Allow workers to opt into a partially privatized system, where of their 7.65% FICA expenditures, 5% goes into a private TSP-style account; and the Employers match follow the same.
Social Security is pay-as-you-go, and already doesn't produce enough revenue to cover current benefits. Plus, 10% of payroll taxes go to Medicare.
If we put everyone on this plan right away, you're talking about cutting revenues by 65% or around $600 billion dollars per year. That will increase the gap of SS revenues and benefits by 350%.
In that scenario, it'll take 20 years or more -- and put the federal government in the red for $6 trillion in current USD -- before the private benefits offsets the loss of revenue. And of course, the state doesn't keep any theoretical surpluses produced by the privatized system, except whatever it can get back as capital gains taxes.
We can phase it in, which reduces the hit. However, that also delays the advantages; and still doesn't change the fact that every dollar diverted from the current plan accelerates the date at which Social Security will be "insolvent" (payroll taxes insufficient to cover benefits and Trust Fund gone).
To ensure solvency in the adjustment period (and to make it politically palatable); lift the cap.
You just punched a 65% hole in revenues, and increased the gap by 350%. Eliminating the cap claws back 75% of the gap. So that's 275% to go.
The 10% of his income goes into a mix of funds that matches the S&P 500 Combined Annualized Growth average since 1982: 7.98% (after you account for inflation)....
Uh huh
Vanguard Retirement Calculator. $50k income, age 30, retiring 65, saving 10% of income, living on 75% of current income, maxing calc out at 10% = income of $2354, which is a $770/mo shortfall. Joe needs to save 14% of his income to break even. Not impossible, but methinks someone is being a tad optimistic.
The scheme might work...
if the program basically forces the investor into a no-fee index fund or ETF,
and balances automatically to move into bonds as they get older,
and prevents the investor from touching anything until retirement,
and people don't freak out when the market (and thus their retirement) inevitably drops,
and we see decent returns.
Why do we need such strict requirements?
Investors routinely balance their portfolios heavier towards bonds as they draw closer to retirement; less risk, less return.
The average investor pretty much sucks, typically netting a 2% return. This is in no small part because people panic-sell when the market drops, and/or that people need the money due to the same conditions that cause the market drop (e.g. recession).
Funds typically levy fees. E.g. in Australia, fees of 2% or more on "Super" accounts are common.
We already know that roughly 25% of 410(k) holders withdraw early (as in, before age 50!) for non-retirement purposes. (IRAs are not quite as bad.)
We also know from Australia that if you grant Joe unrestricted access to $1 million on retirement, he's going to blow it on a Maserati and a yacht. If we have a backup defined benefit program for retirees who have blown it all, then we are doubling Joe's incentives to have a huge blowout at age 65. Heck, there will be websites dedicated to telling you how to game the system, much as they do right now with telling people how to get the maximum out of SS.
BUT WAIT!!! WHAT IF THE MARKET TANKS!!! Markets recover.
Sure. It just takes a few years.
One of the major problems with a 401(k) compared to a defined benefit pension is that if the market goes down, and you need to withdraw, you're depleting your investment faster.
It also means that if the markets drop, so will senior spending, as their income that year will go down. Needless to say, if that market drop is connected to a recession, that's going to compound the economic downturn. Alternately, because seniors lose their collective minds when their benefits drop, they might force the government to do a supplementary payment. Who pays for that?
And again, if you run through your funds, then what? You're back on a defined benefit, and it'll have to be a fraction of what we currently pay, since we are collecting far less in payroll taxes.
So, can it work? Perhaps, but there are serious problems implementing it. In the long term, Joe is likely to make out OK, leave more money for his kids, and cost the state less for his retirement. Namely:
• Getting there will be incredibly expensive.
• It will make the "insolvency" problem worse, for years and years, before it gets better.
• We'd need extremely strict controls in place.
• Undefined benefits mean that in a given year, millions of seniors could have a lower income all at the same time, causing lots of issues.
• Keeping any sort of guaranteed income in place creates harmful incentives.