Social Security Fix

cpwill said:

Here is my proposal:

Allow workers to opt into a partially privatized system, where of their 7.65% FICA expenditures, 5% goes into a private TSP-style account; and the Employers match follow the same. the remaining 2.65% (or, when you count the match, 5.3%) will go straight into SS, but it will be revenue for which SS will never see a liability. the cost for opting out is that part of your pay continues to go to pay for others, but the upside is that you get a combined total of 10% of your annual income going into a retirement account that belongs to you, and grows tax-free. Social Securities' revenues will instantly drop, but nowhere near as severely as their liabilities. To ensure solvency in the adjustment period (and to make it politically palatable); lift the cap. We can lift the cap on only the worker (and not the employer) if we want to encourage job-creation; or lift it on both if we need the revenue to ensure solvency, or if that's the only way to get the thing passed; here is room for compromise wiggling. Higher paid workers will see more of their money leave in the form of taxes, but those making less than $604,000 will get back even more in the form of ownership of personalized accounts (assuming the employer cap isn't lifted, and that's not figuring for the added benefit of those accounts growing tax-free), and so they will be willing to make the trade. Perhaps another compromise point would be to raise the cap to $604K. Poorer workers can either spend their lifetime building far more wealth than they ever would have seen under Social Security if they are younger, or keep the guaranteed program benefits if they are older.

ta-da! the American people and the Government are left better off.

how much better off?

welllll, let's do a quick example:

Joe graduates High School and goes to work, making 25,000 a year. Not anyone's idea of incredible pay, but there you are. Joe gets' a 2% raise every year to account for his increasing talent, experience, etc. The 10% of his income goes into a mix of funds that matches the S&P 500 Combined Annualized Growth average since 1982: 7.98% (after you account for inflation). If Joe retires nice and early at 62; his retirement fund will be worth $1,030,110, and if placed into an annuity / conservative account that generates a 5% annual return, his monthly benefit will be $4,292. That would be slightly less than his last monthly paycheck of $4,979; but still quite livable. If Joe works until he's 65, his monthly benefit will climb above his monthly income to $5,473; and if he decides (as most of us probably will) to delay retirement to 68, he's looking at a monthly retirement check of $6,966.

And remember, Joe isn't exactly one of society's higher paid workers.

But he also had the advantage of time. Let's say instead Joe went to two years of college, and got an associates before entering the workforce to earn that 25,000; and let's say that instead of 2%, Joe turns out not to learn new skills that well, and his annual raise above inflation is actually 0.5%. We're stacking the deck a little against ole Joe, but he still seems to come out okay; his monthly benefit at age 62 is $3,050; at age 65 it's $3,875; and at age 68 it's $4,915. It's worth noting that under this model, the most Joe ever made was $31,672 in a given year; and that his monthly retirement benefits at age 65 represents a $1,200 monthly pay increase over his monthly income. Even if Joe retires early at 62 he will have more in income off of his account than he would from working; and the longer he chooses to keep working, the greater, obviously, his return is.

AND ALL THIS WITHOUT COSTING OLE JOE A SINGLE RED CENT. since the money was cash he was losing to taxes in the first place, his take-home pay wasn't reduced one iota; but because we partially privatized social security, Low Income Worker Joe can retire a millionaire.

OR, if he didn't want the 'risk' of the marketplace, he could have chosen to stay with regular social (in)security. average monthly payout: about $1,100 dollars. or, roughly 1/3rd of what Joe made in our worse case scenario at age 65.


BUT WAIT!!! WHAT IF THE MARKET TANKS!!!

Markets recover. If the market tanks right as Joe was planning on retiring, he can work for an extra year while it rights itself, or simply choose to draw less from the account in order to leave more in there to ride the upswing. OR, if Joe makes the worst decision possible, at the worst time possible and withdraws all of his money while the market is at the low point on the trough (say, a 40% drop, similar to what we just saw), to purchase a 5% annuity... then his monthly income in our worse-case scenario at age 65 will still be more than twice what he could have expected from Social Security.





I am particularly interested in liberal critiques of this plan. Conservative ones (it leaves Social Security, which is unConstitutional, still in place, so on and so forth) I already know, but tend to discount them as beyond the politically palatable. It strikes me that this offers a little something for both sides of the economic aisle: for you Keynesians, the existence of a retirement fund growing tax-free will spur people to consume more and save less; for you Austrians, the existence of a steady flow of capital into the market irrespective of what it is doing will smooth out the business cycle, and create a massive interest group against easy money (people like few things less than watching their nest eggs dwindle thanks to inflation).

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Navy Pride said:

Why would anyone be against SS reform........Don't you know it is a Ponzi scheme and will soon run out of money?

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CalGun said:

Mathematically I believe your plan bankrupts our country as there is not enough of the SS tax left outside the individuals defined saving to make good on its current promise. This fix is great for 30-40 years from now but I have a hard time believing we'd get there with the deficit this would produce.

