Social Security idea - what do you think?

[Individual]

Why not just increase the SS FICA ‘payroll’ tax rates?

The minimum wage earner, $7.25/hr actually earns about $6.70/hr after FICA tax. You feel increasing the FICA tax rate to be a permanent solution without negative consequences?
My suggestion tries to take into account and avoid negative consequences.

 

[Ishm]

8% interest in investing over a lifetime is rather steep. There would be periods of it, even greater, but the average won’t be 8%. Since WW2 to present it’s average is 7.39% adjusted for inflation. I don’t think we’ll see 80 years like that 80 again. Might average 6%. Depends how long the new Great Depression lasts when it takes place.

And a new Great Deoressuin is coming if we don’t change our investment behavior. This is unsustainable and a rapid economic decompression where values reorient to realer leveraging ratios will demand a margin call.

When that happens the bottom will fall out of this vastly over leveraged mess we’ve created. It would be FAR better if we eased off and let that adjustment be a slow recession, but we are no where near that smart. Nope. We like repeating mistakes and reliving bad segments of history we don’t have to repeat. It’s just what we do.

There are several (many?) first word wealthy countries that invest a significant portion of their equivalent of the SS fund in the markets. Three that I know of off the top of my head are Norway, Canada, and New Zealand. I expect there are others as well. The three that I know of have averaged ~10% annual returns over decades. You can find that info on line. Of course these are all substantial funds, and as govt funds, may get access to opportunities that normal investment funds might not. Certainly though a similar US fund would be the most influential in the world.

Back to the OP's point, if the US had followed these other countries with a portion of the SS fund instead of using it as a source of cheap loans to fund ongoing govt overspending, there would likely be an embarrassment of excess money to increase SS payments with instead of worrying about the fund being depleted. I think when the fund was first setup the restraint of only investing in US govt bonds was probably reasonable, and a concept shared by most other countries at that time in not exposing their funds to the vagaries of the markets. The sad thing for the US is that while other countries reviewed and changed that decision decades ago when the developed world first started to worry about coming waves of retirees, the US either never reviewed, or decided that change was impossible with the requirement that congress agree to make the changes. Unfortunately, that boat has long sailed because the SS (and Medicare?) funds are going to be cash flow depleted just to feed the growing payments required. That of course also means that the govt will have to take more bonds to the commercial markets so they can pay back the SS funds they borrowed.

In 2006 the SS fund reached $2trillion. If just 50% of that had been invested in the way other countries have invested their SS funds, the balance today would be at least twice the current ~$2.7T, probably closer to $7T. Then the ongoing interest today would much more than cover the SS shortfall that is now occurring. In fact we could be more significantly generous with our SS payments.

The problems with our SS and Medicare funds are not so much a broken system, as they are a horrible mismanagement by govt after govt, and I suspect the core of the issue is the way we rely on seemingly always divided congresses to do the right things.

 

[ttwtt78640]

The minimum wage earner, $7.25/hr actually earns about $6.70/hr after FICA tax. You feel increasing the FICA tax rate to be a permanent solution without negative consequences?
My suggestion tries to take into account and avoid negative consequences.

OK, but paying a 15% FIT rate would reduce that $7.25/hr to $6.17/hr.

 

[Rumblefish]

There are several (many?) first word wealthy countries that invest a significant portion of their equivalent of the SS fund in the markets. Three that I know of off the top of my head are Norway, Canada, and New Zealand. I expect there are others as well. The three that I know of have averaged ~10% annual returns over decades. You can find that info on line. Of course these are all substantial funds, and as govt funds, may get access to opportunities that normal investment funds might not. Certainly though a similar US fund would be the most influential in the world.

