The Case for Phasing out Social Security

social security card image

Since the 70’s, I have been in favor of phasing out Social Security (FICA) and phasing in an actuarial sound national retirement system, we’ll call it the United States Retirement Program (USRP) for purposes of this outline.

In 1977, our 2nd Congressional District Representative Bill Dickinson was in Headland and I asked him when he was going to introduce legislation to abolish Social Security and replace with a sound retirement program. He said I did not care anything about old people. I got in his face and told him I saw more old people from Jan-Apr in my accounting office than he would see in a year. These were the grandparents, parents, aunts, uncles of people I cared about. I wanted a ‘sound system’ that would last. I was in my 20’s back then and I am in my 70’s today. I still have this belief.

Social Security was doomed from the start. For one thing, it was ‘never’ a retirement program, but a program intended for the ‘general welfare’ of old age citizens. If you do not believe it, read the law as it ‘clearly’ states it is a welfare program.

It enjoyed the advantage of having many workers to each beneficiary for about 50 years. But when we started to get into the 80’s, warnings were raised about the long-term prospects of viability for the system. In 1986, the Tax Reform Act increased FICA taxes to pump up the fund. At another meeting with Rep Dickinson, he stated that the integrity of the Social Security had been preserved for 75 years or until around 2065! I told him flat out that the system would be going broke by 2050. I was wrong. It will be going broke by 2038, which is in 18 years, according to the Social Security Administrator.

Today, there are about three (3) workers for each person drawing benefits. The increase in taxes to keep the system sound will be devastating to working people today as well as in the future. That problem will fall to our children, grandchildren, great-grandchildren and beyond!

We have time to do this now.

My plan is to phase out Social Security and phase in an actuarial based retirement system over a 20-year period. During this 20-year migration, there would be 5% of FICA taxes for each year paid for an employee, both from employee withholding and employer matching contribution, that would be applied to their new retirement program account. So, at the 16th year, that is 16/20 or 80% of FICA taxes would be paid into the USRP program and the remaining 20% still paid into the FICA program. Each USRP account would be kept separate from other individuals accounts. After all, it is an individual retirement program. At the end of the 20-year period, no FICA taxes would go into the FICA system for the employee but would be paid into USRP accounts.

If an individual retires before the completion of the 20-year migration, they will receive a prorated benefit check from Social Security based on the number of years they have paid into the USRP program and an annuity payment from their new U.S. retirement account. So, if they had participated in the USRP program for 14 years, then 30% (6yr/20yr) of their planned Social Security calculated benefit check would be paid and 100% of the annuity based on the balance in their USRP account, calculated actuarially on their age.

Some of you might not know what I mean by an actuarial based system. Simply put, it is you draw based on your own retirement funds. Money you contribute to your plan along with your employer contributions are set into your own fund. The funds are invested and builds the fund from these investments. When you are ready to retire, then based on your age and health, a monthly annuity would be paid out from the fund to you which should last your projected lifetime. A side insurance premium would guarantee the annuity if you lived beyond your expected lifetime.

Here is the nice thing. If you die under Social Security, your family gets less than $300 and that is it. If you died under the plan I outlined, whatever is left in your fund goes to your beneficiaries. That could be $200K. 400K, even a million or more!

Now the kicker would be that the new retirement fund would have to invest in companies that are 90% American owned and NO government bonds of any kind could be purchased for investments. Right now, Congress is using low-rate government bonds that are sold to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund to fund their general spending. So, the returns are 1-3% versus the historical stock market 9% return per year (DOW average). Anyone who understands finance can immediately see that this degrades return on investment via compounding, especially over a long period of time. This will give Congress 20 years to be weened off the Social Security tit.

I calculated what I have contributed into Social Security since I first started and how it would have performed being invested in a stock market index fund as well as how much I could draw from an annuity based on how much the fund would have had at age 65! The difference is disgusting. I could have retired at 65 drawing 3.72 times the amount of Social Security that I am drawing today! That is 372% more per month. And I could ‘seriously’ use it! In effect, Congress has been taking taxes from me and taking my retirement from me. It is disgusting and, to me, it’s theft.

This will be tough to accomplish but it is in the best interest of Americans. The problem is that any talk of doing away with Social Security scares the hell out of retirees (I draw SS) and politicians. Good, clear explanations and communications can ease anyone’s fears. The real issue will be members of Congress and the President. Right now, it is their gravy train of pork barrel spending to ensure their re-election. I am not sure it’s even possible to accomplish but it would be worthwhile to try.

We need common sense approaches to serious problems and with Social Security, the clock is running out. 2038 is not that far in the future.