When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Wednesday, June 6, 2012

Social Security and Pensions--what's the future?

This is a follow-up to my post Government We Can Afford.

As presently constituted, the irrefutable facts in the US are:
1) Social Security is fiscally unsustainable;
2) Private pensions are disappearing;
3) Public pensions are fiscally unsustainable and are bankrupting local and state governments.

What to do?
a) abolish all public pensions--obviously this would be "phased-in" so those already retired or nearing retirement would not be affected. Also note that pensions are already disappearing from the private sector;
b) bring every worker into the Social Security system (e.g. currently some federal employees and other public employees are exempt from social security taxes);
c) establish tax-exempt, self-funded retirement accounts for every worker in the US--funds must be deposited with a financial institution regulated by (and in an account guaranteed by) the US government. The default (direct-deposit) automatic deduction from wages would be 5% of gross wages, but each worker could choose to contribute up to a total 20% per annum of gross income to such accounts--self-funded (no employer contributions), complete mobility, and safe. All other retirement programs--pension funds, IRAs, 401ks, etc., would terminate and balances merged into the single "self-funded, tax-exempt, retirement accounts."
d) Remember that my prior post recommended abolishing all social security taxes, so social security would be funded from income taxes and the employer tax, with benefits determined by lifetime earnings, and means-tested per Simpson-Bowles.

The combination of a reformed and broadened Social Security program, together with tax-exempt self-funded retirement accounts, solves the fiscal crisis of unfunded public pension liabilities and unsustainable Social Security benefits. It also provides retirement benefits for everyone, is fair and equitable, and achieves the goals set out by FDR:

American Rhetoric: Franklin Delano Roosevelt - Speech Upon Signing the Social Security Act: "Today, a hope of many years' standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, had tended more and more to make life insecure. Young people have come to wonder what will be there lot when they came to old age. The man with a job has wondered how long the job would last.This social security measure gives at least some protection to 50 millions of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions, and through increased services for the protection of children and the prevention of ill health. We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-stricken old age. This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness."


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects