Does Anyone Recall the "Pre-funding" Social Security Plan?

[Parisle]

---- Since the Social Security "reform" issue is going to get bounced around some more during the two remaining years of the privatization-minded Bush neocon infestation,... and since democrats are the nominal proud owners of the program, I'd like to resurrect an idea I saw floated a couple of years ago. Does anyone remember "pre-funding?" It was the most innovative notion I'd seen, and it would seem to be quite effective...but it received absolutely NO media attention at the time. That's why I figure it must be a great idea for the average American.

----Here's how it works: Every year, there are about 5 million new American citizen births in the US. At birth, an infant would have a SS number assigned, and a $1,000 deposit made by the gov't into an account for that number. A BANK account, ok?..... one that earns real interest through its various lending and trust activities. At $1,000-per-kid, that first year's outlay would be $5 billion, but the plan also calls for a second $1,000 deposit in the second year of that child's life,... meaning that each person in the US would have an interest-drawing bank account of $2,000 at age two, and the plan would be costing $10 billion per year after the first year. (Note that this annual amount could easily come out of the roughly $150 billion per year "surplus" currently paid into Social Security, but it really ought to be initially funded by other budgetary means,.. like trimming federal pensions.)

----Let's say that the average person joins the workforce in earnest around age 20, so the start-up "cycle" of this plan will be 20 years. At the point at which a 20-yr-old begins working, they also begin paying their Social Security deductions, right? But at that point, assuming 20 years of "average" interest payments, they will already have an account of almost $5,000 into which their SS payments (or an actuarily-determined percentage of those payments) will go. After 20 years, the $10 billion expended on the first year's participants will have grown to $25 billion, and it will NOT have come out of taxpayer's contributions, but rather out of our economy's productive use of capital. It's just a matter of putting the money where it will do the most good, eh?

----Obviously the problem remains of continuing benefits payments to all those who missed out on the plan's start-up. But consider this: the projected "shortfall" in current SS revenues isn't for another 30-35 years. The 20-year start-up cycle of the plan fits conveniently into the timeframe in which we have to "fix" this situation. And no one can say that putting money into a bank isn't "privatization." It just isn't handing your money to Wall Street brokers; you still have banking laws, fiduciary constraints and FDIC guarantees on your side (although banking "reserve" regulations could stand to be strengthened). And if some additional federal funding is required after the 20-year point,... when participants' contributions go into their own accounts instead of the so-called "trust fund," then it would seem that the goal of preserving our supplemental retirement "safety net" is worth what we've wasted in Iraq, eh? Yeah,.. I think so. But that part of the transition would only be for a few years. We can handle it.

----And it should be apparent that the pre-funding plan holds other benefits for the American people and American economy. The pool of investment capital would be enlarged considerably,... money primarily for mortgages & small business, I would expect,... and lending rates would be kept down, as well. At the 20-year point, a total of $200 billion would have been added to the private banking system, along with the interest which began accruing 20 years earlier. The actual total at 20 years should be around $350 billion. Further considerations could include such things as the afore-mentioned actuarial "splitting" of contributions between trust fund and private accounts,... survivorship rights to those accounts,... and interest rate indexing as economic conditions rise and fall,... just to name a few.

----And since I tend to be a real "scatter-shot" type of problem-solver, I'd also expect to see some of the other Social Security remedies being adopted at the same time as the pre-funding plan. Raising the income ceiling on contributions would be among these,... along with putting the SS revenue trust fund off-limits from government borrowing,.... the "lockbox" we hear so much about. Just don't increase the wage deduction percentage, nor reduce benefits too drastically. That really shouldn't be necessary.

----Am I missing something, here? Can anyone suggest why this is not the ingenious "universal trust fund" that it appears to be?

[fasttense]

1. Yup, you are missing the fact that Raygun doubled our Social Security

tax so that Baby Boomers could be the first generation to fund their parents and their own retirements. It was suppose to be temporary, to cover the huge number of Baby Boomers retiring all at the same time. The extra half was suppose to go into a trust fund for the Boomer's retirement. So, what happened to that money? Now everyone pays twice the amount necessary and the government claims it can't afford the boomers Social Security. What happened to our money?

