Some time ago, the President announced to the country his plans for reforming the Social Security program.  With this being such a hot topic of discussion, I thought this would be appropriate for this week’s newsletter.  As I continued to read through the discussions and reports of the President’s speech, I ran across a few issues which concerned me.

I did some research, and in doing so, read this quote from the Congressional Research Service released on May 5th, 1998:

When the government issues a bond to one of its own accounts, it hasn’t purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.

Also, from the Office of Management under the Clinton Administration in 1999, they had this to say:

These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. [Emphasis added.]

In other words: When we pay our taxes at our place of employment, those taxes are sent by our employers in a lump sum payment to the U.S. Treasury.  This includes income taxes, Social Security taxes, and Medicare taxes.  Upon receipt, the Treasury either pays a monthly benefit on behalf of Social Security, or the government spends the money on other programs in need of funding.  No money actually ever goes into the account.  If this is the case, why all the fuss about Social Security running out of money…there was never money there in the first place!  It is simply an accounting mechanism filled with IOUs and credit entries.  Each month, the amount owed continues to grow.  It grew by a total of $138 billion between 2002 and 2003.  Each time those IOUs are credited to the account; the real money is spent on a variety of other programs.

I know that many of you are Bush fans, but the fact that he has spent so much money, has been a huge driving force in the need for this reform.  According to Veronique De Rugy, a fiscal policy analyst at the Cato Institute, defense spending is up 34% during the Bush administration, while non-defense discretionary spending is up 28% (under the Clinton administration this non-defense figure was actually negative 0.7%).  Furthermore, education and labor spending has increased 70% and 65% respectively for programs whose effectiveness may be questioned by many….including myself (the “no child left behind bill for example).  Bush was the first President, either Republican or Democrat, to cut taxes during a time of war.  This is not responsible fiscal policy. Keep your political tax cut, Mr. Bush, and spend that money where it will be better used…the economy.

I disagree with a few other issues related to his new proclaimed policy.  One issue is the exclusive nature of the overhaul.  Under the Clinton administration, which also proposed overhauling the system, there was proposed reorganization across the board.  Everyone would be affected.  Benefits to prices rather than wages, increasing the retirement age, discouraging early withdrawal, and changing calculation means were all ideas that were previously brought to the forefront.  These changes were for everyone, not just for those under 55.  It makes me wonder… was this large “baby boomer” population kept safe as a political move so as to sustain popularity?

Instead of privatizing the system, why not just encourage each individual to invest the unused proceeds of their social security check?  In this day and age, we all must agree that Social Security should not be your sole income upon retirement but rather a subsidy to the savings you already have.  Given the spending patterns of this administration, one must conclude that relying on Social Security is similar to the clown at the fair sitting above the tank of water…hoping the ball doesn’t hit the target (we all know what happens to the clown).

Under the Bush plan, you can leave your benefits to your children.  This is a great addition to the plan.  However, what happens if you die after your social security becomes depleted and you have nothing to leave?  I know that privatizing sounds good, but there are in fact millions who actually depend on these monthly checks for living expenses.  In many situations where this is the case, the financial market knowledge is probably not as great as the knowledge of those in the upper class.  I grew up in a middle class household, one generation away from poverty, which was not as financially savvy as the more affluent in today’s society.  To leave the responsibility to those who really have little or no knowledge about financial markets, could spell financial disaster for many people.  How are these people expected to invest wisely?

I used to trade a stock called Express Scripts Corporation during my days as a stock trader.  ESRX is a Pharmacy Benefit Manager that provides integrated PBM services.  This stock gained considerable momentum to the upside when Bush announced that he was going to expand prescription drug benefits a little over a year ago.   Now he has decided to cut Medicare as well as Social Security.  Spend this week and cut the next…I get dizzy sometimes.  Do the words “flip flop” ring a bell with anyone?

The retirement age should be increased because people are living longer.  Early withdrawal should be discouraged.  Sometimes this is inevitable, but with proper education and/or proper planning it might not be necessary.  Changing the calculation means, as suggested by the Clinton administration, is long overdue as well.  Tying the benefits to prices, as opposed to wages is also a viable option.  However, I fail to see the logic to privatizing the system.  There are many areas where that can be cut back before we resort to privatization.

I was impressed with the President’s new proposed budget.  It seemed that he finally realized the appropriate steps which needed to be taken.  However, privatizing is not one of them.  This overhaul, if passed, will be to the detriment of all those who are not affluent or knowledgeable about the financial markets, and must rely on Social Security to survive.

In the meanwhile, I cannot stress enough the urgency of the need to begin planning and saving for your future today.  The fact that we are having a discussion such as this should be a wake up call.  This wake up call lets you know that you CANNOT depend on the government to provide for your future.  We must be self-sufficient and help one another to become self-sufficient.  “Though shalt not see thy brother’s ass or his ox fall down by the way, and hide thyself from them: thou shalt surely help him to lift them up again.” (Deuteronomy 22:4)  If/when the time comes when the ball hits the target, we should have on a wet suit with scuba gear and be ready to swim.  This is not an option, but an obligation.

Go to the ant, thou sluggard; consider her ways, and be wise:  Which having no guide, overseer, or ruler, provideth her meat in the summer, and gathereth her food in the harvest.  How long will thou sleep, O sluggard?  When wilt thou arise out of thy sleep?  Yet a little sleep, a little slumber, a little folding of the hands to sleep:  So shall thy poverty come as one that travelleth, and thy want as an armed man.  (Proverbs 6:6-11)

God bless, and make that money work.