Alternative Insight

A National Pension Plan - Revisited



Financial constraints portend a precarious future for the Social Security System (SS), a shortened term for Old Age, Survivors and Disability Insurance (OASDI). Six articles, written by Alternative Insight, forecasted 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 six 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 during the Reagan administration, the payroll tax remained insufficient to satisfy future demands. The near future retirements of the "baby boomers" will greatly decrease the worker to retiree ratio, and the Social Security "trust fund" will be empty in the third or fourth decade of the 21st century, or possibly earlier.

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.
This chilling scenario has partly arrived; wages have been relatively stagnant, while an increasingly aging population solicits more social security funds. Fortunately, inflation stays low - dampened by a prolonged recession, controversial statistics and decreased global demand for many products. Unforeseen elevated unemployment, predicted to remain for a lengthy time, complicates the budgeting for the OASDI.

That's not all: Not prominently considered is that as the population ages and births decline, family life changes. Modified lifestyles and cultural patterns evolve and the new patterns will force industries to reconfigure their production. Changing demographics will modify consumer preferences in clothing, housing, entertainment, food, 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 and slowly use up their assets, which they gamble to remain at adequate price levels, or transfer equity investments to fixed income investments and live from fixed income interest. Low interest rates, unsteady stock market and the push for private retirement plans mystify the choices:

All patchwork and contradictions.
The exit of the 'baby boomers' from the work force leads to increased demand for fixed income securities. This drives up the price of fixed income securities and drives down their yields, resulting in less retirement income. The patchwork proposition that investment of social security funds in equities can assist in maintaining the social security fund and yield greater benefits for retirees is not proven and might prove counter-productive. For this concept to be effective, the employed workers, through their Keogh plans, will purchase the securities that the retirees sell to turn their assets into cash or fixed income investment. In effect, the employed workers, through their own Keogh plans, must maintain continually increasinghigh security prices and thus will still finance retirees in a similar manner to the "pay as you go" plan. However, two severe stock market declines in ten years have shown this cannot happen, and have softened the call for turning social security into an investment scheme. Still unknown, and not discussed too loudly, is how will SS be able to meet its present obligations if FICA funds are diverted from the 'trust fund' to investments.

The Social Security problem arises from the failure to recognize that the present system had built-in-problems from the start, and patch- work cannot repair them.. 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, the FICA, and not general revenue, finances SS. 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 focuses on this calculation. The focus more carefully scrutinizes means to improve the retirement plan and resolve the financial issue.

Proposals for keeping the retirement system solvent continually circulate without decision. Nevertheless, 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.

Can Social Security Function as a Pension Plan?
Payroll taxes of workers, rather than general revenue taxes, support retiree income. Social Security determines the formula that shifts a portion of wage earners to retiree income. No matter how it is sliced, diced or construed, the present OASDI 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 secure, stable and advantageous pension for retirees. Security results from the strength of the government system. Stability results from the guaranteed income. The added advantages: 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," and realizes the obligations to the retirement community with SS functioning 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 general tax revenue finances the budget item, has several advantages:

The SS system cannot escape the fact that its outlays are exceeding 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 Social Security has high priority. After all, Social security payments are only a transfer of payments from children and grandchildren to their elders - 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 instantly recirculate in the economy and don't impede the economy from moving forward. Defense programs often result in production of weapons of dubious benefit to the economic structure. Many government programs are wasteful, providing no advantage to the American community. Foreign aid either subsidizes purchases of American goods or 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. Why is a Wall Street broker, who already earned huge sums during a lifetime and has sufficient funds for retirement, worth any more to the public than other workers who worked hard and didn't receive sufficient earnings to secure a satisfactory retirement? A National Pension Plan equalizes public benefits and enables private pension plans or other retirement income means to complement the public plan.

Regardless of previous income, aren't retired workers, who worked equal years and hours and exceeded some minimum wage in each year, entitled to near equal public pensions? This concept conjures a socialist vision of equalizing the wealth. No relation. Government operations - medical, defense, and schooling all provide equally for citizens. Earnings don't determine Medicare benefits. Retirement income deserves equal treatment, with qualified workers receiving a basic income that allows for acquiring the staples in life - food, housing and clothing. The Department of labor can determine what constitutes a basic income.

Preparing huge sums for a financial future has no guarantee and skews the economics of the present. The only guarantee is that the U.S. populace will fulfill an obligation to its retired parents and grandparents. The National Pension Plan makes 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 is preferable to integrate the needs of the retirement community into the needs of the entire society. A responsible society distributes resources and shares sacrifices.

alternativeinsight
july, 2009
updated December, 2010

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