If Social Security Had Been In Private Accounts The Stock Market Drop Could Have Been A Disaster
Back in August, the stock market opened a thousand points down. Naturally the screamers came out of hiding, and started yelling about it.
The stock market continued a period of volatility on Monday. Media reports sounded the alarm as the DOW opened 1,000 points down and other indexes took huge hits, only to climb back up a bit later in the day. While that performance, which had some people calling it black Monday, may have knocked a good deal of money out of people’s 401(k) retirement accounts, Social Security benefits remain by and large untouched by such fluctuations.
That may have driven home an aversion to the idea of fundamentally changing Social Security. “The last stock market plunge in 2008 actually was the nail in the coffin of the idea of privatization,” Morrissey said. “It became very visceral for all the people who lost a huge amount of money in 401(k) plans.” But Republicans still seem intent on bringing the issue back to life.
That may have driven home an aversion to the idea of fundamentally changing Social Security. “The last stock market plunge in 2008 actually was the nail in the coffin of the idea of privatization,” Morrissey said. “It became very visceral for all the people who lost a huge amount of money in 401(k) plans.” But Republicans still seem intent on bringing the issue back to life.
Now I wanted to talk about this for a couple of reasons. One reason is that I want everyone to win, and I hate it when people harm themselves needlessly.
So here is some free, unsolicited investing advice. If you don't like it, I'll give you a 100% money back guarantee.
One: Invest no less than 10% of in your income in retirement. More is better. Don't ask 'how much do I need to save?'... Ask "how rich at retirement do I want to be?". The more you save, the better off you'll be. It's that simple.
Two: Do not invest in single stocks. Invest in mutual funds that have been around for longer than 10 years, with decent ROIs. Look for what their 10-year RIO was. If it hasn't been around long enough to have a 10-year RIO, then move on. If the ROI is bad, move on.
Do not invest in single stocks, or in Day-Trader companies online. Being a stock trader requires you to eat, breath, and drink stock information. A quick tip is: If you have a day job, you don't have the time to be a stock trader. Leave it to the professionals.
Three: Diversify. Single stocks are not diversified. Mutual funds buy stocks in dozens of company. Diversify even more, by buying multiple mutual funds. Once you get $10K in one fund, start buying another, and another and another. When you have 4 or 5 funds, then load them up.
For you Christians, Eccl 11:1-2 says:
Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.
We have other sayings for the same thing. "Don't put all your eggs in one basket". Same idea. Single stocks is the exact opposite. Don't do that.
Mutual funds hire professional brokers that live, eat, drink, and breath stock information. They do the hours of research and investigation, to determine which stocks to sell, and which to buy. Exactly the information gathering that a day trader typically can't do.
Four: Put your money in, buy your investments, and leave them there. Investing is a crock pot, not a microwave. This is a long term plan, not a buy it today, sell it next week, and making millions.
Five: Market dives are when you buy, not sell. When the market takes a hit, that's when the Blue Light Special is turned on. You should be dumping your money into the market when it crashes, not pulling out.
When the market price falls, that means you can buy more at a lower price. Say you went to the store and found a porterhouse steak for $50. Then the next day, you found the same steak on sale for $25. You would never think to run home, and sell the steak you bought. Instead you would buy more when it's on sale.
Yet that's exactly what people do with stocks. They buy Apple stock for $120, and then the price falls to $90, and instead of saying "Oh, I can buy Apple stock for $30 less!", they instead sell the stock they already own, at a loss. And I've met people who did this.
Instead, buy stock when the price is low. And if you don't buy, at least don't sell it. When you own stock, most stocks pay a dividend. That money is then in turn used to buy more stock. The dividend is tied to the profit of the company, not to stock value. So if you earn a $100 in dividends, do you want to the price of the stock to be $10 a share, or $5 a share? You could get 10 more shares, or 20 more. I want 20 more shares. But if you sell off your stocks, you unplug that growth.
And here ends my free advice.
Now let's talk a bit about Social Security and privatization. It's true that the idea of privatizing social security isn't going away, and it shouldn't.
Social Security isn't sustainable, and never was. SS is a ponzi scheme, and like all ponzi schemes, it eventually runs out of other people's money. By the way, SS has always been a Ponzi Scheme. There was never a time where it operated any differently.