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Fact is 20 years from now you best hope we can still print money out of thin air. If not we're screwed thanks to the redistributive vote buying of the liberals.

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cpwill said:

Then you are incorrectly treating current inputs to the accounts as a total loss for the next three decades. Remember that this plan reduces the scheduled payouts from Social Security as well. Starting the year after this was enacted, individuals' accounts would be taking up portions of their payment, and that portion would increase every year. Using rough averages, it looks like the typical retiree will only require about 50% of what they otherwise would have needed from Social Security Funds as of year 15.

Almost immediately the highest-income will start to see sharp reductions in how much they are drawing out of the fund. For example, if you are making a combined income of around $240,000 then your account will already be supplying about a little less than a third, reducing Social Security's lifetime commitment to you by that much.

Now - not many make that, but the point remains - you immediately begin reducing Social Security's scheduled payouts and unfunded liability.

It won't solve Social Security's deficit overnight - but neither will it destroy us (as near as I can tell) like you are suggesting.




Nah. We're going to kick everyone but the poor off the programs. We could make it much better, but we won't. It's too easy to get old people to fear change, and vote accordingly.

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Dittohead not! said:

Plus, making it better would require a Congress that was able to put petty partisanship and extreme ideology aside and work for something that might be of practical benefit, but wouldn't increase the power of their party.

Now, that's just pie in the sky.

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cpwill said:

Then you are incorrectly treating current inputs to the accounts as a total loss for the next three decades. Remember that this plan reduces the scheduled payouts from Social Security as well. Starting the year after this was enacted, individuals' accounts would be taking up portions of their payment, and that portion would increase every year. Using rough averages, it looks like the typical retiree will only require about 50% of what they otherwise would have needed from Social Security Funds as of year 15.

Almost immediately the highest-income will start to see sharp reductions in how much they are drawing out of the fund. For example, if you are making a combined income of around $240,000 then your account will already be supplying about a little less than a third, reducing Social Security's lifetime commitment to you by that much.

Now - not many make that, but the point remains - you immediately begin reducing Social Security's scheduled payouts and unfunded liability.

It won't solve Social Security's deficit overnight - but neither will it destroy us (as near as I can tell) like you are suggesting.




Nah. We're going to kick everyone but the poor off the programs. We could make it much better, but we won't. It's too easy to get old people to fear change, and vote accordingly.

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CalGun said:

No disrespect but the numbers of high wage earners don't out number the masses who's distribution of social security payments won't be reduced a dime thanks to the vote buying left.

Do some math. 40-50% have government as their primary source of hand out! and wage earners over a $100k aren't even 5-10% of the US population and even less when you add them into the total working population of what - 135-150 million? The reason your math fails is that it reduces the lion share of revenue (from the 5%) and only cuts payments to that same small block while the rest still want and get full benefit. So you cut out like 66% of the income and reduce distributions by 10% at most!

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cpwill said:

We reduce scheduled payouts in two ways - 1. fixing benefit increases to inflation and 2. from the accounts. Every single person who earns an income will see the cost of their benefit to the government go down starting the next year; the effect is simply more pronounced and faster for those with higher incomes. In the meantime, we also pop the cap to bring in additional revenue. We see a temporary mitigated increase in the need to support Social Security followed by a long term decrease and a longer term (2-3 decades) complete removal of the program from the government rolls, and a longer term (3-4 decades) shift from Social Security being a net cost to it being a revenue generator for the government.

Basically, we can borrow an additional $200 Bn now to save and strengthen social security, or an additional trillion or so later just to keep it afloat for the poorest of our elderly.

I find it interesting that you direct me to do some math, but seem so averse to using it yourself. If you can demonstrate that any of the formulas I have presented are inaccurate, I would love to see it.

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CalGun said:

I don't discount your formulas. What I believe is skewed is the number of people paying in is very small and the number of people getting a benefit is very large.

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Your formula reduces what is paid in dramatically and reduces what is paid out only to those who pay in.

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I do want to believe in your math, but I don't see it. Please correct me.

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According to this
Personal income in the United States - Wikipedia, the free encyclopedia

48% of the US population makes less than $25 k a year. Does your plan reduce their social security payment? 75% makes less than $50k is there social security to be reduces?

Now if I read your plan correctly that higher 25% will get less social security while 10% of their social security is diverted to their retirement accounts? So you are taking out 80% of the money and redding the benefit obout. 25%. Please correct me?

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cpwill said:

For Social Security this is not correct - there are more payers than recipients.



...no. Firstly, we peg the growth in COLA to inflation, rather than wages, meaning that we are reducing Social Security's scheduled payouts to everyone, including the housewives etc. A second reduction in payouts comes from the accounts of those who are wage-earners, which is the vast majority of recipients.



Which part? I've put up quite a lot throughout the thread.



