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Reforming Social Security - one option


  • Reforming Social Security - one option

    There is no question that the US Social Security system is unsustainable in its current form. Guaranteed benefits which are based loosely on ones contributions ARE a viable option but ONLY if premiums in excess of disbursements each year are retained and invested. Unfortunately, this is no longer how the system works. For the past few decades those excess contributions have been spent through the general fund and replaced with government bonds. Those bonds are ONLY redeemable through tax collections so in any year where distribution of Social Security benefits exceeds contributions the only way to pay that shortage is through accumulating government debt.

    A number of mechanisms have been implemented over the years to ease this debt accumulation including making employers contribute to the program on behalf and in addition to employees, raising the age of eligibility for benefits (hedging our bets by assuming that death will occur before benefits are received or that benefits will only be received for an actuarially reduced number of years) and taxing benefits received. None of these measures individually or as a whole have solved the problem. We MUST make a change.

    Any change that is made needs to accomplish 3 things. First, it needs to satisfy the promise we made to current beneficiaries and contributors. Simply cutting off benefits will create economic havoc and no small amount of ill will. It will make any future promises that the nation makes to the citizenry highly (and rightfully) suspect.

    Second, the change must make the benefit of some kind of public pension sustainable. It must guarantee that benefits never outpace contributions plus growth. We have to fund this program without taking on additional debt every step of the way.

    Third, benefits need to provide a reasonable assurance that the beneficiary will have a useful income from this pension. If the guarantee were only that the beneficiary would receive $200 a month for life that may be a handy addition to the wallet but it’s not enough to keep a roof over ones head or food in ones belly. The ultimate goal of the system should be that those who contribute to it are guaranteed at least a modest and dignified old age. This last bit is actually the difficult part as “modest and dignified” needs to be defined before we can determine what the minimum benefit will cost. It should also be noted that the current system has no such guarantee.

    So, to begin with the end in mind, let’s start with the minimum goals.

    If we can agree that “modest and dignified” is a reasonable starting point then we need to define those terms and I would suggest that such a standard would include shelter with heat and air conditioning, clean clothing, nutritious food and some level of privacy. In short, modest and dignified should mean some form of dormitory style facility with a cafeteria. This would be the minimum standard where even someone who completely failed at saving for retirement would have a place to live. It would be a completely institutional living and not necessarily desirable but it would be preferential to having nothing.

    There would definitely be costs involved in setting up these facilities but many of them could be started by using existing government properties and renovating them. Funding initial construction, maintaining and staffing the facilities could be offset through charitable organizations and special tax credits for both individuals and corporations though it is likely that a substantial portion of the budget for these facilities would require general fund spending but at a rate much reduced from current levels. If, for example, operational cost could be kept to $12k/yr per resident and 20 million people used this system (which, I suspect, would be a very high number) the cost would be in the $250 Billion per year range.

    Now $250 Billion per year isn’t exactly a drop in the bucket so how are we going to pay for this and what are we going to do about everyone else who isn’t in such dire financial straits? Well, that’s where the revised system comes in.

    The first goal of the revised system must be to get those currently in the existing system taken care of while eliminating new enrollments. This is bound to be a long process and should be expected to take decades rather than years. The first step would be to eliminate those from the program that are not in need of the supplemental income.

    The easiest way to do that would be to offer an “opt out” plan. Under such a plan current beneficiaries could opt out of receiving their benefits in exchange for a non-refundable tax credit equal to roughly 80% of their expected annual benefit. This would benefit the well to do in a couple of ways. First off, they would not be subject to taxation on that additional income and secondly the credit could be used to offset tax due on other income. In this way we continue to honor our promise to those who contributed to the program but immediately drop them from the beneficiary rolls. Meanwhile, those who are currently receiving benefits and do not wish to opt out can either stay on the program as it is or enter the institutional program.

    For people within 10 years of their eligibility to receive benefits we will also offer an “opt out” where they can continue as they have been or elect to forego benefits in exchange for a non-refundable lifetime tax credit of 120% of their accumulated contribution. On top of that this group will be allowed to contribute up to $15k/yr to a personal retirement account that works like a traditional IRA for contribution purposes but like a ROTH for distributions….a completely tax free plan. To qualify for this 100% tax free status the plan must meet certain criteria which I will discuss later.

    In effect, someone who is 60 years old and has contributed $6000/yr to Social Security for the past 30 years would receive a lifetime tax exclusion of $216,000 ($180k paid in benefits * 120%) plus they would get the advantage of not even including in income as much as $15k/yr as long as it’s paid into a personal pension plan. This would provide tremendous opportunities for those nearing retirement without providing an excessive benefit to top tier earners.

