I’ve been meaning to start this thread for a while. First off, I think in this thread it would be useful to put ages. For example, I’m 22.
Now, I was actually talking about this with my father a while ago. As I said in this thread, it is inconceivable to me that people in their 40s and 50s and 60s do not have a cushion of their own investments. I can’t get my head around the idea around working at a single company for thirty or forty years, much less have a corporate pension. But most of all, I simply can’t understand not having a cushion of investments and assuming that Social Security will do the job. Why don’t people (especially the early boomers like my parents age) have stocks and bonds and mutual funds and index funds and IRAs and savings bonds and T-bonds and CDs and 401(k)s and 403(b)s and savings accounts? Why haven’t they have them for the last 20 or 30 or 40 years? I mean, I just named 10 ways to invest money (with the possible quibble of a savings account.) Why didn’t they buy some real estate or something else physical that would be practically guaranteed to go up in value over time?
To me, it appears natural that I should at least fully fund my Roth IRA each year and put money into a 401(k) if possible, especially if there is employer matching. It wouldn’t hurt to diversify out into a mixture of long-term and short-term bonds and CDs and to have a good mix of stocks and bonds. I can even just drip invest, especially if I’ve picked good companies or for index funds. And under the President’s plan, even at just $1000 a year, that really starts to add up. Let’s assume 40 years of putting in $1000 a year. Let’s also assume about a 5% return per year on average. Assuming I did the math right, that’s nearly $120,000 right there. Is that a huge amount? Not really, but let’s combine that with a couple other things, like that fully-funded IRA. Ignoring the fact that the amount of allowable contributions are going to go up over time, let’s assume the max limit this year of $3000 will carry through the next 40 years. Let’s also assume that I get about the same 5% return per year. We’re now talking about another $350,000. There’s nearly half a million right there combining the two, a lot of which will be tax-free when I take it out. Assuming a lifetime of 20 years after retirement, that’s nearly $25,000 a year without even getting into other Social Security money. The same amount each year put into an index fund, which would generally return about 10% per year over time, if I’m remembering the numbers right, would be even better. Instead of $350,000, we’re now talking 1.3 million. With the power of compounding at my advantage in any long-term investment, why would I need to worry about getting $23,000 a year from the government (assuming the SS benefits keep being indexed to wages)?
So, for me, if we can partially privative Social Security, why shouldn’t we? Sure, I agree that that itself won’t solve the solvency issue. But, after all, there are ways to do that. Index the benefits to inflation instead of wages. Remove the cap on what can be taxed. Possibly even means-test the benefits. And yes, the switch would cost a lot now, but it’s sure to cost a lot more to fix later. So why this almost knee-jerk hostility to any idea of changing the way Social Security works? Also, is there a more common misunderstanding in the older generation in how Social Security works? Is there a fundamental mistrust in the market that gets people (and it appears to be mostly the older people) prophesying doom and gloom that you can lose thousands and thousands of dollars in practically no time in well-diversified funds? And it’s not like you’d have to talk the mutual fund option. You could stick that $1000 back in T-bonds like the rest of the “trust fund.” Is this going to be one of those cases where a generation gap is clearly visible?
