Category Archives: Retirement

Is Social Security a Ponzi scheme?

Is Rick Perry right or just looking for attention?

Hi Dad,
I’ve seen Rick Perry stating that Social Security is a Ponzi scheme.  I’m hesitant to buy into that view.  Slate Magazine put out an article examining – What would happen if we stopped Social Security right now.  
What do you think of Rick Perry’s statement?  Do you think we should get rid of Social Security?

 

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Cartoon courtesy of: Nate Beeler, The Washington Examiner, Washington, D.C.

 

Dear Daughter:
This cartoon appeared in the Sunday paper yesterday. It pretty much illustrates the reality of the situation. Perry needed a sound bite and he got it. 

The Truth about Social Security

The truth is more like the statement on the left. The Social Security funding methodology was developed at a time when the workforce was young and growing; where the population at work outnumbered the population in retirement. There would always be enough workers paying in to cover the blueheads drawing out. Now, of course, we have a burgeoning baby-boom generation that will (at the current pace) suck the system dry faster than you kids can replenish it.

The problem with Social Security in 2011

The problem (aside from the upside-down funding) is the expectation that Social Security will provide your average worker with a quit-and-go-fishin’ retirement. It wasn’t intended to do that and it can’t. It’s a safety net; a supplement; that’s all.
Back in the 80s, two things happened that make this all the worse. A change in the Financial Accounting Standards Board (FASB) rules required companies to fully fund their qualified pension plans. That made it a lot more expensive for employers to maintain traditional Defined Benefit plans. DB plans are the ones that provide a worker with a guaranteed annuity at retirement. They also put all the investment risk on the plan sponsor (the employer). Second, a financial advisor looking for an advantage for his client discovered an ignored chunk of the Internal Revenue Code in section 401, subsection (k). It’s a nice little tool that allows an employee to set money aside on a pre-tax basis to save for retirement. Only problem is, it’s too easy to get at your money out before retirement and all the investment risk is on the participant (that’s you) not on the employer. End result – employers are shutting down their pension plans and shifting the responsibility of your retirement back on you.
Oh, your question.

Inflammatory silliness

Yeah, Perry’s Ponzi Scheme comment is just inflammatory silliness. You will get a benefit from Social Security. You will likely have to pay more for it and wait longer for it. You should support federal level politicians who understand finance and who talk about restructuring Social Security funding to a system where YOU get out what YOU put in. There should be a cap on income that is replaced, but no limit on income that is taxed.
And don’t stop contributing to your 401(k).
Love,
Dad
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Dad says: Do your taxes!

This is the first year I’ll be filing my own taxes.  I’m using the free Turbotax online Federal tax forms.  But that comes without professional advice. so half way through the process, I call my Dad:

Me:  How come there’s a running counter on the top that says how much tax is due? I thought the whole point is to get refunds …

Dad:  The early part of the process records how much you made, so from its perspective you owe taxes. After that, you start to record how much you, a) have already paid in taxes (i.e., withholding) and b) have paid to other things for which you deserve a deduction (e.g., charities). The the amount that you owe exceeds the amount you have already paid or deducted than you will have to pay additional tax. If that which you have already paid exceeds the amount you owe, then you get a refund. You true objective should be to come out exactly even.

If you get a big refund, it’s because you paid the government too much tax during the year (for which they paid you no interest while they held your money). This year, you were a working stiff for the entire year. While your withholdings will likely offset what you owe on your salary, your interest and dividend income is still taxable. You will likely owe taxes.

Me: gah!  Thats not fair. I didn’t do anything to them. They’re the ones that messed up if they didn’t take it out right.
Dad:  Welcome to the working world. You can have your withholding adjusted so that they take more or less.  The IRS never messes up. Only you mess up.  California taxes will be a whole other issue. Turbo Tax is not going to give you that one for free.

Me: boo

Dad: You could fill out the actual forms. That’s free.

Me:  I could do that and probably find free advice online.  So, I’m going to ask a question that I could look up
but I’m lazy.  Are u supposed to have an IRA and a 401k?

Dad: It’s OK to be lazy. It gives me value.

Me:  haha   Write a blog!  Maybe someone will find u and give u a book deal!

Dad:  It would be very good to have a Roth IRA as well as your 401(k).  That’s nice of you to say. But I don’t right that good.

Me: Is a Roth IRA better than a traditional one. I found this website that explains it but i don’t see the difference
.

Dad: Different rules of eligibility, different contribution limits and different tax consequences. Roth is better because you will never (providing the law doesn’t change) pay tax on the earnings.  Different withdrawal rules too.

Me:  What if I die when I’m 30? who gets it?

Dad:  I do.  Then again, maybe it’s the person you designate as your beneficiary.

Me: I’m watching this Charles Dickens mini series and it’s about a will what wasn’t written correctly and the court case has gone on for generations but eventually all the money was used up in court fees and all the descendants failed at life cause they had been planning on the money.

Dad:  Something about counting chickens and eggs hatching …
Make sure you designate a beneficiary for your 401(k) also, so the the Governator doesn’t take it away.

Ladies and gentlemen, that is the inaugural post / test run for A Dad’s Advice
Thanks for reading!

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Filed under Retirement, Taxes