Social Security: Reform is Not Enough

President George W. Bush has made it clear that Social Security reform ranks high on his domestic agenda, in his second term.  This is a long time in coming, as Social Security has been on a fast track to bankruptcy for most of its recent history.  This is due not only to a fatal flaw in its design, but also to poor stewardship.

Social Security revenue exceeds its outlays.  In theory, the surplus money goes into the Social Security Trust Fund.  In reality, congress spends that money as it does all other revenue.  Social Security surplus revenues are projected to slowly shrink until about 2018, when a deficit will begin to grow, each year.  At that point, the money that the Social Security Trust Fund will be accumulating is supposed to make up for those deficits.  The rosiest predictions say Social Security will remain solvent until nearly 2050.  But, because congress has been spending Social Security revenue as quickly as it is collected, the Trust Fund has not been accumulating any money.  The Social Security Trust Fund has no assets.  Rather than assets, it is just a collection of bonds and notional interest – basically a stack of IOUs from congress.  In order for the trust fund to be able to pay anything after 2018, congress will need to raise money in order to pay off the IOUs, so that there will be money in the trust fund.  In other words, there is no Social Security Trust Fund and Social Security is a system destined to go broke, unless significant changes are made in eligibility and/or funding.  If Social Security is to be preserved, then the participants – all taxpaying Americans – must pay more taxes, receive less benefits, or begin receiving benefits at an older age, or a combination of those options.

Rather than to add my two cents to the current debate regarding how to preserve Social Security, I would rather challenge the assumption that we should preserve Social Security at all.  Social Security is a program conceived on two assumptions.  The first assumption is that people cannot be expected to provide for their own sustenance in retirement, without a government plan that will provide a supplemental retirement income.  The second assumption is that taxpayers have a duty to provide that supplemental retirement income, which is why participation in the program (payment of FICA taxes) is mandatory for working Americans.  In the interest of brevity, I will not bother debating the first assumption, because the second assumption is the real meat of the matter. 

No American has a duty to provide supplemental retirement income to others.  Please, what interpretation of the Constitution is it that people will claim justifies the notion that the fruits of my labor are the rightful possession of someone whose need is greater?  Of course, the case can be made that I am not really just giving my money away, but rather I am investing it into my own retirement fund.  Let us suppose, quite realistically, that I do not want to participate in this retirement plan.  I want to invest my money in the stock market, in a bank, in real estate, or other options.  The mandatory requirement that I participate into the low-yielding Social Security system actually dooms me to a lower return on my money.  More importantly, it denies me the freedom of choosing how to invest my own money.  If I do not have the freedom to invest my money, spend my money or save my money as I see fit, then is it really my money?  I think not.  I want my money back.

Don’t Reform It.  Eliminate It.

Social Security should be abolished.  The program is not sustainable and it denies Americans the fruits of their labor.  Of course, the system cannot and should not be abolished overnight.  A gradual phase-out is warranted, because the compulsory nature of Social Security has forced Americans to factor their projected Social Security income into their retirement plans, and rightly so.  That money has been taken from them throughout their working lives, with the promise of a modest return.  A plan to phase-out Social Security can, and should, be designed in such a manner that it returns money to its participants and provides the modest return promised.

A plan to eliminate Social Security from the federal government should meet four criteria.  First, it should make the system voluntary.  Second, there must be a fair method of making payments to participants who are not yet receiving benefits.  Third, it should provide full benefits to current beneficiaries.  Fourth, it must have a clear timeline for phasing out the system.  The tough part is not the number crunching or the drafting of a reasonable piece of legislation.  The tough part is getting the ravenous dogs of the welfare state to be truthful and put the welfare of the nation ahead of their re-election.  Just to demonstrate just how simple this is, I have drafted an outline for a reasonable phase-out plan.  Each of the four criteria that I mentioned are addressed below.

proxy Make the system voluntary

Effective immediately, Social Security should become voluntary.  If people want to opt out of the program, then they should stop having FICA taxes garnished from their wages.  Likewise, employers should not need to provide a matching contribution to employees who opt out of the system.   Individuals may opt out of the system at anytime, but may not opt to begin participation again, once they have opted out.  Those who cease participation in the system do not get any Social Security payments, upon reaching retirement age.  People who choose to participate in the system can expect benefits according to the guidelines below.

Payment of Benefits to Current Payees, Upon Retirement

Retirement age is set at age 65.  Individuals not yet of retirement age will receive, upon reaching retirement age, a percentage of their projected benefits as determined by the following equation: (age/65)*100, where “age” is the age of the person at the time that payments are made.  They will be paid the determined percentage of their remaining benefits in one lump sum.  What are the remaining benefits?  Read on. 

Note: If you choose to participate in Social Security, but you lose your job, then each month of unemployment is deducted from the age used to determine your lump sum, in the equation above.

Provide full benefits to current beneficiaries

Individuals aged 65 and over receive their remaining benefits in the form of a lump sum payment.  The lump sum payment is the yearly benefit that they are receiving, multiplied by (100 – age) or by 20, whichever is greater.  Obviously, this cannot occur at once without bankrupting us.  So, a timeline is established, to ensure a uniform annual distribution of payments in a timely manner.

Taking the two graphs together, one can see that although the number of years of benefits paid decreases at age 65, this is also the year at which the beneficiary is eligible for a full 100 percent of benefits. 

Timeline for Phase-Out

Due to the tremendous cost of making lump-sum payments, the program should be made into a 20-year program.  For example, in the first year, people with SSN xxx-01-xxxx through xxx-05-xxxx receive their lump sum payment.  In the second year, people with SSN xxx-06-xxxx through xxx-10-xxxx receive their lump sum, and so on.  Those already retired and receiving their monthly checks will continue to receive their checks, until the time for a lump sum payment comes.

This is obviously a long process.  It takes a long time to undo over 70 years of damage, and to do so as fairly as possible.  Of course, this leads to an obvious question: If Social Security is still being paid out, in some form, for the next 20 years, then what has been accomplished? 

1. Citizens are given greater control of their money by having the choice of participating in Social Security or investing on their own.

2. The lump sum payment ensures that retirees are able to pass on all of their benefits to their families in their estates, when they are deceased.  The current system does not allow for this.  Those who are not retired are able to make larger investments immediately that can generate larger retirement funds.

3. Lump sum payments give retirees more money, up front, which gives them the ability to reinvest money that they do not need in the immediate future.  The current Social Security system is one that nurtures dependency by only giving one month of payments at a time. 

4. Social Security is eventually eliminated.

5. Congress no longer has a boondoggle to steal money from. 

Now you can obtain what you want for free by using Free Gift Cards. 6. The system does not go bankrupt.