Thursday, November 4, 2010

Watch Out Social Security, The Fix Is In! ... And You're Out

While Social Security, in it's original conception, had certain federal guarantees many found desirable, it lacked the ability to account for two key variables. These variables change slowly, and thus can be easily dismissed in the short term. But they cannot be ignored in the long term. They are 1) a change in the ratio of people working to people retired; and 2) an increase in the average lifetime of an individual.

So that we're clear on a key concept, as people pay Social Security taxes (and every employed individual does), that money is immediately distributed to people who are retired. It is not saved for you for when you retire. The idea is that hopefully, when you retire, there will be new people paying into the system.

I know there are many solutions people have presented for the "problem" of Social Security. Here's one for your consideration:

Dealing with those still working

Identify how much each individual has paid into the system and how long they would continue to pay into the system should they work until retirement.

The governement would stop taxing for Social Security. This would be an instant 15% increase to disposable income: 7.5% for the individual and the same for the employer. As a result, other taxes would increase: income tax, taxes on profits, etc.

The governement would issue bonds to individuals that would come due in such a manner as to have completely repayed the individual their "investment" into Social Security by the time they retire. These bonds would be a collection of short, medium, and longterm bonds so that the burden of repayment could be spread out over time but still pay the individual back in full.

The bonds could be distributed in either a bell curve where the bulk of the repayments were in the medium term category or a straight line distribution where even payments are spread among the differing bond categories.

These individuals would then be responsible to provide for their own retirement. Retirement planners could assist the individuals in converting maturing bonds to other retirement vehicles.

I would suggest that these be subject heavy scrutiny with penalties sufficiently severe as to remove any incentive for fraud. It seems reasonable that the IRS, with it's vast experience of auditing could provide said oversight.

Those already retired

An analysis would be made per individual of how much individuals were receiving per anum. This would be compared against the average life expectancy of the men and women to see how much the government would have been expected to pay. The government would then take that amount plus five years of the average life and pay the individual in full.

Additional items

The government could then require companies to provide the means where individuals could take pretax dollars and invest them into retirement savings accounts (whatever vehicle that happens to be) up to some fixed percentage (perhaps an even 7.5%). In other words, employers would have to be able to take out pretax dollars and deposit it in a retirement account of the employee's choosing.

The government could also allow companies to match said investments with pretax dollars of their own but with the added bonus that for every dollar matched, the company wasn't taxed for 1.15 dollars. This would provide an incentive for employers to want to match employee retirement investments.

There should be a heavier than normal tax should an individual wish to remove money from their pretaxed retirement saving account, sufficient to strongly discourage meddling with retirement funds.

Basic personal finance and investment would be a required class as a senior in high school and as a sophomore in college.

Pro's and Con's

Pro's
  • The government would instantly drop 25% of it's financial obligations.
  • People would be responsible for their own retirement. They could invest in their retirement tax free.
  • Companies would be motivated to "match" employee retirement investments.

Con's

  • People would be responsible for their own retirement.
  • Retirement accounts would be subject to the risk inherent in their retirement portfolio.
  • There is potential that the government would dramatically increase it's debt in the short term.

Ok, one thing I need help with is, what do you do with people who choose not to invest in retirement? How can you motivate them to do it? Should there be an incentive? A penalty? Both? If they don't choose a retirement method, should the government intervene?

This is very much a rough draft and constructive comments would be most welcome.

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