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Privatizing Social Security Could Give You Five Times as Much

August 8, 2001

By Tom Barrett,

PRIVATIZING SOCIAL SECURITY COULD GIVE YOU FIVE TIMES AS MUCH IN RETIREMENT BENEFITS. To find out exactly how much greater YOUR benefits would be under a privatized retirement system, later in this article I will provide you with a link to a calculator. But first, letís put it all in context.

Since it was created in 1935, our "leaders" have tried to convince us that Social Security is like a pension plan, with our money set aside in a trust to be used only for our retirement. In fact, as you will see, the Social Security "Trust Fund" consists entirely of "I.O.U.ís" from the government. More and more Americans now believe that when they retire their promised benefits will not be there for them.

Liberals are raising doubts that a partially privatized retirement system can work. Employees of three Texas counties have opted out of Social Security entirely. They have proven that a FULLY privatized system is far superior to our bureaucracy-laden federal system.

Before we can go there, we have to understand the problem. Social Security is in trouble- BIG trouble. Without question, unless major changes are made to the system, either taxes will have to be raised by 50%, or benefits will have to be cut by 33%. The only ones who dispute these facts are politicians. You may feel comfortable putting your future in the hands of these politicians, but to me, that is like listening to an embezzling bank president who says, "We donít need an audit. Trust me!"

Donít take my word that Social Security is in crisis. In its latest report the Board of Trustees of the Social Security Trust Funds stated that Social Security tax revenues will be insufficient to pay current benefits as early as the year 2012. By the year 2029, Social Security outlays will have completely exhausted the trust funds, and current revenues will fall short of expenditures by about 2 percent of gross domestic product (GDP) annually. In order to make the payments without cutting benefits, the Trustees estimate that payroll taxes will have to rise from the current 12.4 percent to 18.8 percent. (By the way, the original Social Security tax, which we were promised would never increase, was 2%. Isnít it interesting how government grows? It reminds me of the old movie, "The Blob.")

I hope to accomplish three things in this article. First, to show the seriousness of the problem. Second, to demonstrate how the magic of compound interest can easily solve the problem. And third, to introduce you to a group of Americans who have PROVED that privatizing retirement works.


FLAWED FROM THE BEGINNING. We have to start with an understanding that the concept of Social Security was flawed from the beginning. There never was a "Social Security Trust Fund" and there is none today. It exists in name only. All Social Security taxes are placed in the U.S. Treasury, and all checks are written from there. Whatís wrong with that? The government is using your money, and paying a truly paltry rate of interest for it. What would happen if you had a business, took retirement deductions from your employees checks, used the money to run your business, and then payed the retirement plan far less than it could earn elsewhere? Youíd be in big trouble. But thatís exactly what our government is doing to its senior citizens.

The other serious flaw is the "pay-as-you-go" nature of the system. The only possible way for the program to work without raising taxes or lowering benefits would be for the birth and death rates to remain constant, and for the retirement age to remain the same. Instead, since the inception of Social Security in 1935, the birth (fertility) rate has dropped steadily. The average age of death for both males and females has risen by about 15 years. And people are retiring at younger ages. The result: in 1945 there were 42 workers supporting each retired person. Today there are 3.4 workers each. By the year 2040, there will be 2.1 workers supporting each retiree. Do you want your children to be doomed to spending a huge portion of their paychecks to support a system that has never worked?

"Never worked?" you say. "Of course it works! Look at all the people who have received benefits for years!" Thereís no question that many have received benefits. The question is, "Where did the money come from?" I have heard many retired people say, "I paid into the system for years, and now Iím getting my money back." Wrong! Only a very small portion of the money retirees receive from Social Security comes from their contributions and the interest on their contributions. The lionís share comes from the paychecks of TODAYís workers.


ITíS NOTHING BUT A PYRAMID SCHEME. Basically, Social Security is just a giant Pyramid Scheme. There are hundreds of variations on these scams, but this is how one called "The Airplane" worked. A slick talker would get gullible people to come to a meeting at someoneís home, promising easy money. Each "Airplane was made up of eight "Passengers," four "Flight Attendants," two "Co-Pilots," and one "Pilot." Everyone started as a "Passenger," each one of whom would give the "Pilot" $1,500. Once there were eight "Passengers" (and the "Pilot" had collected $12,000), the "Airplane" was full, and would be divided into two. Each of the "Co-Pilots" then became the "Pilot" of a new "Airplane." Everyone else moved up to the next level, and the race was on to recruit more gullible people to fill the bottom row, so that everyone could move up again. The obvious end result was that eventually there were no more suckers to be found, and the "Airplane" would crash.

