Buyer Be Wary
November 17, 2006
I see in today’s Bozeman Daily Chronicle that Senator Baucus has taken Social Security privatization off the table. This is good news indeed – though the issue had pretty much died on its own, I am glad to see the coffin lid closed.
Privatization is a big subject that got a thorough vetting when Bush proposed it in 2005, so I have just two matters to address regarding private accounts:
- Administrative fees represent a drag on investments, and they accumulate over time. According to the Senate Finance Committee, on average, the drag on Social Security payments caused by overhead represents about 3% of payments to beneficiaries. In the private sector, that drag is 23%. That is, ultimate payments to beneficiaries represent 77% of the total of money invested and earned over time. The rest goes to pay brokerage houses and sales agents.
- A private pet peeve – I once invested in American Funds Capital Income Builder – a solid fund with a good track record. However, and through my own negligence, I did not know that I would be charged a 5.5% entry fee. This is true of many mutual funds, and if you know it going in, fine. However, when mutual fund salespeople quote to you the average return for investment for various funds, they neglect to factor in sales commissions. So when you read that Capital Income Builder scored a 10% average return for its investors, do some quick math. For new investors, it’s more like 4.5%. Often it takes a year or more to get back on equal footing after investing.
Anyway, that’s the marketplace – buyer beware. It’s good to have Senator Baucus at the door to the hen house for now.
November 17, 2006 at 1:47 pm
[...] Max Baucus has taken the privatization of Social Security off the table: “It’s good to have Senator Baucus at the door to the hen house for now.” [...]
November 18, 2006 at 8:45 am
“it’s more like 4.5%.”.
That still beats the average of something like 2% most people get from social security. I’ve been told some black males actually get a negative return on social security. Not sure how they came up with that. It’s probably because of their shorter life span.
You could probably beat social security’s returns by simply accumulating money in a long term saving’s account.
November 18, 2006 at 9:30 am
Fred – I suggest you go out in the marketplace and price a product that does the following:
Provides a life annuity in retirement equal to a third or more of your working income;
Provides an immediate annuity to your children until they are eighteen should you die;
Provides a life annuity to your spouse should you die before her; and
provides disability insurance to you.
I guarantee you that 1) you won’t find such a product, and 2) that if it existed, it would be unaffordable.
We have Social Security for a reason – back in the 1930’s, our senior citizens lived in extreme poverty. The marketplace did not provide for them. SS stepped in, and it is the pride of our country that we have some of the healthiest and wealthiest seniors on the planet. To go back to the old way would be a mistake.