May 16, 2008
Social Security Reform: Possible Effects on the Elderly Poor and Mitigation Options
"Social Security has significantly reduced elderly poverty. The elderly poverty rate has fallen from 35% in 1959 to an all-time low of 9% in 2006, in large part because of Social Security. If Social Security benefits did not exist, an estimated 44% the elderly would be poor today assuming no changes in behavior. The Supplemental Security Income (SSI) program, also provides benefits to the poorest elderly, many of whom do not qualify for Social Security benefits. However, despite these programs, about 3.4 million elderly individuals remained in poverty in 2006. The Social Security system faces a long-term financing problem. The Social Security Trustees project cash-flow deficits beginning in 2017 and trust fund insolvency in 2041. Many recent proposals to improve system solvency would reduce Social Security benefits in the future. Benefit reductions could affect the lowincome elderly, many of whom rely on Social Security benefits for almost all of their income. Such potential benefit reductions could lead to higher rates of poverty among the elderly compared to those projected under the current benefit formula. Because the low-income elderly are especially vulnerable to benefit reductions, many recent Social Security reform proposals have included minimum benefits or other provisions that would mitigate the effect of benefit cuts on the elderly poor. This report analyzes the projected effects of four possible approaches to mitigating the effects of Social Security benefit reductions on elderly poverty in 2042, the first full year of projected trust fund insolvency." [RJ]
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Guaranteed Social Security Benefits: Make It So
The comically complicated PSA (Personal Savings Account) legislation bouncing around Congress will raise taxes, increase investment risk, and expand the size of government. Let's stop applying Band-Aids to spouting arteries. We are looking for a guaranteed retirement benefit program, and organizations capable of providing one. Additionally, we want the new program to reduce taxes, create jobs, boost the economy, cut prices, and increase salaries. Difficult? Not really.
This is the conceptual outline of a five-year implantation plan, a starting point for the brainstorming needed to develop the nitty-gritty details, rules, regulations, laws, and agencies. All that is needed is the will to change things productively. Politicians like to debate changes to determine why new ideas can't be implemented. Here's a plan that must be implemented. Have a listen, throw out an incumbent, and protect your future.
Guaranteed benefit programs have been around for over 100 years, and millions of people throughout the world enjoy the benefits they provide. Here's how they do it. Every month, they deposit money into a trustee-managed investment account. The money avoids the stock market (for the most part), index funds, commodities, or MLM-like derivatives and is carefully invested in high quality debt securities, many privately placed for better yields.
All earnings are reinvested in similar securities, and the fund eventually produces more in earnings than the participating investors contribute; the trustee manages the portfolio. At retirement, the deposits stop and the guaranteed benefits begin. The benefit is guaranteed for life--- extraordinary concept, older and wiser than any living congressman or presidential candidate.
What if, instead of donating 7.6% of your salary (15.3% if you are self employed) to support the war de jour: (a) you could choose to deposit from 3% to 5% of your salary in a guaranteed retirement program maturing anytime after age 60, (b) the lifetime benefit is totally income tax free, and (c) your employer uses his savings to either create jobs, raise non-executive salaries, reduce prices, or increase shareholder dividends. Interested?
The SSRIA (Social Security Retirement Income Annuity) is a new and improved version of the ancient Deferred Fixed Annuity--- a boring but guaranteed fixed-amount-only retirement vehicle. (Wrong, I don't sell annuities--- they just happen to be the perfect Social Security problem solver.) There are a bunch of new wrinkles: (1) The minimum contribution is mandated for all employed persons, but anyone with a Social Security number can have a SSRIA.
(2) Qualified (15 years of Fixed Annuity experience) SSRIA providors are assigned to participants randomly by SS#--- only one per participant, per lifetime, please. Since the "qualified-by-qualified-people" providor companies have no acquisition, retention, or advertising expenses, there are no sales commissions; administrative expenses and investment management fees are capped at .5% of the total fund Working Capital.
(3) All SSRIA contracts, regardless of provider, will contain the same terms, interest guarantees, retirement benefit choices, and pre-retirement death benefits, thus eliminating any incentives for internal fraud and manipulation of statistics.
(4) Qualified providers will establish separate tax exempt, "mutual" subsidiaries to manage and control operations, assuring that profits are distributed to contract holders. Profits are allocated 50% to active contract holders and 50% to a health insurance trust fund for retired participants (HITF). (5) All providers will use the same mortality, investment earnings, and expense assumptions in their annuity benefit calculations, and only Life and Life + One Annuities are available. (6) Benefit payments will be jointly guaranteed by the parent companies and the Federal Pension Benefit Guarantee Corporation. Parent Company income taxes would be reduced by 50%.
Implementation would be completed over a five-year period, and interpreted with an "intent of the law" bias:
In Year One, the Federal Government would purchase single premium SSRIAs for all active Social Security recipients--- hey, they squandered the money. Also in year one: (1) all employee and employer contributions would be cut by 25% (the first of four such annual cuts) and deposited to individual SSRIAs. (2) All Federal, State and Local income taxes on SSRIA payments would be declared illegal and forever prohibited. (3) A private company would be chartered to audit the disposition of corporate tax savings within all public companies and private companies employing 10 or more persons 18 months before enactment.
In Years Two through whenever, the Federal Government would add to retiring persons SSRIAs to bring the annuity benefit to the level guaranteed by the OASI plus COLAs. Once an equalization level is achieved, federal responsibility would cease for that retiree.
In Years Three through Five, all Federal, State and Local Income taxes on all forms of private retirement accounts (IRA, 401(k), 403(b), etc.) would be reduced by one third per year, and would be declared forever illegal at the end of year Five. A Federal Sales Tax of 1% or 2% (on all final-product-sales, not a VAT) could be enacted after the second year's cut. From Year Three forward, SSRIA holders would be able to view their projected monthly benefit at various retirement ages, based on contract provisions and their deposit and earnings history.
By the end of the Year Five: (1) Employers would have no Social Security tax responsibilities, but would be responsible for either employing more people, reducing their product prices, raising non-executive salaries not subject to the minimum wage, or paying higher dividends to shareholders. Any manipulations of their operations or executive compensation packages clearly intended to circumvent the intent of these reforms would be fined appropriately within the Board of Directors, senior officers, and legal council of the Company--- personally, and in each capacity.
That's right, if a senior officer is also on the Board, and responsible for controlling jobs, product prices, or dividends, he or she would be personally responsible for three separate fines. (2) Employees would select their level of salary deduction for year six; the election can be changed once in any twelve-month period. No employee can contribute more than the maximum 5% of salary to an SSRIA.
Of course there are a lot of ifs, ands, and buts in here, but it is a clearly doable program within an established professional infrastructure. It will increase jobs, reduce taxes, boost the economy and reduce the role of government--- in 50,000 less words and 25 fewer years than any approach even being considered in Congress.
Make it so--- yeah, you!
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
Posted by: Steve Selengut | Jun 16, 2008 4:51:30 AM