My wife and I both receive federal government subsidies—Social Security, and Medicare Parts A and B (and we both have approved private Medicare Supplement insurance policies). However, neither of us intended to arrive at retirement age with a significant dependency on government largesse. I guess I might whine that the private retirement programs (duly authorized under U. S. law) in which I participated operated with an assumption of Social Security benefits added in order to arrive at the desired / required total retirement income. I could also complain that Lyndon Johnson made certain that we would not be allowed any alternatives to Medicare when we reached age 65. But I knew what the rules were, and I have no one else to blame. I also understood, as most Americans do, that Congress and the President can radically change or eliminate any federal program in less than a week’s time. My only explanation for our resulting situation is that I allowed my gullibility index to rise, wanting to believe that Ponzi-scheme retirement and make-believe medical “insurance” programs would actually work. But that was yesterday, and today is today. The question now is: How big a bullet will we have to bite to re-enter the reality world, and how might we do it?
The monster Entitlement programs in the United States, Social Security and Medicare / Medicaid, are at present $63 Trillion or more underfunded. They are also growing. Several agencies within the U. S. Government continue to characterize these programs as “unsustainable” (see Trustee Report at http://www.ssa.gov/OACT/TRSUM/index.html). Ominously, the “health care reform” entitlement is in the process of coming on line, and an “education” entitlement is being threatened for the near future; each of these programs will continue to add multi-billion-dollar annual costs.
Today, Social Security is the most expensive single item in the the total United States budget, with Medicare and Medicaid coming in a distant second. Either program dwarfs the cost of the third-place Department of Defense. Interest on the national debt, aggravated by the imbalanced costs of Social Security and Medicare, is at least a temporary third; because it has been running neck and neck with the Department of Defense for some time it may now have permanently captured third place.
Perhaps it is time to stop trying to invent exceedingly clever, and obtuse, solutions to the impending financial implosion of these entitlements, and begin looking for believable common sense solutions.
Although the technical solution to the Social Security problem is relatively straightforward, it will be the most politically difficult of the financial disasters to avert. As a trigger for emotional outbursts, discussions of Social Security have no rival; this has been true almost from its inception as a “temporary” program in the 1930s, nearing the end of the Great Depression. Political parties, and many individual politicians, have worked diligently over the years to capture the value of this emotional potential for their own benefit. This is obviously a situation where ordinary Americans, using their common sense, might generate better ideas than the political know-it-alls in Washington.
First, we need to review what’s wrong with Social Security, keeping in mind its intended purpose. The simple but very real problem is that Social Security is a legal Ponzi scheme which works exactly like Bernie Madoff’s $65 billion scam. It depends on an endless, growing supply of new workers’ payroll deductions every 90 days in order to pay current beneficiaries. Social Security, like all Ponzi schemes, must collapse of its own weight some day. That day is very close now, with all the postwar Baby Boomers arriving at Social Security age.
A concomitant problem has been the government’s insatiable, desperate need for more and more money. Whereas we have heard references to a “Social Security Trust Fund” in the press and mouthed by politicians, there is no such actual fund, nor has there ever been one. The excess of revenues over current benefits payments, beginning not that many years into the program, have been systematically “loaned” to various other government agencies over the years; the result is a gigantic (and worthless) bundle of IOUs from those agencies today—not a trust fund. We are within a few years, in a normal economy, of revenues being less than benefits costs. Should we arrive at that point, there will be no option but to immediately begin reducing payments to all covered retirees, disabled persons, and those receiving survivors’ benefits.
Defining a secure and workable replacement for Social Security is not a complex task. We do, however, need to keep in mind the distinction between the Disability part, the Survivor part, and the normal Retirement part.
The solution is actually so simple and elegant that it greatly offends those members of Congress who have a deep, religious belief in massive, complex, convoluted programs which only devious politicians could claim to understand (but which have worked so well for years in attracting us gullible voters).
This easy solution is to arrive at a point where a private retirement plan has completely replaced Social Security retirement. An actuarially-sound, 401K-like plan, with strengthened safeguards and idiot-proofing provisions solves the problem nicely. In fact, it is the appropriate replacement for the 75-year-old temporary plan that is barely hanging on today.
