February 10, 2005
Social Security Annuity Flaw
Aside from all the political arguments and speaking strictly as an investor, there is one huge nonpartisan flaw with the privatization proposal that is being proposed. If our guaranteed Social Security benefits would end up not reaching the poverty line on the day we retire, then our private accounts would have enough money taken out of them to make up the difference, and converted into an annuity.
The reason this is a flaw is because we cannot control the performance of our money in the short term. Investments fluctuate a lot on a day to day basis. Two people can have similar investment amounts and similar performance, but if one retires on a one-day spike, and another retires on a one-day crash, then it affects the entire rest of their life, to a significant amount.
Our job as investors, especially as we get older, is to protect ourselves from risk when we get our money out of the market.
So here's the poison pill. What is the way to protect ourselves from having a chunk of our money all taken out on one day that, from the perspective as an investor, is arbitrary?
We do everything we can to make sure that our social security benefits will at least match the poverty line. We do everything we can to keep the forced-timing-annuity from happening.
What does that mean for the percentage amount we privatize? It drops, a lot. I don't have an estimate at this point, but I believe there will be a minimum amount we will have to send to social security in order to protect the poverty line.
I am pretty sure that it means that it would only make sense to divert money to private accounts if you make above a certain sum of money.