Obama and Social Security: Where’s the Beef?
Barack Obama has a plan to fix Social Security. Or does he?
Obama does have a vague proposal to raise payroll taxes for workers making more than $250,000. But there is a lot less to it than meets the eye, and Obama has left some hugely important questions unanswered.
We know that Obama wants to create a donut hole in the system. In his scheme, if you make less than about $100,000 (actually $102,000 this year) you would pay Social Security tax as usual. You’d pay no payroll tax on wages from $102,000 to $250,000, but if you make more than $250,000 you would again be hit by the Social Security levy. But that’s all we know. When TPC pressed the Obama staff for details, we were told that none were available. Interestingly, they warned us against assuming that those in this newly taxable group would pay the same 6.2% rate as lower-wage workers, or that the employer share would be what it is today (also 6.2%). They also said they had not decided what compensation would be taxed.
Whoa. If Obama is hinting that those making more than $250,000 would pay a higher payroll tax rate, or that non-cash income, such as options or deferred comp, might be taxed, that is very big news. It would fundamentally change the way Social Security operates and run the risk of making the program look less like social insurance and more like welfare.
Here’s why: Today, benefits are linked, more or less, to contributions. The more tax you pay while you are working, the larger your monthly check after you retire. This has always been critical to the image–some would say myth—of Social Security. But if Obama is going to raise the rate for high-income workers, they will either get bigger benefits, or they won’t. If their benefits grow with their contributions, it will be tougher for Obama to make the program solvent, as he has promised. If their monthly checks shrink relative to the size of their contributions, he will have taken a big step towards decoupling the Social Security tax and its benefits.
Some on the left like breaking this linkage, but others fear it would drain support for the program. After all, why would politically influential wealthy people continue to back Social Security once they realize they are getting a lot less than they are paying in? Might they embrace private accounts, where at least they’d get to keep what they contribute?
The whole idea of the donut hole troubles me, if only because people making $249,000 are hardly middle-class. But it is what Obama is not saying that is really interesting.
Diane Lim Rogers did some nice sleuthing on this for her economistmom.com blog. So has TPC’s Len Burman. But the bottom line is Obama needs to say exactly what he has in mind. Social Security is too important for us to be playing guessing games.
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!
Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com
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”
The policy development process here is interesting: a fairly specific policy is put forward — apply taxes above the cap, with an exemption between $100k-$250k — but left unspecified is whether the tax applies to individuals or couples (which employers couldn't currently administer); only wages or also including capital income (also un-administerable); whether extra benefits would be paid; or what the tax rate would be. The answers to these questions could result in very different policy outcomes and this ambiguity makes it almost impossible for outside folks to analyze. (I suspect that's intentional.) It seems that Sen. Obama is effectively running away from a policy that was confirmed only a couple weeks ago.