Yes, you read it correctly. Here are the words politicians
are unwilling to utter. Democrats have made it clear they wish to
preserve it while many Republicans have argued for partial privatization.
Bernie Sanders has launched a campaign attacking the Koch brothers and
organizations who have questioned the viability of Social Security and
suggested fixes, claiming they want to "destroy" it. Sanders,
meanwhile, has pledged to expand it. Are concerns about the
programs viability legitimate or is it all Koch-funded propaganda?
Signed into law in 1935, Social Security now encompasses a group
of social insurance plans that help protect the elderly and disabled from dire
straits - by most accounts, a noble endeavor. Medicare and Medicaid were
added in 1965. Unfortunately, with a growing number of elderly and
disabled, the financial stability of the program has been challenged.
Since 2010 SS has been in a severe negative cash flow position and estimates
show the disability fund may run out of money as early as 2016 (that's next
year for those of you not paying attention) and the retiree benefits by
2034. After that, income will lag behind benefit liabilities.
While
Senator Sanders and others blame the Kochs for misinformation, the
Social Security website says as much:
“The last 5 Trustees Reports have indicated that Social Security's
Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund reserves would
become depleted between 2033 and 2037 under the intermediate set of economic
and demographic assumptions provided in each report. If no legislative change
is enacted, scheduled tax revenues will be sufficient to pay only about three
fourths of the scheduled benefits after trust fund depletion.”
MEANING, it will require 100% of the contributions of current
workers to fund current retirees and that will only be enough to pay 75% of the
benefits. If the ratio of retirees to workers grows, the problem will get even
worse. Further, Social Security Disability Insurance (SSDI) that
will be bankrupt by next year has got even bigger problems because the number
of recipients has quadrupled since 1970 and as Reason.com explains,
"the statistics show large increases in applications for
disability benefits when the economy is struggling and unemployment is rising
but fewer applications when the situation is reversed, Given that people
obviously don't become more or less disabled depending on how the economy is
performing, it means that people are using the program as a form of
unemployment insurance."
This is not a situation completely unique to the United
States. We are living longer and the demographics that existed in
the post WWII-boom with a larger number of younger workers and a smaller
number of retirees has turned upside-down. Countries that are heavy on
entitlements and haven’t prepared for this change are facing economic disaster
along the lines of Greece.
Is this something that can be fixed or is there a better
way? Of course there are ways to make the existing system last longer but
that doesn’t address the more fundamental question of whether or not it’s the
best way to provide social insurance for the elderly and disabled.
Most people do not understand how SS actually works. In
theory, and many presumably believe in practice, a worker’s contributions to SS
would be kept in an individual account and put aside for retirement or other
need. Many Americans believe this is how it works, along the lines of Al
Gore’s famous “lock box.” That is not the case. Social Security
checks do not represent a return on invested capital and as Pew Research points out, “the taxes paid by
today’s workers and their employers don’t go into dedicated individual accounts
(although 32% of Americans think they do).”
According the the SS website, “tax income is
deposited on a daily basis and is invested in "special-issue"
securities. The cash exchanged for the securities goes into the general fund of
the Treasury and is indistinguishable from other cash in the general fund.”
The SS trust fund therefore has no money in it long term as the cash is converted to debt notes and
bonds. The money itself then becomes available to Congress for spending
as with all other tax revenue.
The government then depends on the sale of securities in order to
fund retirees, along with the taxes of current workers. A program that
assists seniors in the needy is certainly a distinguishing factor of a
civilized society but the problem is twofold: one, in that the program is
not fundamentally structured in a simple way that provides individual
retirement benefits and as such, gives a very limited returns. In
addition, the program has run out of money in the past and is going to again
unless changes are made.
Of greater concern and unknown to most Americans, legally no one
is actually “entitled” to their benefits, meaning the government is not legally
obligated to pay them. As early as 1937 in Helvering v. Davis the Supreme Court ruled
that Social Security was not a contributory insurance program, saying, “the
proceeds of both the employee and employer taxes are to be paid into the
Treasury like any other internal revenue generally, and are not earmarked in
any way.” Even more alarming, in 1960 regarding Fleming v. Nestor, the Supreme Court ruled that
citizens don’t have a right to Social Security benefits even if they paid into
the system and Congress can change the rules at any time.
