Serious Leadership, Real Entitlement Reform

Big Red Car here.  Raining in Austin and I don’t like that because I feel like a New Years Day run out to and through the Hill Country is something I need.  Something I want.

Something I am entitled to.  Speaking of entitlements, I heard The Boss pontificating on entitlements recently and here is what he had to say.

So the President is in the midst of high-fiving and spiking the ball about his recent triumph on avoiding the Fiscal Cliff.  OK, good on you, Mr President.

But is it going to get through the House and, in particular, the House Republicans?

And where, Mr President, are the spending cuts you campaigned on?  The $3 of spending cuts for each $1 of revenue increases — increased taxes?  You did promise entitlement reform as part of the spending cuts, did you not, Mr President?

Entitlement Reform is easy

Entitlement reform — a Social Security frame of reference here but would work just as well — can be effected by the following easy steps.

The Boss says the fix is “in” and this is what is going to happen anyway.  Do you agree?

1.  The eligibility age is going to be increased.  Why not?  Folks are healthier, working longer.  Life expectancy is greater than when Social Security was first enacted.  This change will phased in starting with folks who are currently 55 years old.

2.  Benefits are going to be “means tested”.  If you do not need Social Security, you are not going to receive it.  Fair?  No, but life is not fair.  Remember, benefits are already being taxed.

3.  Young folks are going to have to be granted the right to “opt out”.  Why not?  The sooner we get the government out of the Social Security business, the better.  Let’s let young folks opt out while continuing to pay a small tax — say 1.5% — and continue the employers’ portion at approximately 7%.  In this manner, you continue funding for the existing base of beneficiaries while potentially dramatically reducing the future number of beneficiaries.

4.  Let those young folks put their money into an IRA-like retirement account.  Their remaining 5.5% can go into an account just like an IRA and they can control it themselves.  One of the drivers will be the realization they may get nothing anyway under the means testing regimen.

5.  Find Al Gore’s lockbox and put future Social Security funding into it.  Stop commingling enterprise funds — Social Security — with general funds and letting the government apply them to anything that strikes their fancy.  Cut the crap on the nonsense that there are a bunch of IOUs funding Social Security.  The government is broke.  Broke as a joke.  Their IOUs are not worth anything.

6.  Invest the Social Security enterprise funds.  Even if invested in Treasuries — ironic no, government securities — this will generate some real return.  Now the return is a negative number as the government spends the principal.

Voila!  All done.  Everyone happy and simple as pie.  Or not?

What do you have to do?  Really?

This can all be accomplished quicker than a Prom Queen’s dress can be unzipped and whisked off.

It will take some political courage but remember only folks 55 years and younger will really be impacted.  All the folks on Social Security will be totally unimpacted.  That is just political greased lightning.

Endorsed by Prom Queens everywhere.

But, hey, what the Hell do I know?  I’m just a Big Red Car.

Be good to yourselves.  It’s a cold hard world out there.

5 thoughts on “Serious Leadership, Real Entitlement Reform

  1. almost forgot–nice picture–I don’t remember my prom date looking anything like that! Should have tried New Jersey!

