The world according to me. I am a conservative, middle aged husband and father. These are my opinions on how to make the world a better place. Feel free to post questions or problems and I'll give you my unqualified advice.

Saturday, March 19, 2011

My plan to fix Social Security

MaD dOG Sez:

Social Security is nothing more than a Ponzi scheme run by the Federal Government. It has no hope for longevity. The only way it has lasted this long is because of the massive amount of debt associated with it. The Federal Government has actually taken the basic Ponzi scheme and made it worse. They have spent all the money ever collected, and paid benefits by accumulating debt.

The problem with a Ponzi scheme is that someone is eventually left holding the bag. In this case it is future generations that will have to pay off the debt caused by reckless government spending. My plan will actually increase this debt, but it also creates a light at the end of the tunnel that is not an oncoming train. The good news is that it get's the Federal Government out of the retirement planning business all together. The bad news is, it will still take about 60 years to do it. There is also plenty of pain to spread around, and no really good way to spread it. The people that deserve to be made miserable simply would be unable to make the required sacrifices.

So here is my best effort at changing the way Americans plan for retirement.

1. Means test all Social Security benefits. Anyone in retirement that has income above $120,000 per year would have their Social Security benefit reduced on a dollar per dollar basis for any income over $120,000. So if you would normally receive $25,000 in Social Security benefits, but you have $130,000 in annual income, your benefit would be reduced to $15,000.

2. Age adjusted benefits and contributions.
A. Aged 55 years and over.
1. No change to contributions.
2. Benefits are means tested.
B. Aged 45 to 54.
1. Government to refund 25% of monies paid into social security.
a. This money MUST be rolled into an IRA as currently defined by law, but would not count toward annual contribution limits.
2. Social security contributions reduced by 25%.
a. The 25% difference MUST be contributed to an IRA as currently defined by law, but would not count toward annual contribution limits.
3. Benefits paid at retirement reduced by 25% and means tested.
C. Aged 35 to 44.
1. Government to refund 50% of monies paid into social security.
a. This money MUST be rolled into an IRA as currently defined by law, but would not count toward annual contribution limits.
2. Social security contributions reduced by 50%.
a. The 50% difference MUST be contributed to an IRA as currently defined by law, but would not count toward annual contribution limits.
3. Benefits paid at retirement reduced by 50% and means tested.
D. Aged 25 to 34.
1. Government to refund 75% of monies paid into social security.
a. This money MUST be rolled into an IRA as currently defined by law, but would not count toward annual contribution limits.
2. Social security contributions reduced by 75%.
a. The 75% difference MUST be contributed to an IRA as currently defined by law, but would not count toward annual contribution limits.
3. Benefits paid at retirement reduced by 75% and means tested.
E. Aged 24 and below.
1. Government to refund 100% of monies paid into social security.
a. This money MUST be rolled into an IRA as currently defined by law, but would not count toward annual contribution limits.
2. Social security contributions reduced by 100%.
a. This 100% difference MUST be contributed to an IRA as currently defined by law, but would not count toward annual contribution limits.
3. No Social Security benefits paid at retirement.
As you can see, with the average life span nearing 80 years, Social Security would still be paying out benefits for another 55 years at least. After that however, payout will reduce drastically and eventually become zero. Refunding payments and reducing contributions as shown will also add to the debt accumulated by Social Security. At some point Federal tax dollars are going to have to pay that massive debt.

As people are weaned off of Social Security, they will become more self reliant. The "forced" contributions to a personally owned IRA will help them be ready. There will always be people that fall through the cracks and will need outside assistance at retirement. I believe that assistance is best rendered at the state and local level.

I wish I had access to the tools that could tell me how much would be saved my means testing benefits, and how much it would cost to make the contribution refunds and lower the contributions as noted in the plan. If you have any expertise in this area, feel free to comment. Maybe the $120,000 income level is too high, or too low and would require adjustment. I also wonder if the required IRA contributions of money that used to go to Social Security would survive constitutional scrutiny.

It may not be perfect, but I think it's a pretty good starting point for discussion and debate.

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2 Comments:

Blogger Robert said...

MaDdD_dOGgG,
You are correct that means testing benefits is another way to cut SS benefits and lower costs. You're also correct that it's possible to privatize SS gradually. How much could be saved and how much this would cost really doesn't matter because you don't need to be constrained by privatizing SS within 55, 100 or even 200 years. By gradually "prefunding" benefits (instead of the current "pay as you go" scheme), the overhanging future benefit costs eventually evaporate.

Though it's possible to privatize SS, I disagree that privatization is a proper goal. SS provides not just retirement benefits, but disability insurance. Also, SS redistributes income to those earning low wages or working for shorter careers. The redistribution occurs through the "bend points" in how SS benefits are calculated. I support SS redistribution (and I'm on the high end of the bend points).

Finally, SS acts as an annuity based on earnings record rather than the stock market. Nearing retirement myself, I'm glad to have a core of SS benefits. Looking at projections of my retirement nest egg over the remainder of my lifetime, there's a 10% chance of going bankrupt and a 10% chance of leaving $10 million. I'd much prefer a 100% chance of living a decent life style, and SS benefits provide that core.

6:07 AM

 
Blogger MaD doG said...

Thanks for the comments. Thought I would try to answer some of your questions.

I came at this with the understanding that Social Security is a promise made to American workers by the Federal Government. It is a promise that must be broken. My philosophy is that people should be responsible for themselves. Many people have worked their entire adult lives and planned retirement finances that include Social Security income. The main concern with my plan is that those nearest retirement, those with the least amount of time to take action and change plans, would be the least affected. So if you are within 10 years of retirement, no change at all, except for the means testing. If you are 24 and over 40 years from retirement, drastic changes - no Social Security - because you have so much time to alter course.

We disagree on privatization. Government has proven for decades that they cannot be trusted. Putting the money into the hands of the people that earn it is the best way to go. The disability insurance provided by Social Security should be shifted closer to the individual... state or local level. Much of the disability money is wasted on fraud and addicts, etc. The farther that money gets from Washington, the more likely it is to be used wisely.

As far as Social Security acting as an annuity, I'd be happy to see annuities as options in IRAs. If people want to make those choices, they should be able to. I disagree that Social Security gives you a 100% chance of being the core of a decent lifestyle. I believe that without radical changes, Social Security will cease to exist. How rapidly that happens, and under what circumstances, I don't know. My plan was to let the air out slowly, controlling the descent.

Where I have trouble with my plan is forcing the money refunded or redirected from Social Security into retirement funds. I'm not sure it would pass Constitutional muster. It sounds a lot like forced health insurance - and I'm against that. I can only rationalize it by saying that the worker is keeping the money. It's theirs. They are just being forced to save for their own retirement instead of counting on the government to do it.

A friend of mine also pointed out that there is also an employers share of Social Security contributions. (I just gagged calling them that) What would happen to that money? I think that the employer's payments already should made be refunded to the worker along with their personal contributions as their age dictates in the original plan. For workers that are having their contributions lowered going forward, the matching employers contribution might be split... half to the workers retirement fund, like a 401K match, the other half retained by the employer. That would likely spur job growth. Maybe it could be split three ways with the third share still going to Social Security.

This is definitely a work in progress. Hopefully others will toss in some ideas that make this more bearable. Thanks for your input. More discussion makes a better plan.

10:02 PM

 

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