Fully Funded Retirement Programs
I while ago, I wrote an entry about how to fix social security. I stand by the idea, btw; I still think it's the most feasible approach to unwinding the pyramid scheme that FDR left us with before its inevitable collapse. However, recently I was pondering that the social security problem is not isolated to that one (admittedly gargantuan) government-created disaster in the making, but is a more general problem with retirement plan accounting and funding, and how ripe for abuse they are.
You see, the general problem with retirement plans is that you are collecting money now to pay benefits in the future, and it all goes into the same pool of money. Because the specific benefits are not directly tied to the money being paid in, and the expectations of investment growth are arbitrary, the system is easy to manipulate and abuse. In the government's case, FDR set up a classic pyramid scheme (which would be obviously illegal in the private sector, for good reason), in order to have immediate payouts to people by borrowing from future generations, and thus "game" the system for voter approval. In the case of unions, large defined-benefits for retiring workers have allowed federal, state, and local governments to create their own Ponzi schemes, which are now coming to their inevitable conclusions (with accompanying collapse and inevitable lawsuits). Even though private industries are not allowed to engage in such egregious practices, there are also problems there, from companies "borrowing" from retirement plans to manipulating expected growth numbers to over (or under) state corporate earnings, to pension plans which operate like indirect Ponzi schemes, and collapse when the company goes under. The whole class of situations is a giant systemic problem, in need of a general (and not circumventable) solution.
I would propose the following as a conceptual solution for the problem: require, at the federal level, that all "retirement plans" have fully funded contribution accounts, in the beneficiary names, managed independently of the organization (similar to how 401k accounts are currently). For all plans, there can be a certain amount which is reserved for extra benefits for particular individuals meeting well-defined circumstances (eg: early retirement due to disability, illness, etc.), but this should be capped at a low percentage of contribution amount (say, 10% maximum). Furthermore, the government should provide an estimate of expected inflation over the benefit lifetime (based on historical CPI numbers), and all organizations will be required to use that number as expected annual investment growth for assets in the plan, regardless of actual investments (which, also, should be required to be "safe" in all cases). The organizations can continue to manage the investments of assets in the plan as a whole, primarily to allow governmental organizations to continue borrowing the money from their own plans as long as they have the highest level of credit worthiness; otherwise they will need to be weened off the Ponzi scheme easy-money as new contributions go into private accounts.
Of course, the changes wouldn't be retroactive, and thus everyone already scammed by the various Ponzi schemes would be out their "contributions" to date: but that's really no different than the status quo, only it would be much more explicit and consequently less ignorable. Furthermore, if it was done correctly, it would fix a whole class of problems, and prevent future similar problems, which is the best type of solution. Hard to do, certainly, and most likely politically impossible... but still a good solution, in my opinion.
You see, the general problem with retirement plans is that you are collecting money now to pay benefits in the future, and it all goes into the same pool of money. Because the specific benefits are not directly tied to the money being paid in, and the expectations of investment growth are arbitrary, the system is easy to manipulate and abuse. In the government's case, FDR set up a classic pyramid scheme (which would be obviously illegal in the private sector, for good reason), in order to have immediate payouts to people by borrowing from future generations, and thus "game" the system for voter approval. In the case of unions, large defined-benefits for retiring workers have allowed federal, state, and local governments to create their own Ponzi schemes, which are now coming to their inevitable conclusions (with accompanying collapse and inevitable lawsuits). Even though private industries are not allowed to engage in such egregious practices, there are also problems there, from companies "borrowing" from retirement plans to manipulating expected growth numbers to over (or under) state corporate earnings, to pension plans which operate like indirect Ponzi schemes, and collapse when the company goes under. The whole class of situations is a giant systemic problem, in need of a general (and not circumventable) solution.
I would propose the following as a conceptual solution for the problem: require, at the federal level, that all "retirement plans" have fully funded contribution accounts, in the beneficiary names, managed independently of the organization (similar to how 401k accounts are currently). For all plans, there can be a certain amount which is reserved for extra benefits for particular individuals meeting well-defined circumstances (eg: early retirement due to disability, illness, etc.), but this should be capped at a low percentage of contribution amount (say, 10% maximum). Furthermore, the government should provide an estimate of expected inflation over the benefit lifetime (based on historical CPI numbers), and all organizations will be required to use that number as expected annual investment growth for assets in the plan, regardless of actual investments (which, also, should be required to be "safe" in all cases). The organizations can continue to manage the investments of assets in the plan as a whole, primarily to allow governmental organizations to continue borrowing the money from their own plans as long as they have the highest level of credit worthiness; otherwise they will need to be weened off the Ponzi scheme easy-money as new contributions go into private accounts.
Of course, the changes wouldn't be retroactive, and thus everyone already scammed by the various Ponzi schemes would be out their "contributions" to date: but that's really no different than the status quo, only it would be much more explicit and consequently less ignorable. Furthermore, if it was done correctly, it would fix a whole class of problems, and prevent future similar problems, which is the best type of solution. Hard to do, certainly, and most likely politically impossible... but still a good solution, in my opinion.
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