In Congress there is a current debate over the extension of the payroll taxes. Payroll taxes is liberalese for Social Security taxes – a term that is used whenever it is desired to make Social Security taxes seem like a tax and then not connect it to Social Security. (The term Social Security contributions is used whenever it is desired to make the system look like a pension program.)
As I’ve stated numerous times in the past, the Social Security program will not be there providing benefits whenever anyone who is reading this and whom is under 50 is ready for retirement. Those who are 50-55 may also not see any benefits. (The tax will likely still be there since taxes die very slowly.) There is nothing political about this assertion, it is simple mathematics.
Social Security is designed to be a pay-as-you-go system, in which people who are working pay in money that is collected by those who are retired. The expectation then is that those who are working now will be paid by those who come after them. Theoretically the amount that is paid in should be scaled to match the amount needed by those collecting, but in actuality the excess is simply put into the general fund through some accounting gimmicks and then spent.
The trouble is that a huge number of people are set to retire in the next few years. This means that a lot more people are going to be collecting Social Security and for a longer period of time, given advances in modern medicine. Unlike a traditional pension fund where the excess money that had been paid in by this large number of people would have been sitting there in equities, the excess money was spent. This means that either those whom are working now will need to pay more to cover those who are retiring or those who are retired will need to be paid less. Neither one of these options is politically popular, so I would expect payments to be made as long as possible until either a group of more responsible individuals are elected who wind down the program or the government runs out of money and the ability to borrow more entirely and is forced to stop paying.
Even if the program were to survive, however, the amount that one receives will be far less than one would have received if the same amount of money were invested in a private account. This is because invested privately, the money is used to fund businesses that grow, creating value, which in turn would provide a substantial profit on the investments. The current system can only return what the Government can extract from the taxpayer.
The current payroll tax holiday, however, provides an opportunity to receive those private account returns without finding any more money to invest. Simply take the extra amount you are receiving each paycheck and use it to fund a private IRA account. Because this is money you would not be receiving anyway if there were no payroll tax holiday, as long as you resist the urge to spend it on things you were not buying before, this money should be readily available. As added incentive, realize that reducing the amount people are contributing to pay Social Security benefits is only hastening the demise of the system, so personal savings will become even more critical.
If you like the idea of saving your money in a private account, perhaps drop your representatives a line asking them to preserve the payroll tax holiday indefinitely and increase the amount that is allowed to flow into your IRA each year by a like amount. To pay for it, we can simply reduce the future Social Security benefits that you would receive. I’m doubtful that you would receive them anyway, so it should not be any big loss to lose them.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.