Back to the OP's point, if the US had followed these other countries with a portion of the SS fund instead of using it as a source of cheap loans to fund ongoing govt overspending, there would likely be an embarrassment of excess money to increase SS payments with instead of worrying about the fund being depleted. I think when the fund was first setup the restraint of only investing in US govt bonds was probably reasonable, and a concept shared by most other countries at that time in not exposing their funds to the vagaries of the markets. The sad thing for the US is that while other countries reviewed and changed that decision decades ago when the developed world first started to worry about coming waves of retirees, the US either never reviewed, or decided that change was impossible with the requirement that congress agree to make the changes. Unfortunately, that boat has long sailed because the SS (and Medicare?) funds are going to be cash flow depleted just to feed the growing payments required. That of course also means that the govt will have to take more bonds to the commercial markets so they can pay back the SS funds they borrowed.

In 2006 the SS fund reached $2trillion. If just 50% of that had been invested in the way other countries have invested their SS funds, the balance today would be at least twice the current ~$2.7T, probably closer to $7T. Then the ongoing interest today would much more than cover the SS shortfall that is now occurring. In fact we could be more significantly generous with our SS payments.

The problems with our SS and Medicare funds are not so much a broken system, as they are a horrible mismanagement by govt after govt, and I suspect the core of the issue is the way we rely on seemingly always divided congresses to do the right things.

Of course, investments by the nations of Norway, Canada, and New Zealand don't attract half of the negative attention/controversy as would investments by the nation of the United States.

Look at the dustup caused by Saudi's Sovereign Wealth Fund investments in things like LIV (the professional golf league). The Kingdom of Saudi Arabia isn't exactly a democracy....so political blow back isn't a big concern for them.

But, how or what does a "US national investment fund" do when 1/2 the country/world is upset with companies/entities that support Israel and 1/2 the country/world is upset with companies/entities that support Gaza? Or make the issue Ukraine and Russia. Or (going back in history) apartheid South Africa. Or China???

When - on campus - students protest to have their universities "divest" from investments in Israel, Russia, South Africa - what happens when the "US national investment fund" runs afoul of the philosophy of this group or that???

To be sure, the fund managers at the Thrift Savings Plan (TSP) invest the retirement savings of federal employees in equities and debt - but typically via index funds.

And on top of all of that is the perennial issue of "picking winners and losers" by what has to be - at root - a political process.

 

[ttwtt78640]

Of course, investments by the nations of Norway, Canada, and New Zealand don't attract half of the negative attention/controversy as would investments by the nation of the United States.

Look at the dustup caused by Saudi's Sovereign Wealth Fund investments in things like LIV (the professional golf league). The Kingdom of Saudi Arabia isn't exactly a democracy....so political blow back isn't a big concern for them.

But, how or what does a "US national investment fund" do when 1/2 the country/world is upset with companies/entities that support Israel and 1/2 the country/world is upset with companies/entities that support Gaza? Or make the issue Ukraine and Russia. Or (going back in history) apartheid South Africa. Or China???

When - on campus - students protest to have their universities "divest" from investments in Israel, Russia, South Africa - what happens when the "US national investment fund" runs afoul of the philosophy of this group or that???

To be sure, the fund managers at the Thrift Savings Plan (TSP) invest the retirement savings of federal employees in equities and debt - but typically via index funds.

And on top of all of that is the perennial issue of "picking winners and losers" by what has to be - at root - a political process.

The TSP is in addition to Social Security (SS), not a replacement for SS.

 

[Individual]

OK, but paying a 15% FIT rate would reduce that $7.25/hr to $6.17/hr.

Wages would be adjusted to compensate for the employer share of the FICA tax, the minimum wage would become $7.90/hr and the 15% tax rate would result in an after tax earnings of $6.71/hr.

 

[ttwtt78640]

Wages would be adjusted to compensate for the employer share of the FICA tax, the minimum wage would become $7.90/hr and the 15% tax rate would result in an after tax earnings of $6.71/hr.

OK, but that would be essentially no change for most entry level workers. What exactly does that accomplish?

