Q. We currently have 6 years to pay on a 15-year mortgage. Our home is valued at $180,000. The mortgage has a $65,000 principal balance. We have decided to remain in this home for several years but we need to make some improvements. The cost of the improvements will total about $50,000.

My husband has stock options he could sell in February 2002. They would net us the $50,000 needed for the improvements.

Would we be better off paying for the improvements out of the stock sale or refinancing the house for another 15 years to take advantage of the tax benefit of the interest paid? My husband has just turned 52 and isn't planning on retiring soon.

---M.L., by e-mail

  

A. Don't count on a lot of tax benefits, although your proposed refinancing will improve your tax situation. Recently, for instance, 15-year mortgages for less than $275,000 were available for about 6.0 percent. Your maximum first year interest deduction would be about $6,900. Add your real estate taxes--- about $3,600--- and your itemized home ownership deductions for real estate would total about $10,500.

The standard deduction for 2001 is $7,600 for a joint return. This means only $2,900 of your deductions will actually provide tax savings to you--- about $812 for your 28 percent tax bracket. Significantly, ALL of your tax benefits would come from the additional $50,000 borrowed. At the moment, you have no tax benefits from home ownership.

In spite of this, refinancing your mortgage would be a good idea. The borrowing cost is low. There will be tax savings on the additional money borrowed. The net cost of the additional $50,000 will be about 4.32 percent (72 percent of 6 percent).

You may get a higher return on the $50,000 realized from stock options next year if you reinvest the money. If you invest that $50,000 carefully, it may grow with minimal taxes. It could quadruple to $200,000 over the next 15 years, adding substantially to your retirement nest egg.

If you were older and had fewer years to work, I would favor making the improvements with the option cash because your investment risk would be higher.

  

Q. I gather from some of your columns that you are an advocate of privatizing Social Security. Would you please explain to me why privatizing Social Security with all its uncertainties (when withdrawal time comes) is better than the government investing the funds in a broad index fund--- such as the Wilshire 5000?

  I assume that legislation would have to be passed which would forbid Congress from tampering with the investments or playing favorites.

  ---K.S., San Antonio, TX

  

A. The primary reason is simple: the unfunded obligations of Social Security--- the difference between what the system has promised to pay out in retirement benefits and what it expects to receive in employment tax revenues--- have been gigantic for decades. Basically, a funded Social Security program would need to own virtually all of the assets in America.

The obligation is simply too big a number to be sustained by government ownership of assets. As an alternative, we need to find an efficient way to provide a privately funded security net for all Americans--- with a government backup. That's why I wrote the recent column about the counties in Texas that opted out of Social Security in the early 1980's. (Tuesday, October 9, 2001: "A Safe Way to Privatize Social Security").

Yes, there are uncertainties in any privatization plan. But no one should overlook the uncertainties the existing plan faces. To fund future retirement benefits it will be necessary to make the employment tax even more burdensome than it is today. The alternative is to cut the benefits or increase the age at which workers can retire. The Medicare program faces even greater financial problems.

We're going to be dealing with this issue for a long time.

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