Social Security - Classic versus Plan B
There seems to be some concern that as time moves forward, the number of
people supporting a retiree will diminish. Since Social Security is a
bucket of money, payout will depend on the bucket not running out of money.
If everyone lives longer, the money in the bucket can only be invested
at a 1.23%
[http://www.heritage.org/Research/SocialSecurity/CDA98-01.cfm]
interest rate and fewer people are contributing to the bucket
compared to the number withdrawing, one might guess there are dark
clouds on the horizon.
I've spoken to people that do not think any form of privatization of
Social Security is a good idea. The problem is those people don't have
any convincing arguments why SS will remain solvent.
However, there is one form of privatization no one has mentioned.
We would allow anyone to immediately choose between the current SS
investment plan yielding 1.23% annually [called affectionately SS Classic]
or Plan B. Plan B is
A) A portfolio of US Goverment securities (Treasury Bills)
or
B) A 50% mixture of US Government securities and high quality equities
Those who object to Plan B mention most frequently cite the "safety net"
idea where when all else fails, the U.S. Government and Social Security
will take care of you in your old age. If people invest in the stock market,
how could the government guarantee a safety net? Well, that's the issue.
Plan B is not only the ability to invest in something better than the
1.23% interest, but also the law that creates Plan B also says the
U.S. Government does not abandon the safety net at all. In fact,
the U.S. Government says the following to each citizen:
You choose either SS Classic or Plan B. In either case,
the U.S. Government guarantees you a minimum of 1.23% payout on the
same terms as the current Social Security. The U.S. Government stands
behind the concept of the safety net. If you choose Classic, when
you die, your benefits cease. If you chose Plan B, your keep the
investments.
Well that would seem to solve the problem except for the bucket. It
would now be drained at the same rate but would have fewer contributors
than ever and the fund will be bankrupt in no time. Or will it. The law
implementing Plan B has in it the following required condition:
a) All returns in the Plan B accounts beyond the 1.23% will be
taxed on a yearly basis. The rate will initially be as much as
50% of the return over and above the 1.23% of SS Classic.
Thus, if your account earns 4%, then the US Government
might take 50% of the difference between 4% and 1.23% or it
might take as much as 1.385%.
The money taken is earmarked by law for SS Classic payout.
The tax is further earmarked by law to shrink as the need
for it disappears when no people remain on Social Security
Classic. When a surplus is collected in one year, the tax is
by law reduced in the following year. No additional legislation
is needed.
If the average earnings of those who enter Plan B is just
1.23 + 1.23 + 1.23 = 3.69%
then 50% of the excess above 1.23 is magically 1.23 and the amount of
contribution into the SS Classic fund (into the bucket) is identical
to that now. All who particpate in Plan B always receive a better
return on the SS investment that those in SS Classic. [Treasury
Bills yield 3% today.] Because of the better return and the
ownership of the investment account, SS Classic will rapidly
disappear on its own.
There is one other issue that is seldom mentioned that leads legislators
to oppose privatization: the U. S. Government can borrow
money from the bucket at the rate of -- 1.23% or there abouts.
SS Classic provides our legislators with low cost money to spend on
many things. This source of funds would eventually dry up and the U.S.
Government would have to pay competitive interest rates to get money to
run government. The reduction in available money to the government
seems like a good idea to me.
Here are some observations.
1. The private account would have to be as remote as the SS Classic
account in terms of early cash out.
2. There would have to be publicly visible and verifiable rules for
investments. Trading and options and short selling should be illegal,
in my opinion. [Taxing to fill the existing Classic bucket
would have the effect of lowering the interest rate of the
investments which is what we are trying to raise.] Each account
holder must be able to verify that his or her account is following
proper investment rules.
SUMMARY:
1. Choose SS Classic - current scheme or SS Plan B private account.
2. U.S. Government guarantees all 1.23% and SS Classic terms.
3. U.S. Government taxes private proceeds in excess of 1.23% to cover
shortfall for those who remain in SS Classic.
4. SS Classic withers and dies because no one chooses it leaving
SS Plan B as the surviving partner.
5. U.S. Legislators improvise, adapt and overcome.
2008-10-03
Ed Bradford
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