Alternative Insight

A National Pension Plan


Financial constraints indicate that Social Security (SS), a shortened term for Old Age, Survivors and Disability Insurance (OASDI), has a precarious future. Five articles, written by Alternative Insight since1999 have drawn a trajectory to a similar conclusion with a caveat: Social Security history indicates that only a National Pension Plan can provide a suitable and secure financial arrangement for retirees and SS already has the framework for a National Pension Plan.

This article uses information from the previous five articles to present its case.

Social Security's Built-in-Failures
The reason for the potential social security dilemma is well known; revenue will be insufficient to accommodate the needs of an increased senior population. From the day of its first payment, check number 00-000-001, issued to Ida May Fuller in the amount of $22.54 and dated January 31,1940, Social Security obligated itself to pay benefits that exceeded the contributions from the earliest retirees. The increase in life expectancy and constant cost-of-living adjustments additionally strained the Social Security fund. Payroll taxes (FICA) were greatly increased to make certain that Social Security operated in the black. After substantial increases in the payroll tax, the government concluded that the present payroll tax is still insufficient for future demands - the retirements of the "baby boomers" will greatly decrease the ratio of workers to retirees - and the Social Security "trust fund" will be empty in the third or fourth decade of the 21st century..

Retirees deserve more than the present Social Security system has afforded them. The government created Social Security to meet immediate demands, consistently altered the system to meet growing demands and now is in a dilemma of how to meet future demands. Social, cultural and economic factors change, and a retirement plan must be able to adjust to the changes. It is obvious that a new system is required that can respond to the exigencies of a dynamic economy.The present economic crisis (not predicted by conventional economists ) intensifies the problem and verifies the need for a more secure and stable retirement system.

A chilling scenario awaits a nation with an aging population and a reduced birth rate.

(1) Declining births lower the number of available workers.
(2) Worker demand exceeds worker availability and drives up wages.
(3) An increasing retirement population and their longevity maintains demand.
(4) High consumer demand coupled with lowered production and increased wages signal heavy inflation.
(5) Inflation brings increased interest rates.
(6) Recession and stagflation follow.
(7) Payroll taxes decrease and social security revenue further decreases.

That's not all: As the population ages and births decline, family life changes. Modified lifestyles and cultural patterns will evolve and the infrastructure to satisfy the new patterns will be reconfigured. Some industries will be forced to discard surplus production facilities and their reduced economies of scale will stimulate higher prices. Changing demographics will modify consumer preferences in clothing, housing, entertainment, food, etc. and partially reorder the consumer economy. The changes might be slow and adaptation might enable absorbing the shocks. Nevertheless, the economy will be perturbed.

Another overlooked condition. The present social security beneficiaries must either directly use their investments for expenditures or transfer equity investments to fixed income investments and live from fixed income interest. The exit of the 'baby boomers' from the work force leads to Increased investment demand for fixed income securities, which drives up the price of fixed income securities and drives down their yields, resulting in less retirement income.. The employed, through their Keogh plans, purchase the securities that the retirees sell to gain the assets for fixed income investment. In effect, workers maintain security prices and are always financing retirees.The proposition that investment of social security funds in equities can assist in maintaining the social security fund (an apparition) and yield greater benefits for retirees is specious and might prove counter-productive. Two severe stock market declines in ten years have softened the call for turning social security into an investment scheme. It has not been noted that it would also misalign the nation's financial base.

The Social Security problem arises from the failure to recognize that the present system had built-in-problems from the start and no patch work can repair it. With corporations deserting their original pension commitments and the U.S. government's Pension Guaranty Corporation rescuing the insured, with the stock market falling periodically and investment at these occurrences going strongly into U.S. government bonds, it is obvious that America's citizens are depending upon their government for an assured retirement income.

By using a major portion of the taxed FICA contribution to provide present benefits, Social security is unable to create sufficient reserves for future retiree benefits. On paper, SS is being financed by FICA rather than by the general revenue fund. However, to workers, the FICA payment is only another form of taxation, and the result is the same as if they paid FICA to the general revenue fund. Many workers never recover their total payments after retirement. To them the FICA payments are the same as any tax.

Moving money from one accounting line (Social Security Fund) to another (general revenue), while maintaining the same result resonates as a sleight of hand operation. It is a 'smoothie,' but the benefit of the change is that Social Security will become a true retirement plan, actuarially and financially. However, going from a pay-as-you-go plan to a true retirement plan. does not automatically solve the SS financial problems. Only a properly calculated ingestion of money can place a retirement plan on a sound basis.The proposed change places this calculation in better focus. And this focus allows more careful scrutiny of means to further improve the retirement plan and finally resolve the financial issue.

Proposals for keeping the retirement system solvent continually circulate without decision. And yet, we have a lack of discussion on what may be the most critical failure of the Social Security retirement plan - It operates as a pay-as-you-go plan rather than as a true retirement plan. Changing its stature from pay-as-you-go to a true retirement plan might establish a social security system that is competitive with an annuity of a private industry plan and yield advantages that private industry plans cannot provide.

