Imaginary WMD and Social Security crisis

Is there a "Social Security crisis"? We have received dozens of emails from our readers asking this question. While President Bush has tried to create a crisis (as he successfully created a WMD crisis), looks as if Americans are smarter this time. Only 14% of Americans buy his argument (according to a Zogby poll commissioned by Cato Institute). Most non-partisan expert think that like many other aspects of the American economy, Social Security may need major work but not at the speed President Bush wants to do. After the failure of his Iraq strategy, Bush is also facing a major credibility challenge since most things that he says are hardly believed by anyone who bothers to stay informed. (Related article: Bush's real agenda for privatizing Social Security)

Ronald Lee, director of University of California Berkeley's Center for the Demography and Economics of Aging (He has served on the technical advisory panel for the Social Security Administration and does Social Security projections based on demographics), says, "It is important to realize there are two separate issues. One is that there is a long-run imbalance to Social Security finances. The other is whether we want to move toward a privatized system. The long-run imbalance has to be addressed one way or another. The trust fund won't fall close to zero for another 40 years, maybe 50 years, depending on what projection you're looking at. You might or might not want to call this a crisis, but it is the case that we have to do something sooner or later. The earlier we do it, the easier it will be. On the other hand, it means future generations of participants will bear more of the costs of fixing the problem." (Related article: Why Bush wants to privatize Social Security?)

His colleague Alan Auerbach, professor of economics, who served in the early 1990s as deputy chief of staff for the U.S. Joint Committee on Taxation, which advised Congress on tax policy, agrees. According to him, "It needs to be attended to. People who argue that it's not as bad as some people say are right, in some sense, because it is a manageable problem. It's not something where the sky is falling and we can't do anything about it. We certainly could make no significant changes in the Social Security system and fix it – that is, increase the retirement age a little bit, increase the income subject to the payroll tax a little bit, do a variety of other little things. That's pretty much the approach they took in 1983. What a lot of the debate is about now is whether this crisis – however big it is – should also be used as an opportunity to make major changes in the Social Security system, particularly privatization or partial privatization."

Nancy Pelosi, the House Democratic leader admits that Social Security is not in perfect shape, but America has the time to be deliberate and do it the right way - an approach that President Bush does not like. As many experts start to compare his poor Iraq strategy (executed in a hurry, no debate, without support, risks ignored, incomplete analysis), it is becoming obvious that privatization of Social Security might turn out to be as big a failure as the Iraq war. While Iraq war has cost us about $200 billion, trillions of dollars are at stake in the Social Security privatization initiative. Pelosi says, "We can solve the long-term challenge without dismantling Social Security, and without allowing this Administration's false declaration of a crisis to justify a privatization that is unnecessary, unaffordable, and unwise. To be sustainable, any long-term solution must be bipartisan. And as a first step, we must work off the same set of numbers and the same set of goals." (Related article: Retirement incomes to fall under Bush's privatization plan)

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Bush uses propaganda to mislead Americans

While many younger Americans believe that personal retirement savings accounts is a good idea, not many experts believe that creation of these accounts by privatizing Social Security will in any way help the solvency issue. In fact, even cutting the benefits of retirees, as President Bush's plan does, will not ensure the solvency of Social Security. Or in other words, Social Security does have a solvency problem, but there is no crisis as President Bush has made out to be. (Related article: Retiree benefits expected to fall under Bush plan)

In fact, it is interesting that so many Americans now see the Social Security privatization issue as similar to to the war with Iraq. The President essentially forced various government agencies to cook up a complete lie about weapons of mass destruction (WMD) and he wanted to act fast so that no one would have any time to investigate if he was telling the truth. Indeed, Saddam Hussain was no gentleman, but he had no WMD, and as the world now knows very well, was a threat only to George Bush's ego. President Bush did perfect his technique in misleading the Americans who have since rewarded him by electing him again and it is no surprise that he is doing what he did last time to convince the Americans that they should allow him to privatize Social Security so that their retirement benefits will drop significantly (or disappear altogether if the market heads south) so that he can reward his contributors in the financial services industry and also help the top 1% of the Americans (who will benefit as equities head north in the short run). (Related article: Bush's real agenda for privatizing Social Security)

President Bush was not shy about paying people in the media (in violation of law) to push his conservative policies. Now he is using the Social Security Administration (as he and Vice President Cheney used the CIA prior to the Iraq war) to cook up stories about how the Social Security is in a crisis and how he needs to fix it without giving American people a chance to find out if he is telling the truth. (Related article: Americans totally confused about the privatization issue)

Officers of the National Social Security Council, which represents workers of the Social Security Administration (SSA), have testified before the Democratic Senate Policy Committee regarding reports in the media that employees have been instructed to hype negative projections for Social Security and to promote privatizing Social Security. (Related article: Why did Social Security privatization become a priority for Bush)

Union testimony exposed ways in which SSA employees were instructed to promote the idea that Social Security is in a crisis and that private investment accounts are the solution to this financial situation. The testimony suggests that SSA may have violated federal law prohibiting agencies from using funds for propaganda purposes unless those funds are specifically designated for such use by act of Congress. Additionally, the testimony refuted recent White House assertions and a statement that SSA employees are now required to read, on behalf of Social Security Commissioner Jo Anne B. Barnhart, in the event that they are questioned about the recent media reports.

"Previously, our employees had shared information with the public about Social Security's financial condition, but had never been encouraged to support any particular 'reform' proposal. In fact, they were always expected to remain neutral on political and legislative matters," testified Steve Kofahl, regional vice president of the Council and president of AFGE Local 3937.

"Over the years, through Republican Administrations and Democratic Administrations, there was one constant: the work of the Social Security Administration should not be politicized," testified Debbie Fredericksen, Council executive vice president, now, "frontline Agency employees are being instructed to provide the American public with information that is designed to promote the idea that Social Security is in crisis and that Social Security privatization is the answer." (Related article: Americans concerned about retirement income)

"The use of SSA resources to advocate political positions is wrong and compromises the integrity and credibility of the Social Security Administration. The credibility problem becomes even more acute, when SSA employees are directed to make political statements that are untrue or exaggerated. This undermines the SSA mission to provide clear, accurate, and objective information to the American people about the Social Security system," testified Fredericksen.

