Posted by Ray on April 13, 2010 under Main | 
The privatization of any social program always brings a hot debate between conservatives, liberals and, well, anyone in the middle. Many free market minded individuals think Social Security should be privatized while liberals say no way. Who is right and is it even possible to privatize such a huge chunk of the Federal pie?
First, let’s answer whether or not Social Security could be privatized. The answer is simple, it cannot be and privatization will never, ever happen. Why? Anyone who has been alive for more than 15 years knows that the federal government takes a nice chunk of your paycheck for FICA, basically Social Security and Medicare/Medicaid, but what they do not know, usually, is that the Social Security portion does not go where you might think. There is no actual account for your Social Security benefits instead you build up credits and your payout is determined by what age you retire. The size of your check will vary some depending how long you have worked and who much you put into the system. This is a very 30,000 foot view.
You receive credits into your Social Security account and not a “cash balance” report because there is no cash actually in your account. Believe it or not the government borrows against Social Security assets all the time and gives you an I.O.U. instead – the Social Security Administration is now cashing in some of those I.O.U.’s because they are now broke. You should know this because it means that if the cash flow into Social Security was ever stopped the whole house of cards would come crashing down. In effect, your entitlement program is the largest Ponzi Scheme in the history of scams. It is for that very reason Social Security will never be privatized because all of the lies would be exposed. But, what if we could privatize it?
Is it a good idea to privatize Social Security? That is a complex question and I am inclined to say yes, but with severe limitations. I do not think it is a great idea to put it into an account with only equities because people do dumb things when equities are involved. In my opinion I believe that using a deferred income annuity product would be the best option or some other type of account that has guarantees attached to it. An income Annuity would give the investor much higher lifetime income than you might think. I am also inclined to believe that insurance companies would create a product that would create a greater stream of lifetime income than what Social Security could ever provide.
However, I think some products should never be considered as an investment option. On my list I believe products that involve higher fees should be excluded such as equity index annuities and variable annuities. I am a believer in Variable annuities, but I feel that the current product fees are too prohibitive to make them a suitable option, a new one would have to be created. I am not a believer in equity index annuities, call me crazy but monthly or daily averaging which intentionally lower the rate of return is not a good idea and then throw on caps, yields or spreads and you have a product that is just not good. I am sure someone will disagree with me about indexed annuities, but that is their opinion and I have not seen a product I actually like. Plus when you exclude the dividends for these products it will drastically underperform the market rate of return. In short, these types of insurance products, which I am sure are valuable, are just too complex for a self directed Social Security account and I do not have faith in the government to choose the best products if they were allowed.
I think a hybrid product with a living benefit, which would payout 5% for as long as the owner lives regardless of account value, might be a decent option. They have a lower cost compared to a variable annuity, but provide similar lifetime income guarantees. These accounts also would mandate an asset allocation model that would have to be adhered to or all guarantees are off. Contrary to belief, asset allocation did work throughout the market crisis. Yes, you took a loss even in a diversified portfolio, but a balanced fund only lost 19% and has a standard deviation of 12.7, not bad.
If this were to happen, privatization of Social Security, it would lead to bad products being created since the government has no sense of what is and what is not a good investment for people. It would also lead to great confusion by investors since many have no idea how any type of guaranteed products work or their drawbacks. There is also the possibility that if/when we have another meltdown in the markets the losses incurred by investors would bankrupt insurance companies or whoever is offering guarantees. It is clear that traditional pension funds have not worked, the taxpayer is already making good on those guarantees, which leads me to believe that any type of equity investment options are simply a bad idea.
The only feasible option for privatizing Social Security would be using a traditional income annuity. The risk is manageable and the returns are predictable as well. However, this is all a moot point because it will never, ever, happen simply because if the government did not receive that income from your paycheck they would fold. While I think some investors would benefit from this the larger population would not and the only real winner would be Wall Street, as usual.
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Posted by Ray on October 24, 2008 under Main |
As you probably guessed we read a lot of information. Some of the information we receive comes via email from other, well, unorthodox sources. We like to know what sales people are doing all of the time, especially in these times of panic.
So, we have seen a tremendous rise in equity index annuity material hit the market place. They are saying; “See, we told you these are good and safe investments.” Well, yes you may have not lost any money on the way down, but you don’t make any money on the way up either, so what’s your point?
No matter what, people, these are not good investments if you seek equity type returns. If you want to barely outperform fixed annuities in a bull market then go for this type of product. If you want to make any money in a declining or sideways moving market equity index annuities are the WORST investment you could buy. You would receive the minimum guarantee of 3% on 90% of your principle or maybe on 100% of your principle versus a fixed product that would yield closer to 4 or 5%, depending where rates go.
