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Social Security Reform Thursday: Week Fifty-Nine -- Social Security's Effect on Retirement Investment Decisions


Thursdays are good days for reform, because they fall between Wednesdays and Fridays. And reform is a long-haul process, not a fleeting event. So we're going to keep plugging along with the case for reform, even as the issue goes off the political radar screen.

That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.

(Check that, Will offered a Chart or Graph, I just offer words. But, hey, Will isn't paying me so live with it people.--Justin)

This week's topic:

Retirement Myths and Lump Sum Thinking--The Effect of Social Security on Private Retirement Funds.

Less facts and figures this time, but an important point to review. Will sent me this link to a discussion from Wharton illustrating some of the problems with private retirement funds and the decisions people make with their own investment portfolios.

Imagine being 67, finally retiring without a pension, but with sizable 401(k) assets and a nice home. Living a modest life until now (and if you read ski-blog.com you will realize that I am spending my kids' college funds and my retirement skiing in Utah) and saving and investing, you have a home that is paid for worth in today's dollars $500,000 and an additional $500,000 in 401(k) money. So hypothetically, you are worth approximately $1M. I get my annual Social Security statement and for today's Justin in today's dollars, my benefit is approximately $1800 per month. So we will use that for reference. What is the plan and how does Social Security influence your decisions and what would your decisions be if you did not have Social Security to depend on?

The big problem is that the conventional wisdom is wrong. The conventional wisdom is that as you get older, you should become more conservative in your investment portfolio. So, as I go into my 50's and I'm approaching 60 -- let's say 65 is the magic age -- the conventional wisdom is I should start making my investment portfolio more and more conservative. Yet a couple at age 60 today has a 62% probability that one of them will be alive past age 90. So we're not planning for 15 years, we're planning for 30 years or more.

If I have a 15 year plan for my 401(k) and Home Asset that includes buying an RV and travelling the country to see the grandkids and towing my new Jeep behind it, BAM, there goes 1/4 of my net worth. Maybe we downsize the house and buy our RV, but either way, that money is gone and the new assets depreciate. Not just depreciate, but the loss of that $250,000 of net worth effectively takes away the investment income it would generate--which conservatively is $10-25,000 a year. No big deal, I still have Social Security and $750,000 to live my 15 years. Maybe I love classic cars and buy my dream Camaro. Maybe we just decide we have saved and skimped and sent the kids to college and we should enjoy our retirement, so we spend that little bit extra that we could otherwise save and invest.

There are a lot of businesses that offer solutions:

Condron: There are a lot of challenges around that because the concept of reverse mortgages is wonderful. If I have a million-dollar house and I borrow $500,000, I can create income for myself and settle up the debt at the time of my death, and so forth. But the problems with it are that on the front end, it tends to be expensive for the client because there are a lot of mouths at the trough. There are the mortgage people, there are the investment people -- there are a lot of fees, and that's the challenge.

Demographics and healthcare add to the worries:

I think that you have to remind them that they are going to live for a long time. And, I think that is the one piece [of information] that people are shocked at. For example, people tend to think, "If I'm 65, I've got a 15-year life expectancy" -- because life expectancies for children born today are somewhere around 80 years. But the fact is, if you [make it] to age 65, your life expectancy is a lot longer. And then you get into the probabilities because what we found is -- going back to the point I made earlier -- if you're a couple that is age 65, there is a 62% probability that one of you is going to live past age 90. That's the year 2000 data, the most current data we have. In the 1970 data, you had a 40% probability that one of you was going to live past age 90.

But the biggest problem is the Lump Sum Illusion:

Condron: I want to pick up on the "lump-sum illusion," because it's a problem in the way that the financial industry has taught people to think. You know we've developed retirement plans and defined contribution plans which pay off in a lump sum. We sell life insurance to people in a lump sum. People aren't equipped to really make the calculation and the conversion from a lump sum to income -- because it's all about income.

Now let's get to our real topic--Social Security. How does Social Security play into all of this? Social Security is anything but "Secure". We all know the insolvency issues that are coming. The income stream from Social Security is not going to keep pace with inflation, and retirement age is a moving target. People are living even longer and will live longer in the future.

We talk a lot about Social Security helping the poor old widow not have to eat cat food, but the idea of a safety net provides a backup and almost incentive to spend lavishly early in retirement to travel, see the kids, etc. And many retirees see Social Security as an endless benefit. Why use my private funds as simply a supplement to Social Security, when I have plenty of money to enjoy life. I am a damned millionaire. Social Security will make up the shortfall and we are only going to live another 15 years.

Social Security is going to require tax increases or benefit decreases. And guess what--Social Security is only half the battle. So will Medicare. Medical Costs are rising. Benefits can only decrease or bankrupt the country. And if property taxes, dividend taxes, and income taxes continue to rise to pay for Social Security, well off retirees will pay higher and higher rates of income and dividend taxes on their investment distributions. This further deflates the value of the smart investor that has saved for his/her own retirement. This acts to discourage these retirees from making good decisions with their private money and that runs contrary to the purpose of Social Security.

Higher taxes and lower benefits are only part of the problem. The other part is that multiple industries prey on Retirees with investment schemes. The government preys on older people with the dividend taxes, estate taxes, and rising property taxes. And Social Security and the illusion of a lifetime benefit to make up for bad choices allows retirees to make bad decisions with their money.

