1/31/2005

Private Social Security Investment Accounts: A Dangerous Idea

Right, and Ted Kennedy is my next - door neighbor. Now that the Iraqis have had a real election, fortunes will turn more toward the current domestic agenda item, Social Security reform and private Social Security Investment Accounts. Now, the Progressive - Liberal pundits are using the same scare tactics today with this that they use every time some institution is ready to be changed from the status quo - first, you scare the pants off the average American, who knows very little about economics; next, you make the old people think that it will bankrupt the system and they won't get their check anymore, etc. etc. -- ad nauseum.

The fact of the matter is, there are a lot of ways to skin an economic cat, and the people who understand packaging and marketing have the secret. If somebody shoves something down your economic throat, no matter how good it is for you, most people will balk and resist. It's human nature. But if you package it attractively, and take the middle ground, the acceptance level goes up dramatically, and you get a sale.

Now this is a highly charged issue for those friends on the left - I mean, Hillary Clinton got so worked up about it, she fainted just before giving a speech on the subject.

When I was younger, before I got religion and became a professional software developer, I was a Financial Consultant for Merrill Lynch. Back in 1982, the Government passed "TEFRA" a tax act that changed the treatment of accrued interest on bonds, and Merrill led the way with all kinds of cool new securities based on the concept of "stripping" -- you take a $10,000, 30 year Treasury Bond, strip off all the coupons, leaving the corpus - the principal, which is then sold at a deep discount to match current yields, say for $2,000. I bought millions of these things for my clients, because interest rates were still sky high, and I knew that when they came back down - way before the 30 year maturity guaranteed them back their $10,000 - that the market value of the zeroes would soar - and they did. Since many of these things were in tax - deferred IRA and SEP Accounts, they could take profits and reinvest with no current taxes. But mostly, I used this as a technique to get people who were scared of the market to take a portion of the investment dollars, put them in zeroes, and invest the rest in a good mutual fund, secure in the fact that even if all hell broke loose and the market went to zero, at maturity they were still guaranteed to get 100% of their investment back. It worked because of packaging and marketing, not because it was rocket science.

What the Liberals don't understand is that you can use the same concept to privatize the bereft Social Security system, which in reality is currently giving us all a below - zero percent return on the money they take out of our paychecks due to government greed and graft, and we can still guarantee Uncle Harry and Aunt Mabel that their trusty Social Security checks will always be there until the day they die. But then, being Liberals, having a good economic idea would ruin their fun, which is based on having a large government that knows better than we poor slobs do, and is really good at redistribution of our money to other slobs, who are poorer than we, but who are still smart enough to have their hands out. * The idea is, if you have been very successful in an ownership society, the Government should take an ever higher percentage of your money to help fuel this redistribution of wealth process, in order to reward you for your success. Makes great sense to me.

This "guarantee the principal" scheme is already done in the mortgage industry, the municipal bond industry, and others, and it works just dandy. Private insurance companies can be brought in to do the guaranteeing of the Social Security trust funds - the Government doesn't have to do it. In fact, we can even increase the percentage of the portion that's put into the "zero" fund to guarantee the worst investors in the world that they will still get a positive return on the dollars that they put into their "private investment accounts". And the best part of it is that if you manage YOUR Social Security account well and get a good return, you can have some of YOUR money left over when you die and bequeath it to your kids. I did say it was YOUR money, didn't I . . .

Let's take a for example; we'll use a tax free zero to make it more interesting:

The Savannah GA Development Authority (AAA rated) zeroes mature in 2021 - about 17 years, and are priced at about 45.84 for a 4.691% yield to maturity. So you have $10,000. We take $4,584 and put it into a $10,000 Georgia zero. We take the other $5,416 and put it in the stock market. Let's assume that over the 17 years the market returns what it has averaged over the last 60 years - about 10 percent. So in 2021, we have an investment account worth $27,410, plus a bond worth $10,000. That's a respectable 8.07% return on our hard-earned money. Even if the market only averaged a 2% return, we'd still be better off than we are with those crooks in Washington spending it!

Wake up! It's NOT the Government's money; It's YOUR MONEY! So, you decide: Private Social Security Investment Accounts: a dangerous idea.


* While I'm at it, didn't I mention that I thought the IRS was a bad idea, too? The US Government can raise plenty of money through a National Sales Tax - and eliminate the huge cost of running a behemoth IRS tax system. And, it can be a fair tax, with everybody paying a fair share.