Alternative to Privatizing Social Security

[In My Memory]

I think only the people hiding under the largest of rocks, on the most distant planets, without cable, havent heard about the plan to reform the US Social Security system to privatize security.

 

The problems are to social security are obvious (increasing burden on taxpayers, especially as more people are retiring earlier and living longer), but I dont think privatizing social security is a solution (the 39 - 55 year old group will lose immediate benefits before investments have time to compensate, and price index formulas predict privatizing will result in net loss for investors). So, I have a better plan: Allow Americans to opt out of social security.

 

The idea isnt original, but I am not sure why it hasnt caught on. At least to me, it would seem like some of the basic premises of allowing Americans to opt out are obvious:

 

Imagine if a hypothetical American, Bob, has been working for 10 years. He has paid into social security at least US$2000 (accuracy in numbers isnt necessary to get the point across). If he chose not to opt out of social security, he will have paid another US$8000 over the next 30 or so years.

 

However, Bob chooses to opt out of social security. He is now owed US$2000 (or whatever its 2040 equivalent), which will presumably be paid back to him either in installments, or upon his retirement (it will be as if he never opted out, but his benefits have been reduced to US$2000, and no more than US$2000).

 

I consider the current integrity of government will probably reimburse Bob with US$2000 upon retirement (for the reason that US$2000 being worth slightly less in 2040 is a sly way of cutting benefits); the spirit of lurking variables in this type of governmental slyness allows for slight curtailing of social security reserves from being depleted so quickly. Otherwise, paying Bob the 2040 equivelant to his 2005 investment of US$2000 allows the mathematics of social security to break even, as it follows that one less person paying into social security implies one less person to inherit the benefits of social security.

 

In this sense, the individuals who have faith in Social Security will remain happy, as essentially the pool of money which pays them social security is proportionately identical a system in which no one were allowed to opt out.

 

The individuals who believe social security is a ponzi scheme or nothing more than robbery, they will be happy as well seeing an instantaneous increase in their net income by 7.5%. I can imagine that the additional cash in the average American's pocket will make the supply-side economists happy as well. I think the people most likely to opt out are the individuals with incomes below US$25000, and the individuals above US$150000.

 

Theoretically, this particular type of reform in social security ought to involve no increase in taxes (unless there is some kind of one-time only "opt out of social security tax"), and no decrease in benefits, and be less burdensome on taxpayers. It is a win-win-win situation.

 

I predict that if given the option to opt out, most people would take it - and inevitably, the social security program will most likely dissolve on its own, but the effects will be profoundly positive. A large fiscal burden will be shifted off the government on the basis that the social security decifit ought to be reduced substancially, and many previously unwilling taxpayers will become satisfied.

 

Only until we allow taxpayers to opt out of social security is the idea of a private retirement fund optimally sensible. I would recommend for individuals who feel that an important safety net has been cut away to seek the assistence of professional retirement counselors, or perhaps work out a system that would forward some amount of money per paycheck into a completely private savings account (the "safety net" theory is essentially identical to social security, but now you get out exactly what you put in + interest).

 

Provided I havent overlooked a fundamental flaw, I personally find the idea of opting out of social security to be 100x simpler and more stable than currently proposed social security fixes. (Of course, before I commit myself to trying to encourage public support for the "opt out" solution, I will try to establish the solution on a firm foundation of statistics, greater appeal to commonly accepted economic theories, and colorful charts).

[In My Memory]

The opening post is much longer than I realized at first, so for all the people who are much too overwhelmed to read it all, here is a summary:

 

* Social security has problems, but current privatizing solutions do nothing to solve them.

 

* On the other hand, opting out of social security is good.

 

* One less person to pay into social security means one less person to inherit benefits. Proportionately, there is no net gain or loss.

 

* People who find social security to be sound may have the option to stay in the current system, otherwise they may withdraw from the system and be reimbursed.

 

* This particular system can save social security without resorting to drastic measures of increasing taxes or reducing benefits.

 

* Much of the burden of social security is relieved from government and unwilling taxpayers.

 

* Everyone goes home happy.

[Aardvark]

Possible problem. Richer people who proportionately pay more into social security opt out. Poorer people who pay less into social security stay in.

 

This results in imbalance as financial obligations on social security outstrip income.

[Pangloss]

From the lawmakers' point of view, that's the only problem, and it's the same beef they have with the President's scheme. They would view your suggestion along similar lines.

