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May 3, 2012

Change Social Security before it goes belly up

Amanda Haddaway

Social Security will be out of money by 2033, according to a report issued by the trustees that oversee the program. This estimate is three years sooner than the trustees’ last report. Similarly, Medicare will also be out of money by 2024.


My expected retirement date is in 2042 if I retire at age 65. I will have paid into the system for 45 years of full-time employment and this is money that I may never see. I’ve made some bad investments in real estate and the stock market, but none as bad as paying the government for 45 years and potentially seeing very little, if any, of that money returned to my bank account. The real kicker is that I didn’t have a choice about this bad investment.


Who would willingly pay into a system knowing that they may never recoup their investment? Certainly not I. A pile of money under my mattress would be a safer bet.


The projections could be even worse if unemployment continues or worsens. Less money will be deposited into the funds if people aren’t employed or their wages don’t increase. The report also cites concerns about higher energy prices and increased medical expenses as cause for even further concern and possibly extinction of funds before 2033 and 2042.


At this rate, younger workers would be better off if Social Security and Medicare were transitioned into personal plans similar to a 401(k) or health savings account for retirement and medical spending.


A program like this would require workers to have payroll deductions that would be deposited into an account or a variety of accounts that could not be touched without severe financial penalties similar to an early withdrawal from a 401(k).


There is already precedent for a plan like this. Even former presidential candidate Herman Cain mentioned it in his brief run. The so-called Alternate Plan has been in place for the past 30 years in three Texas counties. Their plan doesn’t allow for individual investment fund choices, but the employees have individual accounts. This means that the entire amount in the account is given to the employee and/or his estate.


What’s even more interesting is that the retirement savings have grown every year, even during our current economic downturn.


According to a Forbes (magazine) article about the Alternate Plan, the contributions are pooled and top-rated financial institutions bid on the money. The bidders guarantee an interest rate return that won’t drop below a certain threshold. The average earnings have been around 5 percent each year.


Additionally, a portion of the employer contribution in the Alternate Plan goes toward a term life insurance policy, which pays four times the employee’s salary tax free, up to a maximum of $215,000. That figure is almost 850 times Social Security’s death benefit.


The Social Security situation isn’t going to get any better if we just continue with the status quo. As more Baby Boomers retire and start collecting on the benefits, the funds are going to dry up. We have seen a shift from corporate pension plans to 401(k) plans and similar retirement savings plans, so it’s time for the government to follow suit and make changes before the funds are exhausted.


Americans who work hard for their money deserve this.


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