Bold New Plan For Social Security

[jtr1962]

I read about the The Social Security Personal Savings and Prosperity Act of 2004 yesterday. This is actually a proposal I like. The plan would allow workers to put up to 10% of the 12.4% taken out for the retirement portion of Social Security into private accounts. This would only apply to the first $10,000 in wages. Above that, you could put up to 5% of the 12.4% into private accounts. Overall it is claimed that workers could put an average of 6.4%, or exactly the employee's portion, into investments of their own choosing. The allowed investments would be carefully regulated as to safety and soundness. Workers who opt out of the current system would be promised pro-rated benefits based on what they had already put into it. For those who remain in the system, benefit levels would remain the same as today.

I have to say that while this plan isn't exactly what I had hoped it does allow you to put a decent chunk into personal accounts. This is unlike previous proposals which divert only a paltry 1%. In the event you die before collecting, at least you know the money put into Social Security simply won't "disappear". It is claimed the plan will bolster the current system while allowing those who opt out to get far better returns than now.

I hope this plan passes and is signed into law. While I had hoped for a plan that would allow me to put everything (15.3%) currently taken out into private accounts and had also hoped that those who opt out would be refunded what they had put already into the system to put into those same private accounts, this proposal is likely as good as it's going to get for now. Hopefully it will pass, and when the value of personal accounts is seen maybe those who opted out will be able to get back the money they put into the current system in exchange for a complete release of obligations on the part of the government to them.

 

[Will Rickards WT]

Sounds great for people like me who would put the money into something else. But how can this benefit the current system? I can't see anything other than a mass exodus happening? Thus there will be much less money going into social security.

And how do the benefits work for those that opt-out?
Do they still get the benefits from the employer's portion? Or just nothing?

 

[jtr1962]

To answer both your question I quoted the article directly:

But how can this benefit the current system? I can't see anything other than a mass exodus happening? Thus there will be much less money going into social security.

Social Security Chief Actuary Goss has scored this bill as eliminating the program's long-term deficits and achieving permanent surpluses, all without any benefit cuts or tax increases. That results because the personal accounts take over so much responsibility for paying future retirement benefits.

And how do the benefits work for those that opt-out?
Do they still get the benefits from the employer's portion? Or just nothing?

Workers opting for personal accounts would receive Recognition Bonds guaranteeing them the payment of Social Security retirement benefits based on the past taxes they have already paid into the program. Workers would then also receive the benefits payable through the personal accounts.
.....
The new accounts are also backed up by a continuing safety net, guaranteeing that workers would receive at least as much through the accounts as Social Security promises under current law.



I presume the employer's portion will be more that enough to pay for this safety net since the average person will get higher returns than Social Security gives, and thus will rely solely on their savings account for their retirement. For those who don't, the safety net will be there.

N.B. The "employer's portion" is actually a misnomer. As far as I'm concerned the tax rate is 15.3% since the employer's portion represents money that is in effect part of the wages, even if it is not reported as such. Indeed, if you're self-employed as I am you actually are taxed at a rate of 15.3% for Social Security/Medicaid (it works out to a net rate of 14.13% once you count the deduction of one-half of the self-employment tax). This is one reason I filed as an S-corp for a number of years-to avoid 14.13% taxes starting with the very first dollar of income. Under the new plan I'll gladly pay. Since I usually make under $10,000 I can put most of the taxes into a personal savings account. My net tax rate would be 4.13%, and in most cases less because the earned income credit offsets some of the self-employment tax. Even if I made, say, $50,000, I would only end up paying about $4065 for Social Security/Medicaid while putting $3000 into a personal savings account. This works out to a net tax rate of a little over 8% instead of 14.13%-still steep, but at least a step in the right direction. I'll be even happier if the amount on which you can contribute 10% is eventually raised from $10,000 up to whatever the average salary is.

 

[Mercutio]

I honestly don't believe that most people are qualified to manage their own money. From observation, I don't believe most money manager are, either.

 

[Grim]

While I had hoped for a plan that would allow me to put everything (15.3%) currently taken out into private accounts and had also hoped that those who opt out would be refunded what they had put already into the system to put into those same private accounts, this proposal is likely as good as it's going to get for now.

Due to the current state of the Social Security system, they could not possibly do what you'd like them to do - they don't *have* the money you've put in. It's been pilfered.

Part of the reason this plan won't get any better is that they need to continue stealing money from younger people to pay back the money they stole from older people who are now receiving Social Security payments. I am actually fairly astounded with the amount of our money that this bill would let us keep. I don't expect to see this get passed without that being widdled down a bit; however, I'm still overall very optimistic about this.

 

[Grim]

I honestly don't believe that most people are qualified to manage their own money. From observation, I don't believe most money manager are, either.

True. The only reason why I'd support something like the afore-mentioned bill is that, on average, people are better managers of their own money than Congress. If Congress as an effective whole was able to leave a large pile of money, that they had promised to reserve for a specific purpose, sit and earn a return, Social Security would be a good program, and would not be in trouble now. Unfortunately, that's not the case.

