February 18, 2005

Commentary

Another Delightful Crisis: Social Security

By Ronald L. DeLegge Rodriguez

Life before Social Security was so much easier.

Employees had larger payroll checks.

Employers didn’t have to fuss with inept accounting software to calculate FICA formulas.

And how about the U.S. government? Financial subcommittees didn’t have to devise half-hearted schemes to make everything look fine. Strategies like raising the eligibility age to immortal levels just to collect benefits, simply weren’t necessary. To our best recollection “privatization” wasn’t even a word.

Before the invention of Social Security, individuals were responsible for their retirement well being, not the government. Guess what? After Social Security, individuals will be responsible for their retirement well being, not the government. The more things change, the more they stay the same.

“Nothing quite compares to having America’s evaporating retirement fund partially managed by reformed crooks.”

It doesn’t matter who you believe. Whether it’s the doomsayers that forecast Social Security to begin running cash-flow negative in 2018 or the frolicking passivists that say the “trust fund” is set until 2042. Believe whomever you wish. Also, believe and know that the current state of Social Security is a short-fused time bomb.

One of our favorite problems with the Social Security conundrum is that the government keeps spending payroll taxes earmarked for benefits on things not related to Social Security. Another fun predicament is that the demand for Social benefits will soon exceed the amount of money required to keep the plan cash flow positive. And lastly, our favorite delight with Social Security is that the trust fund can’t keep pace with inflation.

Referring to possible solutions for Social Security, Senator Lindsey Graham (R-SC) said, “No idea is off the table.”

If Senator Graham’s words are true, then perhaps Social Security should take a lesson from Major League Baseball. It’s worth investigating if Barry Bonds can mail some of his unused steroids to Washington D.C. Think about it. In less than two years Barry went from 35 home runs to almost 75 by using his secret rubbing cream. What would happen to the Social Trust Fund’s trillion-dollar asset bag with a little juice? Too bad steroids only work for aging home run hitters and not on money.

Now to the part of Social Security theater that captivates us most - privatization. President Bush has formed a commission to propose a plan for establishing personal investment accounts. The plan would allow workers to divert 2% to 4% into these private accounts. The remaining portions, along with employer payroll taxes, would go into the system to fund the benefits of current retirees. How would the White House pay for this? The same way U.S. consumers pay for their lawn furniture at Home Depot; by borrowing.

As one might guess, the President’s talk of privatizing part of Social Security has Wall Street’s largest money managers in an erotic-like frenzy. Just imagine how already fat profit margins would look if the U.S. government cuts loose trillions of dollars for them to manage. Fund executives and portfolio managers could then upgrade their aging Ferraris for something more refined like a Maybach or Bentley. In case you didn’t know, Ferraris went out of style around 1986 when television producers replaced Tom Selleck’s Magnum P.I. with Knight Rider.

“Too bad steroids only work for aging home run hitters and not on money.”

While it might not seem possible, there is something far more ominous than the crisis of Social Security itself.

Worse than letting the system bankrupt into oblivion would be to entrust its privatized portion to Wall Street’s asset looting gang. If we believe Social Security is in trouble now, it would be unequivocally toxic in the hands of wolves, snakes, and vultures which operate under alleged umbrellas of legitimacy. As if the fees on the $7 trillion in mutual funds and $1 trillion in hedge funds wasn’t sufficient enough to support their excess! These are the same fringe groups that call thievery professional money management.

It’s not hard to visualize the ineptitude that awaits Social Security’s investing public. In the front of the line and fighting for their portion of privatized managed accounts will be the same reckless ringleaders implicated in the 2003 mutual fund scandal. Nothing quite compares to having America’s evaporating retirement fund partially managed by reformed crooks. It’s a virtual certainty the genius minds in Washington, Boston and New York will maneuver a way to make it possible. You didn’t actually believe the escapade of foolishness would end when government regulators imposed nano-sized billion dollar fines? Did you? One shameful episode supersedes the next.

What about the investments in privatized accounts? The menu should not include mutual funds exclusively, but also ETFs, annuities, and other qualified investment alternatives. Mutual funds should not be given preferential treatment. The investment options in privatized accounts are not for Wall Street or Boston’s high society to influence or decide. Since when besides always do these untamed hegemons get to run the show? Logically, a fair and balanced approach is required and they don’t have either.

It seems to us that index funds, particularly exchange-traded funds would be a natural fit for privatized accounts. The time tested rigor of indexing coupled with reasonable management fees are hard to beat. Whatever the case, an equal opportunity choice of investments should be available for America’s savers. Only then can Social Security avoid future debacles like the one it’s in right now.

More fun and games later. Back to decorating our cave.

Ronald L. DeLegge is the Editor of ETFguide.com and co-principal of Enforte Financial Services, LLC - a leading investment advisor that specializes in ETF strategies.

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