Saturday, June 07, 2008

A Little More on "Entitlements"

I think I received more comments last week about the Social Security issue than on any other article I have ever written for the Newsletter. As might have been predicted, the commentaries ran a very wide gamut. Most of the comments were very thoughtful and offered suggestions that could improve the system and the returns on investment. One commentator seemed to suggest that there was no problem so no fix was necessary. Others advocated some very substantial reforms. One writer suggested that the retirement benefits Congress receives should be blended into Social Security so the people (as in "we the people") and members of Congress would be playing on the same field when it came to retirement benefits. That idea didn't seem unreasonable to me. Why should members of Congress get a better retirement deal than the general populace? Is that at all fair?

When discussing my thought that mandatory financial education may help people ultimately fund their own retirement, I was surprised by the negativity of many of the comments. One person said simply that people are too stupid to understand. I agree that some proportion of the populace may not put the effort into absorbing the information, but I don't think that is a reason to deny the education to others in the public schools who would benefit. Some people are not cut out to learn algebra, but that doesn't mean it shouldn't be taught, does it? Other commentators pointed out that many people are unwilling to learn while still others suggested that people with families had priorities more pressing than preparing for their retirement.

Obviously, each of those comments has at least some merit. Is the answer, then, to just forget the idea of adding to the financial or investing knowledge of the general populace? Yes, families may have difficulty putting aside money to invest, yet many seem to have little trouble buying on credit where they pay annual interest rates of more than 20% on their credit balances. It is tough to put anything away for retirement if you have maxed out credit cards and are paying 22% on the balance. If those families had had the benefit of some financial education, might they have avoided the credit card trap, sacrificed a bit and waited until they had cash to buy the luxuries rather than put it on the credit card for instant gratification? God forbid -- that isn't the American way. With the sacrifice of a little patience, those families would have the 20%+ of whatever the credit card balance would have been to invest. Would that help? It certainly couldn't hurt could it?

One writer suggested Social Security only be paid to those who "need it" and should be paid for by those who don't need it. I thought the system of "from those according to their abilities to those according to their needs" was a financial and political system that had proven itself unworkable. The philosophical question is whether those of us who do are financially responsible for those who don't. Most would agree, that those of us who do may, indeed, have some responsibility for those who can't, but why for those who just don't? Even if one agrees with the concept that those who "need" Social Security should get it and it should be paid by those who "don't need" it, I am curious as to who will make the decision of who "needs" and who doesn't.

I guess that one of the more common and striking views to me is how many folks believed that the general populace should not be permitted to manage their own retirement money because of their perceived incompetence. If that is really so, why should they be permitted to manage any of their money? How is it that they can manage the remainder of their money but not their retirement money? If they are incompetent to manage one part of their money how can they be competent to manage any other part? Logically, should they be allowed to manage any of their money at all? Would anyone who argues that people are too incompetent to manage their own retirement money also contend that the government should also manage the rest of their money?

Finally, whether we get Social Security or not, doesn't it really come down to the fact that we are responsible for our own retirement. As many of the comments pointed out, Social Security is not expected to provide a retirement; rather, it is a supplement. Since that is quite true, at least in practicality, would greater efforts at financial education, both within the schools and by the individuals not be desirable?

Next week -- freedom of religion. Just kidding. I'll be back to talking about issues more directly related to investing and trading. Thanks for all your comments concerning Social Security.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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24 comments:

Anonymous said...

In one paragraph, you wrote, "I guess that one of the more common and striking views to me is how many folks believed that the general populace should not be permitted to manage their own retirement money because of their perceived incompetence."

To carry that thought further, assuming for a moment it is true that we are not competent to manage out retirement money, why should we be allowed to vote? In my mind, one follows the other. In fact, there is probably no end to the things that we can let others do for us if we choose that road.

In looking back over the years, I wish the education system had done a better job in providing me more opportunities to think and act for myself.

Bob (Idaho)

Anonymous said...