That is what is happening to Social Security today. The number of retirees receiving benefits has tripled in the last thirty years. More and more people are receiving disability benefits, a program that was not part of the original Social Security concept. And fewer workers contribute to the system each year. I wish I could reproduce some of the truly frightening graphs I found on the Internet in this newsletter, but I will have to be satisfied with quoting their pertinent facts:

*In 1960 $11.6 Billion was spent on benefits. Last year we spent $400 Billion.

*In 1960 there were 15 Million recipients of benefits. Today there are 45 Million. In the next 40 years that number will double.

*In 1960, retirees received $380 per month (in todayís dollars). Today they receive double that amount.

Rising benefits. Lower retirement ages. Longer life spans. Fewer workers to pay for it all. This is an equation for disaster, and most of our "leaders" have their heads in the sand. No politician is going to commit political suicide by calling for lower Social Security benefits, so higher taxes are the only answer under our current antiquated system. Unless we move swiftly, the result will be an unconscionable tax burden placed on our children.


THE SOLUTION: PRIVATIZATION. The solution is what should have been done from the first. Social Security taxes should be invested where they will make the best return- in the stock market. Yes, weíve had a few bad years in the stock market; there have always been ups and downs. But the stock market has always returned far more than government bonds. According to the Private Enterprise Research Center at Texas A&M University, "...virtually all young people entering the labor market can expect a rate of return on their Social Security taxes of less than 2 percent." By contrast, again according to the Center, the average return from stocks in every 35 year period between 1906 and 2000 was 6.4%. (A 35-year period was used because Social Security benefits are calculated using the 35 years of highest earnings.)

Let me give you three examples of the differences between a private retirement plan and Social Security, for workers whose ages are 30, 40 and 50 today. (These figures are drawn from the calculator I mentioned. If you want to check the numbers for your age, go to Each calculation assumes an annual income of $50,000, a normal retirement age, and no change in the current Social Security system. The returns from the private retirement plan are based on investments split between 60% in conservative stocks, and 40% in corporate (not government) bonds. At retirement, depending on your current age, you would receive the following each month:

*Age 30- $2,102 from Social Security, a 0.5% return. Private plan: $10,390 per month, a 4.8% return.

*Age 40- $1,691 from Social Security, a 0.9% return. Private plan: $8,837 per month, a 4.8% return.

*Age 50- $1,492 from Social Security, a 1.3% return. Private plan: $7,355 per month, a 4.8% return.

(Regardless of your age or annual income, the differences are substantial. Try the calculator.)

To insure that the 50-year-old person receives the benefits he or she has been promised, Social Security taxes will have to rise from their current level of 12.4% to 27.94% (more than DOUBLE) by the time of their retirement. That percentage would be 25.94% for the 40-year-old worker, and 20.4% for the 30-year-old worker.

What accounts for such a dramatic difference? Two things. First, the United States economy is the worldís most productive. The government produces nothing, thus the miserable return of 2% from our Social Security taxes. Second is the "miracle" of compound interest. Albert Einstein called it the greatest mathematical discovery of all time. Benjamin Franklin reportedly said it was the eighth wonder of the world.


THE MAGIC OF COMPOUND INTEREST. Letís talk for a moment about how compound interest can assure you a comfortable retirement. Weíll assume a school teacher making $22,000 invests $800 in a private retirement account each year beginning at age 24, and it earns an average return of 8 percent a year. Her total contributions by the time she retires at age 67 are only $34,400. But her whole investment will have grown to $284,760. The "magic" of compound interest has increased her investment by 827%! The interest alone on this account would give her almost $2,000 per month income. The reason I used the $800 amount is that it represents one-third of her Social security taxes. You could argue that she only pays half of those taxes, and her employer pays the other half.That is a fiction devised to make the whole terrible system more palatable. In fact, employers have a set amount of money available for all employee costs, including taxes. If the employer wasnít paying half of the Social Security taxes, that money would be available for wages.

