Wednesday, July 15, 2009

The Only Way to Fix Social Security….NOW!

The only way to truly fix Social Security is to return it to its roots. Run it the way it was originally intended. It is a safety net; not a crutch. It is an insurance policy; not a retirement plan.

In order to receive Social Security, you must qualify on the basis of need, similar to that of an insurance policy. Life insurance is not paid until death, fire insurance is not paid unless your house burns in a fire, and Social Security should not be paid unless you qualify. It is intended for people who are too old to work and do not have any other income, survivors of those who were the bread-winner in the family, or truly disabled people. In no way should this be used as a retirement plan. A system in which you put in money and that money is used to help others but you have the expectation of getting that same money back doesn’t make any sense.

Why should someone who is making $100,000 a year or is worth over $1,600,000 (outside of their residence) get a check from Social Security? They have the ability to live off of their income and/or they have enough assets to create an income that will provide for them. One thing to consider, if Social Security did not start giving money back once you hit a certain age…whether you are rich or poor…the amount you would have to pay in to Social Security would drop drastically. You could keep your money and invest it in whatever you want rather than being stuck with government bonds (which is what Social Security is basically invested in). Remember…this is your money.

This system could be accomplished by phasing it out based on income. Perhaps when you reach 62 and you make $50,000, you get half of a normal Social Security benefit. At $60,000 a year you get 40%, and soon. If you have no income, than a percentage of your net worth (outside of your primary residence) would be considered your income. A safe assumption is 3%.

For example:
I am 62 and it is time to dig in to Social Security. I own my own home and I am retired. I have no retirement or pension and I don’t have a single penny saved, but I do have two additional homes I am doing nothing with them. The two properties are worth a combined $2,000,000 and bring in $30,000 a year of rental income. It makes no sense that this person should get a full benefit check from Social Security even though they are only making $30,000 a year. They have enough assets to sell and generate enough income to provide a nice life in their golden years. Social Security would look at this person, see that they have a $2,000,000 in assets (outside of their primary residence), and determine that 3% of $2,000,000 is $60,000, so they would only get 40% of the normal Social Security benefit.

Push Back:

But I pay in to Social Security so I want my money back!
Premiums for life insurance do not get paid back to the customer. When you pay into a type of insurance, the premiums go towards regulating risk. Car insurance companies don’t return your premiums after you sell your car. I know there are certain life insurance products that accumulate a cash value, but that cash value is something you pay in addition to the premiums. The idea that everyone will get their money back from social security has to be done away with. Using this program as a retirement plan is a cause of the slow death of Social Security. As it is set up now, it is a Ponzi scheme. I do not mean it is like a Ponzi scheme or has some traits that are similar…it IS a Ponzi scheme. Running it like an insurance policy (think of it as “in case I am poor” insurance) will ensure it is at least run intelligently. Remember, the amount you pay into Social Security will go down significantly if it were run correctly. So it will either be poor insurance for Americans or poor assurance for Americans. You pick.

Why should we pay for Social Security at all?
Society with a safety net is a better society. Take my father as an example. He grew up dirt floor poor. His father ran a produce market and was a farmer, but he died when my father was young. Through a little extra help via Social Security, my father was able to become a doctor and serve in the Navy after he graduated high school two years early. He is a productive member of society and has now paid back 100 fold what was spent on him as a child through Social Security. I cannot imagine anyone begrudging a system that offers this type of help when run properly.

People have already started planning using the current system. Changing now is not fair!
Ok, calm down. Fixing this problem is as simple as picking a couple of dates. Everyone born after 1991 is 100% in the new system. If you are born after 1971 you are in the new system, but by only 50%. If you are born after 1951 it would be 25%. etc. These are arbitrary numbers and would have to be verified by an actuary, but you get the idea.


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