Kofahl cited the effectiveness of the Agency campaign by describing a conversation with a taxi driver. Upon learning that Kofahl was an employee of SSA, the driver asserted that "it [Social Security] won't be there for me." When pressed as to why he felt that way, the driver explained that the "Personal Earnings and Benefit Estimate Statement" he received in the mail from SSA told him so.

Documentation and evidence presented by the Council included:

• Official agency talking points stating, "Modernization must include individually controlled, voluntary personal retirement accounts to augment Social Security."
• An SSA Tactical Plan instructing employees to "deliver message through press releases, presentations at financial planning seminars and public events" and to "look for non-traditional locations ... such as outreach events at farmer's markets, big box retail stores, etc.
• A 2-hour lecture by a SSA public affairs specialist given to insurance and financial planning professionals. The lecture covered the July 2001 report from the Social Security Advisory Board and 3 options proposed by the White House Commission to Strengthen and Preserve Social Security. Both the Advisory Board and the Commission advocated establishing private investment accounts.

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Younger Americans likely winners with personal accounts

Patrick in Columbus, Ohio, writes, "I am in my late thirties and have been contributing the maximum amount to my 401(K) that has added up to $45,000. I have no bad debt, own a home, and save at least 10% of my income each month. I think that privatization of Social Security is an excellent choice for me since I can invest my contribution more wisely than the Government. Is my understanding correct or am I missing something here?"

In principle, when each American plans for her/his retirement, they can be expected to act more responsibly. Because we have a Social Security system that provides guaranteed benefits to most Americans, we do not save enough. In fact, we hardly save anything and have the dubious distinction of being somewhere at the bottom when it comes to saving.

Thus, Patrick is right that if he is in charge of his own destiny, he can plan much better for his retirement. Most Americans in his age group think like him. According to a new poll conducted by Zogby International for the Cato Institute, while just 14% of Americans believe President Bush when he says that the Social Security is in a crisis, three out of five Americans under 50 think that personal retirement savings accounts is a good idea. The opinion is driven partly by the doubts that younger Americans have that Social Security will be there for them when they retire and partly by the fact that during the last decade more younger Americans have become more comfortable with investing and trading, particularly with the availability of online brokerage trading accounts. Young Americans are also more likely to have 401(K) accounts than some baby boomers and retirees.

Adding to that is demographic/social change that is happening in America. As the family system is falling apart with an extremely high rate of divorce, single parents, and general disinterest in traditional family values, more Americans are concerned about themselves rather than caring for others. Many younger Americans simply do not appreciate the idea of paying for retirees.
But it is important to understand that personal retirement savings account do not solve the problem of either the Social Security itself or in any way guarantee that retirees will have a higher retirement income themselves. Even President Bush has admitted that the only way Social Security can be fixed is by reducing benefits by linking them to prices rather than wages (as is currently done). While many younger Americans may not appreciate the risks of stock markets, in the Zogby poll, one out of three thinks that private retirement accounts are clearly riskier. (Related articles: Personal retirement accounts may not solve Social Security problems and Retirement income expected to fall under Bush plan)

What does it mean for younger Americans?

• With our without Social Security reform, retirement benefits for most Americans will go down. However, with personal retirement savings accounts, younger Americans have higher possibility of raising their retirement incomes. (Related article: Americans highly concerned about their retirement incomes)
• Personal retirement savings account should not be seen as money to play with in the stock market. On the contrary, it should be added to the overall pool of savings that you have and basic principles of personal portfolio management applied. (Related article: Personal finance plan key to retirement planning)

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Personal retirement accounts may not solve all problems

At least 32 people have written to us yesterday alone asking about personal retirement savings accounts and their role in privatization of Social Security. As Lisa in St. Louis asks, "I do not understand how creation of personal retirement savings account will ensure the solvency of Social Security. While there is a possibility that returns from the stock market may be higher, they could also be lower for years, hurting the retirement benefits of seniors. Please explain to me if I understand it correctly." (Related article: Retirement benefits may actually fall under Bush plan)

Will personal retirement accounts (PRA) solve the Social Security problems?

Lisa is exactly right. The personal retirement savings accounts are being "sold" to Americans because they sound attractive to young Americans, as found in some polls (though the same Americans change their opinion once they find out that their retirement benefits might actually go down or disappear altogether). In the words of Peter Wehner, President Bush's director of strategic initiatives, the private accounts are an easy way to sell the idea of reform. He wrote in a leaked memo, "...our advocacy for personal accounts is tied to our commitment to an Ownership Society -- one in which more people will own their health care plans and have the confidence of owning a piece of their retirement. We simply cannot solve the Social Security problem with Personal Retirement Accounts alone. If the goal is permanent solvency and sustainability -- as we believe it should be --then Personal Retirements Accounts, for all their virtues, are insufficient to that task." (Related article: Bush's real agenda behind privatization of Social Security)

How will the Social Security problems will be solved then?

By making a change in how retirement benefits are calculated. Its ultimate effect will be to lower retirement benefits but the expectation is that some of these losses will be offset by higher returns in the personal retirement accounts.

But many experts are not convinced that every American can suddenly become a smart investor and not lose her/his shirt on Wall Street. It is no secret that even the smartest brains on Wall Street keep underperforming for years. An average individual almost always underperforms, as well, particularly someone who is a beginner and does not understand the intricacies of investing and trading. Brooks Hamilton, a Dallas pension lawyer and benefits administrator, says, "There's no reason to believe that amateurs can suddenly become terrific money managers," in an article published in the Kiplinger Finance magazine.

During last 20 years, the stock market has averaged a 12% annual return and that is on the high side due to the boom of the 90s. However, Dalbar Financial found that individual mutual fund investors earned only about 4% per year. Vanguard finds that participants in its 401(k) plans earn only about 6% a year. Or in other words, basically all individual investors do a terrible job when it comes to investing.

Ed Dravo, president of Dravo Financial, an investment management company, writes in Slate magazine, "If employees are earning only half of the market averages, that means that in coming decades, there could be serious shortfalls in income for retirees." (Related article: Americans concerned about retirement incomes)

What does it mean for you?

