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As an investor, I've always wondered why Social Security is such a
problem. What's so difficult about managing this particular Trust Fund,
and why is it so different from other investment accounts that pay out
a constant stream of income? The private sector does it routinely with
defined benefit pension plans and fixed annuities, so what's the big
deal? Is Social Security failing because it hasn't been invested
soundly, or is there some other reason?
The most obvious explanation is politics, but we're running out of time
for finger pointing, and Social Security is solvable in a surprisingly
painless manner. It will require a whole new approach that uses old
ideas and institutions in ways that most of us have pretty much given
up on. As hopeless as the Bush Administration's Nicotine Patch for
Social Security would have been, it pointed in the right direction. Now
don't hit
when I refer to "privatization", or when I mention one of my own most
hated financial products, the "annuity". Both are needed to permanently
fix the Social Security mess, to get it away from people who are
neither managers nor investment specialists, and to make the whole
system work more economically. The purpose of this article is to get
you to think about it... and to elect a hero with the guts to fix it.
Unfortunately, Joe DiMaggio has left the building!
Are you surprised that there is no "Social Security Trust Fund"... no
investments and no Investment Managers? This is a gigantic Government
designed and controlled Ponzi scheme that has worked incredibly well in
spite of congressional tinkering and prohibitively high cost. There was
always a tax plan for funding the benefits, but never an Investment
Plan. And as difficult as it is for me to admit, no sophisticated
Investment Plan is really necessary. We just need a new (reduced)
contribution plan, one that isn't designed to fund every politically
sensitive entitlement that compromises itself down the aisle. We need a
simplified benefit structure that supplements privately funded
(untaxed) retirement programs. [Healthcare just has to be a separate
issue, perhaps an actual (managed) Trust Fund, and certainly something
that should not be funded by private citizens until there is meaningful
tort reform in this country.] Pshew! Back to the point... We can
eliminate all the unnecessary bells and whistles simply by mandating
personalized benefit funding. Let the politicians deal with homeland
security while the private sector deals with things financial.
After the repeal of the Social Security tax and implementation of
mandated Individual Retirement Plan Contributions, the Social Security
bureaucracy will retain several important functions: 1) Qualifying
private sector companies and licensing them to provide Social Security
Retirement Income Annuities (SSRIAs). Thousands of providers will be
needed, but only, fixed income experienced, profitable companies need
apply. 2) Developing a computerized system for participant/provider
matching... inspired randomness is essential. 3) Proactive monitoring
of compliance with the minimal rules, installation of fraud detection
systems, and investigation of all violations by providers,
participants, and retirees, 4) Keeping the plan sacred, simple, and
principally unchanged by future legislation. The plan must be kept:
simple and profitable for providers; painless and visible to
participants; timely and comprehensible to retirees.
The SSRIA is a new and improved version of the ancient Deferred Fixed
Annuity Contract... a boring but guaranteed retirement benefit vehicle,
funded by both mandated and voluntary payroll deductions, with a whole
bunch of new wrinkles that make it an ideal Social Security replacement
program. For example, and unlike existing annuity contracts: 1)
Participants will be allocated to "qualified SSRIA providers" so there
will be no sales commissions, no business acquisition or retention
costs, no advertising expenses, etc. 2) 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. 3) Qualified providers will establish separate subsidiaries
to manage and control SSRIA operations and to assure that only high
quality, income securities are used to fund future benefits. 4) All
qualified providers will use the same mortality, investment earnings
and expense assumptions, and all benefits will be fully guaranteed by
the parent corporations.
The SSRIA is a supplemental retirement program, funded by a much
smaller, yet flexible, payroll deduction, and it is designed to be the
foundation of a retiree's total retirement package... a benefit floor.
Participants will choose (annually, for the following year) to deposit
from the required 2% up to a maximum 4% of their Pre-Tax Income to
their personal SSRIA, a contract that will follow them everywhere, from
employer to employer, throughout their working years. Before
retirement, a death benefit equal to the full cash value of the
contract will be paid to the designated beneficiary. At retirement,
participants can elect either a Life Annuity or a Joint & 50%
Survivor Annuity. No variable plans of any kind will ever be allowed;
there will be no loan privileges, withdrawals, or dividends. Providers
are expected to make a reasonable profit, which will ultimately be
determined by their operating and investing abilities... hmmm, I smell
capitalism.
Employer sponsored benefit programs and individual savings and
investments are expected to make up the bulk of private retirement
programs. The SSRIA will assure that every one has something, but
individual savings and retirement plans, both company sponsored and
personally funded, will be encouraged by new IRS policy. No retirement
income, regardless of source will be subject to income taxation!
Neither employers nor self-employed persons will be required to make
matching contributions of any kind to employee SSRIAs. However, they
will be encouraged to use their improved cash flow to increase
employment or to reduce prices, perhaps by a new system that will
reduce their corporate income tax obligations as a reward for boosting
the economy. Similarly, billions of dollars of discretionary spendable
income will find its way back into the economy from consumers whose
payroll deductions have been slashed deservedly.
Subsequent articles will deal with: SSRIA Providers, Participation
Rules, Transitioning the Change at Four Levels, and Dealing with the
Obscenely Overpaid. |