 

[WorldWatcher]

8% interest in investing over a lifetime is rather steep. There would be periods of it, even greater, but the average won’t be 8%. Since WW2 to present it’s average is 7.39% adjusted for inflation. I don’t think we’ll see 80 years like that 80 again. Might average 6%. Depends how long the new Great Depression lasts when it takes place.

And a new Great Deoressuin is coming if we don’t change our investment behavior. This is unsustainable and a rapid economic decompression where values reorient to realer leveraging ratios will demand a margin call.

When that happens the bottom will fall out of this vastly over leveraged mess we’ve created. It would be FAR better if we eased off and let that adjustment be a slow recession, but we are no where near that smart. Nope. We like repeating mistakes and reliving bad segments of history we don’t have to repeat. It’s just what we do.

So the OP suggests 8% = $867,684.07

As you suggest a more reasonable amount long term for conservative investment would be a return of 6%, then you have some of that eaten up with overhead and administrative fees. So take an additional 1%. So now we have:

• 6% = $248,006
• 5% = $131,417

Since that money was never taxed, assuming 25% federal & state income, that is another reduction of $62,000 and $32,000 respectively if taken as a lump sum distribution.

A 20 year annuity would return a little over $1,300 per month if we assume a cash balance of $200,000 at inception. Much lower that the $5,000 to $6,000 suggested which requires a higher long term rate of return.

WW

 

[WorldWatcher]

So a savings bond per child. Didn't we already try that.

Saving bond interest sucks. Solid no loss investment, but you probably aren't going to even keep up with inflation if you go that route.

WW

 

[Individual]

OK, but that would be essentially no change for most entry level workers. What exactly does that accomplish?

For one thing, a more meaningful comparison of taxes paid by low and high income earners.
Changes to the tax code, is where the bulk of improvements would be made.
The progressive tax rates would be tied to increments of the GNI per person, 15% being the lowest for those who earn no more than the GNI per person, or currently about $80,000.
The 1st $80,000 of income would be taxed at 15%.
The 2nd $80,000 of income would be taxed at 20%.
The 3rd $80,000 of income would be taxed at 25%.
The 4th $80,000 of income would be taxed at 30%.
And all income greater than $320,000 would be taxed at 37%.
There would be no deductions, simply gross income from any/all sources would be taxed.

 

[Rumblefish]

The TSP is in addition to Social Security (SS), not a replacement for SS.

yes, I know.

 

[Paradoxical]

To start this off, I want to say that I do believe that Social Security is NECESSARY. At the same time, I do think that it could be more efficient. I've had this thought for awhile and am curious as to your thoughts on the viability of this idea. Here it is.

Let's say the US government gave EVERY US citizen $5000 at birth. They put that $5000 into a Roth IRA for that child, and it was an "aggressive portfolio" for most of it's time, if not all. That $5000 at a pretty modest interest rate of 8% (compounded interest of course) is going to be $867,684.07 at age 67. Now....at that point, the money isn't exactly "theirs," though I'm open to debate of course. This is a "debate forum" after all. But....maybe that person CAN add to that ROTH IRA when they turn 18, or whenever, at that money is theirs no strings attached. Parents could even add to that money as well. Why not????

But....the "idea" is that - just a suggestion - that only a certain amount per month can be withdrawn. Say $5000/month. That's pretty damn good, no? $7000? For everyday life, and whatever. Live well. We only have ONE life we're going to remember, yes? The remainder can be pulled out for situations in which assisted living is needed, or stuff like that.

It just seems to me that the US government and taxpayers would pay a heck of a lot less in everything in a system such as this in comparison to one in which we HOPE that people will do this ahead of time, but don't (or can't). Person passes away and that money goes back into "the system." Any money that they have contributed goes to them or whomever, but it is a heck of a lot more because of that compounded interest.

What do you think?

​

​

I think humans should never be GIVEN anything and instead be taught that the most important thing in life is personal responsibility.