Is the "pay-as-you-go" system poorly designed?
It has become fashionable to accuse the "pay-as-you-go" feature of the SS system as a poor design and try to redesign the SS system as an investment vehicle to riches.Those who framed the Social Security Act intended to create a system that would be self supporting from contributions and would provide some financial security to those entering retirement in a delicate financial state. Out of necessity, the SS system evolved to what seems to be a "pay-as-you-go" system. Although designed so that each worker's contributions would be secured in an imaginary "lock box" until retirement, events doomed that design from the start. Early retirees, who had not contributed much to the fund still had to have an adequate retirement, even if their receipts far exceeded their contributions. Payments to early retirees reduced the funds available in later years. Inflation, which had huge leaps in the 1970's, required huge increases in FICA taxes to compensate retirees trying to exist on pre-inflation payments. An increase in longevity made it impossible for a worker's total payments to the fund to compensate for the monetary demands of longer lives. Eventually, the increasing financial demands of Social Security for retired workers had to be satisfied from payroll taxes of present workers.v Rather than a "pay-as-you-go" system, SS has become an income distribution system. SS shifted a portion of income from earners to those who don't earn income. This shifted income is usually spent quickly and recirculates in the economic system.

Can Social Security Function as a Pension Plan?
Workers are taxed to support retiree income from payroll taxes rather than from general revenue. Social Security determines the formula that shifts a portion of wage earners to retiree income. No matter how its sliced, diced or construed, the present OASI system is almost a National Pension Plan. - the government raises funds by taxes and distributes these funds to give retirees a fixed income. The system only needs improvements; a more just retirement income for everyone and a certainty that the funds will always be there.

Social Security, modified to be a national pension plan, has the capability to provide a pension for retirees that gives security, stability and advantages. Security results from the strength of the government system. Stability results from the guaranteed income. The added advantages is that government control allows quick adjustment of retirement benefits according to family status, cost of living and total income.

If the nation accepts the original objective of the Social Security system as "to pay benefits that provide a minimum degree of social security," realizes its obligations to the retirement community, and perceives SS as an income distribution plan, then SS becomes a national pension plan financed from the budget.

A modified framework for the Social Security system uses the forecasted expenditure for Social Security as a budget item in a unified budget. One modification would be to have tax revenue support the budget item termed Social Security Benefits. The individual's W-2 tax form would become an accounting entry for determining future benefits.

Placing SS benefits in a unified budget and making certain that the budget item is financed from general tax revenue has several advantages:

The SS system cannot escape the predictions that in the second decade of this century, its outlays will exceed its revenues. How will its own budget be balanced?

As of now, the distributions of payments to retirees are well accepted. Continuing those distributions and refining them as economic changes occur are a matter of priority, and assuredly Social Security should have first priority for the public. After all, Social security payments are only a transfer of payments from children and grandchildren to their elders--a family affair. Instead of family wage earners directly supporting their parents, the wage earners will be indirectly supporting them. In other words, no matter the costs involved, as long as they are reliable and sensible, the public will be prepared to pay them.

The costs of the retirement program have a greater return than other government programs. As mentioned previously, its payments are instantly recirculated in the economy and assist in moving the economy forward. Defense programs often result in production of weapons that don't benefit the economic structure. Many government programs are totally wasteful, resulting in no benefit to the American community. Foreign aid, that doesn't require purchase of American goods, moves money and resources out of the country.

Securing the National Pension Plan
The American constitution states that everyone is created equal and America does everything to make its citizens unequal. The OASI is one example: Why is a Wall Street broker, who already earned huge sums during a lifetime and should have sufficient funds for retirement, worth any more than a cleaning woman who worked hard and didn't receive sufficient earnings to secure a satisfactory retirement? A National Pension Plan can equalize public benefits. Private pension plans or other means for retirement income can complement the public benefits

Regardless of previous income, all retired workers are entitled to minimal and near equal pensions. if they worked equal years and hours and exceeded some minimum wage in each year. This concept conjures a Marxist vision of "each according to his/her needs." There is no relation. Government operations - medical, defense, schooling - provide equally for all persons regardless of earnings. Medicare benefits are not related to earnings. Retirement income should not be biased towards any sector of society. Every qualified worker should receive a basic income that allows for acquiring the staples in life - food, housing and clothing. The Department of labor can determine the quantity of funds that constitute a basic income.

The National Pension Plan intends to make Social Security more relevant, more simple and more equitable. By making it a budget item, its solvency is resolved. Rather than treating social security as an adjunct to America's economy, it would be preferable to integrate the needs of the retirement community into the needs of the entire society. In a responsible society, resources are shared and so are sacrifices.

alternativeinsight
july, 2009

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