While Americans are intrigued by the idea of investing in the stock market and many dream of becoming rich overnight, using their Social Security contributions to do this may not be the right choice. If Social Security is privatized, then Americans need to get a crash course in investing and trading and learn how to get it right, invest very carefully in low risk/low return investments, and not meddle too much with their accounts - an advice that is often given to 401(K) participants by most financial advisors.

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Retirement benefits may fall under Bush plan

Dozens of people have written asking if President Bush's plan to privatize Social Security will reduce their benefits. The answer is "YES". In fact, that is the very foundation of his plan. While no one would ever openly say that the ultimate goal is to reduce retirement benefits (Americans will completely freak out once they find that out), below is an explanation on how "Social Security reform" will eventually lower retirement benefits.

How are retirement benefits calculated today?

Retirement benefits are calculated using a complex formula that takes the prevailing wages into account. By using this formula, senior citizens who live on retirement income alone, can still keep up with working Americans when it comes to the quality of life. (Related article: Americans concerned about retirement income)

What changes does Bush's plan makes?

President Bush thinks that seniors are getting paid more than they should be paid because wages rise faster than prices. He wants to link retirement benefits to the price index. Since prices do not rise as fast as wages, retirement benefits will reduce by a few percentage points each year. Over several years, this difference can reach double digit percentages. Or in other words, quality of life of retired Americans will drop to a point that they might fall into poverty, especially with the rising prescription drug prices. (Related article: Tips on importing prescription drugs from Canada)

Why does President Bush want to reduce retirement benefits of seniors?

It is indeed possible not to reduce retirement benefits of low-income and middle class Americans, but that would require raising taxes (e.g. increase income taxes or raise the limit on income for payroll taxes) on rich Americans, an idea that President Bush does not like. (Related article: President Bush's real agenda behind privatizing Social Security)

How can I protect myself from falling into poverty when I retire?

The privatization of Social Security, as envisioned by President Bush, essentially means that Americans can no longer count on Social Security as their sole source of income during retirement. They will have to supplement their retirement benefits with other sources of income. For example, full/part-time employment, a stable reserve of cash that they can draw from regularly till their death, etc.

In other words, retirement planning is key. While baby boomers and others who are very close to retirement have only a few years to catch up on their retirement planning, if you are young, it is an excellent opportunity to think of personal finance and portfolio management as priorities. (Related article: Basics of 401(K) retirement plan)

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Personal retirement accounts benefits not yet known

As reported earlier, the reason Americans are so confused about privatization of Social Security is that there is so little information about how the personal retirement savings accounts would work. While initially there was a lot of excitement, particularly among younger Americans, but as they are learning more about the risks and challenges of investments that are tied to the volatility of the stock-market, they are getting more skeptical. Many argue that they have already diversified their personal portfolio by investing their 401(K) savings into the stock market and by investing their Social Security savings into the stock market could be a recipe for disaster.

Amid calls for Congress to create personal retirement accounts as part of Social Security, a new report by a non-partisan expert panel urges lawmakers to pay careful attention to how and when money from these accounts would be paid out to retirees, their spouses, and survivors if private accounts become a new part of the Social Security system or are created outside Social Security. The report, released today by the National Academy of Social Insurance (NASI), addresses how people might be able to tap the funds and a number of other design issues that need to be addressed if individual accounts are added to Social Security. (Related article: Americans concerned about their retirement incomes)

Co-chairs of the panel are Kenneth S. Apfel, commissioner of Social Security in the Clinton Administration and now a professor at the LBJ School of Public Affairs at the University of Texas in Austin, and Michael J. Graetz, a top Treasury official in the George H.W. Bush administration and now a law professor at Yale Law School. The National Academy of Social Insurance is a nonprofit, nonpartisan organization made up of the nation's leading experts on social insurance. Its mission is to promote understanding and informed policymaking on social insurance and related programs through research, public education, training and the open exchange of ideas.

"Most of the Social Security discussion has been about how money would build up in the accounts," said Graetz. "This report covers, in depth, the largely neglected questions about how the money would be paid out."

"Payouts are important," added Apfel, "because a central goal of Social Security policy is to assure some level of adequate income." Among questions addressed in the report are:

• How much access could retirees have to their account funds? Would they be allowed to take lump sums when they retire, or would they be required to buy annuities, insurance contracts that guarantee monthly payments for life?
• Could people be allowed to withdraw funds or borrow against the accounts before retirement age, as they can now with 401(k) savings plans? Do these answers change if the worker becomes disabled or dies before retirement?
• What rights does a spouse or former spouse have to the accounts? Would accounts be divisible property at divorce? Would spousal rights be decided in federal law or by state family law that differs from state to state?
• Could creditors reach the accounts? Would accountholders have to spend the accounts in order to become eligible for Medicaid or other benefits linked to income and assets?
• What institutions -- government or private -- would be responsible for making payments from the accounts? If private financial institutions, such as banks, insurance companies or brokerage firms, are responsible, would federal or state government regulate their conduct and ensure their solvency? Insurance companies today provide private life annuities and states regulate them to protect against insolvency.
• If these accounts are part of Social Security, how will they affect payouts of Social Security benefits for retirees, disabled workers and families of workers who die?

The report, Uncharted Waters: Paying Benefits From Individual Accounts in Federal Retirement Policy, does not endorse nor oppose the concept of private accounts within the Social Security system. Panel members have different personal views on this question.

"It is crucial that these payout issues be clearly understood by policymakers," said Graetz. "They must resolve the issues discussed in this report if they make a decision to add universally available individual accounts to our current system for providing retirement income." Apfel added, "Retirement, divorce, disability, death of a loved one -- these are life- changing events. Decisions on these issues will have real consequences for American workers and their families."

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Personal retirement account details still sketchy

Poll after poll goes on to show that Americans are highly confused about what they really want to do with Social Security. The results seem to vary with how the question is worded and who is sponsoring the survey. But two clear messages seem to emerge from all surveys:

• Private retirement accounts, in principle, is a good idea (Who can argue with the logic behind it?)
• Americans do not want uncertainty/instability when they are totally helpless in a society that increasingly treats its seniors as a burden.

