Editorial: Reforming and Improving Social Security (1/28/12)

    Social Security is too important and complex an issue to be reformed by a partisan debate. The leadership of both political parties should establish as much as possible a non-partisan commission to thoroughly study the issue and recommend reforms. This means that no changes should be made this year and that no changes should be made before the 2012 Presidential and Congressional election.

    Free and open town hall meetings are worthwhile for informing the public that there is a general problem, but have not really defined the problem and will not solve the problem.

    The commission should consider the following facts, ideas and opinions:

  1. Social Security consists of disability, survivors and retirement benefits.
  2. Shift the financing of survivors' and disability benefits to the general fund.
    [This is the approach that Sweden made in 2005 in reforming its Social Security system. This proposal is contrary to Bush's proposal to keep funding the survivors' and disability benefits by the FICA tax.]
  3. Retirement benefits in excess of a guaranteed minimum benefit should be proportional to contributions.
  4. The guaranteed minimum benefit would be financed partially through individual contributions.
  5. Retirement benefits in excess of contributions should be financed by general tax revenues and be taxed as ordinary income.
  6. Current general tax revenues should be used to pay for current excess benefits of retirees.
  7. General tax revenues include revenues from income, estate and any potential national consumption-type tax. Serious consideration should be given to using the estate tax to fund current excess benefits.
  8. Social Security retirement contributions should be owned by contributors and invested in marketable government bonds that mature at a definite retirement age
  9. Upon reaching retirement, the bonds should be converted to a single-life annuity that is not based on the current market conditions at the time of retirement.
  10. Anyone who doesn't understand the importance of the terms AIME, PIA and 'bend points' can't be expected to solve the problem.
  11. You should have very little faith in the ability of the current members of Congress and their staff to design a good tax system. Look at the monster they have created. It is clear that they do not understand how the incremental laws they write interact with other provisions of the code.
  12. A poorly-designed provision - the Saver's Credit (Form 8880) - was added to the tax law in 2001 to ostensibly help taxpayers save for retirement. The provision implies that a married couple can receive up to a $2,000 credit for contributing $4,000 to their retirement acounts if their adjusted gross income is less than $30,001. The maximum credit is actually limited to $1,410.
  13. The current Social Security and federal income tax system are fiscally irresponsible and discourage savings. The government uses the surplus to reduce the need for general tax revenues and lower-income individuals are discouraged from saving because of both the promises of Social Security benefits and an income tax system that concentrates its retirement savings benefits on higher-income workers.
  14. The proposals from switching the calculation of benefits from wage-indexing to price-indexing is misguided. Sweden decided it was best to switch their system in the opposite direction so benefits would be more closely tied to economic growth.
  15. If you are a senior your cost of living index is not the same as the one that is used to index your annual benefit increase. If a price index is to be used, it should more accurately reflect your cost of living.
  16. The current Social Security system, by not providing benefits that are proportional to contributions, favors people who live in states and regions with lower living costs. Generally, people who live in blue states subsidize those who live in red states.
  17. Some have tried to spin that illegal immigration benefits Social Security. They base their argument on the assumptions that most illegal immigrants pay such taxes and will never receive Social Security benefits. They ignore the potential that many, if not most of these immigrants, will eventually receive benefits if they either become legal residents of the United Strates or when the United States enters into Social Security totalization ageements with their home countries. The Bush administration is considering such an agreement with Mexico.
  18. Require that a certain portion of each participant's FICA contribution be converted to a contractual U.S. Treasury obligation to pay a fixed amount to that individual at a definite retirement age. The government would be required to issue marketable bonds to secure this obligation.
    [This would overcome the previous U.S. Supreme Court decisions that have held that there are no contractual rights to receive Social Security benefits. It is also a better and riskless alternative to Bush's private account plan.]
  19. The more one understands the problems of Social Security the more one realizes that current estate taxes should be used to help support current Social Security benefits. A portion of the estate taxe would be used to pay back to the Social Security Trust Fund any excess benefits that the deceased received during his or her lifetime from Social Security. It would be fairly easy to calculate such excess benefits. My mother died in 2001 at the age of 101 and had collected excess benefits based on my father's earnings through 1961 when he reached the age of 65. The tax on her estate more than returned the excess Social Security and Medicare benefits that they both received during their lifetimes and the disability benefits my twin-sister had received.

Copyright � 2005-12 Richard H. Bartholomew, CFA, CPA. All Rights Reserved.