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Plan for Your Retirement (so Bush can't screw you)

Plan Your Retirement and learn the truth about Social Security

Bush went on TV tonight to end off his Bamboozapalooza Tour around the U.S. with a bang. There were some memorable quotes from the evening, such as his inability to distinguish between various states of matter ("Liquid gas in solid form"). Overall, he just told the same big lies he's been telling since the Inaugeration. Our dyslexic Robinhood found a new game - instead of the usual robbing from the poor to give to the rich (maybe that got boring), he is doing what Krugman calls "a gut punch to the middle class, but a fleabite for the truly wealthy" (the poor will experience no change).

Social Security

How It Works
"Worthless IOUs"
The "Problem"
The Catch-22 of Private Accounts
Inflation: The Current System vs. Private Accounts
Other Flaws with the Bush Plan

One of the things I learned in business school is that people are bad at statistics. Marketers don't mind this though - they use it to their advantage. When you hear numbers thrown around to convince you of one fact or another, half the time you're not meant to understand them. They're just being used to confuse you and sell you something. (One example: A pair of shoes costs $100 and it is marked "30% off" with an extra 20% off after that. How much is the reduction? You're meant to think it's 50% but the math comes out to only a 44% discount.)

So start by throwing Bush's numbers out. He's using them to distract you from the truth. You can also check out a great Social Security post on Daily Kos.

How It Works

In the 1930's, the people who were working at the time started contributing to Social Security through their FICA tax (which is now about 6% of your income). Retirees and other eligible people took from the system what the workers put in. This might have been your great grandparents receiving money which your grandparents, who were working, put in.

When your grandparents retired, your parents generation was already working and paying into Social Security. Your grandparents did not receive the money they paid in because that was already long-gone. They received the money your parents put in. The money your parents paid into Social Security was not earmarked for your grandparents; rather, it all went into one big pool of all of the taxes paid in. Recipients of Social Security received money from the same pool.

The effect was that the U.S. drastically reduced poverty among the elderly. Social Security won't pay for you to retire on your yacht, but it will feed you and keep a roof over your head (barely). It is not meant to replace other retirement products: it is merely an insurance program to insurance against poverty in old age. Even using conventional retirement savings, you might assume you will live 80 years when planning your savings but then live until you are 95. Social security assures you that you will not run out of money in such a situation.

In my own family, my grandfather refused to let my grandmother work. Finally, after 42 years of marriage, they divorced and she got a job and worked for about 10 years. He was well-off until the day he died, cruising to exotic vacation spots several times a year and buying a huge new house. She, on the other hand, retired on the only money she had outside of a small nest egg - social security. She got about $600 per month. My grandfather, who worked for longer and put more money into the system, received $1000 per month. When he died, my grandmother started to receive his payments in lieu of hers.

"Worthless IOUs"

Have you heard Bush talk about "worthless IOUs"? Or Gore talking about a "lock box" in the 2000 campaign? When the baby boomers retire, it's true that we will have more people receiving social security than people paying in. A while ago, plans were made to prepare for this. Any money paid into Social Security that is not immediately paid out goes into the Social Security Trust Fund. This fund is comprised of the safest investment out there - U.S. Treasury Bonds. They don't have an aggressive growth rate by any measure, but they are a safe, responsible option (as one would want with the money that will be their last resort to stay out of poverty if need be). If these U.S. Treasury Bonds are "worthless IOUs" then the U.S. government has a solvency problem far more serious than social security. Bush is lying.

What Al Gore wanted to do was put the surplus we had in the late 1990's into the trust fund so there would never be a solvency problem when the baby boomers started retiring. Bush, irresponsibly, refunded the surplus and then some in the form of tax cuts weighted towards the wealthy, then spent us into the ground with defense spending, and after the enormous budget deficit became apparent, made his tax cuts permanent.

The "Problem"

Ok, so Bush spent us into the ground but that's no reason to punish the elderly (or future elderly) by denying them benefits, right? First, assess where the numbers came from that describe the "problem."

Bush says in 2017, social security starts paying out more than it's taking in. First of all, the number comes from a group that he appointed. Second of all, since the trust fund exists, that's not immediately catastrophic. People will be earning full benefits long after 2017.

The next year you hear is 2041. This was also published by the Bush-appointed trustees. In 2041, social security will need to reduce benefits to about 70% or so of what people are receiving now. The non-partisan Congressional Budget Office (CBO) says that this will happen in 2052.

This estimate came from a very conservative projection of the US economy between now and 2041 or 2052. If America's economy grows at half the rate it has historically grown at from now until 2041 or 2052, then social security will need to reduce benefits at that time. If our economy is so stagnated for so long, social security will hardly be our biggest dilemma.

If, on the other hand, our economy grows at the rate it has averaged at over the past several decades, social security will not become all or partially insolvent in 40 or 50 years after all - it will continue paying 100% benefits.

