The Big Lie about Social Security

Do you ever dream about what your retirement will look like? Do you plan to visit certain places or volunteer for a certain organization? Maybe you look forward to just taking it easy and getting caught up on your hobbies.

Are you counting on Social Security for a large portion of your retirement income? If so, please read on. What I am going to tell you could help you get to retirement in good financial shape.

We have been led to believe that the Social Security Trust Fund will be there for us when we retire. Depending on your age, there may be some form of Social Security, but it will be nothing like what retirees have enjoyed the last 70 years or so. If you are under 50, chances are, Social Security will not be there for you at all.

This is not new information. In fact, congress was first made aware of the fact that the Social Security Trust Fund was unsustainable way back in 1955. Have they done anything with that knowledge? No, instead they added the Medicare and Medicaid plans to the mix, making the whole system even more unsustainable.

First, you need to realize that there is no real Social Security Trust Fund. The money is collected, checks are cut for current retirees, and the rest of the money is deposited in the general fund to be spent as the government sees fit. There is no investment of our money to help build our retirement funds, it has been spent. All of it.

Second, the demographics of the U.S. are showing a rapidly aging population. Between now and 2030 the number of Americans over the age of 65 will grow from 40 million to 78 million. During this same time, the number of workers supporting Social Security will drop until there are only two workers supporting every retiree.

In 1999, Peter G. Peterson, the chairman of the Council on Foreign Relations and chairman of the Blackstone Group, wrote a book titled, “Gray Dawn: How the Coming Age Wave Will Transform America—And The World.” In it he estimates the total unfunded liabilities of the Social Security Trust Fund to be $10 trillion. That was 1999. Now that number is estimated to be in the range of $77 trillion. That’s trillion with a “T.”

What if the government were to wake up and try to fix the problem? Well, according to Peterson, in 1999 it would cost the government $750 billion per year for the next 30 years. Add to that Medicare and the annual amount jumps to $1.5 trillion per year. Now, the total U.S budge is expected to be around $2.7 trillion for 2008. That means the over 50% of the current budget would have to be used to fund these two systems and that is based on 1999 figures not the larger more recent number of $77 trillion.

If the government is not funding Social Security, Medicare and Medicaid then how will the government pay the recipients? There are only three ways: (1) collect more revenues; (2) borrow the money; (3) print the money. The results: (1) a tax revolt; (2) rising interest rates and a collapsing economy; (3) the destruction of purchasing power and also the lifestyle of anyone dependent on Social Security. Not a pretty picture no matter how old you are.

What this means is that most of us will have to continue working to make ends meet and we must set aside funds to sustain us when we can no longer work. If the government will not or cannot do it then we must.

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The Big Lie About Hedge Funds

Hedge funds are really making the news. About half the news is bad, blaming hedge funds for everything from market sell-offs to global warming. The rest of the time the news is gushing about the fabulous returns that hedge fund investors are banking every month.

So whom should we believe? Well, I am pretty sure that hedge funds are not responsible for global warming but the surprising truth is that most investors are not doing any better investing in hedge funds than they would investing in the stock market. And probably a lot worse.

Hedge funds differ from mutual funds in that they restrict the type and number of investors that may participate. Approved investors must own at least $1 million in assets and have an income of at least $250,000 a year. Apparently the regulators believe that people who fall into this category are better educated and sophisticated enough to understand the risks they are taking. (Be glad you do not fall into this category)

By doing this, hedge funds do not have to follow the same regulations that mutual funds must adhere to. Hedge funds can charge higher fees and often use leverage and invest in derivative investments that mutual funds cannot use. Hedge funds also do not have to report results like mutual funds and so you will read only about the highflying funds while the losing funds are closed and quietly fade away. This little known fact causes the estimated returns of hedge funds to appear higher than they really are.

Hedge funds really only benefit the fund operator who charges a set annual fee of 2 to 4 percent plus a performance incentive of 20 to 40 percent of gains. George Soros, founder of the Quantum Fund in the late 1960’s had a few good years and made some money for the original investors as well as for himself. Eventually the fund busted so bad that it had to be shut down. Most of the later investors lost all of their money, but how did Soros fair? An exact number is hard to determine because hedge funds are not required to divulge results but a New York Times article in 2004 estimated that Soros was worth more than $11 billion and that most of that money was attributed mainly to his management of the Quantum Fund. Not bad work if you can get it.

Hedge funds like most investment advice and management firms draw most of their revenue through fees. Most investors read the financial press or watch financial TV and believe that these professionals are earning their fees through exceptional performance. However, the facts just do not bear this out. In fact, the best money managers typically under perform the overall stock market by the amount they charge for management fees.

For this reason, average investors can and do out perform mutual funds over the long haul. Avoid the big lie about hedge funds and secure your financial future.

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