How to fix social security
Ok, how's that for a bold and over-ambitious title? I mean, the US government has been struggling for years to figure out a way to unwind the enormous, underfunded, Ponzi scheme entitlement program ever since it was enacted, back in the 30's. There have been numerous proposals, even more numerous criticisms of proposals without offering any substantive alternatives, a heaping helping of denial, and a general inability of the US government to do anything whatsoever to fix the impending problem. Well, I have a solution to add to the pile, and while I'm almost certain it'll never even be read by anyone with the slightest ability to take any meaningful action, in the spirit of Obama's fake encouragement of other people to come up with good ideas to help the US economy, here's another of mine.
The facets:
- The government should create private accounts for social security. These should be owned by the people paying in, and contain all the money paid into the accounts by the workers (at least).
- The government should contract with one or more private management firms to manage the accounts. Said management should consist of sending out statements, maintaining balances and accounting, handling distributions, and support. These contracts should be bid on every x years (eg: 10 years), and the account data should be stored in a generic, well-defined format (mandated by the government) to allow easy transition and allocation of accounts to management companies.
- The money will be borrowed by the government, which will pay a well-defined rate of return, not below the inflation level. All amounts in the accounts will be explicitly guaranteed by the government.
- There will still be mandatory SS tax, most of which will be deposited into each worker's account. A certain percentage of this (fixed, probably around 5%) will be diverted into a separate account to support early SS payouts (disabled, etc.). This money can be used immediately, per whatever Ponzi scheme accounting the social security office wants to use). Shortfalls will be paid by the government from general tax revenue, and any extra money will be rolled forward.
- When you reach the retirement age, your monthly benefit from SS will be calculated based on the total amount in your account, as follows: total amount, divided by a fixed number equal to the months until a expected death age (eg: 90). The "death age" number should be approximately where people, on average, die from natural causes, and can be adjusted annually per a similar formula (but benefits are fixed for each person once he/she retires). The monthly amount will increase by inflation every year.
- The government will guarantee that monthly payment for as long as you live (even if it depletes your account entirely). In exchange for this, the government is entitled to up to 20% of your retirement-time balance if you die early from natural causes. Any remaining money at the time of your death will pass tax-free to the SS accounts of your spouse (if applicable) or immediate dependents.
What does this give us?
- No immediate disruption: government can continue to operate as it has (still effectively getting all the money from SS tax), and still needs to fix the shortfall, however...
- Social security becomes no longer a "will go away" lie, and instead is guaranteed based on the money paid in, fulfilling the original intent of the program. In addition, each person gets benefits proportional to the amount they paid in, removing the wealth-redistribution aspect.
- Early death is covered, and the government recoups some of those account amounts, to offset the cost of paying for people who "outlive" their accounts.
- Late death is covered with the same payments, no worry about outliving benefits.
- Early benefits are still covered, and the money going to support them is more explicitly differentiated from individuals' personal retirement accounts.
- The shortfall is more explicitly accounted for in the government budget and accounting, since they would be borrowing from individual accounts, and would show all the borrowing as explicit realized liabilities on their balance sheet. This would allow Congress to better account and plan for shortfalls (or at least make them more transparent).
That's my opinion / plan proposal.
The facets:
- The government should create private accounts for social security. These should be owned by the people paying in, and contain all the money paid into the accounts by the workers (at least).
- The government should contract with one or more private management firms to manage the accounts. Said management should consist of sending out statements, maintaining balances and accounting, handling distributions, and support. These contracts should be bid on every x years (eg: 10 years), and the account data should be stored in a generic, well-defined format (mandated by the government) to allow easy transition and allocation of accounts to management companies.
- The money will be borrowed by the government, which will pay a well-defined rate of return, not below the inflation level. All amounts in the accounts will be explicitly guaranteed by the government.
- There will still be mandatory SS tax, most of which will be deposited into each worker's account. A certain percentage of this (fixed, probably around 5%) will be diverted into a separate account to support early SS payouts (disabled, etc.). This money can be used immediately, per whatever Ponzi scheme accounting the social security office wants to use). Shortfalls will be paid by the government from general tax revenue, and any extra money will be rolled forward.
- When you reach the retirement age, your monthly benefit from SS will be calculated based on the total amount in your account, as follows: total amount, divided by a fixed number equal to the months until a expected death age (eg: 90). The "death age" number should be approximately where people, on average, die from natural causes, and can be adjusted annually per a similar formula (but benefits are fixed for each person once he/she retires). The monthly amount will increase by inflation every year.
