where do you draw the line on the type of bonds people are allowed to buy. Municipal Bonds are risky as hell but their yields are very large. Huge funds--- like the now out of control CALPERS--- can suddenly decide something based on politics. There is risk in bonds aside from the inflation risk.

The next solution is to allow us to invest in an “Index Fund,” which is a stock fund that simply invests in either Dow stocks or S&P 500 stocks and in theory your money will ride the long historic bull market. The story goes that if you invest and roll the money over in markets during any 30 year cycle you’ll always be ahead by many hundreds of percent, implying that you will have a fortune. But you aren’t going to invest a large amount. You are going to be investing a tiny amount each and every week or month which means that every month or week you start a new---and shorter---cycle with a part of your money. This means that you will be dealing with a fifteen year two month cycle with a portion or a thirteen year forty week cycle and so on depending on where in the thirty year cycle you invest. And here is where the hair grows on the egg. We will require a very honest mathematician to crunch the numbers because while it’s true that had you invested ALL your money in 1930 at the depression depth and started pulling it out in 1960 you would have been more than OK. What would have happened had you invested fifty cents per week every week from 1930 to 1960? When fifty cents became seventy five? When seventy five became three dollars? What about the cycle from 1944 to 1974? This question cannot be answered until an analysis can be done. You will not garner the same return between 1955 to 1960 (the years just before retirement) that you did between 1930 and 1960. In order for us to see what might happen every week through YOUR thirty years the entire time span for each starting date must be calculated. Nothing else will give you the true picture of the Stock Investment result.

Not to belabor this point but had you invested in the 1954-1984 period you would have been involved in one of the worst crashes ever—the Watergate crash of the 70s—and I doubt that your total return would have been very good because your continuing investment in a bear market would have taken a toll.

Keep in mind that I have not included dividend roll-over which can be so substantial that there is no period of time, no matter how calculated, that wouldn’t be OK. So it’s time to think and listen. It is unfortunate that the attacks from the Left are already dishonest because the Left MUST have business failing in order to establish socialism. We are in for a real war here.

There is one more “solution,” one that allows each individual to invest on their own. This is madness. I’ve been a broker in one capacity or another since 1982 and all I can say is that this is a very corrupt business. You cannot trust these markets with everything you have. Suffice to say that all brokerages view your money as their money and they will take it. Commissions rule. Always. The phone scams for Regulation D offerings are among the worst in the sales field and unsophisticated people will be robbed. Thank you again, SEC.

I’m summing it up here. There is no magic pain free way to “save” Social Security other than raising contributions FROM OUR CHILDREN AND GRANDCHILDREN. This is what the American Association of Rapacious Pricks (AARP) wants for their no longer contributing members. This is what the AFL/CIO wants for their members. This is what the Democratic Party advocates. The result of this policy will be a generation war that could end in armed people in the streets. We cannot continue to rape the young so the old farts can have $100,000 per month drug treatments, borderline living conditions, and endless benefits they haven’t earned.

I honestly think that when these solutions are examined we will find that nothing will work other than increased contributions AND a reduction of benefits. This is a really tough deal and the foolishly optimistic and rosy views from the Right are as wrong as the attacks from the Left.

Late add due to several emails We are currently being nailed by FICA for 12-1/2% of our gross income for SS---Half paid by you and me, the other half by our employer. All calculations include both contributions. Taking a 50K gross, the FICA is $6,250 per (your payment is actually $3,135 per), and 2-1/2% of the $6,250 is $156. Making 26 weekly contributions of $6.01(156/26) gives us a whopping $11K at the end of 30 years. So you can live a year on it. The Democrats have this great idea to have employers contribute more, which would mean the employer cost per hire, currently estimated at 15K, would rise to a point where they would have to be even more desperate to put on new hires than they are right now. Another way to raise unemployment and get elected. What's 30 years times 156, the amount of money equal to the 2-1/2 percent? $4680, which means that you end up with more than twice as much with the interest. The "investment" plan only makes sense if we put a hell of a lot more into it.

Stay tuned.