If Social Security had started out as insurance (FICA) we may have done better over time. The pyramid system of having the young pay for the older retirees was a really unfair way to pay for this, in my opinion. If part of it had been tied to the stock market, we'd be floating in money instead of just about to go broke, as many contend. I personally think we should have financial education in the schools because most of us don't get it anywhere else. I learned the hard way, by experience. I lost a lot of money in the market before I found out how to do it in a manner NOT to lose money, but it took a lot of years and I paid through the nose with my market losses. But, then, we pay through the nose for a college education, so I just figure that was the amount I paid for my financial knowledge. The market started as a hobby. Now that I am retired, I am thankful I have dividends from it to pay for my emergencies. I try to live on my Social Security every month, which isn't easy, but I lived on a strict budget most of my life, fortunately, and now have a stress free financial life at 74. I also think Congress should be on the same retirement plan the rest of us are. That way, the system would get fixed, because it would be an incentive for to them to do it.

Anonymous said...

I agree in flat tax, simplicity and uniformity in All state and federal govt paperwork and documentation not to mention putting it in simple English so "the fine print disclosure" is not necessary.(sorry creditcard industry) For those recieving disability and SSI, a prerequisit should be staying in school and maintaining a C average. If you wish to drop out, you also wish to dicontinue your benifit. This could also include driving privilages. Similar program in schools for sports kids who arent keeping their grades up, your off the team.(Education teaches us to repect ourselfs and contribute to our world.)
If President Bush can shut down an entire country for something as stupid as analog TVs vs. flat screens and FORCE the whole county to buy into something that doesnt fix a REAL problem, Maybe we should just start fixing our problems ouselves stick with the states running their own smaller issues and send him a pink slip.

nosoupforyou said...

Dear Bill,

Others advocated some very substantial reforms.< One writer suggested that the retirement benefits Congress receives should be blended into Social Security so the people (as in "we the people") and members of Congress would be playing on the same field when it came to retirement benefits. That idea didn't seem unreasonable to me. Why should members of Congress get a better retirement deal than the general populace? Is that at all fair? > Since the early 80's Members of Congress HAVE been treated EXACTLY like the rest of us. Ex Social Security Employee.

Anonymous said...

If the social security money was lockboxed and allowed to accrue how many billions would we have in the account now instead of the billions in wothless IOU's the government has used to pay the interest on the national debt.
Maybe if we had basic financial management classes starting in high school it might instill an awareness of how money works and the importance of having a basic plan for the future. I would have liked to have that. How about you? If you are not exposed to something how can you develop an interest? During the tech boom taxi drivers were giving stock tips. Don't tell me there is not an interest. In a country that is supposed to stand for freedom why do we not insist on providing the knowledge of financial freedom. How much freedom does poverty get you?
How much freedom does minimal retirement savings plus a looted social security get you? A basic financial education might help make for a populace that knows what compounding interest means instead of compounding debt. A little education might bring an awareness to the general population to realize that those who are supposed to represent them are looting their future and make choices based on knowledge instead of sound bites.
Knowledge is power. True democracy cannot function without it. Check out "Maxed Out " on Showtime - SAD _ SAD _ SAD.
http://oversight.house.gov/story.asp?ID=847
http://www.whatreallyhappened.com/ARTICLE2/budget.html

jiva34 said...

Appreciate your weekly newletter and comments. Have been reading them for about 2 years. thank you.
Makes a lot of sense to understand that social security is a supplement and not a retirement plan. But if the funds available there are in question it also makes sense to fix it.
I sit down with my budget 2 times a month. I project out expenses and calculate what is expected to be coming in. If there is a discrepancy I see how to fix it. So, it looks like it's time to sit down with the social sucurity budget ina similar manner. It also makes good sense to me that there should be regular sessions of reevaluation of the system. Perhaps annually. It may be that there is no confidence in politicians to do this. So it should not be politicians. A committee of qualified persons should be appointed. We have supreme court judges, and federal reserve members. All of whom are repsonsible for decisions that affect the economics of everyone. so why not a Social Security Budget Oversight Committee. SSBOC..
They would be accountable to Congress.
Someone needs to do the budget regularly for social security...
I know what would happen if I didn't do my personal budget regularly....

jiva34 said...

I agree that money management education should be made available. I wish I had the opportunity in my high school years. It seems very strange to me that fiscal responsibility is not taught in public schools. Money management is as much of a science as any. I see money as a measure of energy. Perhaps as a science it is as yet little understood.

Bill Kraft, MarketFN.com said...

