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Sunday, May 31, 2009

Republican's Ingenuous Social Security Revisions

Social Security is an insurance plan, i.e. an annuity. It is being misrepresented by Pres. Bush as an investment plan. Were social security to become an investment plan, it would be the worst of both worlds. 1) There would be be a substantial reduction in the insurance, 1) the return after deducting the enormous switch over costs would be below that of social security. In essence, the Republican plan with PRA's would force American's to do just what financial experts caution is the worst thing to do-time the market. No one can know how the stock market will be in the year/month/day one has to retire. Unlike a true investment plan where you can buy or sell when you want, no one has control over when one retires. Events that force retirement-firings disability, premature death-are not within the control of the "owner" of the Republican Plan. Let's illustrate with a person born in 1985. At age 65, she would normally retire, i.e. 2050. Under Social Security her annual retirement would be in current dollars (about $20k per year) X 75% to account for the likely benefit cut=$15k. Under the RepublicanPlan, about half ends up in a PRA so only $7500 is guaranteed under modified social security. If the other $7500 is invested in the SP500 Index, but if the Index is in bear market condition at her retirement age, i.e. 60% of value, she would get only $4500 from her PRA plus only $7500 from modified Social Security or $12k vs. $15k, a 20% reduction which would drop her below the poverty line. The Index could be at 150% at some point, but there is no way to determine if that will be near or at retirement age. And, even if it is 150%, if that is at a time of firing, disability or premature death, unless those events occur near retirement age, the 50% premium will probably not make up for the 20% reduction. .If she is fired (1 chance in 4) or disabled (1 in 3), half way to retirement, her combined benefits under the Republican Plan will be less than half of $12k, probably about $5500 v. $15k, a 63% cut which would be totally devastating. In the case of premature death, any survivor benefits would be reduced by a greater or lesser amount depending on where the Index was at the time of death. .No civilized society would put its citizens in such jeopardy.


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