The Catch-22 of Private Accounts

To recap, if our economy does well (and the stock market does well), social security faces no problem. If our economy suffers for the next 40 years straight (and the stock market heads down the toilet), then social security is heading for insolvency. It would only be in this second situation that fixing the problem today is necessary. Given that, let's examine what would happen with a stale economy if we implement private accounts.

If today's younger workers put 2/3 of the money that is going to insure them against poverty in old age into a private account and the economy performs poorly for 40 straight years, then 2/3 of their social security money will be gambled away and lost. If you are surviving on only your social security (as my grandmother has had to), without the private accounts, let's say you would be making $1000/mo. You are still assured 1/3 of that money - or $333/mo (adjusted for inflation when you retire). The other $664? You'll probably have some of it left. Just less of it. You're better off taking the straight $1000.

And what if the economy does do well? We see a potential problem now, we implement private accounts to avert the risk, and the economy does great making the social security fix unnecessary. Sure, you could make money. You'd have to earn a very high rate of return though, to adjust for both inflation and for the fees taken out by the firms doing the investing.

In the end, is it worth it? What if you could gamble on the pool of money used by your health insurance company or your car insurance company to pay if you get sick or crash your car? You *could* make some extra cash, but you could also lose it. Why take the risk? You're paying for insurance to reduce risk, not increase it!

Who, then, does private accounts benefit no matter what? You guessed it: Wall Street. And you can go to
OpenSecrets.org to see how much money they gave to the Bush campaign.

Inflation: The Current System vs. Private Accounts

Another item to examine is inflation. Taking myself as an example, under the current system, I pay taxes today in 2005 dollars. Today's retirees receive benefits in 2005 dollars. No problem. The excess money going into security is invested in U.S. Treasury Bonds, which grow at a slightly higher rate than inflation (not by much, but the point is we're making money not losing it). When I am 65 (in 2045), I will be paid social security in 2045 dollars that was paid in with 2045 dollars in taxes.

If I were to invest in a private account, I would pay in 2005 dollars and my growth rate from my investments would have to exceed the rate of inflation and the fees from the investing firm combined before it would result in a true profit. The mutual funds in my 401(k) all lost money this quarter. That could have been my social security.

Other Flaws with the Bush Plan

Recall that the money you pay in today is not the money you will receive when you retire. The money you pay in now goes to today's retirees. When you retire, you will receive the tax dollars of the people who are working then.

So what happens if we divert 2/3 of the FICA tax dollars we are taking in now into private accounts? What are today's retirees paid with? We'll have to tap into the Social Security Trust Fund to pay them what we promised them. Plus, the administrative costs of planning and implementing the program will also run high into the dollars, and we'll have to start paying out fees to Wall Street for doing the investing for us. Less money into the pool and more money going out - seems to be a theme for Dubya.

You know how Bush has been yapping about the fact that in 2017 social security will pay out more than it takes in? If he really thinks that would be a problem, then he shouldn't endorse his own plan. If we implement private accounts, social security will pay out more than it takes in not in 2017, but today in 2005.
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Planning Your Retirement

Given that the Smirking Chimp is on a campaign to bankrupt the nation, it won't hurt any of us to plan out our retirement. Retirement products include 401(k)s, 403(b)s, IRAs, Roth IRAs, and the like. These products have variances among them, but the general theme is they are in some way shielded from taxes. Also, your employer may match your contributions.

When I first invested in a 401k, I asked a Finance Professor for some tips. He said that there are 2 different types of investments: bonds and equity (stocks). Bonds tend to be a more stable source of interest, but equity can provide more aggressive growth. In the short run, equity (in the form of mutual funds) may go up and down; in the long run, they tend to go up. Therefore, in the long run equity is preferable for the higher growth you can achieve (compared with bonds), but you need to have a long period of time available to increase your chances of making money instead of losing it.

When you are younger, you should have more equity than bonds because you want growth and you have a long time until you will retire. When you are closer to retirement, you want to increase the percent of bonds in your portfolio because it is less risky and you have less time to mess around with.

Fidelity provides what they call Freedom Funds - mutual funds designed based on your year of retirement. As you edge closer to retirement, Fidelity adjusts the ratio of bonds to equity for you. Currently, the fund designed for 2040 retirees (someone born in 1975 will be 65 then) has 72% domestic equity, 13% international equity, and only 15% bonds. The fund designed for 2010 retirees has 40% domestic equity, 5% international equity, 45% bonds, and 10% short term investments.

A range of financial calculators are available on the internet, and chances are your bank or credit union has some calculators on their website too that are heavily laden with information about the retirement products they offer.

With some good plans and investments in place, you deny the Shrub the opportunity to send you spiraling into poverty in old age.
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