Issue 31

05/03/05

Update on Social Security Comments

Issue #31 - Update on Social Security Comments

1. Update on Social Security Comments
2. Thoughts On The President's Plan

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Dear Friends,

After one of the craziest months I've ever experienced, I'm slowly
getting everything back on track and the first thing is to get this
issue of Investing With Mom published immediately.

I had originally planned on sending this issue out several weeks ago,
but in strange way I'm now glad that didn't happen as I've been able
to add content from this past week that otherwise would have to have
waited.

This issue was originally written because of a pair of phone calls I
had received. The first from a subscriber to my Advisory Newsletter,
regarding several specific investments, and the second from a caller
via Ingenio, who was curious to know my thoughts on the potential
timetable regarding Social Security reforms that Bush is working on
getting through Congress.

Because of the length of this article regarding Social Security, I
will have to share my answer to the subscriber in another later issue
of Investing With Mom, so stay tuned. For now, let's get on with my
reply to the Ingenio caller as well as some recent developments that
affect those thoughts.

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Update on Social Security Comments

First of all, I explained to the caller via Ingenio that although I
have no inside knowledge of the situation, it is my expectation that
any meaningful reforms will by necessity be completed by the 2006
mid-term elections, or else Bush will be a lame-duck president and
will find it increasingly difficult to get anything passed at all.

There are however, several issues regarding Social Security that could
make or break the potential success of any proposal President Bush
might push Congress to pass.

The first of which is private accounts, without which Social Security
is dead on arrival.

Why? Well, because that's what the majority of the American public
want when it comes to Social Security reforms.

Actually, even if the majority of Americans could care less about
private accounts, without them Social Security will never be truly
solvent.

Oh there'll be reforms passed, taxes raised and benefits cut, but
we've had all that already and all it's ever done for Social Security
is add a few years here, or maybe a decade there, but in the end it's
all led to the same place.

No surplus left by 2017, and total insolvency within 10 to 15 years
after that!

In other words, unless you plan on retiring within the next 20 years,
there will be nothing left for you in Social Security.

Now I realize that there is a whole cadre of politicians presently
proclaiming that the entire Social Security insolvency is a figment of
President Bush's imagination.

These are the same politicians who are ignoring the massive
demographic shift that the US, and indeed the rest of the developed
nations of the world, are undergoing.

They are also the same politicians who believe that getting a negative
real rate of return on the money invested in Social Security is
perfectly alright, because they won't end up having to deal with the
consequences, due to their lack of fiscal participation in Social
Security.

On the other hand, private accounts will ensure that each and every
participant has a personal financial interest in both the solvency and
the ongoing viability of Social Security. Without which we will
eventually be forced to let it die a slow and painful death.

Actually, the socialists and other fans of big government actually
need to wake up and help George Bush reform Social Security by
creating private accounts, because without these accounts Social
Security will not be able to provide anyone with anywhere near the
amount of financial assistance it presently is able to provide.

In fact, if we fail to create private accounts, Social Security will
have to be scrapped completely within about 30 to 35 years, because at
that point the US economy will be unable to support the weight of the
massive expenditures within the program.

The reality of the matter is that if we institute private accounts by
the end of President Bush's term in office, and we fund them with a
minimum of half the current 12.4% in payroll taxes, anyone who
subsequently pays into the private accounts for a minimum of 20 years
will receive anywhere from double to triple the current level of
Social Security payouts when they retire.

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Thoughts On The President's Plan

Well it looks like the President is back on the right track. I may not
agree with or like all of his proposals regarding the reform of Social
Security, but he's doing the right thing by putting optional personal
private accounts back to the front and center of the debate.

For those of you who missed his press conference, Thursday evening,
President Bush stated that private accounts are assets and that more
than any other reason is exactly why he needs to push private accounts
more than any other reform.

I'm not sold on his idea that lowering benefits for upper income
recipients will do as much to lower the costs of Social Security. I
still believe there are better, more thorough ways to achieve the
necessary cost savings, but I'll leave the analysis of such subjects
to experts like economist Richard Rahn, Phd.

Recently Dr. Rahn took up the crusade to sell federal lands, sound
familiar?

It should, I first mentioned that idea back in Issue #24, when I
quoted the To The Point News' article on the same subject.

Because Dr. Rahn is so much more precise than I could ever be, I'll
just let him say what's on his mind:

"If you spent more each month than you made and
got deeper and deeper into debt, but had an asset
equal to your debts, like a big expensive boat you
never used, what would you do? If you were
rational, you would sell the boat.

"The U.S. government has spent more than it
receives in tax revenue for most of the last 75
years, and, as a result, the national debt and the
associated interest payments have gotten bigger
and bigger. But what is not well known is that the
U.S. government also has many trillions of dollars
of assets, which may exceed the value of the debt.
I say "may" because, in fact, no one knows because
the government has no accurate balance sheet of
what it owns and what it owes.