The point is that if workers were allowed to invest just a portion of their retirement taxes in productive investments, the return would be far better than the pitiful 2% the government pays the Social Security "Trust Fund" for the use of their money. Nowhere is it etched in stone that everyone must participate in our failed Social Security system. Federal employees are not part of Social Security; their plan is FAR superior. (Are federal employees better than the rest of us?) In a recent issue I described how our Senators and Congressmen have voted themselves a fat retirement system which, compared with Social Security, is like the difference between a Rolls Royce and a Chevy pickup. Iíll end this by giving you a brief description of how three Texas counties have PROVED that a private retirement plan works. (For the whole story, go to


TEXAS MAKES THE LIBERALS SQUIRM. Initially, the Social Security Act permitted municipal governments to opt out of the system. Congress amended the Act in 1983, taking away one more freedom from the American people. Before Congress shut down the opportunity, employees of Galveston County, Brazoria and Matagorda counties in Texas voted overwhelmingly to remove themselves from under the heavy thumb of the federal government. In their private plan, contributions are the same as those for Social Security, but the returns are MUCH higher, and life and disability insurance benefits are superior.

70% percent of the total contribution of employees and employers goes to the employeeís individual retirement account, which pays a 6.5 percent average interest rate, compounded daily. The remainder pays for disability and life insurance premiums to cover the employee in case of an accident or death.

While the cost of the private program is virtually the same to the employee and employer as Social Security, the benefits are far greater. According to First Financial Benefits, Inc., which created and administers the plans:

*A person retiring today at 65 with 40 years of deposits and a salary of $20,000 would retire with $383,032 in a personal account.

*Someone with a $30,000 salary for 40 years would retire with $573,782.

*A person with a $50,000 salary for 40 years would retire with $956,303.

A personal retirement account this size provides a much larger post-retirement income than does Social Security. Also, retirees under their plan have a number of options not available to us poor schmucks on Social Security. For example, they can choose among several annuities or take their money in a lump sum. And donít forget- itís THEIR money. Unlike Social Security, they can leave any unused benefits to their heirs. If you die young on Social Security, forget about your children; the government gets your money.

The differences in returns between their plan and our governmentís "safety net" are remarkable. Here are two examples:

*A retired $20,000-per-year worker with the personal retirement account would receive $2,740 each month at current interest rates, while Social Security benefits would be about $775 per month.

*A $50,000 per year worker would receive $6,843 from the private plan, compared to $1,302 from Social Security. Thatís over five times as much, with the same amount of contribution!

In researching this article, I found valuable information on many sites, but the most useful was that of the National Center for Policy Analysis ( Youíll find a wealth of material on the future of Social Security if you go there and do a site search for "Social Security" (or click on this link:


DONíT LISTEN TO ME! When I was pastoring a church, I often told my congregation, "Donít believe anything just because I say it. Go read your Bible and see if Iím telling you the truth." Iíll say something similar to you. Do a web search for any of the concepts mentioned in this article. Youíll find plenty of material from both fiscal conservatives and tax-and-spend liberals. If your eyes are not blinded by your ideology, youíll notice one important difference. The conservative sites have FACTS- lots of FACTS- to back up what they say. The liberal sites will give you lots of feelings. Emotions will be slathered liberally over their rhetoric. But you will notice a dearth of facts.


Why would liberals defend a failed system? First, because they invented it. It doesnít matter which political party you belong to, if you think government knows best, you are a liberal. The second reason is that the most basic premise of liberalism is the Politicianís Golden Rule: "If you have the gold (the taxes) you rule." You rule everyoneís lives. You set social policy by controlling the tax dollars you confiscate from the people.

Conservatives look at things differently. We recognize that everyone is not going to take responsibility for their own retirements and plan accordingly. We also recognize that some people are unable to work and need assistance. But weíre bottom line people. We want to put our money and effort into things that will WORK. Thatís why we want to allow people a CHOICE to put part of their own money into a retirement plan that will work. Isnít it interesting that liberals, who are always talking about choice when it comes to killing unborn babies, want to deny American workers a choice in their retirement future?

Conservatives are going to see to it that Americans have a retirement plan that works. No matter how much the liberals whine and bleat, I believe the American people are smart enough to see through their attempts to confuse the issue. We are going to save Social Security by honoring OUR basic premise: Private enterprise is always superior to government bureaucracy.

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