A Bad Plan to Privatize Social Security
So far just one plan has been proposed to establish private Social Security accounts. It is bad for reasons we will give.
How it works:
Some of the your social security tax is put into a private account for you. For example, social security tax is now about 6-1/2 percent of your salary or wages. (There is another one percent for Medicare that bring the total FICA deduction to about 7-1/2 percent). Three percent might be put into yourprivate account and the other 3-1/2 percent is treated as social security tax.
You decide how to invest the money in the private account, for example you could buy stocks and bonds.
But the money taken from social security tax is not yours. It is a loan. When you retire and start to draw money from the account, you have to pay back some of the money each month to the Social Security System. This is called the clawback.
For example let's say that by the time you retire, $100,000. worth of would-be social security tax was put into the account. Let's say that the interest and stock market gains etc amounted to $100,000. giving the account a total of $200,000. You would pay back to the Social Security system one of every two dollars you withdraw. (Actually you would pay back more because you have to pay interest on the money that the Social Security did not take as tax and put into the account for you to invest. )
If you accumulated more in interest and gains, you could keep more of each payment you drew out. If you accumulated less in interest and gains, you would keep less of each payment.
In addition, your regular social security benefits would be smaller because your original social security tax was reduced to make possible this private account.
We think this is a bad plan and, if it is offered then you should not choose it. Now if they proposed a plan without the clawback then that might be worthwhile.
Last updated 5/14/11
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All parts (c) copyright 2011, Allan W. Jayne, Jr. unless otherwise noted or other origin stated.
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