Bush vs. Gore: Social Security
Bush Argument
By
Mike Trigg (TMF Tonto)
When asked to represent the Bush Social Security plan in our latest segment of Dueling Fools, I was somewhat hesitant. After all, we aren't political analysts and many Fools have little interest in politics, unless of course it relates directly to their portfolios. To my dismay, there have been several instances throughout this election cycle where I've found myself engaged in heated debates over Gore's embracing of price controls and soft patent law, and the adverse affect it would have on my Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> holding.
In fact, living in the nation's capital, one need only travel to the nearest cocktail party to hear similar discussions on tort reform and wishful pundits praying for a Bush Justice Department that will lay off the likes of Big Tobacco and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>.
Political jargon aside, Social Security is an important debate to have for any investment-minded Fool. It can be boiled down to one simple question: Should the government trust you with the option of voluntarily investing a portion of your payroll taxes in personal retirement accounts? The answer for this Fool is "Yes."
To understand the importance of this debate, it's necessary to ensure everyone understands how Social Security works. The government takes 7.65% (6.2% for Social Security and 1.45% for Medicare) out of every paycheck you receive, and requires your employer to match that amount. That means every time you get paid, 12.4% of your salary goes to pay today's retirees. Of course, the problem with this system is that the ratio of workers to retirees has been declining. In 1945, there were 42 workers for each Social Security beneficiary. Today, three workers support the benefits of each recipient. As baby boomers retire, coupled with increasing life expectancy, that ratio will shrink to two workers for every one recipient by 2030.
Thus, the system is in dire straits. However, we do have choices. There are several ways to solve this cash-flow problem. Chris and I agree that raising payroll taxes and/or cutting benefits are horrible alternatives. I'll wait to discuss the Gore proposal until I read Chris' initial argument. However, it involves increasing benefits in the near term, and injecting large amounts of general revenues further down the road.
George W. Bush's plan calls for letting workers establish personal retirement accounts. By doing so, younger workers will be able to voluntarily invest nearly one-sixth of their payroll taxes into accounts that are invested in blue-chip stocks and bonds. The result is that these accounts will generate greater rates of return and build wealth that can be passed on to dependents. Sounds like a great formula to me, but let's take a closer look.
The Bush plan is the only way any of us will receive a fair return on our investment. Over the years, the government has been forced to cut benefits and raise taxes to fulfill its obligations to retirees. Unfortunately, the result has been that workers receive less than a 2% post-inflation return on their investment. That hardly seems fair, considering it's no tall task for an investor to receive a 4% after-tax, risk-free rate from Treasury bills. Another way to consider this is to look at a person retiring today. The Bush website points out that a person would have to live to age 90 to break even on the amount he or she has invested into the program. Twenty years from now, that same person would have to live past the age of 100.
The other reason the Bush plan makes sense is that it allows for meaningful wealth creation. Again, Bush points out that the current system was designed to take your money and then reallocate it to someone else. However, as any savvy investor would note, that provides no opportunity to generate wealth and ignores the notion of compounded interest. Put another way by Bush, think of your 401(k) plan as a benchmark. By voluntarily investing a portion of income in that vehicle, one is afforded the opportunity to purchase a variety of assets that will grow in value, thus building wealth.
So, after reviewing the plan, I have a tough time drawing any argument to the contrary. I'm hardly alone, with the only across-the-board disfavor for some type of payroll-tax investment plan coming from senior citizens. In that case, distaste surely stems from the fear of changing existing benefits for current or soon-to-be retirees. However, the Bush plan assures there will be no such thing.
Al Gore's opposition comes as no surprise. After all, when it comes to investing, Gore has more in common with Socks the Presidential Cat than the country's 80 million stock holders; Gore has never had a stake in the stock market. Making matters worse, he's on record as referring to the fundamental vehicle for raising capital (the stock market) as a risky proposition. I'm not sure about the rest of you, but I'm hardly ready to compare investing to a roll of the dice. That's hardly Foolish, and even less so the truth.
Gore Argument »
