What if there was a way to achieve:
1. Greater benefits for all social security recipients, especially for the working poor who don’t receive much in benefits to begin with due to their lower contributions when working.
2. Eliminate permanently the possibility that Social Security will go bankrupt or forced to provide lower benefits than promised.
3. Eliminate (in the long term) the government liability of future social security pension benefits and all social security debt.
Would you be interested?
OVERVIEW:
The program I’m going to suggest is a fair, slow, multi-decade change that keeps the current Social Security program for today’s workers and retirees with a caveat for those still working. It utilizes at its core, the sound investment advice so often given to those eligible for IRAs or401Ks. The younger you start, the higher the multiplier of your investments by the time you reach retirement age. In other words, a person who contributes a fixed amount to an IRA annually at 20 years old will likely have several times the nest egg than a person who starts contributing to IRAs at age 40.
The proposed Social Security program starts with an investment in their name at birth. This will grow to much higher totals at retirement than any other program today because it will have over 60 years to grow by retirement age which no other current government program can offer. That (restricted) ‘gift’ to the newborn will get paid back as they enter the work force by helping to pay the Social Security costs of those on the traditional SS program. As ‘attrition’ reduces the number of people (over decades) requiring support through the old SS program, the SS taxes needed for it will eventually be less until it is nothing. However, up to today’s rates, those given the birth investment gift will not have their SS taxes go down to zero. Instead, those unneeded taxes will be invested in their names along with their company matches which is part of the SS laws today.
To prevent fraud especially from foreigners looking for a quick unearned benefit, only children of women who are American citizens (could consider also including mothers who are permanent residents) will be eligible for the SS birth investment.
DETAILS:
1. For every future person born to a mother who is an American citizen (may wish to also consider one who is a permanent resident), the government puts $10,000 into a special US Treasury bond with the same rate of return as a normal long term treasury bond. The difference is that instead of spending the money on government programs and nebver getting it back, the money is divided evenly into four pre-approved mutual funds. These funds and fund managers need to be approved and closely monitored by an appropriate government agency with a random double check type of procedure. Expenses of the funds and the government agency must be tightly controlled within high industry standards. Suggest no more than .002% of fund value. Cost to the government given 3-4 million births per year is $30-40 billion – a very small and affordable percentage of the federal government (take from the general fund, do not take this money from the social security fund).
At age 67, the fund value belongs to the person named. At this point, it may be wiser to give the person annual interest payments or an annuity rather than the lump sum which can be quickly squandered by some, leaving nothing for the rest of their lives. What would this be worth? If it grew at historical 10-11% long term averages of the stock market (i.e. doubles every 7 years), it could be worth well over $5 million!! If it grew at a more modest 6% long term average (doubles every 12 years), it would be worth over $400,000. Such amounts should help all retirees, but especially the working poor (or those physically unable to work or work full time) who earned barely enough to live on and consequently never received much in social security benefits. Those who pass away before age 67, since they never contributed to this fund, would have the fund returned to the government (this might eventually pay much of the costs of the program).
2. As the social security fund for the old program begins to exceed the benefits needed to be paid to recipients of the old program (i.e. as their number naturally shrinks eventually to zero), then the excess money goes to a fund for each individual then currently paying the taxes. This fund is an IRA (preferably Roth IRA) and companies continue to match their employees’s taxes as they do today. This fund is inheritable and never goes back to the government. Also, individuals can withdraw as early as age 59 ½ giving them their early retirement options in addition to supplementing the birth gift. It cannot be withdrawn for any reason before age 59 ½.
This also phases in from the old plan to the new plan (as less people are left on the old plan) to become the source of retirement funds through the government for any person not entitled to the birth gift (e.g. naturalized citizens). They get what they and their employers put into it plus investment growth. All investments must go to mutual funds or interest earning investments (not bonds though). No individual stocks. People who want to buy stocks or bonds need to do that outside this program.
3. The people receiving the birth gift of $10,000 must pay higher SS taxes if necessary to keep the old system afloat. That’s only fair to partially reimburse those who gave them the gift in the first place. As the need to pay higher taxes naturally goes away, the SS tax rate never goes below today’s current levels forcing all workers to save for retirement. The government’s liability eventually falls to zero. There is no danger of shortfalls to benefits though benefits are less definable – depends on growth rates of the investments. Overall, it will be a lot more in benefits than today’s system.
As necessary, tweak the current system as painlessly as possible. Examples include eliminating the social security early retirement age for workers under 40 or 45 or whatever the right age is. Possibly raise retirement age by 1-2 years (prefer to keep this temporary). Increase the maximum cap but don’t eliminate it (I don’t believe in onerous Robin Hood plans – they’re immoral). Many of these people may have other means of early retirement; some won’t. Same situation as today.
Have only the birth gift people pay extra social security taxes if necessary and feasible to keep the old plan afloat until it is no longer needed. If not feasabe, have them pay a bigger per person additional share than the rest. Social Security was meant to cover only some of a retiree’s needed income.
This plan comes much closer to covering all of a retiree’s needed income. This is more
and more important as company pensions have mostly disappeared. In addition, unlike
today, where social security tax money is immediately and completely spent leaving a big, non-invested, government I.O.U debt that must paid in the future through taxes and/or borrowing, the funds in the new plan will be real assets with real value and carry no governmental liability.