[SharonAnn]

5. What happened to our money? They stole it by cutting their taxes and

using our Social Security money to run the government.

What's worse is, we let them do it.

[Warpy]

6. Never mind the soothing words, they doubled social security

deductions so he could partially conceal what his reckless tax giveaway to the rich did to the financial stability of this country. At the time, Social Security had been pay as you go. Doubling it created a huge windfall in the form of a back door income tax on the poorest.

Congress has been robbing us of half our social security payments for many years. Currently, the robbery covers about 40% of your OASDI deduction.

Any reform of the system has to start with getting overpayments OUT OF THE GENERAL FUND and away from the pork gluttons in Congress.

(By the way, the man who got overpayments into the general fund was Lyndon Johnson, who used the FRACTION OF A PERCENT of overpayments the system then saw as a way to defray the cost of the Vietnam War. Alas, he forgot to include a sunset clause)

[grizmaster]

2. You skipped over the most problematic issue

"Obviously the problem remains of continuing benefits payments to all those who missed out on the plan's start-up."

To start your program you'd end up paying somewhere in the neighborhood of double to fund both the start-up program and fund the current plan.

Not an easy sell. And as you point out, the baby-boom bulge that's coming is a temporary problem.

[Parisle]

3. Nope,.......

----Launching the "pre-funding" program would cost $10 billion per year. Social Security currently takes in around $500 billion per year, of which $150 billion or so is "surplus," and gets applied to other gov't spending. The "lockbox" portion of the idea WOULD indeed entail higher deficits or require comparable spending cuts......... but not the pre-funding plan. And I would prefer to see the additional $10 billion per year set up as a worthwhile "investment" from the overall budget, and NOT come out of regular SS revenues. These days, $10 billion is a manageable amount, and the objective is well worth it. But pre-funding, by itself, would certainly not require a doubling of overall expenditures. It would be relatively cheap.

[grizmaster]

10. some facts I don't see covered in your post

before you even hit break even you have to kick in more than a trillion dollars the government already owes the program. And if the money is borrowed from another source you have to add in even more interest.

Oh, and who's federal pensions are you intending to cut? Shouldn't that money be as untouchable as SS money should be?


http://www.justfacts.com/socialsecurity.htm

* Between 2037 and 2075, the Social Security program is projected to run annual deficits totaling 30 trillion dollars. <68>

* This shortfall comes to $154,000 (in year 2001 dollars) for every person projected to be paying Social Security taxes in the year 2075. <69>

* To keep the Social Security program solvent, the tax rate would need to be raised by about 50%, or the benefits would need to be cut by about 33%. <70> <71> <72>



* As of 2000, the U.S. government owes 1,016 billion dollars to the Social Security program. This comes to $3,600 for every man, woman, and child living in the United States. <135> <136>

* In 2015, the U.S. government is projected to owe 2,879 billion dollars to the Social Security program. This comes to $9,000 (in year 2000 dollars) for every man, woman, and child who will be living in the United States at that time. The interest on this debt is projected to be 181 billion dollars a year. <137>

[Ellis Wyatt]

4. I don't see how that will make a dent

Assuming everyone gets $1,000 at birth and at their 1st birthday (cost to gov = $10B total), then even if they get 3% interest, that $2,000 will double every 24 years (rule of 72), so they'll have roughly $10k when they retire. $10k per person spread out over the 20 or so post-65 years is not going to fix anything.

If you are talking about $1,000 per person per year (not just their first two years of life), you'll eventually hit a run rate of about $200-$250B a year (assuming 1/3 of the population is over 65) the government is spending to support this, which I don't think people will support. But, even if you were to do that, people would probably have about a $100,000-$150,000 annuity at 65. Which would only pay out about $500 a month, which I don't think is really going to "fix" anything. It would be a nice addition to current benefits, but just throwing an extra $250B a year at the Social Security pyramid isn't going to change the inherrent flaw in the system - only delays its failure.

