Salvaging Social Security’s Retirement Benefits

With the implementation of the National Whole Life Pension Plan, one of the problems facing national retirement reform is removed from the puzzle. The Whole Life Pension Plan would replace the current system for future generations, leaving us to concentrate on salvaging the current system for those of us who have already been born. Unfortunately, there is no sure fire solution that is painless or equitable. Everyone alive today who is eligible to receive retirement benefits from the current program will be hit with unpleasant consequences of reform. Our task then, is to try to mitigate the pain without breaking the financial back of the nation or our retirees.

The 2005 Social Security Trustee Report clearly states that beginning in 2005, the program will experience a $4 trillion dollar shortfall over the next 75 years. To put this in perspective, the entire national budget for 2005 is just over $2 trillion dollars. To replace this imbalance would require the entire tax receipts for two years running, putting an immediate end to all other government functions, just to make up the difference. On a year-by-year basis, we would need to funnel $53.3 billion dollars every year for 75 years into the fund to make up this shortfall. And these would have to be actual cash infusions, not simply budgeted dollars that don’t really exist or are creatively accounted for. Clearly, the task is daunting, if not downright unfeasible. So what can we do?

First, and probably most importantly, we must discontinue the pay-as-you-go standard that the current system relies upon. This practice is what has led to the massive transference of money from the trust fund, a reserve specifically designed to accommodate changing conditions, by allowing the government to subsidize the general operating budget with surplus retirement account money. Now, after decades of exploiting this easy source of ready cash, our elected leaders have left our retiring citizens out to dry, and left our working citizens with an empty promise of future security.
But just as unscrupulous politicians have bled the fund at every turn, we the people must also bear some of the responsibility for allowing the situation to continue. After all, we elected them. Now, we must enact stringent restrictions forbidding retirement funds from being used for general budget expenses.

The system, if left unchanged both in tax rate contributions and benefit payouts, will still be able to offer a 68-74% return to people who are 26 years or older today and will retire in the 2040’s. Assuming we can’t find the revenue to fill that $4 trillion dollar gap, what changes can we make to help ensure that future retiree’s under this system aren’t celebrating retirement in the soup line?

Well, there is no “one-size fit’s all” solution, and there is no painless solution either. The simple fact is that some give and take will need to occur, some people will get less than they were promised, and other people will need to have some flexibility that could enable them to make up the shortfall. Many of the ideas have already been brought up, so I make no claim to originality. The problem has been the resistance to combine all of the so-so ideas in favor of doing nothing. There are no great ideas. We’ll all get the shaft a little bit. It’s time to accept this and move forward, doing the best we can with a bad situation, while instituting a new plan for the future generations.

People who are 55 years old or older, or are currently retired, should have no changes made to their benefits. They faithfully held up their end of the bargain with the government and should get back what they have put into the system. Legislation could be passed that encouraged well off individuals in this group to forgo their benefit checks if they had a retirement nest egg of $750,000 or more, or an annual annuity of over $37,500. ($750,000 divided by a life span of 20 years, assuming a retirement age of 70.) We could offer tax breaks or tax-free retirement withdrawals or other such incentives. Then, we must also slowly phase out the indexing aspects of the plan, starting with those who need the benefits least (the well off, as described above.)

Those who fall between the ages of 40 and 54 will be the first group to receive a lower percentage benefit than the group before them. They will be the first to swallow the bitter pill. To begin with, all individuals with a private retirement nest egg of at least $750,000 would forfeit their claim to social security. I know it’s not fair, but sometimes life just works that way. In return, they could expect an off the top 25% tax credit every year after retirement. Next, we begin phasing in benefit decreases, starting around 5-8%. Again, we could lessen the effects by offering tax-free deposits (up to a certain specified amount) and withdrawals on all personal retirement accounts, eliminate tax on interest generated by a retirement account on a yearly basis, and regulate retirement fund administration fees so that every person clearly can see what the costs of maintaining their retirement accounts are. Finally, we eliminate the inheritance tax permanently for this group, provided that all remaining financial assets are transferred into a retirement account for the receiving heirs.

People between 25 and 39 years of age will face a tougher road than those ahead of them, since this group will have to bear the largest benefit decrease compared to what they have paid in to the system. To begin with, if no taxes are raised, this group can expect to see reduced benefits, giving them monthly checks somewhere around 68-74% of what today’s retirees receive. As a result, these workers, in addition to the changes made for the proceeding retiree group, could receive a 50% off the top tax credit every year after retirement. They could also have tax-free retirement contributions to personal retirement accounts with no ceiling on deposit amounts.