[coquina]

I have to match what my employees pay in. Am I off the hook for employees who opt out? Do I have to pay the equivalent amount into whatever retirement plan the employee wants? This would be a bookkeeping nightmare for companies with many employees.

 

I have been wondering about this through all the talk of privatization - maybe I missed it, but I haven't heard it addressed.

[Dapthar]

Possible problem. Richer people who proportionately pay more into social security opt out. Poorer people who pay less into social security stay in.

Yeah, that's a pretty big problem.

 

<rant>I've never really understood why a rather large portion of people who have a fair amount of money are so eager to dodge taxes. I mean, at that point in time, one is living rather comfortably, and assuming that one doesn't ramp up their spending proportionately, there's no danger of themselves or their family not satisfying their basic needs (food, shelter, health care), or having the necessary funds to pursue a collegiate education if they so wish. Thus, any 'extra' money that one is able to reclaim by opting out of social security would be spent on luxuries, which by definition are unnecessary.

 

However, I guess I'm one of the few people that realizes even though those in power tend to misuse tax dollars, there are some programs and organizations (such as public schools, higher education, the NSF, social security, and medicaid) that are being funded, and that still makes them worth paying.</rant>

 

I have to match what my employees pay in. Am I off the hook for employees who opt out?

The exact thought would most likely occur to business owners across the US, and I'd be willing to wager that the more unscrupulous ones wouldn't be as considerate as yourself, i.e., they wouldn't consider paying out an equivalent amount into a retirement plan of any sort.

[In My Memory]

Possible problem. Richer people who proportionately pay more into social security opt out. Poorer people who pay less into social security stay in.

 

This results in imbalance as financial obligations on social security outstrip income.

The imbalance is actually strikingly deceptive. Using Excel' date=' I've put together some data and created this chart to show the balance of power using our [i']current social security system[/i]:

 

Annual Income	Average SS Paid		Average Benefits	Paid/Benefit
	   Per Year		   Per Year		  (Larger numbers denote 
							  Larger financial burden)

<  US$45 000	US$2 790		US$9 160		.3045

  US$45 001	US$4 650		US$13 688		.3397
to US$85 000

>  US$85 001	US$5 580		US$17 700		.3152

							(These numbers are not 
							intended to add up to 1.00)

[The chart assume 6.2% Social Security tax. The figures for projecting the benefits come from [url=http://www.ssa.gov/OACT/quickcalc/index.html]SSA.gov Social Security Calculator[/url].]

Unless my math is incorrect (which I wouldnt exclude as a possibility as the process of computing social security burden across 10 financial brackets is complicated), the greatest financial burden is on the middle class.

 

When you break down the burden into much smaller teirs (i.e. US$10 000 - US$15 000, US$15 001 to US$20 000, etc.), the greatest financial burden appears to be focused toward the middle 68.5% of Americans (i.e. US$55 000 +/- US$11 400). Low-income families have the least burden, whereas higher income families have an intermediate burden.

 

Allowing taxpayers to opt out does not increase the financial burden - the only thing that really makes your US$1 worth less is when citizens retire early and live longer, otherwise the calculations in a few hypothetical models I've put into Excel show no essential change in the burden of social security.

 

(However, when trying to calculate how this would effect the social security deficit, my numbers would not converge on a single date. Estimates are around 2100 of SS rates between 6% and 7%, with wide discrepancy noted.)

[coquina]

The exact thought would most likely occur to business owners across the US, and I'd be willing to wager that the more unscrupulous ones wouldn't be as considerate as yourself, i.e., they wouldn't consider paying out an equivalent amount into a retirement plan of any sort.

 

I'm betting the government would require employers to pay the matching funds to social security, whether the employee opted out or not.

 

Now, the employer contributions are tracked through W2 funds, and are balanced against payroll deposits. If employers didn't pay the government, how would they know that the funds were dispersed at all?

 

They couldn't audit every company 100% every year to make sure all funds were paid where and when they were supposed to be, unless they hired thousands of additional employees.

[Douglas]

I'm betting the government would require employers to pay the matching funds to social security, whether the employee opted out or not.

I happen to be self employed, since I pay double FICA does that mean I can only opt out of half of it?

 

I'm for the privatization plan for numerous reasons.

[Douglas]

Possible problem. Richer people who proportionately pay more into social security opt out. Poorer people who pay less into social security stay in. .

On the other hand, poorer people may opt out, simply for the extra cash each week, figuring that uncle Sam will take care of them.