Younger workers make less and older workers make more - remember that what we are looking at here is people retiring at different times, and the younger/lowerincome folks are (see OP) actually better situated than the older/higher income folks because their long term return is better. If your typical 28 year old is making $38,000 today, then that's more than fine because it means that (assuming a RIO of 7.5% and a growth in income of 2%, commensurate with what Social Security currently assumes) he will have completely replaced what the government would have been on the hook for by the time he reaches about age 50. So he's a lower income worker, yes. Who now represents zero liability to social security. Since the vast majority of low income earners are in that age bracket, and since the average income of the 15-24 year old age bracket is about $14,539; they have a fairly heavy pull on national averages.

So (as of 2012), full time workers had an average income of $59,532 (median $45,365), which cuts out the part-timers that are going to be heavily represented in that 15-24 year old lower-income age bracket.

So a relevant bit to bring in is household income by age bracket:

And you'll see the same trend repeated - the older workers have greater experience and skill sets, and tend to earn more, until they start retiring (it seems we like to retire early - boomers are all getting out asap), at which point they earn less.

The point being that the very workers who represent the largest loss in revenue from their 10% FICA, A) current figures do not depend on much more income from them, making the loss the least over time and B) they are most likely to most heavily mitigate through replacement of the benefit from their accounts.

Social Security deficits are sustainable for a short time:

This is about where we are currently sitting. By popping the cap and indexing growth to inflation instead of wages, we reduce the near-year deficits by about 85%, before we reduce FICA inputs to put the deficits back up. By the time we get to that 2032 year mark, by my count, the average retiree should be replacing somewhere around 75% of his SS check, significantly reducing necessary outlays instead of collapsing the system. When the first private-account-retirees start dying, as well, an additional 50% of their account is taxed right back into SS.



I wouldn't be averse to additionally flattening the benefit by ending or sharply reducing COLA increases for upper-income retirees, similar to the Simpson-Bowles Proposal:

But only if necessary to make the thing solvent.

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CalGun said:

Ok simple question:

Are you advocating the reduction of benefits for everyone? If you are the points kind of moot because the left will never sell off their votes.

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cpwill said:

No. I am willing to reduce the benefits of the wealthy - but I have not proposed such a thing here. I have proposed increasing their FICA contributions in order to help fund the shift over to a partially-privatized Social Security model that would cause people to provide for their own retirement rather than being dependent on others.

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CalGun said:

So my hypothesis of what you suggested is real then. You are going to divert much of the wealthiest people money into personal retirement accounts for their own good (great) but you are going to leave the social security liabilities for everyone else in tact - which means you are decreasing the labilities a small sum (only for the rich) and decreasing the income dratically - unless you are alking a huge FICA increase? I did not see a FICA increase in your proposal so I missed that.

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cpwill said:

No. I am decreasing liabilities for the entire population, and I am also diverting the money of everyone into personal retirement accounts for their own good. The only FICA increase currently proposed is popping the cap.

You are correct that this will increase the deficit in the short term. It will reduce it in the long term, and have the opposite effect of generating a powerful surplus for the government in the out-years, allowing us to decrease other forms of taxation.

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CalGun said:

At least you acknowledge the short term hit on the deficit. I think it's bigger then you imagine however. Also I oppose removing the cap as a solution. This just penalizes success and rewards failure even more and we have too much of that in society now. Mind you though I'd take that compromise if it meant we all had our own retirement plans instead.

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cpwill said:

No. I am decreasing liabilities for the entire population, and I am also diverting the money of everyone into personal retirement accounts for their own good. The only FICA increase currently proposed is popping the cap.

You are correct that this will increase the deficit in the short term. It will reduce it in the long term, and have the opposite effect of generating a powerful surplus for the government in the out-years, allowing us to decrease other forms of taxation.

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Dittohead not! said:

What you are suggesting is a compromise that just might work: "Pop the cap" on SS, make wealthier wage earners pay more into the system so that people can put a (presumably ever increasing) percentage of their SS money into private accounts.

Of course, the radical right will call that "Marxism", as you're taking money from the wealthy to give to the less wealthy, and the radical left will say you're destroying Social Security. That is the hallmark of a good compromise: Neither extreme likes it.

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cpwill said:

:shrug: due to the accounts belonging to the individual, it's a net win for upper income earners up to about $460,000 a year, before you count the tax benefits. I'm willing to face down the Pledgers on the right over that border.

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Dittohead not! said:

If you're ever elected president, you can try to get your idea through Congress. If we've thrown out the incumbents by then, you just might be successful.

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cpwill said:

Your name just went on a list to send donation-request emails from now until the end of time :mrgreen: :lol:

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CalGun said:

At least you acknowledge the short term hit on the deficit. I think it's bigger then you imagine however.

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molten_dragon said:

I'm not sure why so many people keep coming up with complicated solutions to fix social security. Fixing social security is extremely simple. The only thing that needs to be done is to raise the retirement age significantly. Bam, Social Security is solvent again.

If you want a safety net to protect you when you're too old to work, or unable to because you're disabled, social security will provide it. If you want to retire for 20 years, do it on your own dime.

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