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Social Security IRA

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 [3] 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 [4]. 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 [5], 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.