MaXJohnson said:
If I understand it correctly, the Presidents plan:
a. only affects a small percentage of your SS deduction, topping out at 4%. I could see this being upped to 10% if the plan is a success.
b. is optional. You don't have to participate if you don't want to.
c. restricts how you can invest the optional amount. You would have a cafe plan of investment funds to choose from.
d. isn't paid out all at once. It's a long term investment so it can survive market downturns.
e. will likely be covered by some sort of goverment guarantee similar to how the FDIC covers bank deposits.
f. sounds good to me. I'm on the bubble.
Yes, remember the government will always get theirs first, but the proposal is a step in the right direction.
SSI/FICA is the only FLAT TAX the government applies to (almost) all employees.
The FICA flat tax is now 12%: 6% paid by the employee, and 6% paid by the employer (just think all these years you were actually getting paid 6% more than you thought you were).
What was the FICA fix in the mid 1980's? They raised the FICA flat tax from 4.7% to 6% (from 9.4% to 12% if you count the employer contribution). They also increased the age required to draw full benefits (for people who were in their 20's at the time of the fix it increased from 62 to 70 years old). The topping out income (when FICA is no longer collected) was raised from $65K to $87K (IIRC).
The fix gained an instant 3.6% increase in revenue for the government (per contributor), and up to an extra eight years of life long deposits (that's more than a 10% longer contribution term, per contributor), and an extra 12% of $22K for every "high income" contributor (another $2,640 per year from the "wealthy").
What do we have to show for the 12% (the extra 3.6%) contributions over the last twenty years? SSI/FICA is now a cash cow for the government until 2042 (as opposed to 1994 under the old plan). This is when the annual expenses will exceed the annual contributions (when the annual cash given to plan participants will exceed the annual cash collected by contributitors). SSI/FICA has never spent more than it collected in any one year, but the politicians have borrowed against the surplus collected every year.
SSI/FICA will not cost the treasury anything or increase the national debt until sometime after 2042, but it will become less of a blank Flat Tax check for politicians to spend without representation.
The Bush plan is an attempt to allow contributors to place an amount like the 3.6% increase in contributions from the 1980's into private accounts (rather than into the general SSI/FICA fund pool).
What does this do for you? Let's say you collect 3.6% of $60,000/year over twenty years? How much is this? $43,200. Add in the benefit of a modest return (6%) and it doubles in ~ten years. The initial contributions double twice (or more) in twenty years, and hopefully your income increases too, but in any case it is not unreasonable to expect the account to end up holding $100-$130K.
$130K is an extra ten years of $1,100 a month checks (I better start exercising to live that long, with the extra they collected over the last twenty years)!
Increase the term of that 3.6% investment to fifty years (from 20 to 70 years old like SSI/FICA) and the return can easily cash out $1,100 a month for thirty years (keep paying you benefits equal to SSI/FICA until you are 100).
If you can accomplish this fiscal peace with only 3.6% of your income invested, and at only 6% interest, what is happening with the 12% SSI/FICA collects now? The government is spending the difference each year, spending it like a flat tax but not calling it a tax.
The Bush plan calls for the 6% employer contribution to always remain headed to the SSI/FICA fund (even if you will never collect it). The plan with the most support calls for an employees initial 2% to SSI/FICA and 4% max to a private account. SSI/FICA will always be funded 8% of your income, regardless if you will ever receive anything.
Later modifications are proposed to allow the employee to invest up to 16% of his income in a private account, above the 8% mandated to go into SSI/FICA (a total of 24% of your annual income invested in SSI/FICA and tax differred accounts).
Serious doubts about the harm of market speculation will likely force the returns into less attractive investment performers (and the government wants a 0.3% maintenance fee), so the return is not likely to double for fifteen or twenty years (poor 3% interest rate). The fifty year term still has the investment pay out better than the current SSI/FICA (even with 1/3 the capital investment).
Take the equivalent investment in a 401K (even 8% of your income), with a few funds posting 10% returns, and you will never need to draw SSI/FICA.
