Monday, January 24, 2005

Social Security Is In Trouble: Raise Taxes Of Course.

Is raising taxes the only answer our government knows to solve a problem? Today the AP is reporting some possible solutions to the Social Security crisis according to Rep. Bill Thomas (R-CA) the chairman of the House tax-writing committee. His answer to the current problem with Social Security is to implement a "value added tax." What is that?

Thomas mentioned the valued added tax, a kind of consumption tax. It is, in effect, a sales tax imposed at each level of production of goods and services.

Yeah, that's the ticket. Let's tax companies to save Social Security. Here's how law-makers think: If you tax companies, than the general public will never see it and won't be up in arms about the tax hike. Social Security will be saved for another 20 or 30 years and everyone's happy. After all, corporations are evil anyway just out to steal your money. They deserve to be taxed more.

Here's what they don't tell you: If a companies taxes go up, that becomes an extra expense. Do companies just eat expenses and make less money? Sometimes. It depends on what the competition is doing and charging. If an expense is across the whole industry, all it does is it gets passed down in the price of the product. What happens when most every industry in the country gets this new expense? The price of most every product will go up. That's called inflation. So who, in the end, pays for this tax increase? The people do, it's just not as obvious as a hike in the payroll tax percentage. People's paychecks may be the same, but we will all be poorer because each dollar will buy less.

Social Security is broken. It's been bandaged before and they're trying to bandage it again. Eventually, you won't be able to bandage it anymore and it will be scrapped. Why not scrap it now?

Now I'm going to do some math. Numbers very easily get errors, so if anyone sees a problem, please let me know.

When I usually get a statement from Social Security, it basically tells me that I can expect about $1000 monthly payments when I retire (in about 40 years). Now let's calculate what someone would get should they invest the money they put into Social Security. We'll assume a $50,000/year income for 40 years. I'm also assuming that the Social Security portion of the FICA withholding is about half so 7.5%. (Don't forget that you're employer also pays 7.5% towards your FICA.)

Annual Income: $50,000
Monthly Income: $4166.67 ($50,000/12)
SS portion to invest: $312.50 (7.5% of $4166.67)
Time until retirement: 40 years
Return on Investment: 3% (A very modest return)
Value of Investment at retirement: $288,930.56 (Using Future Value function in Microsoft Excel)
Divided Monthly for 20 year: $1203.88 per month.

That's $200 more per month than Social Security will give you. Granted there are some problems with my numbers, but I've stated my assumptions. This also assumes that at retirement, the whole nest egg is pulled out of investment and just divided into payments for the next 20 years. If only the monthly portion was pulled out and the rest left in the investment, it'll increase even more.

Imagine what would happen if the money was invested into something a little more aggressive. Let's assume an 8% return (very realistic in today's market). The monthly payment would be $4538.31 per month!

The other thing is that if you were to die before the money was used up you could leave it for your children. With Social Security, you're just out of luck.

So why are there so many against privatization? Set a cut off date for those that can participate in Social Security as is, for example, the age of 40. Everyone younger than 40 will put their Social Security portion of their payroll taxes into an IRA like fund allowing the person to invest it however they choose. This will not only increase the assets of the individual, but the influx of investors in the market will help the whole economy.

What if someone doesn't invest it wisely or is too aggressive and loses it all? The government won't allow them to die in the streets, of course. Turn it over to the welfare system. It's better for a few to end up in the welfare system than for every one of us relying on a check from the government as part of our retirement income.

If we need to raise taxes to get those last few through the old system, or better yet, cut spending, than so be it. In the long run, the whole country will be better off for it.