POTENTIAL COUNTERPOINTS AND RESPONSES TO THIS PLAN:
1. “We can’t afford it”.
Actually, we can. In the short term, the money is negligible and come from taxes and borrowing especially as other costs go down (e.g. Katrina Hurricane is paid for; or as we slowly withdraw from Iraq as conditions permit, those expense go away and this plan annually will be much less than them). The truth is we can’t afford not to do it. Social Security due to the good news that we live longer and in general retire no later and often earlier than previous generations cannot sustain itself in the long term. Expect average life spans to only increase continuing the
pattern of too few workers to support ever more retirees. Through no one’s fault, Social Security has become a kind of national pyramid scheme that will eventually collapse of its own weight.
2. “It’s risky”.
All investments are risky including the current Treasury bonds investments with only future taxes and loans as the only ‘asset’ to pay off their future liabilities. Mutual funds reduce the investment risk to acceptable levels while substantially increasing the eventual funds available for Social Security benefits. We could consider options to reduce risk further by allowing the birth gift to move (if chosen by those individuals who want it) to more conservative interest earning monetary funds. However, this excludes bonds which behave just like stocks (i.e. go down as well as up) and over the long run have historically generated substantially less returns on investment than stocks.
3. “Some people born in the same year and/or day will receive different benefits from the birth gift than others.” True, because their investments will not grow exactly the same. So what.
It is after all a ‘gift’. You should be grateful for whatever you receive. Whatever it is, it will be substantial. However, if this becomes a political impasse to legislation, another option would be to take all the $10,000 gifts for all the qualified birth citizens in a given year and put them into one big ‘pot’ of many mutual funds to use as they reach SS age to give everyone in that
year the same payout.
Have to be more careful with this approach. Previously, the ones who died before SS age had their gift funds returned to the government. Now what happens if it is part of one big pot? Secondly, as these people age, the few remaining say at age 90, might have millions of dollars each given every year from the big pot which is not the purpose of this approach. One approach could be to give occasional, actuarily justified cost of living raises as people age. Another would be to find a fair way to give the excess back to the government. I still like the individual gift better
than the big pot approach, but even this is infinitely better than what we have now
ONE FINAL COMMENT:
Don’t wait for the government to legislate this (because it may never happen) to do something wonderful for your children and grandchildren. It may never happen. If you can afford it, open up accounts now and in the future for your children and grandchildren, especially when they are born. It doesn’t have to be $10,000 ($500 has a reasonable shot of growing to $250,000 by age 63 if you invest it for a person at birth). It also won’t obviously be a tax free IRA (meaning there can be tax liabilities due to mutual fund capital gains and dividends, but these usually will be small). They also can spend it on what they want at any adult age (unless you do a controlling trust fund) without penalties (though l;ack of control is the part I really don’t like. It is much
better to wait to a normal retirement age to grow it to a big number (a young adult may be immature enough to just blow it on a car and have nothing for retirement).
NEXT STEPS
If you believe these ideas have merit, please forward to others in your Mailing list. Better yet, forward to your elected representatives in the Senate and The House of Representatives. Their email addresses can be found at:
http://dir.yahoo.com/Government/U_S__Government/Legislative_Branch/Congressional_Email_Addresses/. The email address for the President is:
comments@whitehouse.gov. Tell them you support this plan and request their feedback on what they like and don’t like about the plan. You may want to delete the one final comment section since it has nothing to do with legislation. Those of you that may receive this email with a very large number of forwarding addresses, instead of forwarding, consider copying and pasting and sending as a new email.
Getting it Right - Welcome
The goal of this blog is to publish my thoughts on a variety of economic and political topics in the hopes that people who find them educational or beneficial will utilize them and/or forward to others who might find them interesting and/or worthwhile to promote to others, possibly including politicians who can push some of these ideas to fruition. The topics in my blog are meant to be of value on a long term basis, not a daily diary or political issue of the day log. If the information posted is useful to you, by all means utilize it and/or forward it as you see fit. If not useful, then merely ignore it. There are no universally agreed upon truisms and too little tolerance between some of those with opposing viewpoints to successfully convince the people with hardened opinions to move away from them. I am an analytical type person who will try to be as factual as I am able.
I disdain the current popularity of name calling and condemnation of viewpoints with no factual alternatives or logical solutions given that I see so often. If you don't have a solution based on fact and logic, then opt out of the discussion because you have nothing to contribute. My background is a degree in Economics from the University of Michigan and 39 years working in middle management jobs for a major retailer. My opinions are forged on the personal experence of life, family, friends, and work as well as triumphs and mistakes that I have made and hopefully learned from. My hope is that this blog helps you.
My first topic will be about personal finance. I chose that one first because most of us work long and hard just to survive but not all of us realize our dreams of becoming financially independent from the labors of our work. Much of our political votes/thinking also focus on the economy and in particular how well we are personally doing financially.
It is relatively simple, without sacrificing the enjoyment of living for 'today' and even at moderate incomes, to retire as a millionaire or multi-millionaire, if you focus on that goal consistently from a young age. It is also simple to ensure that your child or grandchild retires rich. It merely requires a one time gift of just $2,000 invested wisely and the passage of time. Please read my first post on this blog to learn more.
An index/schedule of past and future posts and their dates will always be updated so that it becomes the first post that you see below. If the date of a post that you wish to read is preceded by the word "Posted", then find it below or click on the title in the Blog archive to review.