Bob in Idaho, you and I are definitely on the same page on this one.
Bill Kraft

Bill Kraft, MarketFN.com said...

I agree, 74 year old Anonymous, so many of us get our financial experience the hard way and many lose a lot of money getting the "hard knocks" education. I really do believe education would make the way better even though it would still be imperfect.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, jiva34. I agree it is important to understand that Social Security is not designed to provide the total retirement package. On the SS website (www.socialsecurity.gov) under Research Note #1 to the Agency History, however, they do say: "Social Security benefits are described as the *"foundation"* [emphasis added] upon which individuals can build additional retirement security through company or personal pensions and through savings and investment." If it is indeed the foundation of retirement benefits, it seems like it should be regularly reviewed. However, in order to create a workable budget process, it seems that the money should be unavailable for anything but benefits and reasonable administrative costs. I am also not crazy about a new and added bureaucracy that would be responsible to Congress.
Bill Kraft

Anonymous said...

"One writer suggested that the retirement benefits Congress receives should be blended into Social Security so the people (as in "we the people") and members of Congress would be playing on the same field when it came to retirement benefits. That idea didn't seem unreasonable to me. Why should members of Congress get a better retirement deal than the general populace? Is that at all fair?"

I agree with that idea, & I imagine most people would too . But it would be expensive . Maybe we could do it when Bush's tax cuts for the rich run out in a couple years & we end the stupid war in Iraq, that was based on lies about WMD & has been a fiasco.

Anonymous said...

"Social Security is not expected to provide a retirement; rather, it is a supplement. Since that is quite true, at least in practicality, would greater efforts at financial education, both within the schools and by the individuals not be desirable?"

Yes, but for many people social security is the main source of money , so it needs to be guaranteed. Some people can run their own finances, but some can't. Don't forget , it's called "entitlement", because we are "entitled" to it.

Anonymous said...

Enjoy your weekly articles--regarding the phrase, who would decide who "needed" SS and who didn't--I would start with a panel of persons with a maximum of a high school diploma or GED to determine it, and if they were not able to see who actually "needs" it, I would them lower it to an 8th grade education until I found a level that actually has some real sense. After all isn't the real question "Who really deserves it, us well to do people or the less intelligent folks that didn't prepare for retirement and only deserve us looking down our noses at them in disgust. Thanks for listening.

Anonymous said...

I have said for years that the way to fix the SS system is simply to require that to be the retirement fund for congress. They have been stealing from SS for too long, when private industry does that they call it "embezzlement" and somebody goes to jail. We also have to be smart enough to vote the crooks out.
I also think finances should be required in school, too many people do not have the knowledge or ability to pass it on to their children. I had a good retirement saved but did not have the knowledge to recognize the 2000 market crash early enough and the Enron fiasco, as a result I lost 80% of my retirement along with my employer closing down. I am learning how to trade in the stock market but it has been an expensive lesson.

Bill Kraft, MarketFN.com said...

Anonymous, you remind that Social Security is called an "entitlement" because we are entitled to it. I know there is no constitutional entitlement to Social Security benefits so who determines we are entitled to it? At what level are we entitled? What is to define what we are entitled to? How are you going to "guarantee" that to which you believe you are entitled if Congress is permitted to take it away at any time?
Bill Kraft

jiva34 said...

excellent points about ss entitlement. Further evidence that the system needs a qualified committee to oversee it. At least as important position as Federal reserve board, or Supreme court judges..., this is the financial security of the citizens at stake here, and involves billions of dollars. Just further indication that the system is in need of repair. Perhaps a separate entity from government is needed. Like the
Federal reserve is a separate entity. Accountable but not controlled.. Not necessarily a privatization but not controlled by Congress either. A hybrid, since this seems to be the age of hybrids...

Glenn G Jenkins said...

As that one person who thinks the social security program is basically sound, let me point out that social security is the one government program still on a pay-as-you-go plan. As trust fund assets currently are only allowed to be invested in U.S. Treasury obligations, social security winds up financing other government programs (e.g., foreign entanglements). The Social Security program should actually serve as a model for all other federal agencies.

