Another Social Security Fix

[drz-400]

Cpwill had a proposal with some good points in it earlier. It failed, however, to gain any democrat votes. I did some looking around, and found a plan somewhat similar to his, only with a smaller amount of money going towards personal retirement accounts. I also believe it has a much smaller burden in the transition from a PAYG system to a partially funded system, since the contribution to the private accounts is smaller and is added in addition to the PAYG system. According to this plan benefits would be reduced for those associated with PAYG, but with the addition of personal accounts they should be comparable to what is paid out now (of course this will vary from person to person). Also, the retirement age would be increased. Anyways here it is:

Source: Vox Baby: Nonpartisan Social Security Reform Plan

The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency. Specifically:

1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.

2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.

3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.

4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.

5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.

6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.

 

[cpwill]

i would like to see a wider range of investment options for the personal accounts; and i am saddened to see that they aren't enough to provide for full financial independence for the poor.

but hey :shrug: i'll take any compromise that moves us away from the train-wreck and towards personal ownership of retirement.

running the numbers, starting regular-income-Joe off at 25K a year at the age of 20, and working him with a 2% raise every year until he's 65 leaves him earning a little under 61,000 his last year. the median income is about 50K; so I would suggest that this is roughly a fair approximation of your average American.

if the account is tightly regulated and only allowed to grow at 3% above inflation (say, for example, it's invested in bonds; a solution i think that our politicians are proven all-too eager to grasp onto with our social security funds), then his monthly benefit (once the account is placed into an annuity making 5%) at age 65 is only $440. If it's loosened up a bit and allowed to grow at 5% above inflation, then his monthly benefit (in constant dollars) is $723. and if he's allowed to invest fully in index funds and matches the S&P 500 average of 7.98% he has a monthly benefit - in constant dollars - at age 65 of $1,656. at the new regular retirement age of 67, those numbers climb to $483, $814, and $1,947 respectively.


IF, however, Joe makes less, starting out with only $20,000, and seeing his income grow only at a rate of 1% above inflation each year, then his retirement benefits at the age of 67 will be $315, $549, or $1,370; dependent on how free Joe is left to invest. even if he works until 70, his account will never amass more than 500,000.

 

[Goobieman]

The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts

Raise taxes, decrease benefits, and privatize?

 

[Lord Tammerlain]

i would like to see a wider range of investment options for the personal accounts; and i am saddened to see that they aren't enough to provide for full financial independence for the poor.

but hey :shrug: i'll take any compromise that moves us away from the train-wreck and towards personal ownership of retirement.

running the numbers, starting regular-income-Joe off at 25K a year at the age of 20, and working him with a 2% raise every year until he's 65 leaves him earning a little under 61,000 his last year. the median income is about 50K; so I would suggest that this is roughly a fair approximation of your average American.

if the account is tightly regulated and only allowed to grow at 3% above inflation (say, for example, it's invested in bonds; a solution i think that our politicians are proven all-too eager to grasp onto with our social security funds), then his monthly benefit (once the account is placed into an annuity making 5%) at age 65 is only $440. If it's loosened up a bit and allowed to grow at 5% above inflation, then his monthly benefit (in constant dollars) is $723. and if he's allowed to invest fully in index funds and matches the S&P 500 average of 7.98% he has a monthly benefit - in constant dollars - at age 65 of $1,656. at the new regular retirement age of 67, those numbers climb to $483, $814, and $1,947 respectively.


IF, however, Joe makes less, starting out with only $20,000, and seeing his income grow only at a rate of 1% above inflation each year, then his retirement benefits at the age of 67 will be $315, $549, or $1,370; dependent on how free Joe is left to invest. even if he works until 70, his account will never amass more than 500,000.

Nothing is stopping anyone from putting money into personal savings accounts outside of SS

 

[cpwill]

Nothing is stopping anyone from putting money into personal savings accounts outside of SS

that's correct; and people should be. but the unfortunate fact is that social security and medicare have created a moral hazard, which help to incentivize people not to do so. at the same time, many people currently in debt or bringing in lower incomes (as much of our younger demographics are) feel they can't afford to start saving for retirement - which is So Far Away Anyway, etc. if we could transform SS into a vehicle for those kinds of savings accounts, we would be actually insuring that America's elderly are not left destitute (or frankly, poor at all), while at the same time reducing our nations' future liabilities, all while not costing our current workers a red cent extra.

you would think that would be a no-brainer.