Private Accounts for Social Security create a sense of Social Security as a fixed asset that is part of your investment portfolio, not a simple government entitlement. It becomes part of your net worth and forces you to think of your entire retirement funding strategy as a whole. Most retirees do not view Social Security and the revenue stream as anything more than an endless entitlement until they die. It cannot be passed on. And when you have endless government money, why not enjoy spending your own savings when you have the safety net of someone else paying for you to live when you make mistakes.

It is 10 years after welfare reform was enacted. And at the end of the day, when people understand their benefits are finite, they act in their own best interest which in turn is society's best interest. We insulate people from bad investment decisions and that encourages them to make them and costs all of us.

It's time for reform.

The clock is ticking.


Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).
-Week Twenty-Four (KidSave Accounts).
-Week Twenty-Five (Latinos and Social Security).
-Week Twenty-Six (AmeriSave).
-Week Twenty-Seven (Cost Of Doing Nothing).
-Week Twenty-Eight (Chile).
-Week Twenty-Nine (Entitlement Spending Out Of Control).
-Week Thirty (Reform Better Deal Than Status Quo).
-Week Thirty-One (Social Security As A Labor Cost).
-Week Thirty-Two (Social Security And Dependence On Government).
-Week Thirty-Three (Social Security, Currently A Bad Deal For African-Americans).
-Week Thirty-Four (Longer Life Expectancies Straining Social Security).
-Week Thirty-Five (Howard Dean & Salami).
-Week Thirty-Six (Growing Numbers of Beneficiaries Draining Social Security).
-Week Thirty-Seven (The Crisis Is Now).
-Week Thirty-Eight (Disability Benefits).
-Week Thirty-Nine (Broken Benefit Calculation Formula).
-Week Forty (German Social Security Disaster).
-Week Forty-One (Crumbling Pyramid Scheme).
-Week Forty-Two (Overpromising, Globally).
-Week Forty-Three (Demographic Wave).
-Week Forty-Four (The Jerk Store).
-Week Forty-Five (Defined Benefit Plans).
-Week Forty-Six (Even The Empty Promises Are A Bad Deal).
-Week Forty-Seven (Our Aging Population).
-Week Forty-Eight (The Tax Increases Required To Cover Social Security's Costs).
-Week Forty-Nine (Much Longer To Get Your Money Back From Social Security).
-Week Fifty (A Vote, At Last).
-Week Fifty-One (We Can Do Better).
-Week Fifty-Two (Socialist Security).
-Week Fifty-Three (China Has The Same Problem, Only Worse).
-Week Fifty-Four (Potential Crisis Size).
-Week Fifty-Five (The Crisis Moves Closer).
-Week Fifty-Six (Big Brother Social Security).
-Week Fifty-Seven (Personal Accounts Are Awesome).
-Week Fifty-Eight (Private Accounts and Presidential Proposals).

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

Posted by Justin B. · 3 August 2006 11:41 AM


Seniors are living longer and the cost exeeds the revenue. The old widow eating cat food is doing so because SS is a lousy socialist government retirement fund. Those individuals who would like to opt out of SS should be free to take their hard earned income and invest it a better way! Our future generations deserve to have the option since SS is not achieving what it set out to...

Posted by: Zsa Zsa at August 3, 2006 03:48 PM

Justin...Are you familiar with SS Reform Thursday Week Thirty-five?

Posted by: Zsa Zsa at August 3, 2006 04:40 PM

I have the feeling that people my age somehow are the hiding places for the Democrat's salami on Social Security.

MMMMM, Salami.

Honestly, I tell my wife everyday that if we are smart, save, send our kids to college, don't buy a boat, invest well, run our own businesses well, and vote Republican, we might have a chance to have the Democrats take most of our assets with an Estate Tax. If we do things right, and aren't leeches, they will call us the Capitalist Swine that we are and take things anyway.

What is the incentive? Now I just want to buy a damned boat and a Corvette. Mmmm, and now I am hungry for some salami.

Hey, Howard, Hide the Salami is not played by Harriett Myers and George Bush's Supreme Court, it is played by Massachusett's Supreme Court when they find the hidden Salami that John Adams put in there that says the Mass Constitution grants people the right to Gay Marriage.

Posted by: Justin B. at August 4, 2006 03:29 AM

The Dems. deny how great the Bush economy is. AND YET, have the nerve to propose windfall profits tax and Estate tax. Is there something wrong with that picture? They needed to get to work on Reforming Soc.Sec. Instead of welfare and gov. hand outs and more taxes to support all their govt. programs. Our future generations deserve better than the lame excuse for retirement we know as Soc. Sec.

Posted by: Zsa Zsa at August 4, 2006 12:31 PM

Justin...It is my belief that everyone has just a little bit of Homer in them... MMMMM Salami! Doh!

Posted by: Zsa Zsa at August 6, 2006 06:48 PM

On Social Security
I have an idea for Social Security reform that has no conversion costs. All you have to do is have lockboxes and then put the 6% excess into TIPS bonds that have between 4% to 6% in interest. Also, I would enact the FAIR Tax and get rid of Medicare and Medicaid and do Romney Care.

Posted by: Jill Perkins at August 7, 2006 11:27 AM