If given a choice, three-in-five Americans would strengthen Social Security with as few changes as possible, according to a poll conducted by AARP. The poll also found that the more Americans learn about diverting Social Security taxes into private investment accounts, the less they like the idea. This is happening because most Americans still do not fully understand how these accounts will work. While some find the idea of playing with money in the stock market very tempting, when they are reminded that they could potentially lose all their retirement savings, they prefer more stable (but possibly less) Social Security benefits rather than high (but more unstable) retirement income.

Two-thirds (66%) of Americans age 30 and above support keeping Social Security as is, including 6 in 10 (62%) Gen Xers ages 30-39. A similar number of leading edge boomers ages 50-59 (65%) and a clear majority (57%) of boomers ages 40-49 agreed. This poll is clearly showing a shift among younger Americans, who in previous polls, had indicated higher support for individual retirement accounts. It is obvious that with the discussion just starting and Americans learning more about how their Social Security system works and what it means to divert the funds into private hands, they are also appreciating the risks.

"A majority of Americans, even younger adults, would like to see Social Security continued substantially as it is today," said AARP CEO Bill Novelli. "Social Security does need to be strengthened and people accept that fact. On one hand, the public has been told to have doubts about their Social Security benefits. On the other hand, they expect the government to deliver on its obligation to honor those benefits." Novelli added.

More than two-thirds of people under age 50 are not confident that Social Security will be there for them, the AARP poll indicates. But a strong majority of all those polled (83%), agreed that Social Security should be strengthened rather than replaced, and that private accounts would hurt Social Security (60%).

"Most people who are not retired or close to retirement know little about Social Security," said Novelli. "A political undercurrent of uncertainty contributes to support for investing a portion of their Social Security taxes in the stock market. But support falls away the more people learn about private accounts and how they might work," he concluded.

After initial supporters had been exposed to all of the consequences of diverting payroll taxes to fund private accounts, only 10% still favored them. This means, in the context of the entire survey sample, that only 5% favored this approach once the consequences were evident.

The survey found that 43% initially supported the concept of diverting payroll contributions to fund private accounts. But barely a quarter continued to support private accounts if it meant a lower Social Security benefit in retirement. The $1 trillion in additional debt in order to pay Social Security benefits to current beneficiaries reduced support to less than a fifth (18%) of respondents. Leaving responsibility for this debt and for Social Security's current shortfall to our children reduced support even more, to 17%.

"A lack of knowledge about private accounts is a dangerous thing," explained Novelli. When people are exposed to the full details of private accounts, support falls to only 5 percent."

In summary, Americans need to start learning about personal finance, retirement planning, and 401(K) programs right away so that they can plan for retirement.

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Personal finance plan key to retirement planning

In the Social Security privatization debate, the conservative argument is that they want to turn America into an "ownership society" (Related article: Bush's real agenda for privatizing Social Security). Some conservative think tanks eventually want to push for private health insurance. But as even a six-year old will tell you, an "ownership society" means that we have to become more responsible about personal finances and also face a riskier future.

How to minimize risk of lower income during retirement?

Just ask those Americans whose 401(K) accounts turned into 201(K), as they joked about the value of their account becoming half within a matter of days/weeks? They were cheated by companies that basically cooked their books.

While personal retirement savings accounts, in theory, will allow us to become owners of our destiny (and probably wealthier, if we get lucky), there is a very strong chance that many Americans will either have close to zero retirement income or at least highly unstable income at a time in their lives when they are most susceptible to falling into poverty.

Here are a few things that you can do to protect yourself from lower retirement income:

1. Learn something about personal finance and retirement planning.
2. Use what you learn to put together a plan for personal financial management.
3. Be disciplined about saving and investing.

How to make personal financial planning program work effectively?

As any rich person will tell you, no one ever got rich by working, and only a few get rich by saving, though both are important steps on a path to create wealth.

To create personal wealth, you have to make your money work for you. And you do not make your money work for you if you put it in a savings account. Real gains come when you make strategic investments (buy low, sell high). This is true for real estate as it is true for stocks.

Chances are that this seems like rocket science to you. But that should not scare you since it is way too important now that we are entering a period in our history that we are refusing to take care of our seniors and the younger Americans are refusing to take care of us. So do some research, learn what you can, and even hire a personal financial advisor if you can afford to.

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Basics of 401-k retirement savings plan

The Social Security privatization debate has generated so many questions about retirement planning that we are having a hard time answering all of them right away. So we will start off with what Americans can do right away. So this article is about the basics of 401(K) program and how you should take full advantage of it.

What is 401(K)?

A 401(k) plan is a retirement savings plan that is funded by employee contributions and (often) matching contributions from the employer. At what point the employer starts to match and how large the match is varies by employer and is entirely the will of the employer. The key benefit of a 401 (k) plan is that the contributions are taken from pre-tax income (thus lowering your taxable income), and the funds grow tax-free until withdrawn after retirement. Also, the plans are (to some degree) self-directed in the sense that you control where the money is invested, though you will have only a limited choice of funds, and in some cases, a company might insist that you keep at least some of the investment in your employer's stock.

They are also portable; or in other words, they go with you when you change employers though you may not be able to carry with you all of your employer's contributions with you (you can always carry with you all of your contributions). Most employers insist that you work for certain number of years after the matching contributions are made. The term used is "vesting". It means that the money does not belong to you until you work for X number of years. For example, you may be required to work for 5 years to be 100% vested (or be able to take all the employer's contributions with you). If you work for only two years, for example, you may be only 20% vested (or be able to carry only 20% of the employer's contribution with you if you leave).

Who can join a 401(k) program?

If your employer offers a 401-K program, you can find out the eligibility requirements at your work. Typically, you need to be with the company for a certain number of months to start contributing.

You will required to complete simple paperwork and typically the plan administrator will help you do it and also help you picking the right investment.

How should I invest?

You should use a personal portfolio management approach for investing. Or in other words, depending on your age, risk appetite, and income, you should choose riskier investments (with potentially higher returns) if you are young, and relatively stable and secure investments as you approach retirement. At all points, you should be diversified to some extent so that you can take advantages of market booms and be protected somewhat from market collapse.

How actively should I manage my 401(k) account?

While it is a good idea to regularly watch the performance of your 401(K) investments, it is best to leave it alone most of the time. Only when there are major structural changes in the market (e.g. Internet stocks went totally out of favor in 1999/2000), should you reallocate your funds.

