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How Can the U.S. Transition to Personal Public-Private Social Security Saving Accounts? Options for risk adverse investors in a post “Great Recession” world
+ = ? Matias Zelikowicz 3-30-2012
Social Security Basic Facts
Created in 1935. It is a social insurance program that provides benefits to retirees and unemployed
Funded by payroll taxes (employees & employers)
Represents 39% of income during retirement
Organized as a PAYG-defined benefit plan
Social Security: From Surplus to Deficit
Number of Workers for Every Social Security Retiree Is Falling
1950 1960 2011 2035
Source: Social Security Trustees Report
1940
42:1 16:1 5:1 3:1 2:1
Key Issues for the Current Social Security System
• Unsustainable fiscal trends
• Demographic trends
• Poor returns inside its trust fund
Objectives of Potential Reforms
• Protect investor’s retirement savings
• Increase real returns inside retirement accounts
• Transition to a sustainable retirement system for workers
Other Popular Retirement Plans:
IRA
457/403b
401 (k)
Private DB Pensions
Social Security
Defined Contribution Defined Benefit
Pension Assets are Shifting Away From Defined Benefit Plans (%)
IRAs Defined contribution Defined Benefit
Trillions $3.3 $10 $15
1990 2000 2010
Asset Class Performance 1978-2010
Argument for Privatization
The Lost Decade
Cash is not King
Investor’s Challenges With a Defined Contribution Type Plan
1 NO PARTIAL PRIVATIZATION OPTION
• Increase payroll taxes to pay for the baby boomer generation retirement
• Cut benefits for younger workers
2 PPPSSS
• Provides diversification with insurance
• Eliminates market risk (MLCD)
Policy Alternatives
• Managed by the Social Security administration
• Invest ½ of social security taxes into PPPSSS
• Pass it on to your children • Account would become private
property • Minimizes credit risk (FDIC)
• 24 % benefit cut • 30 % increase in payroll taxes
Investment Options Inside PPPSSS Accounts
Certificates of deposit that pay a return based on the performance of a market index, i.e. S&P 500.
Provide the safety and security of FDIC insurance.
Guarantees principal protection*.
Allows investors to participate in the potential market upside of stocks, commodities, gold etc.
Financial Instruments are managed and constructed by AAA rated banks.
PPPSSS Investment Options
• Guaranteed Return of Principal
• Potential Upside Participation
• FDIC Insurance
• Diversification
In the Future These Will be Your Choices
401K 403b
LTC
IRA
MLCD
U.S.T-
Bonds
PAYG
Qualified non-taxable transfer
PPP SSS
Do I Need to Become a Financial Engineer to Invest in MLCDs?
Example: $1000 Investment 4 year S&P 500 Max 64% - Min 2%
How Do PPPs Work? Market Competition
Bank A
Bank B
Bank C
2 Year MLCD S&P 48% Cap
2 Year MLCD S&P 47% Cap
2 Year MLCD S&P 45% Cap
Ranked #1
Ranked # 2
Ranked # 3
PPP SSS
2 Year Gold vs. 2 Year Gold MLCD 48% Upside Cap (1970-2010 nominal)
2 Year Gold MLCD 48% Upside Cap vs. 2Year T-note (1980-2010 nominal)
0%
10%
20%
30%
40%
50%
60%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
2 year t-note MLCD GOLD
2 Year Gold MLCD 48% Cap Point to Point vs. 2 Year Gold MLCD 48% Quarterly Cap Structure
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
mlcd 2 year return Point to Point mlcd 2 year return Quarterly Cap
From Crisis to Opportunity
From Crisis to Opportunity
