Rep. Ryan's Plan to Save Social Security

It has been known for 60 years or so that a huge cohort was moving through the U.S. population like a swallowed pig through a snake. Commonly called the Baby Boom generation, these 76 million individuals are now beginning to enter their retirement years, putting a strain on Social Security.

Although Congress and numerous Presidential administrations have had nearly 60 years to deal with this, it has been regarded as too sensitive, becoming known as the "third rail" of American politics.

Stepping bravely (or foolishly, depending on your point of view) towards this highly-electrified subject is Rep. Paul Ryan (R-Wis.), who last week issued an alternative to the Obama Administration's budget.

Although Ryan's budget plan did not address Social Security, it's an issue he addressed previously and his proposal is generating a lot of interest on Wall Street if nowhere else.

Ryan proposes to let workers under 55 invest about a third of their Social Security taxes in personal retirement accounts. His plan differs from an earlier proposal by former President George W. Bush by guaranteeing that the investments would be guaranteed against loss, even after inflation.

His plan is patterned after the Thrift Savings Program (TSP), a longstanding program that's available to military personnel and most other government personnel. It basically combines the benefits of the stock market – a high upside – without the risk normally associated with investing in the market.

It might sound unrealistic but in a 2010 analysis, the Social Security Administration said the government's cost of the guarantee would be relatively small, less than 1%. The analysis assumed an investment mix of 65% stocks and 35% bonds for an average combined return of 2.9% above the inflation rate.

Anytime this subject comes up, naysayers are quick to point out the years in which the stock market indexes remain in the doldrums, but this fails to account for earnings from dividends and bonds, which generally pay better when stocks are down. Most investors with a well-balanced portfolio manage to keep their heads above water and do better than they would with CDs.

The Social Security analysis found that Ryan's plan, over time, could eliminate the structural deficits in the existing program because participants would be getting less money from the government upon retirement and more from their investments.

Ryan also notes that his proposal "includes a property right, so those who own these accounts can pass on the assets to their heirs," something Social Security does not offer.