401(K) is not a short-term investment program and your time horizons should be counted in years/decades rather than months. Most data suggests that over the long term, stocks generally produce higher rates of return. Thus, it is good to pick funds that include companies that will be around for a long time and produce stable returns.

What else do I need to know about 401(K)?

It is best not to touch this money until you are retired. In emergencies and for certain types of personal situations, you may be able to withdraw funds or borrow against them. There are often tax implications of early withdrawals and you may have to pay interest on the loans. So talk to your plan administrator and make sure that you understand the risks of early withdrawal. When you change employers, you can simply rollover your 401(K) account to your next employer's 401(K) program or into an IRA.

What should I do next?

Do some more research on 401(K) programs and on retirement planning in general. Try to develop an understanding of the basics of investing and financial planning. Do some calculations to find out how much retirement income you will need and if you are saving the right amount each month to have the desired retirement income. Many websites have free calculators that allow you to make these calculations. In other words, get smart about investing because privatization of Social Security will force every American to become an investor.

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Getting started with retirement planning

No matter whether privatization of Social Security happens or not, it has definitely made Americans more aware of their personal finances and retirement. Let us take a look at what Michael from Salt Lake City writes, "I am closely following the Social Security privatization debate. Since there is so much misleading information out there, I am as confused as any other American. (Related article: Americans confused about Social Security privatization pros and cons) But I think it is time for me to have a retirement plan since I am convinced that even if I turn out to be a winner with the personal retirement savings account, I am not so comfortable with the uncertainty. So if I want to get serious about my retirement planning, where do I start?"

That is exactly the approach that most Americans should take. Most Americans are smart enough to understand that when President Bush wants to privatize Social Security, welfare of Americans is the last priority that he has. (Related article: Bush's real agenda for privatization of Social Security) In other words, from now on Americans are basically on their own during their retirement. Therefore, planning is key.

How to plan for retirement?

If you have never truly planned for retirement in an organized manner, you might want to understand what is meant by personal portfolio management. While it may sound slightly technical, in reality it is a very simple concept. Having a personal portfolio means that you not only have assets but also have a portfolio of assets. Thus, diversification is the key word here. Most financial planners recommend a portfolio that contains:

• Real estate
• Stocks
• Bonds
• Money market account
• Savings account
• Cash
• Others like 401(k), IRA, gold, antiques, boat(s), other luxurious items that can be sold, etc.

The distribution of your assets in the portfolio will be determined by your age and appetite for risk. For instance, the rule of thumb is that if you are young (recently started to work, no major liabilities) then you can take more risks and invest in high-risk, high-reward options like stocks, and to some extent, real estate (if you buy at a good price and expect that prices will go up over time). As you age and approach retirement, you should gradually shift towards less risky options like bonds, savings accounts, etc.

How to get started?

1. It is never too late to start. If you have zero savings and have credit card debt, you can still start by developing a plan that is designed to reduce your bad debt (credit card debt) and increase your savings.
2. Secondly, come up with an allocation for your portfolio that is appropriate for your age, lifestyle, and income. Except for real estate, most of the other options do not need huge initial investments to get started. For instance, you should be able to open an online trading account with a few thousand dollars and similarly you can open an IRA with a few thousand dollars.
3. Finally, grab the "free" money. If your employer matches 401(k) contributions, you should at least start contributing as much money as to get the match from your employer. While maxing out your 401(k) is the best strategy, at least start off with what your employer gives you.

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Americans concerned about retirement income

The Social Security privatization debate is closely linked to retirement planning for Americans. It is no secret that as a nation, we are not big fans of saving. Secondly, our values have reached a point that in vast majority of cases, we can not expect our children to take care of ourselves in old age or to pay for us. In other words, Social Security is the only hope that most low-income and middle-class Americans have when they retire. (Related article: AARP strongly opposes privatization of Social Security)

Nearly half (45 percent) of the U.S. workforce does not believe it will have enough money set aside for a comfortable retirement. This according to the latest national Hudson retirement survey, which also finds that three-fourths (74 percent) of U.S. workers plan to work at least part-time during their retirement years. Forty-one percent of workers plan to retire before they reach the age of 65. Though 47 percent of employees believe that their company does a good or excellent job educating its workforce about retirement planning and benefits, a nearly equal percentage rate their organizations as fair or poor. Individuals in higher income brackets give more complimentary appraisals.

Nationally, workers do not expect company pensions and Social Security to provide significant retirement income. Half (52 percent) report that personal savings will provide the biggest share of their income after they stop working, while only 20 percent expect company pensions to do so. Twenty-one percent of workers expect social security to comprise the biggest chunk of their retirement income. (Related article: Americans totally confused about the Social Security privatization issue)

A third (31 percent) of workers in the age group of 50-64, who are fast approaching traditional retirement age, anticipate that Social Security will provide the biggest income contribution, although a plurality (40 percent) expect personal savings to do so. However, the younger workforce (18-29) is no longer taking Social Security for granted. Only 14 percent expect it to provide the biggest share of their retirement income. Workers under 40 are also more likely to predict they will not work during their retirement years than those 40 and older.

What can we learn from this survey?

1. There is no definitive poll yet that provides an accurate picture of retirement planning and perspectives on privatization of Social Security.
2. Americans are in denial about their financial situations. When the savings rate being among the lowest in the world, and the consumer debt being among the highest in the world, it is interesting to see that half of the people in this survey expect to use their personal savings to help them live in retirement.
3. Americans need to spend more time planning their financial future and learning more about the details of the Social Security privatization debate so that they can make more realistic opinions.

Recommended article: Basics of Social Security privatization

Americans totally confused about privatization

It is still not clear what American people really want and that can actually hurt them. When the country is as divided as it was in the elections of 2000 and 2004, even a small number of people can make all the difference. The same thing is happening with the Social Security privatization issue. If one were to analyze various polls out there, one would get the impression that Americans want no new taxes, privatization of Social Security (there is support for personal retirement accounts) and guaranteed retirement benefits. Unfortunately, these are contradictory. (Related article: According to Pew Research, Americans oppose privatization of Social Security)

Summary: Americans are simply too confused because they seem to want it all: no higher Social Security taxes, no reduction in benefits for everyone, availability of private retirement accounts, but higher taxes for the ultra-rich (which again can not happen since these are the folks driving the Social Security privatization initiative).

