Magazine article Insight on the News

An IRA Option Could Benefit Elderly, Rescue Social Security

Magazine article Insight on the News

An IRA Option Could Benefit Elderly, Rescue Social Security

Article excerpt

During the presidential campaign, Bill Clinton said of Social Security: "It's solid. It's secure. It's sound." But the truth is that for many young Americans, Social Security is terribly unfair. For them, it will pay back less than they paid in, cheating them of their money and their future.

Suppose your uncle put this proposition to you: Give $250 out of your earnings every month for the rest of your working life, and when you retire I'll return 90 percent of all you paid me. Okay?

That is the deal Uncle Sam is requiring single people who earn average salaries to accept in the Social Security system.

But what if you invested that same $250 a month in an individual retirement account? A market return of just 3 percent a year (the Standard & Poor's 500 has averaged 7.4 percent after inflation during the past 63 years) would give you an annual retirement income of $34,580, compared with Social Security's $14,398. If you were married and your spouse had earned an average salary, the IRA option would give you a $61,000 annual retirement income as opposed to Social Security's $31,000. A more realistic market return of 4 percent or 5 percent would widen the disparity to three times the retirement income provided by Social Security.

This little bit of arithmetic simply illustrates a point made recently in BusinessWeek: The higher your salary, the lower the return will be on your Social Security investment, A young person making an average salary of $20,000 will see only 90 percent of his money back; one with a $57,000 salary will see only 60 percent In fact, almost all average or high-income earners who retire after the turn of the century will receive a negative rate of return on their lifetime Social Security contributions.

That's a big tax, a hidden tax. It's grossly unfair and it isn't what Social Security is supposed to do for us.

But there is a straightforward solution: Give people the option of investing their retirement contributions in their own IRAs.

For the young, it makes a lot of sense. Stay with the Social Security plan if you want to or if managing your own retirement funds makes you uneasy. But if you want to try for a higher retirement income, the market option allows you a chance to increase your savings at market rates. …

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