For those who have not been paying attention for the past 20 years, our nation has found itself in a unique position. In 1935, President Roosevelt signed the Social Security Act to provide retirement aid for those in the industrial sectors. Ten years after the historic legislation was signed creating our Social Security system, we experienced a population surge we call the Baby Boom. This boom helped expand the economy for the past 40 years as well as fund the Social Security fund which provides funding to retirees. Today, these babies are now the retirees and the Social Security program which they were funding now needs to pay them. The problem is the decrease in population growth following the baby boom has placed a strain on the system due to the decrease in funding for Social Security in order to meet the existing and future demands of those preparing to retire.
When the Social security Act of 1935 first started, aid was provided primarily to the industrial employees of the US who were not receiving pensions or other retirement benefits from their company. With economic and employment stress weighing down on the nation, states were being overwhelmed financially by providing aid to their citizens. The Act provided grants to the states from the Federal government to offset this burden. Over time, “Social Security” as we know it now was expanded to cover more people and provide increased benefits resulting in an increase in costs. Starting from a 0% tax rate to 12.4%, our nation has yet to discover a way to find a cost balance in the system. The 1983, a Commission was designed to examined the issue and make a series of recommendations to improve the efficiency of the system. These recommendations were mirrored in the 1996 Report as well as the 1997 Advisory Panel. In 2000, personal accounts were proposed as a way for individuals to save for themselves in the hopes that their investments would offer a higher return than what the government could provide, but this proposal has been met with a lot of protests. Perhaps there is some merit to the concept of investing some funds in the open market where the government could off-set the expenses of the program as long as there are specific controls in place to protect the solvency of the program. Consider the following.
Recommendations:
Isolation of Social Security funds: One of the issues currently plaguing the Social Security system is the fact that funds set aside to maintain the benefits for eligible retired people is counted with the general Congressional budget and tax revenues. We are familiar with the games played with Social Security during the 2000 Presidential election. Al Gore would repeat the phrase that he wanted to put Social Security surpluses into a “lock-box” which could be accessed in the future when the program needed the excess funds. The problem was that the funds were not be stored for the future, but rather used to pay down the nations’ debt. Then, somewhere in the future, the government could borrow the money back to pay the Social Security demands. To an extent, Congress has practiced that over the years anyway. So by removing these funds from the hands of Congress and their accounting games, a clear picture of the current health of SS will be available for the general public to see. An annual report will be presented at the beginning of each new year (following the tallies of the prior years tax returns) indicating what the current value of the SS fund is, how much was paid out the prior year, what was collected the prior year, if the fund increased or decreased, and how far into the future the SS is estimated to provide coverage.
Social Security Board: In order to provide transparency and independence, the Social Security Board will be compiled by professional accountants and experienced stock market brokers and mutual fund managers. The members of the Board will be selected from the financial industry based upon performance, strategy, and integrity. The professional accountants will provide credibility to the current and future health of the Social Security fund, and the brokers will be responsible for the proper allocation and investing of Social Security tax revenue to ensure a higher return. Maintaining the health of the Social Security fund and generating an increased return on investment is the boards’ sole responsibility. This is why experienced and accomplished stockbrokers and mutual fund managers are necessary to the new system, especially when they will be in charge of $600 Billion in annual tax revenue.
Stock market investing: With the need to recover lost income without raising taxes on those currently employed, investing a small portion of the Social Security annual tax revenues provide the best potential for offering a higher return in a shorter period of time than investing federal funds into new business ventures. To limit the risk of possible losses, only 6% (or $36 Billion) of the annual tax revenue would be invested into the market, broken up into three different categories. One-percent of the funds would be invested in high-risk mutual funds (high risk for large returns), two-percent invested in medium-risk mutual funds (medium risk for average returns), and three-percent invested in low-risk mutual funds (low risk for small but dependable returns). Just as mutual fund managers evaluate and change the holdings within their portfolio on a monthly basis; the board will do the same with the mutual funds they are investing in. Active involvement in the portfolio will keep the Board informed on the health of the funds they are invested in and what holding changes occurred in each funds portfolio.
Need-based perspective: Going back to the original intent of Social Security, aid will only be provided for those who actually need the funds. Through this process, the demand on the system will be decreased, allowing more funds to remain in the pool for those who will actually benefit from the program. The first change will be to lock the eligibility start age for average beneficiaries at 65. This will prevent Congress from adjusting the date periodically, allow the individual to plan their entire life accordingly, knowing exactly when they will become eligible for funds. Secondly, those who continue to work past the date of their eligibility, receiving an annual salary of $150K or more will not be eligible for aid at that time. This $150K limit will rise over time as inflation increases so the issues with the Alternative Minimum Tax (AMT) will not be repeated. With that being the case, those who earn more than $150K per year when they reach the age of 65, and continue to work past their date of eligibility, the individual will not be able to receive catch-up benefits at the point they retire. Since they chose to continue to work, and they were not in a financial position where government funding was needed, to provide “past due” funds would not be necessary. Lastly, in the world of multi-million lotto winners, people hitting it rich in the stock market, large salary earners and so on, there is 1% of the population with over $5 Million in personal assets which do not require aid. While they have paid into the program, like an insurance plan, you do not receive the aid until you need it. Social Security is a program designed to protect those that are actually in need of Government aid to sustain themselves after retirement, and in most cases, multi-millionaires are not in that position.
While with many recommendations, there are some listed above which few might disagree with, especially when they are the ones no longer eligible for aid. However, they might be the ones who receive the most media time due to their exposure and clout. It is imperative that the media and the Congress understand that it is the silent majority that are the ones who need to be heard. These proposed changes should provide a process for the Government to protect and manage the funds invested by the workers smartly, and to ensure the solvency of the program. This will not be a “lock box” nor will funds be removed from the system and placed in the hands of individual, inexperienced investors, placing an even larger demand on the government in the future. It is time the patches are removed from the Social Security program and changes made to actually fix it once and for all. We are 20 years behind in taking action on this issue. We cannot wait another 20 more years until we are already in the red financially.
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