    For those outside of the 10 year window there would be no option to continue with the current Social Security program but they would all be issued a lifetime non-refundable credit in the amount of 150% of their current contributions as well as the option to pay up to $25k/yr into a personal pension plan like the one mentioned above. Contribution limits for this group and the previous one would be adjusted for inflation on an annual basis.

    The result of this method would be that, through attrition, the current Social Security system will phase out and each individual will have their own personal retirement account that can be transferred should they pass away before they become eligible to use it. Little by little the government will be phased out of this gigantic liability and the goal of a universal pension will be realized.

    Now, you may have noticed that if we do this then there would be a whole lot of people out there with very large tax credits which means that very little tax would be collected and you would be correct. The simplest way of accommodating that shortfall would be to mandate that corporations would still pay into the system as they have been for their share of Social Security contributions. Doing so would not put any additional strain on corporations as they are already paying this portion. The remainder of the shortfall would have to come from (and my Conservative friends will hate this) additional borrowing BUT this borrowing will no longer be an open ended issue. As the new program phases in and the old one phases out the need to borrow will gradually decrease and eventually we will be able to start paying off the debt.

    Some of the concerns that have come up when I mentioned this plan before have been “what happens if people opt out and then don’t fund their plan?” and “what happens if the market tanks and people lose everything?” These are legitimate concerns but they are also easily addressed. First off, contributions to the plan will be mandatory just as they are now. A mandatory 7% of earned income must be withheld by the employer and deposited into the plan. That is a bit more than is currently mandated but, like most other things in life, if the employee never sees the money they won’t miss it. On the other issue we simply make the qualification for the plan to be that a certain percentage of contributions – say 50% - be invested in guaranteed government securities as they are now. This would provide for guaranteed income in each plan as well as the opportunity to earn far more than a 100% guaranteed plan would afford.

    The ultimate effect of such a plan would be that the social safety net would be preserved, the concept of a benefit would be tied to ownership and investment rather than entitlement and administrative costs would be cut to bare minimums thus reducing the need for one monolithic and expensive government entity. It’s a long term plan but the ultimate benefit would be that the individual would once more be in charge of their own financial destiny.

    • tsquare
      tsquare commented
      Editing a comment
      Re: Article: Reforming Social Security - one option

      Originally posted by lutherf
      You've got to be careful with that "almost anything" because you know doggone well that there is someone out there occupying a seat in congress who's solution will be "Increase benefits to spur the economy!"
      Thus the 'almost'

      One good start would be to do the following:

      Restore the full contributions to the fund
      Means test the damn thing!
      Make SS a free standing, self-supporting program... like it was before LBJ started messing with it. No more surpluses going into the general fund.
      Start reworking benefits for those under 40

      Do the same thing with Medicare... and things would start to look like this:

      Click image for larger version

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      Then the rest of the budget can fall in line:

      Click image for larger version

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ID:	404516

      And thus was can cut our deficit by 2/3 in four years with minimum cuts and tax increases... mostly covered by GDP growth not rate increases.

    • Lutherf
      Lutherf commented
      Editing a comment
      The only problem with that, T, is that the program remains a "defined benefit" program and the benefit remains a political tool for congress.

      By flipping the program to a "defined contribution" model it preserves the benefit for the participant while eliminating one of the primary ties that government has on the population. Although I didn't directly push it in the article we need to consider the residual long term effects that any changes will have on the economy and by creating a program that encourages participation - in fact, ties benefit to participation - we grow a society that begins to see benefits in terms of what they can do as opposed to one where they see benefits as what government must do for them.

    • tsquare
      tsquare commented
      Editing a comment
      Re: Article: Reforming Social Security - one option

      Originally posted by lutherf
      The only problem with that, T, is that the program remains a "defined benefit" program and the benefit remains a political tool for congress.

      By flipping the program to a "defined contribution" model it preserves the benefit for the participant while eliminating one of the primary ties that government has on the population. Although I didn't directly push it in the article we need to consider the residual long term effects that any changes will have on the economy and by creating a program that encourages participation - in fact, ties benefit to participation - we grow a society that begins to see benefits in terms of what they can do as opposed to one where they see benefits as what government must do for them.
      I'm fine with that... as long as it comes off budget so that the Congress Gritters can't mess with any 'surplus'
    Posting comments is disabled.

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