This leaves us the group of people who are under 25 years old before the implementation of the National Whole Life Pension Plan. They would decrease their contributions to a system that will likely have little left to offer them. They would receive all the benefits of the preceding groups, but their tax credit on retirement funds would be 100%. In essence, they would divvy up the remnants of a dying system, with perhaps a specialized program being developed to fill in the gaps, funded through lowered expenses as a result of other government streamlining.

As I said, these ideas are all available, but no plan for this system is without pain, including increasing the tax base to levels that would likely have negative consequences in other financial areas. Essential is the task of repaying the borrowed funds as soon as possible and restricting any future raids on the account. This is a problem that will be felt for at least 75 years. There is no lottery big enough fill the void. Minor tax increases could ease the burden slightly, but too high of a tax increase could be just as harmful. A minor increase may be a necessary component of any plan, but realistic compromises will have to be made. Reforming our retirement program to ensure a graceful end to the present program and a smooth transition to the Whole Life Pension Plan will take patience and sacrifice. The down side is that we all lose. The upside is that our descendants won’t have to face this situation again.

The National Whole Life Pension Plan

IMPORTANT NOTE: Readers are advised that the plan presented in the following essay is one which would apply to future generations and would not directly benefit current workers except in such a way as to remove the burden of repairing the current retirement program for future generations. This plan would run parallel to the current system, eventually replacing it as the sole national retirement program. A final essay on the topic of national pension plans will address the problems of the current system and how to sustain it until this new plan came to maturity.

In my last essay, Crafting A National Pension Plan, I presented a case for developing a national pension system for retired workers based upon the concepts of gratitude for a lifetime of hard work and appreciation for participating in the continuance of the American Dream. In this essay, I will describe my thoughts for administering such a system in a way that is both equitable and economical. After much thought, I feel that this can best be accomplished by a short summary, followed by an imaginary “Question & Answer” period. So without further ado, I offer this plan to you.

The National Whole Life Pension Plan seeks to accomplish one goal and one goal only. Its task is to ensure that all citizens will have a standard minimum retirement fund available to them when they reach the end of their productive working years. It accomplishes this goal by recognizing that although all citizens may not be equal with regards to employment skills or desires, each task is of equal value to a smoothly functioning society. Whether you choose to rear children, wash dishes in a restaurant, operate an oil-drilling platform, or design computer programs; your financial security in old age should not be dependant upon how much money you earned in your lifetime.

As its name implies, the National Whole Life Pension Plan would begin at birth with $5000 placed into an account in your name. This account would belong to you and you alone, but would be pooled with all of the other personal accounts from people born in the same year. For the first 30 years of the plan, the government would deposit $600 per year into your account. At the age of 31, the government would end their yearly contribution and you would then be able to make contributions of your own until you reach age 70. At age 70, you would retire and begin to draw an annual stipend from your account, tax free, for at least 20 years. Once you reach the age of 90, all of your basic costs of living would be free, paid for through a separate social security program for elderly citizens.

Q: How much is this program going to cost compared to the current system?
A: At its inception, the program would cost approximately$22.5 billion dollars. This figure is derived from the average number of new births in the U.S. (4 million/year) times $5000 plus that same number of births (4 million) times $600. Each year the program would require an additional $20 billion for the new births, $2.5 billion for the yearly $600 deposits, and an additional $2.5 billion for each preceding years births up to 30 years. At its peak-funding requirements, the program would be paying out $95 billion dollars a year. ($20 billion for new account start-ups and $70 billion in account contributions.) The current system pays out $540 billion per year (for both benefits and administration costs.)

Q: Who pays for this system?
A: Unlike the current retirement program in which the employee and employer contribute a like amount into the national fund, under the new plan, only businesses would be required to contribute to the Whole Life Pension Plan. The reason for this is twofold: first, business is the main profiteer of an employees hard work, deriving its continually climbing profits from employee ingenuity and dedication; and secondly, because of the changes in the retirement system mentality, employers would no longer be contributing to a matching retirement pension like the 401k or other private plan, and would likely not have other benefit costs, or at least much lower ones, through reform of the medical industry. (Another topic to be sure.) Currently, the federal government collects $819 billion a year from employees and employers for social security programs, including Medicare and Medicaid. If half of that is the employer’s portion ($409.5 billion), then a yearly cost of up to $95 billion surely represents a tremendous savings to businesses.

