The Coming Retirement Problem

By Jalexson

copyright 2003

     A common misconception about the coming retirement problem is that it will only affect Social Security. The retirement problem involves potential problems with private investments as well as possible shortfalls in Social Security taxes.

     The stock market could be in serious trouble if an insufficient number of new investors can be found to purchase stocks sold to finance retirement. A shortage of workers would force American companies to increase wages and reduce dividends paid to retirees.

     Someone will need to provide goods and services to retirees. A shortage of providers would raise the prices of goods and services reducing the ability of retirees to pay for them, particularly those whose retirement income cannot increase with inflation. Increases in productivity will alleviate this problem to some extent, but the nation will have to increase immigration to insure an adequate number of workers.

     The fastest growing segment of the population is the group over 80. This group will start growing explosively when baby boomers start turning 80 in 2026.

     Private retirement accounts may not be inflation proof over a long period. Those investors whose accounts aren't large enough may run out of money before they die, particularly if they spend their last years in a nursing home. This situation would also apply to persons with individual rather than group Social Security accounts.

     Social Security is a true retirement insurance program. Unlike private retirement accounts which may provide only a preset, fixed income or total investment, Social Security guarantees an income for life that adjusts for inflation. Allowing individuals to remove part of their money from Social Security would limit its ability to support all recipients as long as they live, even those who live to be 120 or more, as some baby boomers are likely to do.

     Social Security is part lottery. Those wishing to collect need to live to retirement age or their investment will go to others. The biggest winners under Social Security are those who live the longest. Social Security guarantees an income as long as the recipient lives with the amount increasing with inflation.

     A major problem with private Social Security accounts is that some investors will make bad investments, particularly if no controls are present to prevent investment in fraudulent stocks. Will those who make bad investments starve because they don't have enough money? Or, will Congress decide to step in and rescue those who have insufficient income?

     Preservation of Social Security should include a provision taking it out of the general fund budget and adding to the Social Security fund an amount equal to the interest the money "loaned" to the budget would have earned if it had been invested in federal securities instead. Congress should do this now while the federal budget has a surplus.

     If Congress pays off the national debt, Social Security will need some other income producing investments. Shifting the large sums in the Social Security fund among investments could destabilize markets by dramatically changing prices. Some safeguards will be necessary to prevent using Social Security funds to bail out future Lockheed and Chrysler Corporations.

     One alternative would be to change the way the federal government finances new technology, particularly military and space technology. Instead of just giving money to private companies, Congress would invest Social Security money in the technology through purchase of stocks or bonds in the companies developing the technology. The public through the Social Security fund would benefit from all profits generated by the new technology rather than just receiving benefits from aspects of the technology used by the federal government.

     If Congress pursues this option it should guarantee that the Social Security fund won't lose money from such investments.

     Allowing people to take money out of Social Security for their own personal retirement would be a mistake, but the system could be structured so that individuals could move money around among different accounts such as is done with some private employer pension funds. Those whose funds did well would receive higher benefits than those with less productive investments.

     Instead of completely eliminating the estate tax, Congress should consider reconfiguring the tax as a tax on inheritance received by an individual with the funds going to Social Security. The tax would generally only apply to inheritance of cash and other intangible assets over some specified amount such as $50,000 to $100,000. Businesses and real property such as the family home would be exempt from taxes unless sold.

     Many people don't understand the vital economic role Social Security performs. We live in a mass consumption economy in which workers produce more than they can consume. Without sufficient consumers, employers must lay off people. Retired people whose productive ability has declined provide a ready market for many goods and services. Social Security insures that retirees will be able to continue to consume and provide jobs for others.

     In the past, parents relied on their children to support them when they were no longer able to support themselves. Parents needed to raise large families not only to spread out the cost of supporting them, but also to allow for those children who died from disease, accidents or serving society in time of war.

     In an age of smaller families that option isn't practical. Many retirees have no children to support them. Some never had children. Others may have lost children from natural causes or participation in war. Many "children" no longer have parents to support.

     Instead we need to provide for those who supported us as children collectively. The adult population of our day, rather than just our parents, paid for our education. Even many private grade and high schools rely on donations to pay part of their costs. Therefore we should collectively support those who supported us when they retire.

     Any good investment counselor will recommend that clients rely on a variety of different investments with different levels of risk. Low risk investments provide less return, but insure some type of income. High risk investments can provide a much higher income, but at the risk of not providing any income.

     Social Security is designed as a no risk investment that guarantees a limited income to provide for basic needs after retirement. Stock investments can provide a much higher income, but even seemingly secure stocks can quickly lose value such as has happened recently with California electric utility stocks.




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