"For instance, the federal government owns
somewhere between 600 and 700 million acres of
land, or over 30 percent of all U.S. land. But
again, no one knows for certain if the federal
government owns 630 million acres or 670 million
acres or some other amount. Private companies are
required to produce accurate balance sheets for
their stockholders, and, if they do not, their
executives might be sent to jail.

"We American citizens and taxpayers are the
"stockholders" of our government, and hence we
should expect and have the right to receive
accurate accounting statements. It is a bit tiring
to hear sanctimonious and hypocritical public
officials say corporate managers should be
punished for deliberate or even accidental
accounting mistakes, when the most important legal
entity for most Americans, the government,
produces financial information so incomplete and
inaccurate it would embarrass even an Enron
accountant.

"This issue of proper government accounting is
important for many reasons. As one example, the
current debate about Social Security involves
whether the government will raise taxes or cut
benefits. The current system is a Ponzi scheme in
which the taxes from the workers have been spent
on both the current retirees and other government
programs, and hence there is no money in the
"trust fund."

"If a private businessman set up such a scheme, he
would (rightly) go to jail for fraud. Like all
Ponzi schemes, the time on this one has run out as
Americans live longer and have fewer children. To
prevent this type of fraud in the future,
Americans must move to individual trust accounts
that cannot be raided by the politicians, whether
managed by the government, or privately or some
combination."

Actually, when it comes to the private accounts themselves, I have
recently come across an idea that is definitely worth a look.

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A comment regarding Bull's Eye Investing:
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him in keeping count."
--Peter L. Bernstein, author of the bestseller Against the Gods
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Whether you agree with him or not, we all recognize that Bush seems to
be set on private accounts, but what if I told you that we already
have private accounts in place and the solution could be to just start
funding them with whatever percentage of Social Security payroll taxes
Congress could agree on?

William J. Murray wrote Friday, in his latest missive from the RFC,
that "President Ronald Reagan already created personal retirement
accounts that are voluntary and inheritable. They are call IRA's
(Individual Retirement Accounts) and are untouchable by the federal
government. My IRA, which has the bulk of my investments, can't even
be touched if I file for bankruptcy. I am having some difficulty
understanding why we need another voluntary private retirement account
system."

Most Americans alreay have an IRA, or will open one up over the course
of their working years, and thus cannot complain that private accounts
shouldn't be created because they wouldn't be able to participate, as
many older Americans seem to be saying by their opposition.

What I am proposing is that, those of us who are young enough should
have up to half of our Social Security payroll tax contributions
diverted into an IRA of our choice, instead of creating a whole new
private account system. Those Americans who already have an IRA open
could request that the money go directly into that account and those
who have yet to open one could decide, voluntarily, whether they would
like to open an IRA and participate, or keep their current Social
Security situation intact.

Congress could continue to mandate that there should be limits on the
amount you could contribute to your IRA, but those limits would be
over and above all of the payroll tax that would be diverted into your
IRA.

Now some might say that's even more irresponsible, because of the
potential for losses on investments made through your IRA. However, I
disagree because there already many restrictions that Congress has
passed into law that limit what can and cannot be invested in with
money that is in an IRA.

Additionally, it isn't like IRAs are anything new, either. They've
been around since the early 80's and are not only generally accepted
as viable investment options, they are also quite popular, even in the
most fically conservative circles of our society.

I believe that anything that is investable with IRA contributions,
should be investable with any other money that is earmarked for
retirement, including Social Security payroll taxes. As they say,
what's good for the goose is good for the gander.

The key however, will be that investors will need to be actively
involved in the investment of their IRA monies. Of course, that is not
a problem for those of you who read Investing With Mom because you
obviously have an interest in maximizing the money you invest, no
matter how large or small the amount you're investing may be.

It's that brother-in-law of yours that never seems to make the right
decisions regarding his finances that will probably end up like the
other half of Mr. Murray's comments. (Emphasis is mine.)

"(President Bush) reiterated that the personal
accounts would be voluntary and that those with
the least income during their lives would have
increased benefits. Thus, those who are LEAST
PRODUCTIVE in their lives and SAVE NOTHING will
get more out of Social Security and those who are
the MOST PRODUCTIVE WILL GET LESS unless they open
private accounts. This may actually sell to the
Democrats."

And that my friends is the beauty of President George W. Bush's Social
Security plan.

You wait and see, eventually those politicians on the left who want to
get reelected, or in Hillary Clinton's case elected President, will
join Bush in pushing private accounts. Once that does occur however,
the spin you will see coming from that side of the aisle, will make
every contortionist in America proud.

To continue with IRAs however, we notice that by utilizing the
pre-existing structure that IRAs provide we ensure that Bush's plan
for asset ownership is maximized. Simply because this is the only way
that low income Americans can finally generate the assets necessary to
enjoying a better life.

Anyone who has read Robert Kiyosaki's "Rich Dad/Poor Dad" will
understand this principle, developing assets that work for you is the
key to the long term development of wealth.

Fortunately, Congress is finally giving us some hope that they've got
the picture that this is what American's want. They showed this
understanding in the recent repeal of the death taxes.

Now we just have to wait and see whether the Senate follows suit.

Investments good for my mom and you,
Andy Prior