In calendar year 2007, the social security program took in $675 billion in contributions, investment income and tax revenue, while disbursing less than $500 billion in benefits ("entitlements", if you must impart spin). This positive cash flow increased trust fund assets by $175 billion. (During the same period, deficit budgeting increased the federal debt by $551 billion.)

In 2006, social security took in $642 billion while disbursing $461 billion, increasing trust fund assets by $181 billion. During the same period, deficit budgeting grew the federal debt by $526 billion.

In 2005, social security took in $604 billion while disbursing $442 billion, increasing trust fund assets by $162 billion. During the same period, deficit budgeting grew the federal debt by $579 billion. (Curiously, George W. spent millions traversing the country in Air Force One in a vain attempt to convince grassroots voters that social security was in "big trouble".)

In 2004, social security took in $566 billion while disbursing $421 billion, increasing trust fund assets by $145 billion. During the same period, deficit budgeting grew the federal debt by $615 billion.

In 2003, social security took in $544 billion while disbursing $406 billion, increasing trust fund assets by $138 billion. During the same period, deficit budgeting grew the federal debt by $609 billion.

In 2002, social security took in $540 billion while disbursing $394 billion, increasing trust fund assets by $146 billion. During the same period, deficit budgeting grew the federal debt by $473 billion.

In 2001, social security took in $518 billion while disbursing $377 billion, increasing trust fund assets by $141 billion. During the same period, deficit budgeting grew the federal debt by $215 billion.

In 2000, social security took in $484 billion while disbursing $353 billion, increasing trust fund assets by $131 billion. During the same period, the federal debt shrank by $90 billion as Bill Clinton turned in the last of a series of budget surpluses. (Remember Bill Clinton?? The last president who knew how to balance a budget???)

With $2 trillion of assets in the trust fund, social security is well positioned to meet their commitment to the baby-boom generation. Some adjustment is needed to assure equitable continuity for following generations....but there is no need to "throw out the baby with the bathwater", as there are a whole host of solutions available. Personally, I think it it makes sense to empower the Social Security Administration to administer the trust fund as a sovereign wealth fund empowered to "shop the globe" for the best and safest returns.

Others have observed that social security is intended as an insurance program and not a retirement program. It has always been intended as a safety net, assuring contributors of a minimal income in old age and assuring the rest of us that the elderly are not a burden to society. With a safety net in place, people can be free to take risks in life. Enron 401K plans may be worthless, markets may crash, the airline industry may default on their retirements, but the ol' safety net assures that folks too old to work can at least afford to dwell in a singlewide and eat catfood.

Bill Kraft, MarketFN.com said...

Interesting observation about the "embezzlement" of Social Security. I agree about the populace being smart enough to vote the crooks out and I also favor term limits. The "good ole boy (and girl) network" has produced some shameful results.
Bill Kraft

Anonymous said...

Remember back to the 70s. Congress could not bear the oil industry making a buck they might be able to get. So we had the Windfall Profits Tax. So, they no longer had the obscene profits. Nor did they have the money to expand the fields and get more exploration accomplished. I am convinced the Democrats must have all failed economics.
Bob H.

Alexander said...

I have been investing since I was 18 and began with no education about finance. I don't see what is so hard about putting a percentage of your paycheck towards your retirement in a mutual fund driven IRA...it's not rocket science! We may not all be capable of researching and valuing our stock purchases but when it comes to retirement planning investing in an IRA is a slam dunk.

Anonymous said...

Social Security Dilemma

Re-characterize Social Security as Personal Pension Plans
Or
Fix the traditional Social Security Welfare Program


We need to recognize that when FDR’s Social Security Act (SSA) was passed in 1935, it was a welfare program funded by select segments of the labor force (and their employers) for their benefit at minimal cost to the government. A portion of the Act was known as “Old Age Assistance and Survivors Insurance”. The purpose being to provide food and shelter for older retiring workers without adequate means to support themselves in retirement or their families should they die with young families. It was not a guaranteed retirement program, but a floor of subsistence that no retired worker who paid into the plan would fall below. The model for provisions of the SSA was found in the many “mutual benevolent societies & associations” formed by European immigrants to the U.S. in the early part of the 20th century. Each ethnic group organized to help their own in time of need and some of these societies continue to flourish today.