This month, investors were polled about the privatization of Social Security in a joint effort by UBS and the Gallup Organization. When asked if they would prefer to privatize Social Security or continue with the current system, investors were divided. 49 percent reported that they favor putting a portion of their Social Security takes into a personal savings account, and 46 percent preferred to retain the current system. These findings contrast with a similar survey conducted in June 2000, which found that 60 percent of investors polled were in favor of privatizing Social Security and 36 percent wanted to keep the current system. This means that as the Social Security debate has heated up, Americans have had more opportunities to understand the mechanics better. Indeed, Americans realize that in general stock market might produce better returns but few want to risk their retirement benefits. (Related article: Social Security privatization explained in simple terms)

In addition, investors were asked about their personal expectations of the current Social Security system. When asked if Social Security benefits would be a major source of their retirement income, 19 percent said it would be a major source while 17 percent reported not at all. This differentiates from investors polled in 1998, when a similar 17 percent said it would be a major source but 30 percent of investors said not at all. This is very interesting change since it indicates that after the meltdown of the stock market, Americans have finally realized that when it comes to retirement, it is better to have guaranteed (even if small) benefits than unreliable (even if huge) benefits. That is why more Americans now expect they will receive all of their Social Security benefits upon retirement.

Despite increased concern about the U.S. government addressing the issue, investors today are somewhat more optimistic than they were five years ago about the state of Social Security. Today, 53 percent of investors say the system needs major changes compared to 2000 when 61 percent held that view.

On the issue of how to fix our current Social Security system, 64 percent of investors reported that it was a bad idea to raise Social Security taxes and 87 percent disapprove of reducing benefits for all recipients. In addition, 70 percent reported that it would be a bad idea to gradually extend the age at which benefits can be received to 70 years old. However, 73 percent of investors reported that it would be a good idea to raise taxes for people with incomes of $500,000 a year or more in order to ensure that the current social Security System can continue indefinitely.

Suggestions to those Americans who are confused

Social Security is not to be taken lightly. Even if you believe that you will not get any benefits at all, you should not ignore the issue by being passive. You and your family members contribute to it and you have every right to participate in the debate and also to plan your retirement. So get engaged, do your research, learn more about it through research, and participate in the discussion.

Recommended article: Bush's real reasons for privatizing Social Security

Crisis or not? Create an imaginary crisis if needed

One of the major arguments that is being presented for privatizing Social Security that there is huge crisis about its solvency and that it is in serious trouble. But as anyone can imagine, not only are we talking several decades into the future, we are also talking about a situation in which one group's assumptions are as good/bad as any body else's. So all projections should be taken with a pinch of salt. (Read an excellent article written by a management consultant on how unreliable most projections are).

On one hand, Bush administration is arguing that the crisis has suddenly become so grave that we can not even wait to talk about it for a few weeks. On the other side are other economists who do not agree that the crisis is so big and so urgent. (Related article: Bush's real reasons for privatizing Social Security)

Alarms being raised about Social Security have a hollow ring, according to Bill Witte, an economist and co-director of the Center for Econometric Model Research at Indiana University. "There is no crisis. A crisis implies something imminent," Witte said, disagreeing with claims that the system will be undermined by 2018 and bankrupt by 2042. In his view, deep philosophical questions are raised by President George Bush's proposal calling for workers to take a portion of the tax that goes into the Social Security system and put it into a personal retirement savings account that each individual can invest. "If you view it as a social security system, it is set up appropriately," Witte said. "It has lasted and performed well for three-quarters of a century, making it one of the most successful government programs ever." Privatization would shift the risks and responsibilities away from society as a whole and place them on each worker individually, he said.

"If the President and members of Congress and those responsible for the management of the federal government were CEOs and CFOs and directors of business enterprises, they might be in prison today." These are strong words, but they are probably true. They are the words of J. Edward Ketz, accounting professor at Pennsylvania State University, and they appear in his "Accounting Cycle" column in the January 2005 issue of SmartPros.com. Dr. Ketz compares the Social Security accounting fraud with that of the Adelphia scandal. He writes, "... Adelphia did not bother to recognize its debts to the SPE, arguing that they are off-balance sheet items. The scheme came tumbling down when the investors discovered the SPE was sitting on a lot of worthless receivables.

"Under unified budgeting, Social Security works the same way, with American laborers serving as the investors. The workers transfer some funds in the form of Social Security taxes to the Social Security fund. The Social Security fund takes this cash and gives it to Congress to disburse as it chooses. And Congress refuses to combine these activities with the general fund, treating it as an off-balance sheet liability. Some day this scheme will come crashing down."

If you want to hear what Bush administration is saying then it is interesting to read Vice President Cheney's view that the world is about to end if the Social Security reform is not done right away or rather weak argument put forward by Greg Mankiw's lame argument that "...the combination of large benefit increases and a growing elderly population puts the Nation on an unsustainable path."

Recommended article: How Social Security works and if it is in trouble

Bush's real agenda for privatizing Social Security

There has been a lot of speculation about why President Bush has suddenly decided to "reform Social Security" (as he calls it, instead of the more commonly used term "privatization"). We have dealt with this issue in our article on why Bush wants to privatize Social Security and you may also want to read Vice President Cheney's argument for Social Security privatization and finally Gregory Mankiw's logic for reforming Social Security.

So if you believe the President and the reason that he is giving for why he wants to privatize Social Security and think that he truly cares about American people and American economy, then you need to read a leaked memo from Peter Wehner, President Bush's director of strategic initiatives, on the White House's plans for Social Security privatization. Most likely you will never hear any of the reasons in public, but below are extracts from the memo (with our comments in bold on top to convey the theme) that clearly indicate the reasons for this sudden buzz about Social Security privatization.

Let us pursue the conservative agenda to dismantle Social Security

"...this will be one of the most important conservative undertakings of modern times. If we succeed in reforming Social Security, it will rank as one of the most significant conservative governing achievements ever. The scope and scale of this endeavor are hard to overestimate...For the first time in six decades, the Social Security battle is one we can win -- and in doing so, we can help transform the political and philosophical landscape of the country...The President remains flexible on tactics -- and rock-solid on the principles. But there's nothing new there."

