December 1, 1996

Year End Change

          "Charge" up your credit cards before year end. Deductible expenses that are charged on a credit card by December 31 are deductible even though the charges are not paid until the next year. For example, medical bills and charitable contributions. But this only applies to general purpose cards like Mastercard, Visa, American Express, Discover and Diners Card. It does not apply to store cards.

50%

          Olivia Goldsmith, the author of The First Wives Club, recently said, "Any woman needs a really good gynecologist, a really good hairdresser, a really good stock broker and a really good accountant." Two out of four isn`t bad.

The Biggest Deed

          The most important act that William Jefferson Clinton did during 1996 was turn 50 years of age. By his act, he focused attention on the major color issue in America today, turning gray. To put in perspective how baby boomers dominate America; in New Jersey, one out of three people, and one out of two adults are boomers. Now, this generation is poised on the brink of wrinklehood and advanced middle-aged spread. Every four months for the next 18 years another boomer in New Jersey will turn 50. The first boomer will turn 70 by 2016. The graying of New Jersey and the United States will be complete.

The Most Important Debate Starts Now

          Clinton, Dole and all the rest avoided discussing the most important issue for Baby Boomers and those who follow. Except for Steve Forbes who naively believed the public was ready to hear reasoned discussion and not irresponsible demagoguery.

          Social Security as we know it is about to disappear. With it will come some of the most important financial consequences to you; and an opportunity to make a lot of money if you act now. More on this later.

          In Social Security`s place will likely be a federal retirement system that forces today`s workers to save more on their own and that pays out smaller benefits. Most dramatically, a portion of the tax dollars now flowing into the Social Security Trust Fund will probably be invested in the stock market rather than in ultra safe government securities, as is the case today. 

          Nebraska Senator Bob Kerrey, advocate of entitlement reform says the time to change Social Security is now.

          According to a 1996 report, the Social Security trustees say that in 2012 the taxes paid into Social Security will no longer cover the benefits being paid out as boomers begin retiring; so taxes will have to rise, benefits will have to be cut or the government will need to borrow in order for the trustees to redeem the government securities the trust fund has invested in.

          A group of reformers are pushing for what until recently would have been considered a radical change in the system; partial privatization. They say that a portion of the payroll taxes that currently fund Social Security should be invested in the stock and bond markets to pay today`s workers a presumably better rate of return. The idea is gaining momentum.

          This is an important financial opportunity. If so many additional funds will be flowing into the stock market over and above the amounts discussed in my April newsletter then funds invested prior to this seismic shift in the stock market will reap a windfall.

          The key issue that held up Clinton`s thirteen member Advisory Council on Social Security was not whether a portion of Social Security should be invested in the stock market but how much to privatize and whom to entrust with the investing decisions.

          To alleviate concern that people with little or no experience in the markets would make bad investing decisions some privatizers believe that individuals should be restricted to a limited array of stock and bond funds. Some of those would be index funds, a basket of stocks or bonds that holds shares reflecting the overall market. This way, individuals wouldn`t need to worry about choosing the wrong stocks at the wrong time. Of course, if the market headed south, the whole basket would be hit and might not earn the returns you need to have a comfortable retirement.

          The following are the five major options, with brief descriptions that will be discussed in the coming months:

1. Personal Security Accounts (PSA)- backed by five members of the advisory council, your 6.2% share of the Social Security payroll tax would shrink to 1.2% and the difference would be invested in a PSA which you would open at a bank, brokerage, mutual fund or insurance company. You could invest that money in an broadly available financial asset, from blue ship stocks to junk bonds. At age 62, you could start withdrawing your contributions plus their earnings, tax free.
2. Personal Investment Plans (PIP)- Senators Kerrey and Simpson favor two percentage points of the 6.2%, about $500 per worker, to be diverted into PIPs. This could be invested into an IRA and invested virtually any way you choose or in a selection of three funds; a stock index fund, a bond index fund and a Treasury Securities Fund. To help keep Social Security solvent the Kerrey Simpson plan would earn higher returns than the trust fund now earns by gradually investing 25% of the trust fund in a stock index fund.
3. Individual Accounts (IA)- two council members favor you paying an additional 1.6% into an IRA type account.
4. Maintain Benefits Plan (MB)- six members favor raising the tax rate by 1.6% and investing 40% of social security in a stock index fund.
5. Raise Taxes and Cut Benefits- self-explanatory

           If you have any questions about this or any other financial matters, please call me.