Issues

The SSA was a masterpiece government welfare program – a Trust Fund that was funded by wage earners and their employers that now (because of amendments) provides the Federal government with no-interest, intra-government loans. This near utopian economic concept is now threatened with extinction by President Bush who is campaigning to replace it with Personal Pension Plans for those under 55. The problem with the Social Security Program as we know it today is two-fold and as such there appears to be bi-partisan support to scuttle Social Security, as we now know it, from two different party line perspectives. First of all, over the years the democrats have attempted to emasculate many of the key provisions of the original plan. For example, the independent Trust Fund has now been commingled with the general treasury, benefits are now taxable to the recipients and the benefit recipient base has been expanded to include many who have never contributed to the plan to name a few changes enacted. No wonder we are exhausting funds for retirees who paid for many years into the plan. Now President Bush comes up with a plan to extricate the Federal government from paying Social Security benefits to those under 55 and shifting the total retirement responsibility
(including the Social Security safety net) to the wage earner. Keep in mind that corporate America is also endeavoring to extricate themselves from the traditional pension plan, in favor of 401k plans. The SSA of 1935 was probably one of the best welfare programs ever devised by this country. It was a means to prevent retired workers from becoming destitute. Arguably one can make a case that the Federal government of the most prosperous country in the world can and should economically protect the workers who made us great. Shirking this responsibility would be tantamount to ‘human rights’ violations on millions of retirees in the U.S.A.

.

Exacerbating these problems, over the years, many people have been misled to believe that Social Security was to be their retirement panacea. Nothing can be further from the truth. In 1935, Social Security was planned to be an economic safety net and that guiding principle has not changed. Congress continues to diminish the intention of the SSA of 1935. Why?

In the absence of in-depth projections and sufficient details about the characteristics of the Bush Personal Pension Plans for workers under 55, the potential risks, costs of restructuring Social Security, and the question of who will be funding the restructuring are all cause for much concern. It is noted that we haven’t seen much support from Wall Street and there is no solid evidence coming from any country in the world that broad-based worker-controlled Pension Plans have been successful. Would it not be prudent to try to fix our crippled but proven welfare program rather than changing course entirely? Some argue that the cost to convert an on-going welfare program in stages to personal pension plans would cost in excess of $1 trillion. Who would shoulder this financial burden and is it worth it?

The President is calling on the average worker to become financially savvy, with limited control of his/her personal account. Past experience with failures in IRA’s, 401k’s etc. and the volatile stock market are good indicators that we can expect more ill-prepared retirees on the horizon. As American corporations continue to shy away from offering employee pension plans, the future retiree is now being forced to plan for retirement on his/her own as the safety net of social security fades away.

Solutions

In most simplistic cost-effective terms: (1) Abolish all of the amendments made to the SSA of 1935. None of them benefited the intended recipients and have caused the impending insolvency. (2) Modernize the Plan to accommodate today’s demographics. Raise the retirement age. We now live longer than the 1935 wage earner. Enhance revenues collected from the participants. To insure solvency, payroll deductions need to be increased and pegged to inflation. Benefits should be limited to the plan participants and phase out gradually at a pre-determined cap. This cap is determined by the amount of retirement income the beneficiary receives. I’m certain that no moral-bound millionaire would want to appear to be on the government dole. Yet should he/she be wiped out financially, the safety net is there.

Simple, not really, but I’m sure that some august committee can complete the analysis and update the plan to provide our retirees with a fiscally sound safety net at a fraction of the cost for the Bush Personal Pension Plans



Adam Miklovis, Captain, USN-Ret.
Seaville, NJ

Bill Kraft, MarketFN.com said...

As you no doubt know, Alexander, it's easier said than done for a lot of people. Congratulations to you for your plan and ability to follow it.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thank you, Captain, for your thoughtful and reasoned contribution.
Bill Kraft

Anonymous said...

Here's a possiable solution. Invite Mexico to join the USA. Give them the jobs that we send to China and in return get a huge trade defecit (hopefully the shipping with the increasing energy cost will offset the labor costs) This would eliminate our border problem, increase our tax base,cut our trade defecit, increase our terrorist security all the way down to Guatamala, solve our social security, as the Mexicans get 4 points a year for 10 years before they can collect, and send a message to the terrorist with 2 Christian countries joining forces