Wednesday, February 25, 2009

Obama's Social Security Plan

Obama wants to tackle Social Security. I support this 100%. However, he appears to be accepting the defeatist attitude that Social Security must continue to pay current and soon to be retirees promised benefits. This is the same attitude taken in every reform package since 1950. They protect soon to be retirees and retirees at the expense of the worker and future workers.

His idea is to create retirement accounts so Americans can save for their future. Wow, this is nothing new. This is where the Individual Retirement Account came from in the late early 80’s. The concept was to create an account that had incentives for people to save. Did they save, no? What happened was that those with savings simply shifted those savings to IRA accounts and those who were saving opened up IRA accounts. Did it increase savings, no? Those who had no discretionary income to save were out of luck.

Another variation was created and tried. The 401K was born with the concept of providing workers more incentive to save, but the same identical problem occurred. Those with savings with kids in college were not saving so they spent down their savings to allow them to contribute to 401K’s. Did this increase savings, no it simply shifted where the resources were. Those who were already savings simply shifted current savings from taxable accounts to tax deferred 401K’s. Those with too little discretionary income still were left out in the cold.

The basic problem is simple; if you do not have any discretionary income, then you have nothing to save after meeting necessities. However, if you fall into this category, you still continue to pay the payroll tax to support Social Security and Medicare. Two programs that will provide you a negative return on your contributions. Therefore, had these programs been eliminated, workers would have had increased take home wages, creating discretionary income to save.

Until these two programs are dramatically reduced in cost, there cannot be any increased savings by workers. Without increased savings, the standard of living of future retirees will decrease.

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