Ida May Fuller - Wikipedia, the free encyclopedia
The very first recipient of Social Security, Ida May Fuller, paid in just $24.75. For that money, she was paid $22,888.92. Obviously, if anyone was going around town and saying "for under $25 in my investment firm, you'll make $23 Thousand!" We'd be calling the police. And by the way, as a side note, many people like to try and claim there was a huge demand for Social Security, but in reality, most had no idea what it was. Ida is quoted saying "It wasn't that I expected anything, mind you, but I knew I'd been paying for something called Social Security and I wanted to ask the people in Rutland about it." She didn't even know what it was.
But the main point is, it's a ponzi scheme, though legal because government is running it.
All Ponzi schemes eventually destroy themselves, and SS is now nearing that end. Currently Social Security is running a deficit, and will continue to do so until the entire system is reformed.
Right now the government is borrowing money, to pay Social Security benefits. This can't continue. In 2014 SS ran a $71 Billion dollar deficit. The trustees of SS have said that over the next 10 years, they expect deficits to reach $1.1 Trillion a year.
Trustees Report Summary
In theory, SS has investments they can cash in to pay out benefits. In reality, the only investments SS has, is government bonds. The government doesn't have any money, which is why they must borrow money to pay back the money they borrowed.
If we don't fix this failing system, then we risk ending up like Greece. There were numerous attempts to fix the Greek pension system for decades leading up to the crash. Now it's too late.
Privatizing is the only solution.
The best pensions in the world
On Social Security and Pension Reform: Lessons from Other Countries The Current State of Chile's Private Pension System
I was surprised to discover that many countries have privatized pensions. Denmark, Chili, Australia, Poland, and several others, have all implemented some form of privatized pension system.
I was not surprised at all to find that most all publicly funded pension systems have been reformed, and some multiple times.
Again, government funded pensions all eventually fail. They all have to be reformed with lower benefits, and higher taxes. Our own system has already been reformed multiple times, and is still failing. At the start, SS was only a 1% tax on the first $3,000 of earnings. Today it's 12.4% of the first $118,000 of earnings, and yet it's still going broke.
Benefits Planner: Maximum Taxable Earnings (1937 - 2015)
Those that want to save the current system, suggest we just need to increase the tax. Let's remove the contribution cap. Sure that may bring in a bit more money, but not nearly enough to save the system.
Warren Buffet for example, one of America's most wealthy, only has a salary of $100,000 a year. Raising the cap, wouldn't bring so much as a penny from Warren Buffet. Most of the wealthy have low cash incomes, relative to their wealth, and they do this by design. So raising taxes and contribution limits, may post-pone the crash, but it's not a solution.
But they insist that SS must be saved because it's a guarantee income for the elderly to avoid poverty. I would argue that the only guarantee SS provides, is that of poverty.
Average Monthly Social Security Benefits, 1940–2015
The average SS monthly check today, is only $1,270 a month. That's of all pensioners, the average, is $1,270. Comparatively, minimum wage is $1,150 a month. Living on the guarantee of SS, is to live on the guarantee of poverty.
Again, that's the average. People at the lower end of income, are collecting $700 to $800 a month. They could easily make more money working at Wendy's.
But the real killer is that they could easily have a really good retirement, if they invested privately. Say you work for minimum wage, from working age, until 65. Now this would be difficult to do given most jobs give an automatic raise for just existing at the same job for multiple years. You work at some place for 40 years, and are so bad you never get a raise, but good enough you never get fired... that is amazing.
But as a hypothetical, you work your whole life at minimum wage... at 65 you would get a whooping $728 a month, until you die. Now keep in mind, that you pay into Social Security, 12.4% of your income, which is $143 a month.
If you were to invest that $143 into the S&P 500: The S&P 500 averaged 8% growth per year. At $143 a month, with 8% growth, you would have only a tiny $700,000 at retirement.... or SS $700 a month. Which seems like a win to you?
But even worse, we are comparing the private retirement to Social Security as it is today. When the funds of SS run out, benefits will be cut to how much the revenue into SS can afford. As it stands, that's a 25% cut. Meaning that $700 a month, will become $525 a month. As if the half million alternative wasn't already a better plan....
Now what some have said "but that's risky, and people could lose their savings in the market". Is that true?
Some people have said statements like "they lost all their retirement". That is just a bonkers. You would have to put in a massive amount of effort into losing everything. In order for a stock in a company to become worth nothing, and have zero value, the company would have to close. Not even bought out... but close down. You would have to either buy single stocks yourself, and put all the money you have into one single company that then closed.... or you would have to pick the one mutual fund on the planet that successfully invested all the money in the entire fund, exclusively into companies that all closed.