That 5 grand comes from someone else. This is what has happened in the Biden administration. TRILLIONS given to individuals and states for Covid, much of which was wated. Over a trillion for green energy, all wasted and nothing to show for it. Student loans for wealthy Democrats forgiven. Abortions paid for by taxpayers and on and on and on.

 

[WorldWatcher]

Just to point out a couple of things. (Not saying the OP is a bad idea, it has merit.)

#1 In 2024 dollars is $20,000,000 for the cost of the deposits (not counting administrative overhead to implement the program and for on going management). Thats for 3.66 million live births in country and a few hundred thousand live births to US citizens outside the country.

#2 It would take 67 years for the program to be fully on line, meaning in the interim we would still have the issue of SS for existing people.

WW

 

[WorldWatcher]

I think humans should never be GIVEN anything and instead be taught that the most important thing in life is personal responsibility.

That 5 grand comes from someone else. This is what has happened in the Biden administration. TRILLIONS given to individuals and states for Covid, much of which was wated. Over a trillion for green energy, all wasted and nothing to show for it. Student loans for wealthy Democrats forgiven. Abortions paid for by taxpayers and on and on and on.

Interesting you ignore the TRILLIONS that Trump spent during his administration for COVID.

WW
.
.
.

The Trump Administration and the COVID‐19 crisis: Exploring the warning‐response problems and missed opportunities of a public health emergency - PMC

This article examines the Trump Administration's inability to mount a timely and effective response to the COVID‐19 outbreak, despite ample warning. Through an empirical exploration guided by three explanatory perspectives—psychological, ...

www.ncbi.nlm.nih.gov

 

[ttwtt78640]

Just to point out a couple of things. (Not saying the OP is a bad idea, it has merit.)

#1 In 2024 dollars is $20,000,000 for the cost of the deposits (not counting administrative overhead to implement the program and for on going management). Thats for 3.66 million live births in country and a few hundred thousand live births to US citizens outside the country.

#2 It would take 67 years for the program to be fully on line, meaning in the interim we would still have the issue of SS for existing people.

WW

Yep, that’s a major problem with many ‘let’s transition away from SS’ plans. Another is accounting for those who become disabled, often far before ‘normal’ retirement age.

 

[Paradoxical]

Interesting you ignore the TRILLIONS that Trump spent during his administration for COVID.

WW
.
.
.

The Trump Administration and the COVID‐19 crisis: Exploring the warning‐response problems and missed opportunities of a public health emergency - PMC

This article examines the Trump Administration's inability to mount a timely and effective response to the COVID‐19 outbreak, despite ample warning. Through an empirical exploration guided by three explanatory perspectives—psychological, ...

www.ncbi.nlm.nih.gov

A LOT of money that Trump spent was because of Covid and if he didn't the left would have accused him of murder.

 

[NWRatCon]

All I'm posing (as an idea....NOTHING is going to happen) is that the government invest $5K-$10K at birth into SOME sort of retirement/healthcare/food/security plan because it seems to me the initial investment would be FAR more financially responsible than how they are currently allocating money. Do you disagree?

Again, I'm not advocating for eliminating these programs in any manner. In fact, I am advocating for EXPANDING them in a way that makes more fiscal sense (in my view).

I don't see the point in keeping the contribution ceiling where it is. I'll just go ahead and put my chip down like the gun hobbyist absolutists do. No steps towards privatization. If they get to do that for a stupid reason, then I get to use the same strategy for a good reason. We should raise the contribution ceiling until the program is solvent long term.

I have always advocated (as far as I can remember) a similar idea as a supplement to social security. Congress being what it is, however, Helix's concern about "privatization" is always relevant (see what ideologues did to the postal service). If they can be cheap, they will be. There not being an existing program, I have done something similar for my own children.

There are some problems with administering such a program, as individuals always want to control investment strategies and program managers need protection from lawsuits. But virtually every State of the union, and the federal government, and numerous business and union entities, administer investment programs for their employees already (I'm not aware of any that don't), so that part is a virtual no-brainer. That's what 401(k)s are, as well as other "defined contribution" plans.

