The Concept of Privatizing Social Security

There has been much said about modifying or changing Social Security to allow people to have more of a say in their retirement. Here's what I would consider the best solution to the argument.

Social Security, as it's currently set up, is no different than a ponzi scheme, where those that got in early make huge rewards, and those that get in near the collapse of the scheme lose everything. Social Security is heading in that direction. Either a massive tax increase, or a massive cut in benefits, or both, is needed to sustain the system to meet the needs of retirees entering the labor market today.

Rather than continue the system as it's currently structured, there are many options available to the people of this nation. One I would suggest is to split Social Security "contributions" into three parts: 40% into US Government bonds owned by the individual, 30% in one or more mutual funds chosen by the individual, and 30% invested in long-term growth stocks such as utilities, food, real estate, banking, and industry, also chosen by the individual from a long list of possibilities.

For instance, suppose a new wage-earner enters the workforce at age 20, earning minimum wage (currently $5.25/hour). Their monthly gross income is approximately $910/month. They will be taxes at approximately 8.75% for Social Security, with an additional 8.75% paid by their employer. That leads to an approximate payment of $150/month into Social Security. Let's assume the Federal Government invested $60 of that into 10-year government bonds at 8%, with the interest rolled over into additional bonds. They would then invest $45 into a mutual fund paying from 8%-16%, also rolled over, and $45 into an accumulating fund to purchase stocks in companies selected by the individual.

Social Security today "pays" approximately 2% interest over the life of the "investment". Here are comparisons with my 40/30/30 split above:

Social Security (interest rate 2%/year)

Interest or dividend rate per period (e.g., 8.25)	0.17
Number of periods	540
Amount of each investment	$150.00
Initial value*	$0.00
Total payments	$81,000.00
Total interest	$50,333.69
Total value of investment, before taxes	$131,333.69

Government Bonds (40% of total, paying 8%/year)

Interest or dividend rate per period (e.g., 8.25)	0.67
Number of periods	540
Amount of each investment	$60.00
Initial value*	$0.00
Total payments	$32,400.00
Total interest	$288,340.64
Total value of investment, before taxes	$320,740.64

Mutual Funds (30% of total, average return 10%/year)

Interest or dividend rate per period (e.g., 8.25)	0.83
Number of periods	540
Amount of each investment	$45.00
Initial value*	$0.00
Total payments	$24,300.00
Total interest	$440,831.48
Total value of investment, before taxes	$465,131.48

Selected Stocks (30% of total, average return 12.5%/year)

Interest or dividend rate per period (e.g., 8.25)	1.04
Number of periods	540
Amount of each investment	$45.00
Initial value*	$0.00
Total payments	$24,300.00
Total interest	$1,126,371.66
Total value of investment, before taxes	$1,150,671.66

Total return on investment from this three-way split would be $1,936,542. Even the minimum investment, 40% of gross Social Security payments for US Government (or other) bonds would pay nearly twice what Social Security would pay. The interest on almost $2million would be a substantial amount, capable of supporting just about anyone without having to touch the original principal, which could then be given to children or grandchildren at the wage-earner's death.

Let's suppose our wage-earner retired at 65 after working for 45 years. He decides to discontinue rolling over the interest he receives on Government Bonds, and has it paid into his bank account instead. That means he would receive more than $25,000 a year, just from this investment. If he decides to only take the dividends from stocks and mutual funds he's invested in, and this amounts to 1.8% per year (low return), he would receive an additional $29,000 from those. This provides our retiree a combined retirement income of $54,000 a year after a lifetime of working for just minimum wage. Any increase in wages, additional money set aside for retirement, and any other changes would also affect his retirement in a positive way. This amount would continue as long as the individual lived, and the economy remained relatively stable. These types of investment would help create and maintain a stable economy.

It's impossible to say exactly how this would affect the economy of the United States, however. Imagine having a nation of mostly millionaires, just from earning minimum wage and investing it wisely. The amount of new money introduced into business, savings, and the economy will have an incalculable effect. Someone like Thomas Sowell or Walter Williams is probably able to do the math better than I can. Even with a 2% or 3% "Maintenance fee", the government bonds alone would outstrip the current outcome for Social Security.

There is no reason NOT to revise Social Security other than the need to work out the exact details, and keep the government's heavy hand from the procedings.