The usual first response to suggestions of a private plan is “look what happens to 401K plans in a down economy”. I consider this a legitimate before-thinking-about-it concern. But a little thought brings back into our minds the fact that government tax revenues also shrink during business slowdowns, recessions and depressions. In fact, the tax revenues that pay current beneficiaries today, including my wife and me, are at this moment less than the benefits being paid out. Of course, we expect tax revenues to increase substantially when the economy returns to normal. But it is nonetheless true that in the meantime our Social Security checks are currently partially funded with money borrowed from Japan, China, et al.
A personal disclosure might be appropriate here. I “retired” twice from companies where we had 401K plans. The timing of my retirement left something to be desired in both cases; the value of one 401K plan dropped by 16% and the other by 38%—caused by dips in the economy that were becoming apparent within days after I had notified my employers. Needless to say I was not a happy camper. Both times I was the victim of rules, set between my employer and the mutual fund manager, regarding the amount of advance notification required. Both times the rules did not permit a decision reversal once the process had started. These arbitrary rules were obviously designed for the potential benefit of my employer and / or the fund manager. Those experiences made me a champion for strong safeguards and idiot-proofing provisions built into the new plan (and they are would be appropriate for today’s 401K plan).
What would be the government’s role in this new private retirement plan? The government must do what it is constitutionally designed to do: create and enforce laws to protect citizens and their possessions, including these new retirement accounts owned by each individual worker. Realistically, the government would have to make participation in an approved retirement plan mandatory for all income earners (as with Social Security) and to require an actuarially correct minimum contribution, with optional contribution increases allowed and / or encouraged. Today’s mandatory contribution to Social Security is the total of the amount deducted from employees’ paychecks plus an equal amount added by their employers—about 15% of an employee’s gross salary, in round numbers. Is 15% too much or too little? I don’t know, but an actuary and financial planner team should be able to give us a definite answer.
Replacing the disability and survivor parts of Social Security with private replacements should also be reasonably simple. We have had, for many years, very affordable term life insurance and long-term disability insurance policies available from private insurers (frequently provided today as an option in employers’ benefits packages). Participation in an approved version of both types of insurance would also have to be mandatory.
Please Note: We learn from the Bible that “The poor will always be with you”. Several thousands of years of history seems to reflect what the Bible has told us. Therefore we can expect that some number of people will, no matter what, arrive at an advanced (retirement?) age without any financial resources. As a society we will, as we have always done, take care of such people through private and public charities and through welfare / safety net programs. But this activity has no relation to well-planned retirement programs.
Even with the thousands of details to be worked out, a Social Security replacement program can actually be as simple as I have described. The first part of the implementation would also be simple; just enroll new workers in the new plan, never to be touched by the phasing-out, old Social Security program. With a robust economy and higher tax revenues, the government might also be able to transfer accumulated contributions of some fraction of the more recent Social Security participants, enabling them to select and enroll in a private plan, with no loss. But for current retirees and those workers who will retire in coming years the implementation can not be quite so simple or totally painless.
In a fairy tale world the U. S. government would just continue writing Social Security benefits checks until the very last enrolled person died, ending his or her retirement benefits. But in our real world, all of the money “stolen” from the “Social Security lock box” by the government over all those years will become an up-close-and-personal problem.
For a little perspective, consider that sixty years ago there were 16 active workers contributing to Social Security for every retiree; today there are just 3.3 workers per retiree. In fact, only our growth in worker productivity—translated to growth in real income—over those sixty years has allowed us to get this far with the national Ponzi scheme.
It doesn’t seem likely or possible that the U. S. will have a hyper-boom economic period, with extraordinarily high tax revenues, that continues unbroken for the 30 to 40 years necessary to get past the peak payout years of Social Security as it phases out. Therefore we are faced with some combination of reduced benefits, delayed benefits, and higher Social Security taxes to get us over the hurdle. There are narrow limits to reducing benefits and raising taxes, so a very political optimization will be necessary. However, if the tax-and-spend disease of Congress and the President does not abate, and they continue adding even more entitlement programs, all bets are off.
We can solve our Social Security entitlement problem with a combination of political will, consultation with world-class problem solvers, and judicious pain management of those affected. We current recipients may be the first to feel pain, but there will undoubtedly be sufficient misery to touch all participants. However, one very small group will suffer disproportionately more: the politicians who have made careers out of scaring old and ill-informed Social Security dependents. I believe these politicians will be doubly dismayed when some common-sense ideas for also taming Medicare are revealed in the near future.
Posted by thedrake01 