But you're right that something should be done about Social Security. It's an inevitability in a pyramid scheme that someone loses all their money. Whether we wait 40 years or next week something needs to get amended, because the current social security method is not perpetually viable.

[Parisle]

8. Good points, Ellis,.....

----And I would have no intention of making the government's $1K contributions a lifetime arrangement,.. although I could see extending it to 3 or 4 years in order to jack up the principle from which interest could be earned. ($15B - $20B annual) I was also figuring a little over 3%,... 4%, to be exact,...which would be conceiveable once that principle amount got into serious CD territory, and considering the extreme length of the full package program (45 yrs) And the program would have to be maintained until everyone was onboard, and their regular paycheck deductions going into the program. I believe the specific fractional amounts needed to accomplish this could be actuarily determined, and still be within financial reach. And I am also keying on the "supplemental" nature of the Social Security system - it wasn't intended to be a full retirement program. Post-retirement drawdown of principle is also allowed.

----In any event, I think the concept deserves more study, and has promise. The point is to shift asset growth away from taxpayer dollars, and into the banking & financial system. If unscrupulous politicians hadn't resumed "appropriating" the so-called surplus from the fund once it became solvent again in 1983, then there would currently be about $2 trillion in it,..... What's the interest on that, eh?

[papau]

12. You were going great until you used the words "pyramid scheme" instead of "insurance"

A pyramid scheme can easily be shown to fail- to have to fail because of the math - while an insurance scheme goes on forever as long as you employ actuaries to guide it.

Your life insurance is sold by a company that plans to pay claims as they due - forever - and to be in business -forever.

Likewise the Social Security Actuaries report shows that system never goes bust - even if no change is made - as long as economic growth in the future is a reasonable, lower than 100%, percentage of the growth in the past.

Indeed if economic growth stalls down to a much lower rate despite the influx of new population, we and the world have much bigger problems than Social Security.

But the politics of Social security says we can not use the reasonable projection assumptions that show no problem of the next few centuries, so we are left with one of the other two projections done by the Actuaries. The projection that basically assumes a near recession for most of the future - called the low projection - is just there to scare the children and uninformed. So we are supposed to talk about the middle projection, despite its very conservative assumptions. And that projection pays 80% of the current in law benefit forever, with the missing 20% only paid through 2041 (Bush calls this "bankrupt".

The percentage of payroll needed to fix this is 1.9%, assuming the money is put into non-government bond assets, 'cause we know that when SS funds are invested in government bonds the money is used to lower the taxes of the rich - who never want to pay back that tax giveaway and use the cash to retire those bonds because paying back would mean higher taxes on the rich.

The fix is therefore remove the wage cap, along with in the year 2030 raising beginning to raise the full benefit retirement age from Reagan's 67 to 68.

Better is to remove the wage cap and apply the tax to the FIT calculated income - including investment income - thereby raising so much extra money that we can CUT the tax rate for Social Security!

Sorry, but Social Security is not a ponsi or pyramid idea - just solid insurance against starving in your old age, paid for while you are working, and as it is paid for by you, it can never be called welfare.

But that is what the GOP wants to call it and to make it - by adding a "means test" so after paying in all your life you must be poor enough to get SS in your old age - or else you get nothing.

End the wage cap - tax investment income too - and let the rich get million dollar benefit checks - 'cause they will have paid enough extra such that the tax the rest of us pay goes down.

It is sad to see on DU people repeating GOP lies about Social Security.

But all is forgiven - go and sin no more! :-)

By the way if you want source data for any of the above just PM me and I'll point you to the Government site and the Society of Actuaries site that has the info.

[M155Y_A1CH]

7. My big question is.....

Would you intend for these funds to be withdrawable
or would unneeded funds be redistibuted within the SS sytem?

This type of privitization would assure that those with lucrative jobs
during their working years and able to contribute much, will have sufficient
accounts but those underemployeed or underpaid would continue in their stuggles
with little pension and little SS funds to tap.

