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Thread: New idea to save/replace Social Security

  1. #1
    Sun Devil asun2art's Avatar
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    New idea to save/replace Social Security

    Did anyone else read this? It's a radical new approach to a failing system. It makes quite a bit of "cents" - Pun intended.




    The End of Social Security? Don't reform it, replace it
    By Laurence J. Kotlikoff | November 21, 2004 | Boston Gobe


    After a long campaign season of spin, smear, and slogan, we're finally having a serious debate over domestic policy. President Bush has set the agenda -- Social Security's privatization and tax reform. The president wants to cut Social Security's payroll tax and have workers invest their tax cut in stocks and bonds within private accounts. And he wants to replace the federal income tax with a tax on consumption.

    Both proposals drive Democrats nuts. In their view, Social Security and the income tax are the only things keeping the elderly out of the poor house and the rich from gaining all the spoils. But Social Security is broke, and the income tax is a mess. So the Democrats must engage and stop treating these institutions like sacred cows.

    In his quest to privatize Social Security, the president is poised to support one of three plans developed by his 2001 Commission to Strengthen Social Security. The plans differ in important ways, but each diverts payroll taxes to private accounts. Obviously, this limits Social Security's ability to meet its benefit obligations.

    The trillion-dollar question is, thus, how to finance this tax cut, particularly given Social Security's dire financial position. As things now stand, Social Security doesn't need an immediate and permanent tax cut ranging, depending on the plan, from 16 to 33 percent. Instead, it needs an immediate and permanent 28 percent tax hike to cover its short- and long-term benefit commitments.

    One way to make up for the loss in revenue from privatization as well as cover the existing revenue shortfall is dramatically but gradually to cut Social Security benefits. Such cuts are part of each of the commission's plans. The commission's report uses artful language to hide this fact. But the proposed cuts are huge. The second plan, for example, indexes the initial receipt of retirement benefits to prices, rather than wages, as is currently the case. Over time, this means that Social Security benefits would replace an ever smaller share of workers' pre-tax wages. In the long run, Social Security would protect those in abject poverty, but that's it.

    Because they cut long-run benefits so deeply, the plans are actually fiscally quite conservative. But in the short run, their adoption would significantly raise the already massive federal deficit. This could drive up interest rates and trigger a recession.

    Another concern is transactions costs. On a per person basis, the proposed accounts are small. Indeed, they're so modest as to suggest that the commission's real goal is eliminating not just the existing Social Security system, but compulsory saving in general. Take a household with $50,000 in income. The maximum annual contribution under all three plans would be only 2 percent or $1,000. This is hardly worthwhile when you consider how much Wall Street will charge to "help" workers keep track of and manage this money.

    Moreover, many workers won't properly invest their account balances and end up at retirement with little to show for years of contributing. Those workers who invest well will find themselves at the mercy of rapacious insurance companies when they try to convert their balances into retirement annuities (pensions).

    Finally, the plans are generationally inequitable. Social Security has a $10.4 trillion unfunded liability, and well-heeled current and near-term retirees should be asked to help pay it. But the commission's plans force today's young and future generations to bear essentially the entire burden. The method is simple -- eliminate most of their future Social Security benefits while maintaining most of their future Social Security taxes.

    The president's second initiative, tax reform, has lots to recommend it. The income tax is enormously complex, engendering major compliance and collection costs. But fixing the income tax doesn't require shifting the tax base or reducing progressivity -- the requirement that the rich pay proportionately more than the poor. We can and should keep the income tax, but also broaden its base and lower its rates, while maintaining the share of taxes paid by the rich.

    Rather than substitute consumption for income taxation, I favor substituting consumption for payroll taxation. We should do this as one of nine steps needed to properly reform Social Security, albeit in ways that are very different from those the commission proposes. My plan, which has been endorsed by 150 of the nation's leading economists, is called the Personal Security System.

    Step 1 shuts down, at the margin, the retirement (Old Age Insurance, or OAI) portion of Social Security. Current retirees continue to receive their full retirement benefits, and current workers receive all the retirement benefits now owed to them, but that's it. There is no further accrual of Old Age benefits.

    Step 2 eliminates the employee FICA taxes (7.65 percentage points of the total 15.3 percentage point employer plus employee tax), directing these contributions to individual Personal Security accounts. The employer FICA contribution continues to finance Social Security disability, survivor, and Medicare benefits.

    Step 3 uses a roughly 10 percent federal retail sales tax to replace employee FICA taxes and pay off all accrued Old Age benefits. Over time, the sales tax rate falls as more and more of the accrued benefits are paid off.