Create a sense of crisis and urgency, even if we have to make things up

"...the current system is heading for an iceberg. The notion that younger workers will receive anything like the benefits they have been promised is fiction, unless significant reforms are undertaken. We need to establish in the public mind a key fiscal fact: right now we are on an unsustainable course. That reality needs to be seared into the public consciousness; it is the pre-condition to authentic reform."

Personal retirement accounts is only a buzzword to sell the idea

"...our advocacy for personal accounts is tied to our commitment to an Ownership Society -- one in which more people will own their health care plans and have the confidence of owning a piece of their retirement. We simply cannot solve the Social Security problem with Personal Retirement Accounts alone. If the goal is permanent solvency and sustainability -- as we believe it should be --then Personal Retirements Accounts, for all their virtues, are insufficient to that task."

Let us reduce the benefits but do it by confusing Americans

"...we're going to take a very close look at changing the way benefits are calculated. As you probably know, under current law benefits are calculated by a "wage index" -- but because wages grow faster than inflation, so do Social Security benefits. If we don't address this aspect of the current system, we'll face serious economic risks."

Ride the morality train that started prior to the elections

"...we consider our Social Security reform not simply an economic challenge, but a moral goal and a moral good."

Recommended article: Social Security privatization basics for dummies

Privatization explained in simple terms

Dozens of people who are desperately trying to make sense of all the buzz about social security privatization have written to ask if there is an easier way to understand what it all means for an average Joe and Jane in America. We have consolidated all the questions in a few here and as one visitor suggested, we will try to explain Social Security privatization that it would make sense to a six-year old.

Please note, though, that this is not meant to be the most comprehensive analysis, and therefore, we would encourage you to do more research, visit a few more websites, and then make sure that you really understand this issue well so that you can plan for your retirement with all the knowledge that you need. Privatization of Social Security, if it happens, will fundamentally change the lives of Americans.

What is meant by privatization of Social Security? What is the definition?

The term privatization can have a political meaning and that is what is happening right now. There are too many interpretations already. But in simple terms, it means what is not public or commonly held. As is well known, Social Security program is publicly administered by the Federal Government. Privatization means that control will transferred from the government to private hands (to you, but indirectly to American corporations in which you will invest your savings).

Privatization happens when individuals have greater control over how their retirement savings are invested. Most likely, Americans will invest these into stocks (which are again private, or not government, investments) as opposed to typical Social Security investments that by law can be made only into government bonds and other similar "secure" investment instruments.

Is privatization good or bad?

Depends on who you ask. But historical data shows that investments made in the stock market (over the long run, which means decades) produce higher rates of returns than those in government securities and bonds. This applies only to indices, and not to specific stocks. So while some stocks do produce enormous returns, many stocks will simply wipe out your investment. In other words, a passive investment (which means through an index-linked investment like an Exchange Traded Fund or ETF) can produce a higher rate of return than that in a bond or a savings account.

But a high reward comes with huge risk. Stock market can continue to be in a slump for years. If you did not get in at the right time or at the right price, you may not recover from your losses during your life time. There are also many dishonest companies in America (Enron, Worldcom, Tyco, etc.) that often cheat investors. Privatization will attract more crooks on Wall Street whose only aim will be to prey on average Americans who will get a taste of investing for the first time. Investors themselves can make poor choices (e.g. hoping that Internet stocks will continue to rise forever as investors thought in the 90s).

Is it a good idea to put your retirement savings at risk by privatization of Social Security?

Here it is important to understand that not everyone has the same appetite for risk. While younger Americans want to take more risk (as some surveys show) and it is fine to do so since they have many more years to recover if they make poor investment choices, the same people want to have a guaranteed income when they retire, as do the baby boomers and retirees.
Many Americans already invest in the stock market either through a personal online trading account or through their 401(K) plan, but Americans have come to expect that the Social Security is their safest best when it comes to providing them with a steady source of income when they are retired. (Related article: Most Americans oppose privatization of Social Security)

By privatization of Social Security, there is high risk that your income when you are retired can fluctuate and/or disappear completely, but of course some American can get lucky and prosper.

What is the difference between wage and price indexation?

This is a technical point but has a huge impact on what your monthly check will be like. At this time, Social Security benefits are linked to wages. In other words, as wages grow, benefits grow. This makes a lot of sense because this allows retired Americans to maintain a lifestyle that keeps pace with how others are living.

President Bush wants to change that so that Social Security benefits will instead be linked to prices. Or in other words, while wages might go up for everyone else, but if prices stay the same or go down, your Social Security benefits will stay the same or go down. That means that the lifestyle of retired Americans will not be as good as those of working Americans.

I understand that stock market investments produce higher return but I am afraid that I will not have steady income at a time when I am so helpless. Why does Bush wants privatization so bad?

There are several reasons and we have addressed them in our article on why Bush wants to privatize Social Security. In addition to that it may be noted that taking on an issue as big as this, Bush can divert the attention of American people away from the war in Iraq, falling incomes of Americans, lack of jobs, etc. Privatization will also allow the very rich to become even richer basically overnight while most average Americans will have to pray for good luck. Finally, there is a more important conservative agenda being pushed and Social Security is a good target since it will the greatest (the next one was the tax cut in the first Bush term) transfer of wealth from low-income and middle-class Americans to top 1% of Americans (who happen to be the largest contributors to Bush's campaigns and are pushing this agenda through several think tanks, advocacy groups, and lobbyists).