This, incidentally, isn't a partisan problem, as both parties have raided Social Security on numerous issues to fund their own pet programs. The real problem is that the average Congressperson is roughly as skilled at managing money as the average person; however, they, as a general rule, are not held accountable for their money managing decisons. When they are held accountable, their replacement typcially doesn't undo their dirty deed - at best, they'll redirect the pilfered money to a different pet project.

 

[sechs]

What's the point of Social Security if you can blow it? If we want people to have more control over their retirement, simply decrease the amount of money that is taken for OASDI and let the people invest it privately. No need to get the governement in the way.

As I see it, Social Security is insurance (old age and disability insurance, to be sure). It's guaranteed; the full faith of the US government guarantees it. And while the return is very poor, it *will* be there.

 

[Grim]

What's the point of Social Security if you can blow it? If we want people to have more control over their retirement, simply decrease the amount of money that is taken for OASDI and let the people invest it privately. No need to get the governement in the way.

The problem with this approach is that many people will spend any money they get their hands on, even though they know better. (This is why direct-deposit investments are seen by many to be a very good thing.) This bill is purportedly doing something similar to that. (As I haven't seen the actual text of the bill, I cannot say for certain.)

As I see it, Social Security is insurance (old age and disability insurance, to be sure). It's guaranteed; the full faith of the US government guarantees it. And while the return is very poor, it *will* be there.

Unfortunately, the current state of affairs is that a number of bodies are questioning the US government's ability to continue to do this in the manner that it has thus far. Many of the bodies doing this questioning are in positions to know even more than those who merely watch C-SPAN. We have a Congress which is peopled by individuals who have a reputation for spending any money they get their hands on, even though they know better. The idea behind this bill and others motivated similarly to it is to have a portion of the mandatory retirement investing *not* be in a location where Congress can get its hands on it.

 

[jtr1962]

Yes, Grim, that is exactly one of the main advantages of this plan as I see-a good portion of the money is put in a place where Congress can't get its grubby hands on it. All other things being equal, this in and of itself is a good reason to support it. It is not surprising voters usually reject new "dedicated" taxes these days. They know the money will eventually be spent for everything but what it was intended for. Frankly, I was shocked the first time I learned that the money paid into the system was spent, rather than invested. I don't count US government bonds as an investment here. What the government has essentially done up to this point is deficit spending funded by the surplus in Social Security.

The simple fact is that the system in its current incarnation can't continue. Either benefits would go down or taxes would go up. The article mentioned the necessity of eventually raising the tax rate to 20% to pay benefits at current levels (I don't know whether this was 20% in total, or simply the employee's portion). Regardless, either way the net result is you pay more for less. The system as it is would create a two-tiered society where those who are already retired (and who paid 6.4% or less over their working lives) are enjoying the same or better benefits than people who will pay 6.4% or more into the system for their entire careers. Ultimately, this will undermine popular support for Social Security (to a large extent it already has), and I feel in time the system as it is would be dismantled anyway.

Social Security has only continued to exist because the average person felt they benefited from it. Once this is no longer so, someone will challenge the constitutionality of what is essentially a mandatory insurance program, and I believe they would win such a challenge. At that point the system would become voluntary and many people would undoubtedly opt out. This law seeks to give people a better deal, and to transition the program from pay-as-you-go into vested.

On another note, I was also shocked when I found out how low the returns are with the current system. The article claims conservative investments of just the employee's portion will yield payments of 1.5 times what Social Security gives. Average investments will yield about twice the benefits. Basically, they're admitting that the current system gives a return on investment of from one-third to one-fourth of what relatively safe investments would once you count the employer's portion. Factor in the amount taken out for Medicare, and it just gets worse. Speaking of Medicare, something desperately needs to be done there as well. Medical entitlements in general are eating up ever larger portions of government budgets as the population relies more and more on expensive medical intervention, and less on prevention. Among the more brain-dead ideas of recent times was allowing drug companies to advertise. This has resulted in a "there's a pill for everything" mentality combined with less emphasis on leading a healthy lifestyle.

 

[sechs]

The problem with Social Security now is that:

1. Current income supports current expenses. Premiums paid today should, in reality, go towards expenses incurred by those who pay them. As the working population changes, the amount of money available for expenses changes.

2. It's way too easy to get Social Security money. There are required pay-outs and now sensitivity to a person's current income. This means that people are getting checks that don't need them. As insurance against poverty in old age, you should not get Social Security unless you're poor!


Social Security is not an inherently bad system, but it does have some structural issues. This bill does not address those issues.

 

[Grim]

Social Security is not an inherently bad system, but it does have some structural issues. This bill does not address those issues.

To address those issues, they'd need to admit that they were wrong.

Social Security itself has been around long enough that it can be completely revamped without slighting anyone still in office (or, for that matter, alive). However, many people are still in Congress who've raided SS for their pet projects, and there was a campaign just a few years ago that I heard about to get people who didn't need SS benefits but were entitled to them to file for them, so that they could claim more people were dependent upon them.

For whatever reason, the typical US voter has stated by means of their votes that they will not stand for any congressional representative admitting to making mistakes of any significance. We therefore have a legislative body that would not do what it takes to fix the real system, even if they really did want to fix it.