    Step 4 has married workers split their contributions 50-50 with their spouses/legal partners leaving each with an equal sized Personal Security account. This protects dependents whom are secondary earners.

    In step 5 the government matches the Personal Security contributions of low-income workers, making the new system as progressive as it wants. It also contributes on behalf of the disabled and the unemployed.

    Step 6 invests all Personal Security account balances in a global, market-weighted index fund of stocks, bonds, and real estate securities. "Market-weighted index" means buying assets in proportion to their share of the financial market. The allocation of the portfolio is thus determined solely by the marketplace, not the government.

    Step 7 limits the risk of market downturns by having the government guarantee that at retirement Personal Security balances will equal at least the sum of past contributions adjusted for inflation.

    In step 8, each participant's holdings of the global index fund is gradually sold off between ages 57 and 67. The proceeds from the sale are used to purchase inflation-protected annuities (pensions). These annuities are paid out beginning at age 62. Between ages 62 and 67, participants receive additional annuities based on the sale of remaining balances. Participants dying prior to age 67 bequeath their nonannuitized account balances.

    Step 9 has the Social Security Administration administer all Personal Security transactions at very low cost. It collects the contributions, manages the accounts, buys and sells the global index fund, and handles the annuitization of account balances at retirement. Wall Street plays no role and collects no fee. The Social Security trustees determine which foreign financial markets to include in the global index fund.

    The most controversial aspect of the plan is switching from payroll to consumption taxation. But a moment's thought indicates that this is not only generationally equitable, but highly progressive. The payroll tax is levied only up to a fairly low ceiling, currently $87,900. Bill Gates pays his annual payroll taxes in minutes. But with a retail sales tax, Gates would pay taxes not only on all his earnings, but also on all his current wealth, the minute he spends these funds. Saving or bequeathing earnings or wealth postpones but doesn't avoid the tax. Whenever these funds are spent, they and any accumulated interest, are subject to the retail sales tax. Thus, taxing consumption is an indirect way to tax earnings and wealth.

    How about the poor? Wouldn't they be hurt by having to pay higher prices due to the sales tax? The answer is no. In the case of the elderly poor, Social Security's cost of living adjustment would protect the real purchasing power of their benefits. The same would hold for the unemployed and welfare recipients provided their benefits are adjusted for the price rise. Poor workers would also be better off because the burden of the sales tax would be less than the burden of paying employee FICA taxes.

    The Personal Security System pulls no punches. It entirely replaces a system that is broke and well beyond its prime. It asks everyone in society, except the poor, to contribute to paying off the old system's bills. And it sets up a new, safe, low cost, progressive, and efficient retirement system that Democrats as well as Republicans can call their own.*



    --- Laurence J. Kotlikoff, chairman of the Department of Economics at Boston University, is co-author of "The Coming Generational Storm."

  2. #2
    Chaos silverx2's Avatar
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    so wait, my retirement fund gets put into teh stock market? i dont understand stocks and bonds and im sure many others dont either. it seems very complicated so i dont understant how if everyones funds go into the same stock how does the stock go up or down? what if it goes way down?

    that guy needs to put it in simpler terms if its to go over well with the people

    *buys a plane ticket to another country just in case*
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    Phantom Flasher... Markp.com's Avatar
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    Can you summarise in less than two paragraphs?!

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    Retired SCORM Guru PAlexC's Avatar
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    I read part of that book. Very depressing.
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    I Mastered Dead Technology TallGuyLittleCar's Avatar
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    I have a fail proof cure for social security. Unfortunatly it is very complex and will need a primer to be fully understood... has everybody seen "logan's run"?
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  6. #6
    Sun Devil asun2art's Avatar
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    what is depressing is that WE are paying into a system that WILL be bankrupt when we get older and will recieve nothing at the current state. This is why we need to begin a new system now to get us on track.

  7. #7
    Retired SCORM Guru PAlexC's Avatar
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    Well, what's really depressing according to it is we're boned no matter what, but not nearly as boned as the Russians, and slightly less boned than Europe.
    "What really bugs me is that my mom had the audacity to call Flash Kit a bunch of 'inept jack-asses'." - sk8Krog
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  8. #8
    Sun Devil asun2art's Avatar
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    Originally posted by TallGuyLittleCar
    www.fairtax.org
    Isn't that "tax" going to drive up the price of goods and services in America; thus Increasing consumption of foreign goods& Walmart type stores?