Recommended article: American companies push for privatization of Social Security

Impact of Social Security privatization on Hispanics

Senator Harry Reid of Nevada, an advocate of Hispanics, has conducted research into the impact of privatization of Social Security on Hispanics and finds that it will have disastrous consequences on them. Hispanics will be specially hit hard because the program is central to health and well-being of elderly Hispanics. Below are some of the findings of Senator Reid's research:

The Social Security program has been remarkably important for Hispanics

The Government Accounting Office found that, “In the aggregate, blacks and Hispanics have higher disability rates and lower lifetime earnings, and thus as a group tend to receive greater benefits relative to taxes than whites.” [GAO, Social Security and Minorities, April 2003]

Retired Hispanics Have Lower Levels of Private Savings and Rely More on Social Security

“Older Hispanics are less likely to have income from private pensions and assets than whites.” 76 percent of all Hispanics over the age of 65 rely on Social Security benefits for 50 percent or more of their total income while nearly half rely on Social Security for 90 percent or more. [AARP Public Policy Institute, September 2003]

Hispanics Have Longer Expected Retirements Making Social Security Particularly Important

Hispanics on average live longer than other racial and ethnic groups. Because of their longer lifespan, Social Security is a key component of their retirement security. According to the Center on Budget and Policy Priorities, “By comparison, a white man who was 20 in 2001 is expected to have 16 years of retirement and a Latino is expected to have 19 years.” Social Security provides a guaranteed benefit every month for as long as the recipient is alive – unlike with private accounts, a worker cannot outlive her benefits. [Center on Budget and Policy Priorities, 5/12/03]

Without Social Security, almost 33 Percent of Older Hispanics Would Fall Into Poverty

Social Security is remarkably successful at keeping retired Americans out of poverty. Without these benefits, almost 33 percent of older Hispanics would fall into poverty. [AARP Public Policy Institute, September 2003] (Related article: AARP opposes Social Security privatization)

The Bush plan will cut benefits by tying benefits to the rise of inflation instead of wages

“Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century.” Younger workers are more likely to be Hispanic than others, thus cuts in benefits for the next generations will have a greater impact on Hispanics working today. [ Washington Post, 1/4/05] (Related article: Why Bush wants to reform Social Security)

Benefits Will be Cut By 45 Percent or More

By changing the way Social Security benefits will be calculated, seniors will see their benefits greatly reduced. “According to the Social Security Administration's chief actuary, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised.” [ Washington Post, 1/4/05]

Bush’s Proposed Cuts Would Replace an Ever-Smaller Share of Preretirement Income

The Bush proposal to change the indexing mechanism used to calculate Social Security benefits will continually reduce the portion of workers’ preretirement income that Social Security will replace. “Social Security benefits currently equal 42 percent of the earnings of an average worker retiring at 65. Under the new formula, that benefit would fall to 20 percent of pre-retirement earnings. Future retirees would, in effect, be consigned to today's standard of living.” [ Washington Post, 1/4/05]

Private Accounts do not Guarantee a Minimum Benefit and Threaten Future Hispanic Retirees with a Greater Likelihood of Poverty

Because current Hispanic workers are less likely to hold other assets or to participate in private pensions or retirement accounts, the risk involved in diverting Social Security funds into the stock market would be more greatly felt by Hispanics than other workers. Several studies have shown that stock market returns are not always better than the guaranteed benefit that Social Security provides – it all depends on timing, and a person cannot choose when they become disabled or when the sole income provider dies. [Bureau of Labor Statistics, Annual Demographics Survey 2002; Economic Policy Institute, 12/22/04]

Recommended article: Most Americans oppose privatization of Social Security

Americans oppose privatization of Social Security

The Pew Research Center for the People and the Press finds that while a growing number of Americans consider the fiscal health of Social Security a top priority, the public is split over the current condition of the program. Nearly half (47%) believe it works pretty well and needs only minor changes; 34% think major changes are required; and only 15% say the Social Security system has to be completely rebuilt. In other words, most Americans do not seem to agree with the proposal for privatization of Social Security.

This is not surprising since most Americans don't appear to be as concerned about their personal finances and retirement as perhaps they should be, according to another national survey by Nationwide, a leading provider of diversified insurance and financial services. Americans also do not appear to pay as much attention as they should to financial/retirmenet planning issues. When Washington is going crazy talking about Social Security privatization, Americans are more focused on the divorce of Brad Pitt and Jennifer Aniston.

In December, the Pew Research Center asked respondents how much they had heard about a proposal that would allow younger workers to invest some of their Social Security taxes in private retirements accounts, including stocks or mutual funds. Only about a quarter of Americans (23%) said they had heard a lot about the proposal, and another 43% said they had heard a little.

The belief that Social Security is in need of fundamental change is most evident among people in their 30s and 40s. Nearly six-in-ten (57%) believe the system needs major changes (40%) or to be completely rebuilt (17%). Younger people ­ those age 30 and under ­ are less persuaded of the need for a major overhaul of Social Security. As expected, senior citizens generally believe the system works pretty well as it is; just 34% say it needs major changes or to be completely rebuilt. (Related article: AARP strongly opposes privatization of Social Security)

Experts believe that younger Americans, who are still awed by the fact that some people that they know became filthy rich during the stock market boom of the 90s, believe that they can do the same if they had access to their retirement savings and online trading account.

There are no significant political or ideological differences in opinions on the state of Social Security ­ about half of Democrats (50%) and Republicans (48%) believe the program works well and needs only minor changes. Pluralities of liberal Democrats (48%) and conservative Republicans (45%) also share that view.

Most Americans Favor Keeping Guaranteed Benefit

Opinion is much more partisan about the idea of introducing private investment accounts into the Social Security program. But, attitudes on this issue also are highly dependent on how the proposal is framed. In summary, when the concept of investment risk is introduced, greater than two-to-one (65%-29%), the public believes it is more important to keep Social Security as a guaranteed monthly benefit rather than it is to allow younger workers to invest some of their contributions, which may cause benefits to increase or decrease depending on how well they do. Support for a guaranteed monthly benefit has grown since fall 2000, when 54% supported this option. (Related article: Privatization of Social Security may hurt baby boomers)

This all makese sense since the U.S. personal savings rate is near record lows and Americans will need Social Security benefits to get through their final years. Numbers from the Commerce Department show households saving just 0.1 percent of their disposable income last October -- one of the lowest rates recorded since tracking began in 1959. Moreover, despite the rise of 401(k) plans, less than half of workers are covered by any type of pension plan, and of those eligible, one in four don't participate. Fewer than 10 percent contribute the maximum amount permitted.

"While it may be easy to know what to do in theory to plan for the future, putting that knowledge into practice can be much more difficult," said Gordon Hecker, vice president and chief marketing officer for Nationwide's financial services company, Nationwide Financial.

Recommended article: Center on Budget & Policy opposes privatization of Social Security