  2. Jeff-thanks for the clarification–I missed that. A couple of things–first, the when of retirement is predictable for some people but not for others–what if you’d had to retire due to age or disability at the end of, say, 2009? What would your rate of return been then? or during any of the other recessions we’ve had over the past, say, 40 years? Though the average return may well have been the number you use as an example, we all know the real world return of a retirement portfolio is much less. Second, what sort of retirement would the 5.5% or so you suggest as a contribution really mean? And what would the investment costs be? Even if you choose index funds through Vanguard, say, there’s a fee, low though it is, relatively speaking, so you’d have to deduct the cost of investing itself. The vast majority of people (about 2/3) in the US have no other retirement plan than SS–in part because they work jobs that do not pay enough for them to live day to day and save for retirement–much of this is not their fault, either, though of course some is–and SS is of course not much to retire on anyway.
    One of the most interesting aspects of retirement is that most people will not save for it unless forced to (and you likely do not fall into that category–you’re much smarter than the average American). Numerous studies have pointed this out with 401 (k) and other kinds of retirement accounts–the money has to be pretty much left untouched in order to grow to an amount that will make a difference in people’s retirement. I used to be stunned when i did income taxes at how little retirement funds the vast majority of my clients had–not just the 25K adjusted gross guys but the 100K+ guys, too–and how worried they were about saving for their kids’college–I used to advise them to think more about their own retirement than about their kids’ educations–they can borrow for college/join the Army (like we did)/get scholarships/attend community college (where I teach now). But none of those options are available for retirement.
    The fact of the matter is that SS forces people to save for the future, and at low cost/input from them. And this is something government really does do better than the private sector–it makes people do something they would not do otherwise. I agree that the funds in SS could llikely be better invested (I am in the state teachers’ retirement system in Missouri, which costs me and the college 15% each of my total salary–we do not pay into SS and do not earn SS credits–though I will get it based on 27 years in the Army–and the state pension system invests its money pretty well–though it lost a great deal a few years ago during the crash and our contributions had to go up).
    I can understand the philosophical position you take, and would agree with it, were it not for the fact that most people would end up truly poor–SS is one of the most effective anti-poverty programs the government has. Now, if the private sector would generate more good-paying jobs, your recommendations would have a great deal of merit. But since our tax system is skewed in favor of financial dealings over real investment (carried interest, for example), I doubt that the private sector can do so. In the current recession, employment in the private sector has rebounded nicely,but wages are low; productivity gains made by workers have not really been distributed to them.
    Some are now concerned over public sector jobs (teachers, cops, firefighters, state and local bureacrats) that have not recovered because states and localities have to balance their budgets and tax cutting legislatures cannot or will not fund the positions lost during the recession. These public-sector jobs place demands on the private sector–they buy, etc.–and without them, the private sector will not make a full recovery.
    It’s a complex business, to be sure. Thanks for stimulating my thinking–Mike

    • .

      Bit of the fire hose, so I cannot reply on everything. Thanks for the long comment.

      First, thank you for 27 years of military service. I served 6 and in some ways I regret having gotten out. I had a damn good run.

      The original plan for SS was to prevent abject poverty not to provide a comfortable retirement. We often let things get out of control and allow them to morph into something they were never intended to be.

      As an example, the estate tax was originally intended to fund wars — a temporary tax. They forgot to repeal it after WWI.

      As to how you fund things, currently the SS payroll tax is transparent. The employee and employer pay equal amounts and it accumulates unseen. This transparent approach is going to have to be utilized to get folks to participate.

      Business owners and leaders are going to have to act “in loco parentis” and school their employees. When I had 500 employees and a full package of benefits, I had to provide annual training on our benefits (health/dental/vision/life insurance, 401K, IRA, ESPP (employee stock purchase plan), cafeteria 125 plan, health savings accounts, Tx Tommorrow Savings, etc). There is no easy way.

      The single greatest retirement asset most folks own is their home. That is why home ownership is so important from a sense of personal accomplishment, from a shelter perspective, from a savings perspective and from a retirement perspective. It is terrible that Medicare attacks home ownership as a negative means test.

      There is no subdivision of economic growth and job creation that can prosper while the balance of the economy suffers. All boats must be floated free. This is why the recent kabuki theatre of tax rates is so silly — it does NOTHING to grow the economy or to create jobs. Nothing!

      I am very confident in the long run and very pessimistic in the short term.

      We shall see.

      Regards, Mike.


  3. Though I have variety of comments on this issue, having studied Social Security (I am no expert) as part of my job working with the military retirement system when I worked in the Pentagon some years ago, I just have one question so far: what happens to the employer contribution in this construct? It goes away?

    • .
      Mike, see #3 above. The employer contribution continues. In this manner, the coverage increases and hopefully the rolls of those in line to receive SS thin just a bit.

      If this had been available to me personally, I would have opted out at age 12. I have paid in to SS for 49 years and truly expect to see nothing.

      If I could have that money back and have made the average return of the stock market over that period of time — 12% — I would be a very happy camper.

      Thanks for writing. Hope you are well.


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