If you invest in an S&P 500 index fund, you are saying the top 500 corporations in the country all closed at the same time? I don't think so. So no, you are not going to "lose everything" in the stock market.
Nevertheless.... yes, if we allow people to move money in and out of the market at will... then in theory a person could move money into stocks when they are high, and pull out when they are low.
I actually knew a guy who did that, and just about screamed at him. He pulled his money out of stocks at the bottom of the market after the 2000 dot com bust, then put his money all back in after the market recovered in 2002. He did the same thing all over again in 2008. He turned a million dollars into $800,000 for no reason.
But the only requirement is to prevent people from jumping in and out of the market. And worse case, have a minimum safety net, if people actually go broke.
The Chilean system, has a minimum basic state funded pension. If you completely drain all of your own money, from your own account, then the state takes over with a minimum payout. However, under the Chilean system the private pension system has done so well, the number of people falling to the states minimum pension, is almost zero. There is no demand for raising taxes on the working people, to pay for retirees, because retirees are living off their own money.
Chile's Next Generation Pension Reform
This mirrors the experience of Singapore, where the government funds very little if any retirements. People have their own money in their own retirement accounts.
But for those who are simply too scared to put their money in the market, and for those who can't stand the remote possibility that someone might lose some money, there is a compromise solution, that should be agreeable to both sides.
Let one of the personal investment options, be investment in government bonds. Now the return on bond investments suck... but they are in fact stable, and they are as safe as the government they belong to. That retirement would be no less safe, than Social Security is right now.
In fact, it would be preferable to Social Security as it is. A mutual fund investing in bonds, can make between 3 and 5% return. Even at 3% return, you would still have $175,000 at retirement. That's way better than $700 a month, and if we had a final safety net of $700 a month if you run out, then you are no worse off than you were under Social Security.
In fact you are better off.... Under Social Security, if you retire early, and find the amount paid too little, and go back to work, you actually forfeit an amount of SS based on how much you earn.
Even if you are over the retirement age, if you earn too much, your Social Security income is taxable. So you are paying taxes, on income you paid taxes to get.
Under the private plan, the $175,000, or whatever amount you have, is your money no matter what, even if you continue working after retirement age.
By the way, Texas has already tried this with success. The Texas allowed people to opt-out of the Social Security plan, and put their withholding into private investment funds.
In all cases, the Texas plan has better results.
How Three Texas Counties Created Personal Social Security Accounts and Prospered
- A lower-middle income worker making about $26,000 at retirement would get about $1,007 a month under Social Security, but $1,826 under the Alternate Plan, according to First Financial’s calculations.
- A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the banking model.
- And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security vs. $5,000 to $6,000 a month from the Alternate Plan.
I have two responses. First, it isn't. Second, we already have a solution. You can invest in government bonds, and it won't be anymore of a gamble, than Social Security is now.
But honestly, it isn't a gamble, unless you make it a gamble. If you try and time the market, jump in and buy a stock on Monday, so you can try and sell it Friday for a profit..... this is called speculating. It's the same as buying Gold, or Silver, or Oil, and hoping the price will go up by Thursday so you can sell it for a profit.
That is Gambling. It's random chance. It's luck of the draw.
Even professional stock brokers don't engage in chance. Back in 2002, I worked at a Financial institution in their IT department. One of the place I had to wire up, was the stock brokers room. It was a room enclosed by glass. There were 6 large screen monitors around both sides of the room. A ticker of live stock prices, of each stock they owned scrolling across the tops of both sets of monitors. Every major news paper, and financial paper was delivered to the room; Bloomberg, Wall St Journal, Financial Times. Reuters and CNN, and several other major news outlets were on TVs in the corners of the room, at all times.
These people are not flipping a coin to pick a stock. It's not random chance, and "I hope this one goes up".
But the value of stock, is not chance. These are companies engaging in producing goods and services. Ford does not exist by accident. Apple Computer was not a random act. Risk is real, but it's not the roll of the dice.
And we know that because over the course of the markets history, prices generally go up, because companies generally work toward success.
However, the bottom line is, Social Security is going to be reformed. Now or later, the system is going to end. The sooner we deal with it, the better off we'll be.
If we wait too long, the choice will be made for us, when the system implodes, and the country is plunged into crisis.