- The government will guarantee that monthly payment for as long as you live (even if it depletes your account entirely). In exchange for this, the government is entitled to up to 20% of your retirement-time balance if you die early from natural causes. Any remaining money at the time of your death will pass tax-free to the SS accounts of your spouse (if applicable) or immediate dependents.
What does this give us?
- No immediate disruption: government can continue to operate as it has (still effectively getting all the money from SS tax), and still needs to fix the shortfall, however...
- Social security becomes no longer a "will go away" lie, and instead is guaranteed based on the money paid in, fulfilling the original intent of the program. In addition, each person gets benefits proportional to the amount they paid in, removing the wealth-redistribution aspect.
- Early death is covered, and the government recoups some of those account amounts, to offset the cost of paying for people who "outlive" their accounts.
- Late death is covered with the same payments, no worry about outliving benefits.
- Early benefits are still covered, and the money going to support them is more explicitly differentiated from individuals' personal retirement accounts.
- The shortfall is more explicitly accounted for in the government budget and accounting, since they would be borrowing from individual accounts, and would show all the borrowing as explicit realized liabilities on their balance sheet. This would allow Congress to better account and plan for shortfalls (or at least make them more transparent).
That's my opinion / plan proposal.
There are two issues here:
ReplyDeletea) The system depends on current payroll taxes to pay current benefits, rather than saving current payroll taxes and paying them in the future.
b) The system is government run, which some people are ideologically against.
If you want to change the system to one that saves money, it is the hard b/c future benefits are like a huge debt owed to people who paid into the system. I agree with your goal of switching to a savings-based system, but no matter how you slice it we have sacrifice to pay down that “virtual debt”. In your system, you turn the virtual debt into actual bonds, which will have to be paid back with taxes on the workers. Either way, you have to “get caught up” by having current workers keep paying taxes while saving additional money for retirement / disability / life insurance that Social Security would have covered. That’s the rub.
Getting caught up is work. Tweaking the current system is easy. Some people (not me) actually prefer a gov’t-run system, so they have no incentive to “get caught up”. There are people like me who don’t like a huge gov’t system but like the fact that it drastically reduces poverty by forcing people to save and by giving wealthier people’s money to the poor. We are therefore going to go the easy route and simply adjust the payroll tax rate, retirement age, and benefits, on a regular basis such that the system stays solvent. The system’s critics continue to paint this condition as a crisis and a crisis caused by the fact that it’s government-run. These claims are false, so the critics look foolish.
Yes, there's a large ideological gap between the two general philosophies: people who want to keep social security a Ponzi scheme and keep adjusting the numbers until it becomes painfully obvious that it's doomed to failure, and people who want to privatize the system, restoring it to its original stated function and intent (as a retirement and financial security blanket program, not a wealth redistribution program), but forcing the government to acknowledge all the pending losses up-front while dismantling the Ponzi scheme aspect of the system. I thought my idea was interesting because it balances between both of those to some extent: the government would still be able to pay current benefits from the money currently being paid in (which the government would be borrowing from the private accounts), while converting to a more fair and sustainable private accounts model. I don't think the government would "catch up" immediately, or possibly ever, but at least the real future deficit could then be accurately and transparently accounted for, instead of inviting manipulation, accounting tricks, and arguments about the extent of the problem.
ReplyDeleteSee, a large part of the current problem is that many people don't understand the future obligation, or why it's not sustainable. It's a property, to some extent, common in all good accounting fraud schemes: people don't understand the numbers, so they can believe people who distort or misrepresent them. For example, some people in and out of government continue to argue that we can just adjust the numbers in slight, non-drastic ways to keep the system solvent in the future: a concept which is fundamentally false given current projections of population growth, and the inherent problems with Ponzi schemes. This is the kind of misunderstanding which my plan would hopefully eliminate: by clearly accounting for all the future obligations through explicit borrowing, there would be much less doubt about if and when politicians needed to act on the problem.
As for the issue of wealth redistribution, it's true that my mechanism would reduce some of the inherent socialistic monetary balancing which occurs in the current system, which I view as a good thing. Moreover, it would remove entirely the temptation for politicians to expand social security taxation well beyond what would be conceptually necessary for its stated purpose, and use it as a full-fledged socialist wealth redistribution tax mechanism, which I would view as a vitally important check on the current government direction and tendencies. This is not to say that we should not have a socialist government, or socialist wealth redistribution systems (I don't personally think we should, but that's a different debate); however, it's fundamentally disturbing and dangerous when the government expands a social security safety net and retirement program, which is ideologically sound, into a socialist wealth redistribution program, which is a whole different beast. We should have that debate openly, not have the program thrust upon the country through the back door under the guise of tweaking numbers.