Social Security is one of those political sacred cows. It's not an easy topic to cover, not only do people have strong opinions, but most of them are ill-informed. Talking points on the conservative side make it sound like we are losing money every day, and talking points on the liberal side claim Social Security is running a surplus. The truth is that SS is currently in a surplus, but it is making promises for future payment that can't be met. The social security administration's projection is that by 2018 social security will be in a deficit. The national debt clock estimates that the promises that social security has already made amount to a $15.1 trillion unfunded liability (meaning a deficit for which there is no anticipated income). The 2003 Trustees' Report believes this number is actual $26 trillion.
In theory, once the 2018 transition happens social security will begin to pay benefits out of the social security trust. Using this money, Social security could pay all promised benefits until 2042. However, the trust contains no money, only government bonds. What this means is that any payments will have to come out of the current year's budget.
What all this means is that social security needs reform. If the system is not reformed, not only will it bankrupt our country, but the promised level of benefits will not be paid.
The Plan
Institute a system of private investment accounts. Anyone younger than 40 will be required to use a private investment account, and will lose any claim to future Social Security benefits. Those people between 40 and 65 will be given the option of transitioning to a private account and will receive a bond in the amount of accrued savings. Those people who choose not to transition as well as those people who are already receiving Social Security payments will be unaffected.
Social Security was never free money, currently every worker in the country has 7.65% of their paycheck taken for social security contributions. That 7.65% will now be put back in the worker's paycheck with the intent that it go to their private investment accounts. Currently, the employer is also required to match the 7.65%, for a total paid of 15.3%. Employers will still be required to pay their 7.65% in order to defray the costs of closing out the social security system.
Further, the US government will establish a set of investment standards that are considered "Retirement Grade". Those investment firms that conform to the required standards will receive government insurance against catastrophic loss of principle. (You may not make money, but you won't lose money). Further, these "Retirement Grade" accounts will receive special tax benefits which exempt it from dividend taxes.
Any money in these accounts at time-of-death would be subject to 40% taxation upon liquidation in order to defray the cost of insuring against catastrophic loss and defraying the cost of the transition. Heirs would, however, have the option of transferring the balance to their "Retirement Grade" accounts at a significantly reduced tax rate.
Why it works
Long-term social security rates of return are pathetic when compared with market interest rates.
A pay-as-you-go system robs the country of that savings, once the private accounts are online, it will create an influx of business investment.
Low-income workers would be positioned to receive significantly higher benefits.
Private investment accounts would allow people true ownership over their retirement benefits. US Supreme Court ruled in Flemming vs Nester that social security does not represent a contract with the American public and that benefits can legally be changed, cut, or even taken away at any time.
Warnings
This plan will almost certainly increase debt in the short-run. As younger people stop paying their share into the system, revenues will drop off. However those in retirement or about to enter retirement will not change their plans. As a result, revenue increases while expenses stay the same (or increase). However, once the public is weaned off of social security, we will have a 7.65% tax that can go towards paying down the debt of the transition.
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