Privatization would only work if the same amount of money was to be deposited
in every account yearly and the shortfall in some accounts made up by other payees.
A ratio of hours of work : work availabilty and employability should set the amount
in one's account, not current income.
We all would still pay an income apportioned premium but overages to set account limits
should be diverted to insufficient accounts. The moneys should be non-transferable to the individual until need for it is established. It would be of little benefit to
folks this program is meant to aide, if it were merely a savings account based on
individual income.
We would have even more shortfalls in coverage than we do now.

[Parisle]

9. More good points,....

----This is why I was throwing the idea out there for discussion and comment. This is great.

----Funds could not be "withdrawable" as with a savings account,... although survivorship and early retirement or disability could be factored in,... say around age 55. And those really rich people paying a higher premium WOULD, in fact, be helping with the overall system, and not receiving any greater benefits,... pretty much as they would with any income ceiling extension being currently discussed. The benefits status of non-income earners would have to be dealt with, for sure,... but their initial stake would always be there, at least. And it wouldn't break my heart if the government DID in fact contribute a modest yearly amount to help make up for cases like this.....

[M155Y_A1CH]

11. I hope you meant what you said...

when you invited comment.
I've been thinking about it a bit today and I can't quite picture letting go of the common pot idea of today's workers paying for today's needs.

How would you assess needed savings rates far into the future to assure retirees will have enough. We can't control inflation, nor can we accurately predict it's rate that far into the future, which could easily outpace any savings plan set up today.

Isn't it preferable to set contribution rates by current spending (a known rate)?
Pay for current retirees instead of future ones who's needs are unknown.

Also, no one wants to think that they are feeding a surplus when they are taxed. The rate of taxation must be represented by tangible evidence of need not some prediction of the markets over the next 70 years. What if you begin withholding for this plan and then national healthcare comes along and removes the burden of medical and disability claims from the formula thereby reducing the needed funds and creating a lowered withholding for the payees.
How would you adjust the savings rate?
Would you send back rebates and set up new withholding schedules.
What if we never get healthcare coverage for all and certain people continue to have greater needs than others for health related SS coverage?
Should predisposed persons be required to save more? In the individual account you will begin to need portfolio planning as accounts grow larger. Each person's expected need may be different so some form of individual account planning seems needed at the onset of this type of plan.
I think that the set up we have now can be made to work if witholding is always based only on current needs of the system and no other use of the moneys is ever allowed. No politician should be able to request the lockbox and we should always strive to keep any excesses in the system to a minimum. People aren't against paying into a system that they feel is stable and will be there for them in their time. How would someone be credited for all their contributions up to now as it has already been spent?
Costs will rise and the amount of money you need to retire will only go up. Would you rather pay the cost of a current retirement or the cost of retirement many inflated years from now. You have to remember that the current wages have not been adjusted for this inflation so a larger propotion of your paycheck would have to go into a personal account for it to be large enough for a retirement of the future..
Just too many problems for me to see it as a good move. I think we really just can't have our cake and eat it too. We have to pay as we go or overburden the current payees income. I think all we really need to know to be satisfied with SS right now is that it will still be in place and fairly administered forever or as long as there is a USA.

BTW Welcome to DU! :hi:

[papau]

14. All good points! :-)

:-)

[papau]

13. privatization as a universal 401k - outside of the SS system - can be made progressive

via a match on the first $1000 only of a dollar for dollar, paid for from the FIT tax general revenue.

Any attempt to replace SS via privatization accounts, or to lower the SS benefit claiming the benefit you MUST purchase from the government with the account value (yep - that was the Bush idea mechanics) will offset the lost SS benefit, runs into the fact you are fixing a system that really does not need a fix, or at most needs a very modest in the future fix, by spending 20 times the cost the future fix really needed in order to prefund a benefit with borrowed money that gets added to the national debt (or do you think Bush will raise the FIT to get funds to fund the start of the private account replacement for SS?).

Bush wants to fund via borrowing - if you did that would you be a dime wealthier?

But the 1998 Clinton idea - which is the progressive design that is an ADD ON to the system and replaces nothing - is a private account plan that has merit.