One of the benefits of moving from a house to a condo, beyond reducing yard work to zero, is getting rid of 20-plus years of accumulated stuff. We retained plenty, but feel liberated from the tyranny of useless possessions. While going through files, I found something I wrote so long ago that it was typed physically on paper. A reference to the Family Leave Act suggests that it was written after 1993, but before I acquired my first PC. Rereading it all these years later reminds me of how naïve I used to be. (Some things really don’t change.)
I offer this old piece of writing without alteration, except for a couple of obvious typos. Consider it a prelude to something else I’m thinking about – finish date uncertain.
Individualize Social Security
The current state of our Social Security (“SS”) Trust Fund (so called) is a disgrace. Our elected leaders (elected, yes; leaders, no) have chosen to use this money, tens and hundreds of billions of dollars earned by tens of millions of hardworking Americans and supposedly saved and reserved for their personal financial well-being as if it were current income.
Our Congress and Presidents have been and continue to spend our savings. Everyone knows what happens when you spend your savings (especially if you’re counting on them to last): your investment income decreases, causing your savings to decrease at an accelerating rate (as you spend to make up for the earnings shortfall) resulting in an inescapable downward spiral. Every school child knows that if you constantly raid the piggy bank, it will never fill up. Why then does our Congress spend our long-term savings for current expenses? And more importantly, what are we going to do about it?
I propose a simple straight-forward approach. A plan that is easy to understand, quite a contrast to the proposals of Congress. Does it ever occur to you that Congress prefers to hide behind big words and indecipherable laws? Do you realize that virtually every time Congress passes a law telling us what to do, they exempt themselves (Family Leave, Equal Employment Opportunity). But, I digress.
I propose that we lump SS taxes in with all the other taxes and fees that the government collects. They are currently collected and considered separate funds; in reality, they aren’t. This change in accounting will simplify discussions concerning the federal budget and reduce the underhanded attempts to explain why we have surplus SS taxes and why we are spending instead of saving the surplus. In typical fashion, Congress says: “we are saving” and “we do have a SS Trust Fund.” And, in fact, we are buying US government bonds with the SS surplus. In actuality, the government buying bonds from itself is like putting money in a mattress and paying yourself interest every month. It is a very difficult way to get ahead. When will Congress and our various Presidents stop playing word games?
According to my plan, we now have one pot of money from which we pay all government expenses. Simple, straightforward, unlike Congress. I now propose that we systematically reduce the amount of money paid into this pot for the next fifteen years. Under current law, all employees put 7.5% of their pay into SS and all employers also put in 7.5% of their employees’ pay, for a total of 15% of our total salary. I propose that we reduce this by 1% per year for the next 15 years. At the end of the period, there will no longer be anything called a SS tax.
The federal government will continue to pay all of its SS obligations (it has to keep some of its promises). The only difference is that these payments will come from general funds, not from a fictitious trust fund. So far, so good.
Now for the radical part: as we are eliminating SS taxes, I propose that the funds freed be used to establish Mandatory Retirement Accounts (MRAs), separate from all other retirement plans and accounts. Thus, in the first year of this plan (and please excuse the simplicity of the analysis), 14% of your pay would go to help pay SS and 1% to an MRA, in the second year 13% of you pay would go to SS and 2% to the MRA. After 15 years, all 15% would go into your own individual MRA. You would manage and be responsible for your own account. No withdrawals would be possible until the age of 60.
Obviously, there are many details to be worked out. For instance, who will maintain the accounts? How will SS be phased out for those who have already paid in substantial sums? What happens if someone invests poorly? Even so, the plan has the significant benefit of reducing some of the double speak emanating from Washington; of treating SS for what it is: current expense; of reducing the influence of government interference in our retirement planning; of reducing government influence period. No doubt you can think of benefits that I have not considered.
The most difficult aspect of the entire program (other than enactment) is to keep Congress from changing substantive portions of it in the future. I apologize for chiding Congress so much, but really, do you think they care more about us or about getting re-elected. It is time someone legislated for the benefit of the country, not just a narrow parochial interest. Where are the far-sighted citizens who want to help all of us (as our founding fathers did in the revolutionary period), not just the people they know or collect funds from?
Our representatives need to do what is right for the country. It is not always possible to please everyone, however if decisions are made based on the aggregate good for the country, everyone would benefit. This new no-SS plan is good for the country, though it will adversely affect certain individuals and that concerns me. But the overall good vastly outweighs the negative impact, which can be alleviated by other in-place programs.
Wow! I was quite self-assured back in the day. I like to think I’m a touch more nuanced now. As most of you know, George W. Bush broached the idea of privatizing SS during his presidency – it went nowhere. https://en.wikipedia.org/wiki/Social_Security_debate_in_the_United_States. Based on this recent article posted at the Motley Fool (https://www.fool.com/retirement/2020/02/15/the-surprising-amount-of-money-congress-has-stolen.aspx), perhaps it’s time to revisit the concept . . .
A couple of thoughts… Social Security was never particularly designed to be funded via the ‘trust fund’ — that only smooths out periods when revenue exceeds demand. It is in essence a pay-as-you-go system, though as you note, with separate accounting from the general budget. Individualization (usually called privatization) is certainly possible – it’s been done to differing degrees lots of places. But it would also defy the logic of social security as social insurance. Social security was designed to prevent old-age poverty – that’s why the replacement rate on the lifetime average income declines as income rises. It’s an insurance policy, not a pension fund. Individualization would return us to something like the status quo ante (albeit with mandatory savings). That is, those with low incomes, non-working spouses, the disabled, and those who work in the cash economy would have little-to-no retirement income. The well-off would have more than now. And financial intermediaries would skim off a big chunk. This would be worsened by the typically poor choices individuals make in managing their own retirement funds (public pension funds generate far better returns than individuals on average, pay far lower fees, and don’t create inequalities based on financial knowledge). These poor choices are typically worse among the less-educated, further increasing our already huge inequality. And just imagine the retirement ‘advice’ they’d get on Fox Business (buy Bitcoin! buy Gold! Sell!)…
I don’t necessarily think it’s a bad idea to put social security into the general fund – frankly it’s finances are in pretty good shape (despite all the doom and gloom). Doing nothing, we cover all obligations until well into the 2030s, and even after that we have the money to cover better than 70% of obligations. Modest parametric reforms would bring this into actuarial balance (remove the income cap on taxes, limit benefits, raise the retirement age, tax unearned income, whatever you like). And once the baby boom generation is through, its finances get much better.
Medicare is the real worry. Medical costs escalate in the US massively, far more than general inflation. There the solutions are obvious, but politically unpalatable.
It’s great to have smart knowledgeable friends. For those who don’t know, marcus is a professor who studies issues similar to the one I raised, as I understand it — most often in the context of foreign countries, especially those in South America. I appreciate his insight and kid gloves.