Still in Denial

The people against Social Security reform are still in denial about the problems Social Security faces. The system is in bad shape, and needs some major assistance. There's ample evidence of the discussion all over the Internet, and in hundreds of Legacy publications. A Google search for "Social Security reform" brings up 684,000 hits. There is significant evidence that Social Security will be in major trouble in less than fifteen years, and totally bankrupt in 50 years. That sounds like a long time, but that means my 15-year-old granddaughter will probably never receive a penny of Social Security, regardless of how much she might pay into the system, unless things change.

Today, Social Security taxes are 12.4% - 6.2% from the individual, and an additional 6.2% from that individual's employer. If you're self-employed, or own your own business, you pay the full 12.4% yourself.

Here's the problem: the people drawing Social Security today are being paid from social security taxes collected today. There is no such thing as a "personal" account, except that the government calculates your "benefits" based upon how much you've paid into the system over your working life. That money isn't set aside, invested, or managed: it's spent as fast as it comes in. What isn't paid out in Social Security benefits is transferred to the General Fund, and spent. It's a Ponzi scheme, and another source of taxes Congress can use to satisfy its hunger for spending other people's money.

Social Security needs to be converted from a "pay as you go" system to a truly fully-funded investment-based retirement system. That's going to be expensive, but necessary. The sooner it's done, the less expensive it will be. The following is a suggestion on how that transfer could take place with the least amount of problems for everyone and at the least cost.

The current Social Security system collects 12.4% of income up to $90,000. None of the money is invested. I propose a system where, effective January 1, 2006, four things take place:

1. Each person paying into Social Security will have 2% of their payroll taxes diverted to a fund that will be invested in US Government Treasury notes. This will be increased to 3% in 2009, and to 4% in 2013. Interest accrued by the notes will be split among all interested parties according to the amount they have in the fund. Maximum income levels on which Social Security will be calculated will increase to $94,000 in 2006, $97,000 in 2010, and to $100,000 in 2014.


2. Beginning in 2008, 1% of the individual's Social Security taxes will be diverted into a fund in that individual's name used to purchase shares of no-load mutual funds in the individual's name, but held by the Government until retirement. All dividends earned by the individual's shares will be deposited to that individual's fund, and used to purchase more shares. The percentage of each individual's 12.4% Social Security taxes will be increased from 1% to 2% in 2012, and to 3% in 2014.


3. Beginning in 2010, 1% of the individual's Social Security taxes will be diverted into a fund in the individual's name used to purchase shares of common stock from a list of firms provided by an independent agency. The individual will be allowed to select five stocks from the list to invest in. This amount will be increased to 2% in 2013, and to 3% in 2015. The individual will be allowed to increase the number of companies that he can buy stocks from up to 10 different companies in 2013, and to 25 in 2015.


4. The individual may deposit additional money into his personal retirement account equal to the total amount paid in under Social Security, into each of the three accounts, beginning in 2008, and increasing with scheduled increases in Social Security diversions. The government will be allowed to charge a 1% surcharge on all transactions from funds deposited directly by the individual accountholder, and 0.25% for money diverted from Social Security withholding. The government will be required to live within this budgeted amount. No fees can be charged against the existing funds within an account, only on newly-deposited funds.

The remaining 2.4% paid into Social Security will be used to pay the offset covering current Social Security recipients and those receiving Supplemental Security Insurance (SSI) and Social Security Disability Insurance (SSDI). The Government will impose a 1% sales tax that cannot be increased or extended on all items except food and gasoline to cover the payment of Social Security to those eligible to receive it while this conversion is taking place. Any moneys collected but not needed to meet current Social Security outlays will be deposited into a collective account in Treasury notes, mutual funds, and stocks until such time as they are needed. Once there are no longer any payments to recipients who are not fully funded under the new system, or whenever such funds in these trusts have reached the point where the fund is capable of meeting those expected payments, the sales tax will be discontinued.

In the long run, every person in the United States who works will have a government-managed retirement fund, 40% of which will be in US Treasury Bonds, 30% of which will be in Mutual Funds, and 30% of which will be in stocks of the individual's choice. The individual will also have the right to increase the cash value of each of these three retirment scenarios by individual contributions. No one who is currently drawing Social Security, or who is eligible to draw Social Security under the current system, will be denied any promised payments.

I'm sure this plan is practical, but only someone with a lot more information and some serious training in economics can say for sure. From my calculations, I can't see how this is any worse than any other plan anyone else has come up with so far, and IT WILL WORK for all of us. With individual accounts, people can borrow against their accounts in troubled times, and the accounts can be passed down to children and grand-children. The system can be a truly fully-vested plan, instead of a tax liability. The majority of the money invested will be earning additional money, instead of being transferred from one pocket of the government to another. Businesses will be capitalized, wealth will be created, and savings will be greatly expanded. Even more important, switching Social Security from a pay-as-you-go system to a personal retirement account will force the government to reduce the paperwork involved, cut expenses, and reduce the burden on the worker and his employer. The average citizen will truly become the owner of his retirement, accountable only to himself for creating it and maintaining it.