In essence, as Michael Tanner of the Cato Institute accurately
points out, “Social Security is not an insurance program at all. It is simply a
payroll tax on one side and a welfare program on the other. Your Social
Security benefits are always subject to the whim of 535 politicians in
Washington.”
Yet when some Republicans mention even partial voluntary privatization,
there is a backlash. while the private market admittedly offers much
greater upside, people have also experienced substantial losses and that isn’t
ideal for a social insurance program.
What is the answer? Many Republicans demonize Social Security
without acknowledging its intent, dwelling on the cost rather than addressing
the fundamental flaws. Meanwhile Democrats exploit the public’s ignorance
to use preserving SS as a talking point, never admitting that there are far
better ways to craft such a program.
If there was ever a doubt that
Social Security in its current form has become a political tool, look no
further than the ever-contradicting-himself Paul Krugman, who expressed great
concern over the program in 1996 and agreed with Bill Clinton that "every
single year we avoid resolving this, it will get harder and harder and
harder," and continued his expression of worry for years, only to back peddle in 2007 and ostracize
those expressing similar concerns. Sadly, this has become routine for
economist-turned-pundit Krugman who has made similar about faces on minimum
wage and other issues.
This is the typical “us vs. them’ black and white thinking that
permeates our political landscape. It’s unfortunate because better
options are usually right in front of us...or sometimes, to the north.
Canada, for example, is a real, multi-faceted social insurance and
pension plan: a hybrid of a pay-as-you-go and private pension
plan. Canada has its own taxpayer-supported social security-type
system for senior citizens of modest means, the the Old Age Security pension
(OAS), but also provides the Canadian Pension Plan. The CPP Investment Board states as “a global
investment organization, we invest in public equities, private equities, bonds,
private debt, real estate, infrastructure and other areas. “
While the OAS and CPP provide benefits somewhat
comparable to Social Security, the contributions are much lower. As of
2013, employees contributed 4.95% of gross income between $3,500 and $51,100,
up to a maximum contribution of $2,356.20. The employer matches the employee
contribution, which totals 9.9% of pensionable income. In contrast,
Americans are currently contributing a total of 12.4% with a cap of $7,254 as
of 2015. Canada as well as the UK are also offering tax-free universal savings accounts and not
just for retirement.
So Americans really aren’t getting a good deal. There is
much criticism of Wall Street for making a lot of money and the benefits of
investing are mostly relegated to the top half of earners. Most people
would like to ride on the same train but also don’t want to put everything at
risk, even if they have the wherewithal to invest. Others are worried
about educating the public about diversification. Suggestions at even an
option for a voluntary, partial use of one’s own social security contributions
to be put in private accounts by President George W. Bush and Paul Ryan were soundly rejected and while the idea has
great merit, it certainly presented challenges for transitioning.
America’s seniors are already the new middle class and
have become that with a combination of Social Security, pensions and
investments they made during the Post WWII boom. The New York Times
reports that today’s seniors have greater resources than previous generations
but the trend is not likely to continue. While paychecks may be larger,
SS benefits may be smaller when today’s workers reach retirement age and
today’s 401(k) savings plans are not guaranteed nor as generous as
employer-sponsored pensions of the past. States and local municipalities
are also being forced to look at unfunded liabilities and overly generous
promises made as they try to avert bankruptcy or some cases (Detroit) come out
of it.
The best solution? Most reasonable people, if educated,
would presumably want the benefit of the private market without the risk.
is that too good to be true? In private investments alone, yes...but what
if the government worked in partnership with the market?
The
Rise Up Theory of Economics, also known as The USA plan,
advocates the best of both worlds: It
redirects the payroll contributions presently paid by
individuals and employers into personally-owned investment accounts that can
grow into millions over the citizen's working life. Instead of going to the
government, the funds are invested in a unique USA (Universal Savings Account)
in safe indexed stock funds that have historically been growing at over a 10%
rate for the last 25 years and most importantly, the proposed enacting
legislation would guarantee no reduction in benefits. The accounts will
be backed by the government and insured against loss; in other words, all of
the upside with none of the risk. In fact, if successful, the guaranteed
minimum benefit could be increased in the future.
How much better would the economy be and how much less would
seniors and others be reliant on govt benefits if they were able to retire at
an average of 8x their current salary? The potential is staggering:
even an minimum wage worker earning only $7.25 for a 40-year career (much less
than anyone is likely to earn) is able to accumulate a nest egg of over $1.2
million and receive a $10,000 monthly benefit check. Some of that would
presumably need to be set aside to insure against loss but regardless, it is
far more than Social Security provides now or ever will in the future.
