A Proposal for the Future of Social Security
In the political atmosphere surrounding Social Security, the best thing that can be done at this time is brainstorming. There simply aren’t enough options on the table yet, and it’s obvious that no one position has the support of the citizens or their representatives. The President’s proposal doesn’t make actuarial and financial sense, nor does the Democrats’ assertion that it is not yet time to act on Social Security hold water.
So what do we need? Ideas. Lots of ideas.
Here are mine:
First off, what are our goals for Social Security? I see two: to eliminate senior poverty and to provide a mandated pension to force people to save some of their earnings. Social Security is currently straddling the line between a welfare program for the elimination of poverty and a pension account. If we split these two purposes up and make them financially independent, we can make each work on its own.
The welfare portion (let's call it 'Elder Security') would be means-tested, and would ensure that all seniors receive enough support from the government, in the form of cash, to maintain a basic standard of food and shelter. Accomodation would be made for those who own their own houses but have no income or savings. Elder Security would be received by poor seniors regardless of their contribution to the system. It would be funded by real-time payroll taxes on a flat or progressive scale, unlike SocSec's current regressive tax scale.
The most difficult thing about Elder Security would be the means-testing, but it can be done. This might be a combination of looking at lifetime earnings and disqualifying those who give away their savings to family members or sell their houses to their kids for a dollar, etc. We could count on the smallness of the payments to prevent most seniors from trying to cheat to get it. Also, I would recommend one-time means testing, so that if a retiree decides to go back to work part-time or inherits money he is not penalized by losing his Elder Security benefits. Lastly, it would include a small location adjustment similar to that used by the Federal government for its own employees. This cannot be a perfect system, but with proper avenues for appealing means-test decisions and strong auditing it can achieve our goal of eliminating senior poverty.
The other part of the system would be a pension fund, which would consist of private-contribution accounts. Let's call it "Workers' Pensions". There would be a minimum contribution and a maximum, within which earners could decide how much to save. The savings would be untaxed; the payouts would be taxed as normal income. A variety of savings plans would be available, varying from a safe but tame interest-bearing account (for those who like SocSec as it is) to the equivalent of a mid-risk stock portfolio (for those who want greater return and are willing to accept greater risk). The funds would be the legal possession of Uncle Sam, and thus untouchable by bankruptcy, etc. Shortly before someone retires, some or all of his funds would be transferred to an interest-bearing account to keep them secure. Retirees could decide to keep some of their money in low - or mid-risk accounts if they so desire, but an ample minimum will be held in the safest accounts.
To deal with the uncertainty of age-of-death, retirees would be able to collect benefits at the same steady rate until they passed away, regardless of how long they live. To fund those who live long, those who die young will be subject to a death tax on their pension funds. This tax would be automatically adjusted to meet needs.
This entire system would be phased in over time, so that workers under age 30 would be the only ones expected to live entirely on their pensions. Taxes would be adjusted to meet the Elder Security payments - in the long run, they would be adjusted downward over time as better-off Social Security recipients (the last of whom would retire in 2047) die off. Until 2047, a temporary tax hike would most likely be necessary to meet the costs of baby boomers retiring; this could be achieved by raising or abolishing the $95,000 maximum on payroll taxes.
The retirement age would be set flexibly: recipients of either program could begin withdrawing benefits at age 67 (per current law) or could choose to delay retirement. If they chose the latter, their Elder Security or Workers' Pension payouts would be increased slightly, in accordance with actuarial life-expectation, so that they do not forfeit earnings by working longer. Of course, a 67-year-old could choose to receive Workers' Pension while still working, but our progressive income tax structure would automatically incur a small penalty.
An unavoidable cost of the new program would be added bureaucracy, but that's a necessary part of the package.
My recommendations above are based on (a) stated goals, (b) a centrist understanding of the current SocSec situation, (c) basic economic and actuarial principles, and (d) the premise that private ownership is a virtue. Please add to, challenge, or question my application of these. We need an intelligent discussion of the Social Security issue, and there's no time like the present to begin that conversation.