  9. #9
    I Mastered Dead Technology TallGuyLittleCar's Avatar
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    Originally posted by asun2art
    Isn't that "tax" going to drive up the price of goods and services in America; thus Increasing consumption of foreign goods& Walmart type stores?
    no.

    here is the faq on the site
    http://www.fairtaxvolunteer.org/smart/faq.html

    our current tax system is what drives alot of jobs overseas. Under the fairtax system the u.s. becomes the worlds largest tax haven (in theory), so the job growth would skyrocket.

    what is depressing is that WE are paying into a system that WILL be bankrupt when we get older and will recieve nothing at the current state. This is why we need to begin a new system now to get us on track.
    look at it this way, the social security that we pay is like paying for the u.s. Our grandparents kept this nation and handed it over, so we have to pay them for it, afterall nothing in life is free.
    ONLY RON PAUL AND ALUMINUM FOIL CAN SAVE YOU NOW!
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  10. #10
    FK's Geezer Mod Ask The Geezer's Avatar
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    look at it this way, the social security that we pay is like paying for the u.s. Our grandparents kept this nation and handed it over, so we have to pay them for it, afterall nothing in life is free.
    That's not what it is. Your grandparents been paying into it all along. The government was supposed to manage the money til they retire, then give it back in monthly payments, using it in the meantime, like a loan. But they have been making up more and more excuses to spend it and not pay it back. They have failed you and me, and if you think any new promises are going to make them live up to their old promises, your just as gullible as your grandparents. No offense.
    Last edited by iaskwhy; 11-23-2004 at 10:12 PM.

  11. #11
    Senior Member MG315's Avatar
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    i agree that the only way social security will last is if it's privitized, although the big problem is that the average american is too ignorant to understand the market. The gov't will need a "general investment plan" for the average american that invests moderate-aggressive at the beginning and conservative towards the end, with a gradual transition into bonds from stocks as one approaches retirement age (to lessen risk and volitility).

    I can just see some 60 year old investing in the newest investment bubble, losing all his money and then demanding that the gov't help him out.
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    The point of the Retail Tax % falling as the Liability falls is logical, but fails to address governmental greed. If the out goings fall then no government, certainly not one straped for cash is going to reduce it's own income.

    You can enshrine tax legislation in law in an attempt at preservation, but the law can be changed. This is never more true than when the government sees a direct benefit to/for it's self.

    Nice to see that someone has an alternative plan instead of complaining about the present one, refreshing.
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    I Mastered Dead Technology TallGuyLittleCar's Avatar
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    Originally posted by iaskwhy
    They have failed you and me, and if you think any new promises are going to make them live up to their old promises, your just as gullible as your grandparents. No offense.
    Gulliable is anybody that believed the so-so security pyramid scheme would work in the first place. If social security had been started by a private business, it would have been illegal and shut down, it is a scam and always has been.
    ONLY RON PAUL AND ALUMINUM FOIL CAN SAVE YOU NOW!
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    Catapultam habeo. Nisi pecuniam omnem mihi dabris, ad caput tuum saxum immane mittam.

  14. #14
    FK's Geezer Mod Ask The Geezer's Avatar
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    Originally posted by TallGuyLittleCar
    Gulliable is anybody that believed the so-so security pyramid scheme would work in the first place. If social security had been started by a private business, it would have been illegal and shut down, it is a scam and always has been.
    Yeah, kind of makes you wonder why it got passed in the first place. So now that that Rube Goldberg has been found out, let's privatize it. Maybe let someone like Enron oversee it. With my faith in our polititions, I see this move to privatize a government sponsored social security as just another way to gain "plausible deniability" for the government. blame it on some private officials who will skim billions and get 9 months at the retirement golf course when caught.

    I hate to say it, but it's our Government that needs an overhaul, not social security. Am I the only one who sees that it could have worked if the people in power were just honest? How about some laws with real backbone to them, like a minimum of 10 years in Levenworth for taking a bribe?
    Last edited by iaskwhy; 11-24-2004 at 01:26 PM.

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    Spartan Mop Warrior Loyal Rogue's Avatar
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    Re: New idea to save/replace Social Security

    Originally posted by asun2art
    Did anyone else read this? It's a radical new approach to a failing system.
    ....
    But Social Security is broke,
    That is just a flat out lie.
    The social security system is doing the exact job it was made to do.
    The only problem is that our government keeps stealing all of the money out of the fund to use for other purposes and not putting any of it back.

    The problem isn't with social security.
    The problem is with the politicians who lied and stole it's funds.

    I say we fix the problem not by replacing the social security system but by replacing the politicians with leaders who aren't afraid to do the right thing and be fiscally conservative and responsible with our taxes.
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