Q. With reference to a recent column:

I agree that (1) the government spends too much, and (2) that using Social Security payments to reduce the deficit is, at best, dishonest. However, you frequently recommend Treasury Notes as safe investments. When one buys a T-Note, the government squanders the money exactly the same way as it squanders the Social Security funds. When it comes time to pay the T-Note, the Treasury borrows the money to pay, just as it will have to borrow to pay of the Social Security trust fund obligations.

How should the Social Security Trust Fund be invested? Why is a Treasury obligation a safe place for my money, while it is not a safe place for the Social Security fund?

---AP, San Antonio, TX 78213

A. Good questions. The answer on the Treasury note for you and me and investors is simple: it is backed by the full faith and credit of the U.S. government which has unlimited power to tax and/or print money. For that reason, our government securities are a better credit risk than any private security. In addition, they are the most liquid, easily traded securities in the world. Personally, I still feel ambivalence about the purchase of government debt because it is, in effect, like providing drugs to an addict. It is, however, a very strong addict.

The Social Security side has a negative reason for much the same reasons: Treasuries are backed by the power of government to tax and print money. They can fulfill their promises by raising taxes, printing more money, or selling more bonds. However you cut it, it takes money out of the private economy and transfers it to people who are no longer working and producing. Eventually, the producers will rebel.

In addition, you and I don't have a fiduciary account with Social Security. It is not a trust fund and there is no binding promise. They can jigger with the CPI adjustments, raise the taxes on Social Security benefits, change the formula, increase the retirement age, etc., etc. and we will have no more say in the matter than the political process provides.

Real security is built on the earning power of productive assets; either debts incurred to put assets in place or net profits earned by those assets. If you and I invest in a 401k plan or in taxable savings, our money goes into productive investments... or into the power of the government to take the income from productive assets ( if we invest in Treasuries). Our employment taxes, however, have never been put into productive investments: they are transfers of income from one group to another.

Q. A recent column in the Wall Street Journal suggested avoiding non-deductible IRA contributions because of the documentation hassles at the time of withdrawal. I am contributing to IRA's for myself and my wife this year which will be tax-deductible based on the fact that neither of us qualify for a company sponsored pension/retirement plan during this calendar year only. Past and future contributions are non-deductible due to ceiling limits on income (we gross approx. $100,000/yr.). I don't feel that the potential long-term problem that is alluded to in the column is adequately explained. Should this be a serious concern for those of us who have mixed deductible/non-deductible contributions, should we disregard the tax deduction this year and keep the accounts non-deductible contributions only, or should we disregard the IRA concept and just invest in mutual funds and pay the taxes as we go and thus lose the compounding potential that makes this plan attractive in the first place. Based on retirement projections in today's dollars, I am not anticipating a lower tax bracket (28%) than I am currently paying.

---M. H., Worldnet.com

A. You've already got the problem and it would be a shame to give away the current tax benefits so you should continue on--- but with the foreknowledge that you need to assemble the records showing the cost basis of the non-deductible accounts and keep them. I assume you intend to separate the non-deductible from deductible accounts.

The problem with the non-deductible accounts is that they are a record keeping and accounting problem because the IRS wants you to apportion non-taxable and taxable funds. In a comparable product like a variable annuity, IRS says all money is LIFO, Last In, First Out so the first money out is taxable income and all withdrawals are taxable until you get back to original principal. With IRAs they make you apportion it and the annual accounting cost could become a burden.

One possible way around the problem is to use the non-deductible account as a withdrawal source between age 59 1/2 and 70 1/2... and use that particular account before the others. It will reduce your tax burden and could be a source of non-taxable funds that could help extinguish left over mortgage debt, etc.

File Name: 961216MODallas Morning News file date: 12/17/96---TUEUniversal Press Syndicate file date: 12/16/96---MON

 © Dallas Morning News, Universal Press Syndicate, 1996