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Social Security IRA

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As experts debate potential changes to Social Security to improve is deteriorating financial situation, one of the ideas that’s been offered is that of a Social Security IRA. I first read about it when it was mentioned by the founder of the Association of Mature American Citizens in the wake of the news that the AARP was in favor of changes to Social Security. AMAC said that in order for them to support increasing the full benefit age from 66 to 69, they would require the mandatory offering of a Social Security IRA.

What exactly is this Social Security IRA? It sounds a lot like the privatization of Social Security (which was a red hot political term for many election cycles), by putting it into an IRA and letting the wage earner direct the investments. Their proposal is to make it tax deductible, payroll deducted, and owned by the wage earner (rather than sitting in a “lockbox”). You couldn’t withdraw any funds until retirement (62-65) and 50%+ of the funds would have to be put into “guaranteed interest accounts.”

What’s the downside in all this? As is the case with any investments, people usually don’t make the best decisions since they’ll be governed by their emotions. How would your average wage earner have reacted to the gyrations of the market the last two or three years? We all know that market timing doesn’t work, people were overall terrible at it through this last crisis, so do we really want to offer up that much control over Social Security?

I think people should be able to manage their own money, even if they’re terrible at it. You have to educate people, not shelter them from difficult decisions. I think Social Security is an imperfect system but I also know that giving people that much control, despite my belief that people should have that much control, can be dangerous.

That said, I like that this is being discussed because something has to change about how our entitlement programs operate.

{ 23 comments, please add your thoughts now! }

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23 Responses to “Social Security IRA”

  1. STRONGside says:

    I am a state employee and we have the option of selecting a defined benefit plan, or choosing a self-directed plan. One plan assumes all fo the investment risk with a moderate, and defined, benefit while the other plan could potentially bring about a much greater benefit but the investor assumes all of the risk. The Social Security IRA sounds great for a savvy investor, so maybe they should make it an opt in, opt out scenario.

  2. People have no clue how much better off they’d be if the government wasn’t managing their retirement savings. The downside is that the government would have less money available to fund their spending than they do today since they figured out years ago how to tap into that legendary social security “lockbox.”

  3. cubiclegeoff says:

    I see the benefit for some of having control over the money. However, most of the population is uneducated and does not want to be educated. And if they screw up, the government is going to end up paying for them in some way or another in services, housing, food, or something else. So I’m not so sure putting everyone onto an IRA type of account would really be all that beneficial.

  4. NateUVM says:

    People have no clue how much MORE MONEY would be wasted if the government wasn’t managing their retirement savings.

    Simple question, do you think it will cost more to administer one large account or 330 million smaller ones…?

    • NateUVM says:

      And while I personally would welcome the opportunity to direct my own investments in this regard, I acknolwedge that there is a higher purpose to the SS program. That there is a mandate to participate so that we ALL have some level of protection when we really need it, and to have some means to prevent us from being a burden to society.

      There is a greater good being served here. While we sometimes might not think it’s the case, what happens to my neighbor has an impact on me.

      • mannymacho says:

        Greater good or not, at it’s core it’s still just a huge Ponzi scheme…

        • Evan says:

          AMEN! SEC’s Definition of a Ponzi Scheme:

          A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

          Ummm…doesn’t that sound EXACTLY like SS?

        • NateUVM says:

          A cynical view that applies to any insurance contract.

          • mannymacho says:

            I didn’t say that to be cynical, just to shed light on the fact that SS as it is pays retirees directly from the huge pool of current contributors (I sort of see the relation to insurance, but don’t agree that it is the same). To move it over to IRA-type accounts would not be just shifting dollars, it would be a huge and potentially chaotic shift from what it currently is. Some interesting ideas in these comments though.

      • No Debt MBA says:

        I’m with Nate. Much as I’d like to manage my Social Security money myself (at least to make sure I got out what I paid in), I know that there are millions of people out there who would mess up the system for everyone. What do you do when someone mismanages their benefit then can’t put food on the table?

  5. Jason says:

    Why not pre-qualify people to participate on an opt-in basis? It’d be pretty easy to determine through a financial literacy test, whether somebody had the “knack” for managing their own retirement investments, then just keep the majority of Americans who don’t have the aptitude or desire in the same corral (cattle reference unintentional).

    That doesn’t solve the problems with SS, but it would be a step towards a better system, as those who did manage their own SS would inevitably raise their children to do the same thing, and so on.

  6. Baby steps are needed here. It would be ideal to have an educated population that makes good decisions, but that won’t happen. If you watch C-SPAN (yes, I’m a NERD), the sticking point is and always will be the question of the consumer’s ability to manage investments properly.

    With this in mind, I’d love to see the Social Security fund managed more like a pension than simply buying government bonds. Throwing some equities in there would certainly improve returns over the long haul. Maybe a first baby step would be 10% of the total fund and move it up from there.

    • Oh, and there has been a great deal of discussion about eliminating personal retirement accounts because of the poor returns that most investors receive relative to market indices. Not only is the ‘uneducated’ argument being used to derail private accounts for Social Security, it’s also being used in the argument to eliminate all forms of self-directed retirement accounts.

      • Jason says:

        Don’t be so paranoid, they’re just laying the foundation for one day ‘appropriating’ our 401k investments because Washington is so much better at managing money than us dumb cityzins!

        • NateUVM says:

          Nevermind that this is exactly opposite to the trend we are discussing, let us not forget that 401(k)s are an unintended consequence of an obscure section of the tax code [um, section 401(k)] whose original intent was never the widespread deferral of income that we see today.

          See, when it comes to 401(k)s, it’s the public that has taken advantage of what the government has provided, not the other way around. Not that this is a bad thing…not in the least. Just that we should never be surprised if they were to close that loophole… (I would expect that would never happen, given that the govt. DOES eventually get to tax the money, no matter what, per mandatory minimum distributions.)

          • saladdin says:

            Nate,
            Well thought out, intelligent posts. The internet is not ready for such things.

  7. freeby50 says:

    AARP did not change its policy on social security benefit cuts. There were false reports about that which AARP disputed.

    http://www.aarp.org/about-aarp/press-center/info-06-2011/aarp-has-not-changed-its-position-on-social-security.html

    ““Let me be clear – AARP is as committed as we’ve ever been to fighting to protect Social Security for today’s seniors and strengthening it for future generations. Contrary to the misleading characterization in a recent media story, AARP has not changed its position on Social Security.”

    If you look at AARP.org then you can see they are actively lobbying against cuts to social security.

  8. Joser says:

    My Wife left me for two years and took our kids 1600 miles away,I gave up and now she hasn’t been dealing the finances as usual for the past 4 yrs. and now she thinks I had a kid I’m not telling her about ! What do I do?

  9. JJ says:

    Right now every dollar that I pay into social security is being paid straight back out to CURRENT retirees. My own social security benefit will be paid by people younger than me.

    If I start taking dollars that are currently going to current retirees and saving them in my own IRA, what will be done to make up for those dollars not going to current retirees?

    Nothing should be done to social security OTHER than eliminating the wage cap.

  10. Angry Voter says:

    Everybody retiring today should get an equal share of what they contributed to America!

    I refer, of course to the $14T debt.

    Expect your bill shortly.


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