Why change Social Security?
a) should social security be saved?
b) why should the government get involved in private retirement?
c) will all the fuss be worth it?
Social Security is a complex program - in fact, too complex, but simplification will have to wait until after other things are done. In fact, it'll be much easier to reduce the Social Security overhead burden if the program is modified than if it's left as it is now.
Social Security was originally designed as a safety net for those that didn't have a retirement account funded by their workplace. Today it's become the primary retirement for most Americans, something it was never designed to be. That fact caused the first crisis, because the program was originally a "pay as you go" program for only a few. Now it's so expensive it cannot continue the way it was originally designed to operate. Changing over to an investment-type account will be costly, but essential. Right now, there is more money committed to future retirees than the system can come up with.
In the current "pay as you go" plan, every dime that comes in is spent. It either goes to pay retirees or it's "borrowed" by the government to meet general funding requirements. The current system has five or more workers paying into the fund for every one taking money out, and there's a modest surplus. When my generation, the "baby boomers" begin retiring, the number of workers to retiree will be more on the order of two to one. That will mean that social security taxes would have to take in from each of those workers approximately $850 per month to pay me my $1500 per month government-mandated retirement (the rest is eaten up in overhead). That's a pretty steep tax, and it will only increase as cost-of-living increases raise my retirement amount. Since I come from a family that usually survives into their mid-80's, and a few of us reach 100 or more, that monthly tax bill could be a millstone around the neck of future taxpayers for 20 to 35 years. That is, it MIGHT be a millstone, unless the entire Social Security system itself went bankrupt, the government decided to cut its losses and did away with benefits entirely, and the "safety net" is jerked away from all those baby-boomers halfway through their retirement. That, too, is a possibility.
By wisely investing the money coming in, partly in government bonds, partly in mutual funds, and partly in long-range growth stocks, a person beginning at age 20 could build a retirement account worth millions of dollars by the time they're ready to retire. A person working for 45 years at a flat rate of $7 an hour would end up with about $81,000 being paid into Social Security between himself and his employer. Social Security would, under the current system, then pay that individual about $815/month for the rest of his or her life. If that money had been invested wisely, and had earned an average of 5% during those same 45 years, the individual would have a personal account worth about $304,000. The annual interest on that amount at 5% would be $15,200, or $1266/month. This could continue indefinitely, as long as the individual never took out any of the base principal, or there was no decline in the interest rates.
Most of us aren't going to work our entire lives at a fixed rate. We probably started off at minimum wage, worked hard and developed new skills, and received promotions, changed jobs for higher pay and/or better working conditions, and so forth. The above figures don't take into consideration the cost of managing such an account, which should be held to a minimum, or any changes in the amount of money being put into the account. A typical worker who starts out making minimum wage and ends up making $16-$20 an hour would have a larger account, and a better retirement. A trust officer could work out a plan to allow the retiree to take both the interest and a small amount of the principal each month, and have more money to spend each month, but a finite retirement - there will come a time when there's no money left.
An investment account, then, would earn money at a average rate while the person was working, and provide a considerably better retirement in the end. The number of people who are drawing a retirement would be immaterial, since EACH of them would have an investment account, and each of them would only be getting their own money back, with interest. The taxes being collected each month would be distributed into individual accounts, and invested. The number of workers paying into the account and the number of workers collecting retirement would be decoupled from one another. The main problem is in vesting current accounts, and continuing to pay those that were promised a Social Security retirement under the old system.
That brings us back to our opening paragraph, and our three questions.
Social Security, as a concept, is a good idea. It imposes upon people the commitment to plan for their future, to invest today for their retirement, and to keep themselves from being a burden upon their families and society in general. Whether the government should continue to be the sole manager of Social Security is another question, and one that would require several books to discuss thoroughly. If done carefully, if set up properly and carefully supervised and managed, a government retirement account program could be very effective.
I've suggested a program that would divert up to 10% of the 12.4% Social Security tax into private accounts. That 10% would be divided into 4% to be invested in Treasury notes that pay from 2.75% to 10% interest, but have a fluctuating interest rate that cannot be determined ahead of time; another 3% invested into no-load mutual funds that provide a rate of return ranging from 3% to 7% on average; and another 3% into common stocks, primarily selected for long-range growth rather than anything else, which usually return from 3% to 12% over the long run. All interests and dividends would be returned to the individual retirement account, divided up among the three investment areas, and re-invested.
What about that other 2.4%? Social Security also pays a small amount to people who are physically or mentally unable to work. That would come out of that 2.4%. So would a portion of what people would receive for a work-related disability. Some of that 2.4% would also be used to pay for the overhead of the entire Social Security program. The good thing is, once the program is fully vested, there will never be a need to raise the social security tax level - ever! Overhead costs should actually come down as the program becomes fully implemented.
There are some other benefits that could (but not necessarily would) accrue from a vested retirement account system:
- Employers would have an incentive to pay into an individual's Social Security retirement account instead of maintaining a separate retirement account for their employees.
- There would be no disruption or problems arising over changing jobs - your retirement account isn't with the company, so it's 100% transportable.
- Employer contributions to an individual's retirement account would still be an incentive, but a less costly one to the employer.
- Individuals, also, should be able to contribute an extra amount into their personal account, if they choose, to increase their retirement return.
- Individual accounts could be handed down to children and grandchildren. That's not possible with Social Security today.
- There would be limited enthusiasm for alternate retirement accounts, which should reduce the overall costs to governments and private enterprises (the US Government currently funds between eight and eleven different retirement programs).
- The individual could possibly borrow against his/her retirement account for emergencies, or draw down a small portion for their children's education or unusual medical bills. The individual would then have the option of making up the withdrawn amount or accepting a smaller retirement. The big thing is, the individual would have a CHOICE.
The Social Security program as it exists today is a bad investment, heading for insolvency, possibly even bankruptcy . Making the change to individual retirement accounts would be expensive, but would solve the current problems in the long run. In the meantime, how can we pay for all those people already in the system, who are going to be bleeding it white in the next 20 years or so?
I suggested a 1% federal sales tax on all retail sales except food and gasoline. That should bring in enough money to continue to pay current recipients and cover the transition costs for the program for future recipients. We should allow anyone 50 or younger to "opt-in" to the program, and subsidize their retirement account until it's at the level it would have been in if they had paid into the program from the start. Once transition costs are paid, the tax would automatically end, and Congress would be prevented from renewing it. Everyone pays for the transition, and everyone benefits in the long run. With the system fully vested, Social Security would be nothing like the system we have today, but everyone would be better off!