I am not saying they are all bad, so save the nasty emails sales people, but the vast majority of them are bad. Times like these make people appeal to your fears and you will make a decision you will regret. What is bad today, in regards to equities, will be good tomorrow, but a bad investment today will remain a bad investment for tomorrow.
On word, we get a lot of buy these stocks now, which are all bogus, never buy a stock because you get an email. Probably the most interesting email we received was from another annuity website. You may have seen it, Annuity MD – I refuse to link to it. This site is just plain ridiculous.
He starts out by saying he was an agent (we could not find is license in Michigan where he is domiciled) and was refused appointment by an insurance company because he told people the “truth” about annuities. It is one of those long one page sites, called a squeeze page which is always a warning sign to any web visitor to quickly hit the back button, where he states that you are being lied to the industry stinks and everyone, except for him, is stupid.
He sells his wears for $47 – it was free when he changed his business model to some lawyer to sue insurance agents, but now its paid again – with an up sell of $97 or a $100 and something fee for his “gold” service, whatever that is. Anyhow, we read his material, yes we paid for it, it is rudimentary at best and not even close to the price tag.
He is trying to sell annuities either through a referral program or himself, we never enquired further. I do not know this guy, but I do know that he also used to run the 2 minute workout site as well, an annuity expert that is also a fitness trainer?? Alrighty then, I guess there is some business diversification for you.
So we bought his material which we now use as light reading material when we are, um, well indisposed at the moment to see what it was all about. As we just stated what he sells you get on our site for free, so you make the call. We now get periodic emails from him and what he is up to, this is what we got last week – the exact email, we know there are grammar errors!:
Dear bob (that’s me, like I’d give him my real name),
Before I get to the bad news, I would just like to ask the following question:
What are you doing to ensure that you don’t become a victim to this financial crisis we are in the midst of?
It is no secret that we are in a economic struggle at the moment. The markets are going down in unprecedented amounts and we are struggling finanacially as an entire nation and world.
Unfortunately, the bad news is that this isn’t going to get better any time soon. In fact, we think it’s going
to get much worse before it gets better.
But my question is, what are you doing to protect yourself? Are you taking the proper measures to assure
yourself that you are doing the right thing? Do you even know what the right thing to do is?
Well, here is the good news. We are here to help you. I am proud to introduce the annuity MD Cures(tm) - No it is not trademarked, we checked - Newsletter.
This newsletter is designed to provide Financial Remedies to Help You Prosper in Today’s Currrent Market Crisis. It is
hands down the most actionable newsletter you will read. It is packed with tips and strategies of what to do and how to do it. It is information on what’s working, what’s not, and what to do to not only protect your self, but how to capitalize on this financial crisis we are facing.
Furthermore, because you are on our list, we are offering this to you at a very special price for a limited time. If you are looking for direction, or need help managing your financial future, please take a look at our newsletter. You will be glad you did. You can see our very special offer for you by visiting:
Link Removed, I did not want anyone to even consider buying this bathroom material.
All you need to do is visit that page and we have a very special offer waiting for you. If you are like everyone else, you are wondering where to go and how to handle your financial future. Let us help you. It will be time and money well spent. Again, please click on the link below to take a look at our very special offer.
If you have any questions regarding this offer, please reply to this e-mail and I will be happy to answer any questions as soon as I can. I sure hope you at least consider what we are offering. I am absolutely sure we can provide you with the proper insight you need to make sound financial decisions in this tough time.
Thank you!
Sincerely,
Tony
So I wrote to Tony, here is what I asked:
Dear Tony,
What qualifications do you have in order to provide timely investment advice on this current crisis, i.e. licenses or securities experience?
I have not heard back from him as of yet, that was about 10 days ago. He is selling this news letter for, what he says, ordinarily $99 per month, but is running a special for $47 a month. However, since I am a client I can buy it for only $19.95 a month.
He claims that, and I quote: “When you become a subscriber to this newsletter, it will pay for itself one thousand times over in the money that you’ll save alone! The money you will save and earn as a direct result of this relevant and detailed information can pay you back 1,000 times your minimal investment. What if you don’t invest in the annuity MD Cures newsletter and you end up making one of the mistakes that could cost you thousands of dollars in your future? Furthermore, what if one tip we give you has a significant positive impact on your financial situation (which we believe it will)?”
Talk about fear mongering and profiteering. The point is that there are people who will do anything to make a dollar. This guy is one of them, switching between some rudimentary report to an affiliate of a law firm who sues brokers, WMI or something like that, to now selling this bogus newsletter. It is incredulous that someone would sink to this level.
Just because its on the internet it does not make a viable or worth while product.
The markets have yet to test their lows again, but we are seeing it trading between 200 and 350 down which could lead to a close on the 7800 lows today. However, the last hour of trading is erratic and dangerous to take any position. We are speculating a close of down 400 for the day with Monday being a swing trade day.
Have a great weekend and be careful about bogus sales people.
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