Q: What is the average payout expected to be compared with the current system?
A: The answer to this question really depends upon what an individual decides to do once the account becomes their full responsibility at age 31. But for purposes of estimating, let’s assume that the accounts earn an average yearly return of 4.5%, compounded quarterly. (This number is based on average returns for long-term T-Bill investments.) At age 31, each personal account should have a balance of about $52,000. If a person simply left that $52,000 in the same account, growing at that same 4.5% rate, when they begin to draw on that account at age 70, they could expect an annual payout of $21,292 in today’s dollar value. If that same person decided to contribute an extra $1200 per year, their monthly income would increase to $30,652. The current average yearly retirement benefit under Social Security is $11,500.

Q: What about naturalized citizens who were not born here? How would they be covered?
A: Because naturalized citizens share in the hard work of creating the American dream, they too should have a way to benefit from their contributions. In that spirit, a separate but similarly administered fund would be created, funded with up to $1 billion dollars per year, to accommodate our naturalized citizens upon their retirement. This fund would not necessarily be a guarantee though, like the Whole Life Pension Plan. Each naturalized citizen would be required to contribute at least $600 a year for 5 years cumulatively in order to draw a pension. And they must have worked in the U.S. for at least 15 years prior to retirement. We must remember that our retirement program is being designed to reward our citizens for their contributions, not to act as a stimulus for the world’s poor to flood our shores in their golden years.

Q: Would the National Whole Life Pension Plan be guaranteed to all citizens who are born in America?
A: Except in cases of lifetime imprisonment or banishment, each citizen would be able to collect their pension funds upon reaching age 70.

Q: What happens to someone’s account if they die before they can collect?
A: The answer to this question depends upon when the person passed away. If they had not yet begun their working life, or if they were single and had no dependants, then their personal account would be reabsorbed into the general Social Services budget. If, on the other hand, a spouse and/or children survived the person, those survivors would have a claim to the account and could receive a single lump-sum payout, minus a 25% tax, which would be transferred to the general Social Services budget. If they were to die after reaching retirement, the remaining balance would be transferred to their estate for distribution to their heirs.

Q: Who administers these accounts? And if it’s the government, how can we be sure that they won’t just raid this fund like they did the original retirement fund?
A: Initial collection and disbursement of the account funds would be handled by a government administration, but would be subject to strict guidelines and frequent audits. Legislation would be enacted that would forbid inclusion of these retirement funds in any federal budgeting process and no Congress could never leverage another expense on the backs of our retirement accounts. Any attempt to do so by a lawmaker would result in immediate impeachment proceedings, presided over by a combined citizen-judicial-legislative panel. Further, each personal account would be established as a deposit only account, and have a unique unlock code that was time dated for withdrawal activation only at the account holders 70th birthday.

Q: How can the money earn interest if it stays in one place?
A: In a personal bank account, the money you deposit is not physically in a box in the bank. Similarly, the National Whole Life Pension Plan lends out a portion of its balance through the purchase of long-term government bonds. A separate provision requiring the entire balance be available for lump-sum payout at age 70 could be instituted, allowing pensioners to transfer their funds into a private account if they so desired, but the same yearly disbursement requirements would follow.

Q: While this sounds pretty good, could I still invest in supplemental retirement accounts for myself?
A: Absolutely! A wide variety of investment options would still be available to supplement your retirement savings. These programs could have an unlimited, tax-free ceiling for contributions, but would have a graduated tax schedule applied for withdrawals, based on total non-national pension funds or purpose for withdrawal.

Well, that’s pretty much it. The National Whole Life Pension Plan could be a solution to the future insolvency of Social Security’s retirement program. It seems to be considerably more economical for businesses and government to fund and operate, and considerably more lucrative for individuals who will need to live off the funds for 20 or more years. This plan levels the playing field from the beginning, allowing workers to become more focused on the job they do today rather than worry about their retirement benefits, resulting in possibly better worker output and better corporate profit.

The beauty of this plan is that it could begin at any time, since $22.5 billion dollars is just a drop in the bucket of the federal trough. Even in thirty years time when the system is running full blast, the outlay is a mere fraction of what is being spent today. The adoption of this type of plan would also have the immediate effect of securing retirement benefits for future generations, taking that aspect of our current systems breakdown out of the equation and allowing us to concentrate on helping the program limp along until its last recipient has drawn their last benefit check.

(Note: Population figures derived from U.S. Census reports and projections. Current Social Security Administration budget figures derived from the 2006 U.S. Federal Budget. Pension fund estimates used retirement and compound interest calculators found here: http://www.moneychimp.com/calculator/retirement_calculator.htm)