Every responsible person who has the money to invest does so
because of the returns. There is no reason this opportunity should be
relegated to only the top half of earners.
- Many people can’t manage their own
money so the contributions still have to be involuntary.
- A new plan shouldn’t cost the
taxpayer more than it does now.
- Taxpayer funds should be in trust
and unreachable by politicians, Congress, taxes, courts, one’s creditors
or spouses and by the taxpayer himself until retirement.
- All present and future retirees
without the time to accumulate substantial nest eggs must be guaranteed to
receive the amounts presently paid under Social Security, Disability and
Medicare.
- Taxpayer’s funds cannot be managed
by stockbrokers or investment houses; the trust will invest directly,
bypassing commissions and other costs associated with brokers.
- Taxpayers will have control over
which bond or stock funds his or her money is invested in during their
working life. These funds will track the steady upward movement of the
market and grow with our economy.
- No risky investments will be
allowed. Funds should be diverse and contain hundreds of quality
stocks to avoid having a few crash the entire account.
Now the bottom half of earners won’t have to watch the top half
reap the rewards of investing while hoping that someone such as a Bernie
Sanders opening about income inequality will change things by raising taxes and
minimum wage. Ironically, it satisfies the supposed goals of those who
will likely work hardest against it by turning the non-existent
"trickle-down theory" into a windfall for everyone—something
the actual supply-side economics advocated.
The USA plan, or one similarly crafted, creates and preserves
wealth for anyone who works. That is the first, most important and obvious
benefit...but there would be many more.
The infusion of over $100 billion of new investment capital into
the stock market every month would be a powerful force against economic
stagnation and provide capital to accelerate job creation. It should put
the economy into overdrive. By doing so, as well as creating much greater
wealth in retirement, it could also be the impetus for paying off all debt and
unfunded liabilities, followed by taxing Americans at much lower rates.
Long term, it could possibly reduce or eliminate the need for separate
government pensions and Medicare, end the need for businesses to
independently fund retirement plans and potentially reduce the size of
government dramatically by eliminating much of the bureaucracy dedicated to
social service administration. The creation of wealth could even
dramatically reduce crime.
“Faced with the competing interests of right and left -
Republicans and Democrats – it was up to me if I was to construct a new
economic theory to meet certain basic requirements of both philosophies. The
right has always been focused on ways to increase the flow of capital into the
equity markets to keep the economy growing. On the other hand, Democrats
and their many diverse special interest groups continue to look to the state
for answers to their varied social and economic needs and to finance their
myriad of programs by taxing the rich. “
Many assume that wealth is finite and we must take from the rich
in order to give to the poor and hence, ostracized supply-side economics by
falsely portraying it as “trickle down.” The USA Plan actually does what
true supply-side endeavors to provide: greater access to capital and
lower tax burdens for everyone. It meets the demands of both
parties by increasing the wealth of the “have-nots” without taking anything
away from the wealthy. The only ones who may be disappointed are those
who truly believe that great wealth should not exist.
McDonald continues: “Create an economic theory that
does both... It is going to be an involuntary rain storm of mammoth proportions
for all classes of Americans and substantially close the gap between the rich
and the poor.”
This plan is actually relatively simple in concept and execution.
The only real complication is in transitioning over. It is long
past time for all Americans to understand that our leaders have a propensity,
even when intentions are good, to create overly complex, mediocre and often
poorly-performing solutions to society’s ills. Our tax code is probably
the best example but Social Security is another. The creation of great
wealth for all Americans is not an unattainable pipe dream and would go a long
way in helping to alleviate a lot of other social welfare issues that divide
us, as well as lessening the need for relying on government to solve
them. Government is here to provide support where the private
sector isn’t sufficiently incentivized to do the right thing; it isn’t supposed
to take its place.
The Democrats have championed—and guys like Bernie Sanders wish to
expand—programs that are fundamentally flawed and don’t provide the kind of
“relief” that the USA Plan could. Meanwhile Republicans have offered
half-baked solutions that offer upside but lack provisions ensuring that
Americans without the wherewithal to invest wisely or cover their losses won’t
be at risk of losing everything.
Of course, if we solve this problem, there might be far fewer special interests
left to pander to. In fact, if we truly eliminate poverty, we'll have to
find someone else besides the wealthy to demonize.