Retirement benefits: Access, participation, and take-up rates for defined benefit and defined contribution plans​

My State's program has always been top-notch. Most provide returns that exceed the general markets. It's almost always better to rely on professional money managers. That's essentially what "mutual funds" are.

There are risks, of course, and the biggest one is politicians. Any time there is a pool of money available, they'll want to tap into it. It needs to be well insulated from raiding. Second, is that institutional investors (which is what this is) can have great impact on markets. The reality is that hundreds of millions of us already do so without knowing it.

 

[NWRatCon]

What is $5000 X 200 million? That is a Trillion $ in IRA's looking for returns and when all of them mature it will be over $100 Trillion. There are not enough investments in the world for that.

Your numbers are of significantly. How much do you think is invested in IRAs now?

 

[NWRatCon]

Some key questions:

1) Who in the federal government decides how that money is invested in an “aggressive portfolio”?

Money managers. We already do that. E.g., Thrift Savings Plan.

2) Could that investment portfolio be changed by the account holder once they turn 18?

Ditto.

3) What happens if the new retirement account holder becomes disabled at age 40 (or younger)?

SSI, primarily

4) While that allegedly might work for newborns (if such a law was passed), what would fund existing SS disability/retirement benefits for the rest of the US population? I’m assuming your plan would exempt those with these new SS alternative retirement accounts (and their employers?) from paying SS FICA ‘payroll’ taxes.

You're confusing issues. That's a non-applicable concern.

 

[NWRatCon]

I don't currently support no cap. It seems like the cap would be a good way to negotiate in order to keep the whole thing working, assuming that negotiation is possible.

Can we discuss the apple proposal instead of the SS orange?

 

[NWRatCon]

Some data: The $109 Trillion Global Stock Market in One Chart​

That's just stocks.

"61% of non-retirees have a 401(k) or 403(b), 20% have no retirement savings

That only 61% of non-retirees have a 401(k) or 403(b) and 16% don't have any retirement savings at all is troublesome.

While Social Security is an important social program, it's designed to replace only 40% of the average salary after retirement. Unfortunately, one in five married retired couples and 45% of single retirees depend on Social Security benefits for more than 90% of their income in retirement." Motley fool

 

[NWRatCon]

Maybe I was misunderstanding this proposal. Is this instead of Social Security or in addition to?

 

[Individual]

I like the idea of raising the contribution ceiling. Other big change ideas seem like privatization scams.

My suggestion eliminates the ceiling, permanently resolving the Social Security issue.

 

[ttwtt78640]

My suggestion eliminates the ceiling, permanently resolving the Social Security issue.

Nope, your suggestion includes a tax increase and (I assume) still caps the maximum SS benefit level (which is a ceiling).

 

[Helix]

I have always advocated (as far as I can remember) a similar idea as a supplement to social security. Congress being what it is, however, Helix's concern about "privatization" is always relevant (see what ideologues did to the postal service). If they can be cheap, they will be. There not being an existing program, I have done something similar for my own children.

There are some problems with administering such a program, as individuals always want to control investment strategies and program managers need protection from lawsuits. But virtually every State of the union, and the federal government, and numerous business and union entities, administer investment programs for their employees already (I'm not aware of any that don't), so that part is a virtual no-brainer. That's what 401(k)s are, as well as other "defined contribution" plans.

Retirement benefits: Access, participation, and take-up rates for defined benefit and defined contribution plans​

My State's program has always been top-notch. Most provide returns that exceed the general markets. It's almost always better to rely on professional money managers. That's essentially what "mutual funds" are.

There are risks, of course, and the biggest one is politicians. Any time there is a pool of money available, they'll want to tap into it. It needs to be well insulated from raiding. Second, is that institutional investors (which is what this is) can have great impact on markets. The reality is that hundreds of millions of us already do so without knowing it.

My concern about "privatization" is that it is the Republican party's strategy to destroy public programs, not to make them better.