US Social Security Rant

!--- Caution RANT Ahead -----!

I'm going to go on record here that I think Bush's plan for SS is terrible. I think he has the right idea, to expand the investment options for SS funds. But his proposed solution of individual self-directed accounts creates more problems than it solves.

Diversify Investment Options:
One problem is that Congress made the SS surplus a cheap line of credit for them to borrow from. There is nothing wrong with investing in government bonds. But to force a pension fund to invest only in low-yield bonds is a mistake. It goes against the wisdom of diversification of investment portfolio, and balanced risk versus yield for the time frame of the investment.

The solution is to free the SSA from these investment retrictions. Instead, they should allow them to manage themselves like any other pension fund. They should be able to hire the fund managers they think will meet their objectives. They should be able to make investments that they feel will return optimal returns within the given time frames.

The arguments against this is that people don't feel that the government should be investing in private industry because it creates a conflict of interest. Well, that conflict of interest is there anyhow. All the more reason to place the investment decisions in the hands of a board who are responsible to the investors versus Congress.

Perhaps this "conversion" can take place over a 5 year schedule to help midigate the impact on the federal budget. 20% of the surplus, per year, can be rolled out of cheap T-bills into a professionally managed pension fund.

Increase Revenue Contributions:
Right now, only the first $80k a year of income is taxed at 12.4% for SS contributions. Half is paid by the employer. Half is paid by the employee.

Part of the funding solution is to bring in more revenue by increasing the tax. This can be done by either raising the percentage, raising the cap, or a combination of both.

I think the best idea is a tiered tax. Keep the current system in place. Tax income from $80k to $100 at 6.2% percent, paid by the employee only. This way there is no additional tax burdon placed on business. Then tax $100k-$120k at 3.1%, again paid by the employee.

In addition, these limits ($80k, $100k, $120k) need to be re-evaluated and adjusted every 5 years to account for inflation.

Stop Automatic Benefit Increases:
It is financial suicide to saddle SS with automatic cost-of-living-adjustments (COLA) without an corresponding automatic adjustment on the contribution side. You can't give out more money than you take in. That is common sense.

Instead COLA should be tied to the investment health of the surplus fund and projected revenue. To have automatic increases is contributions through tax increases is politically impossible. No one wants an open-ended comittement. So therefore the only solution is to kill automatic COLA.periodic evalutation of contibutions.

Obiously increases will be needed to keep up with inflation. But these increases should only be funded by improved investment returns first, and contribution increases second.

Mandatory IRA Investment:
I believe that there should be more investment options for SS funds. The question is who will make the decisions? The individual, or the SSA? The private, self managed retirement accounts Bush wants to create already exist. They are called IRA's. They have been around since the 1970's and there is a well serviced and regulated industry in place. To create a new class of retirement accounts is overkill.

If the idea of self-managed retirement accounts is implement, then it could be done by simply mandating IRA invesment. Employers could send their share of the SS tax to an IRA account nominated by the employee.

Australia already does this. It is called SuperAnnuation. Employers are required to contribute 9% of an employee's salary to a retirement account. The employee is responsible for telling their employer what account to send the money to.

US employers already do this too for 401K and other pension contributions. They submit taxes withholding tax quarterly. It is not a stretch to simply add SS contributions to the same distribution system.