Let’s K.I.S.S. Social Security Goodbye: Part 2

The Private Sector can do it!

We have all the tools and expertise in place now to fix this financial mess without ever making the drastic mistake of delegating investment responsibility to the general population. Allowing individuals to pick and choose from a selection of funds will undoubtedly fail, will continue the mythology of Wall Street brilliance, and will exacerbate the retirement income problem for future generations. As tainted as our Financial Institutions are, as self serving and conflicted as they have been proven to be, they still do have the wherewithal to deal with the Social Security problem. But we need to get them back to the basics of investing. We need to create a non-commissioned and non-competitive environment for the sole purpose of providing a floor of Retirement Income (not a portfolio of securities or a high net worth) for plan participants. 

          We can’t allow the Institutions to use their fee laden, unproven, product creations to provide retirement benefits when what we really need is their old fashioned skills with stocks and bonds... the old safety net, slow growth approach to amassing income generating wealth. There is no need to risk the whims of the marketplace when income is what people need in retirement. The Trust Fund needs to generate guaranteed income, and there isn’t a mutual fund of any color alive that can legally do that. In fact, the proper financial solution would never look in the direction of a Conventional Open End Mutual Fund, an Index Fund of any kind, or any other of the huge array of peripheral types of products, contracts, and speculations that exist today, period. On the day I retire, Uncle, I want to know precisely what my monthly supplemental income will be...without worrying about what’s going on in the financial markets. Yes, we know how to do that, it just doesn’t involve the glitz that Wall Street likes to sell! 

          K. I. S. S. the complications and competitions goodbye! This is an easy job for an old concept...an old concept with a whole bunch of new rules. And even with strict qualifications for a financial entity to become a Social Security benefit provider, hundreds of banks, insurance and annuity companies, and brokerage firms would qualify. And we can even let them make a large sum of money in the process.

 Investment Rules:

Any established and profitable Financial Institution will be able to offer a single Social Security Retirement Program.

Every participating institution will use the same general plan to provide the benefit levels established by the Social Security Administration in pretty much the same manner as they are now. Each approved entity will establish one segregated Trust Fund that will be allocated at least 75% to Fixed Income Securities of various types, but of only Investment Grade Quality.

Only pure securities (no zero coupon, hedged, or gimmicked varietals) are eligible for inclusion. The remaining 25% may be invested only in Investment Grade Value Stocks (including ADRs, and managed, non-index, CEFs…both of appropriate quality and income potential). In other words, a very conservatively managed (100% immediately vested) Group Pension Plan (with a named manager, not a committee). One manager, with appropriate research and administrative staff, backed up by assistant managers, a dedicated trading operation, etc. Researchers will be looking for Investment Grade Securities, not the next series of high risk and high media attention IPOs. (The SSRIA is another alternative.)

Asset allocation is determined using the Cost Basis of the securities in the fund. [Failure to do this is what makes defined benefit plans so unpredictable and expensive for corporations, particularly those with Cash Out benefits. Here we are dealing with a total contribution amount and a monthly benefit amount. There is no Market Value number entitlement involved. The fund generates the income needed for the retirees. Income generation is king. Market Value is not particularly relevant in securities where quality and income is maintained.] 

There is no (we can predict the future) allocation to Cash or to other artificial product orientated classifications of capitalization, global presence, sector analytics, etc. (other than a reserve for the next three to five months of benefits). Managers are expected to operate within acceptable diversification standards within both the fixed income and equity asset allocations. This is not new. It is an old fashioned method that has always worked to provide retirement benefits. It still does. No two funds will be identical on the inside, but they all should be able to get the job done. At the SSRP, Income is Job One!