Social
Security Reform
You have probably noticed
by now that the White House, Congress and the media have all become very
interested in the fate of our national Social Security system. According
to CNN Money, the White House is planning a massive public relations
campaign over the next several months to raise the public’s awareness of
the impending trouble with the system.
Although there are many
critics of the President’s and other plans to "fix" the current social
security system, almost everyone agrees that something must be done at
some point. Thus the real contention is whether we currently face a
monumental crisis needing immediate action, or whether it’s simply a
bump in the road that can be fixed with reasonable changes at the
appropriate time.
Here are some interesting
facts about the Social Security system:*
Estimated Returns: A
worker born in 1900 earned a real return of 12% on the money they
invested in the Social Security system. The return fell to 5% for
workers born in 1925. The Social Security Administration now predicts
that Americans who are born between 1950 and 2050 can expect real
rates of return on their contributions of less than 2%.
Payroll Tax: The
Social Security payroll tax has grown from 2% in 1949 to 12.4% today.
This tax has been raised more than 40 times since the program began.
Ratio of Workers to
Retirees: There were 16 workers for every retiree in the system in
1950. Today there are approximately 3.3 workers. The Social Security
Board of Trustees estimates there will be 2 workers for each retiree
in 2030.
Total Tax: Nearly 80%
of Americans pay more in Social Security taxes than they do in federal
income tax.
Opponents of privatizing
the current system often argue that investing in capital markets is too
risky. We examined the rolling five-year returns for a hypothetical
portfolio which had 70% invested in the U.S. equity markets and 30%
invested in Intermediate U.S. Government bonds.** Over the 73 years from
1931-2003 this portfolio experienced 2 five year periods with negative
returns: for the five years ending in 1937 the portfolio lost 2.88%, and
again from 1966-1970 it lost 0.27%. In no other five-year period between
1931 and 2003 would this portfolio have lost money.
We can also look to a
real world example of a privatized social security system for reference.
The Chilean program was privatized in 1980, and today more than 90% of
the workers in Chile participate in that privatized social security
system. The average real return on an investment in the Chilean system
over the last 23 years has been more than 10% annualized. Currently
Argentina, Bolivia, Chile, Colombia, El Salvador, Peru, Mexico, Uruguay
and Great Britain have at least partially privatized their systems.
We hope this information will give you a
better understanding of the history of the U.S. Social Security system,
as well as the potential for privatizing our current system. We will
continue to report on this important issue in future editions of our
newsletters.
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Click here to read excerpts from Wealth Without Worry
©2007 JWA Financial Group, Inc. All rights reserved
