Nathan Sass

Simple – Not Easy – Solutions

In 2012 Elections, Economics, Health Care Reform, Politics, Tax Policy, Taxes on February 1, 2012 at 6:00 AM

The biggest long term threat to the US economy and federal budget is the unfunded liabilities related to federal entitlement programs.

Over the next 20 years, these programs if left unaltered will consume every tax dollar collected by the federal government.  All spending on any other program, from national defense to environmental protection, would need to be reduced to zero or be funded with borrowed money.

Its a big problem, and so far no one has advanced an acceptable solution.  But maybe the solutions are not at complex as the political class would have you believe.

First, let us examine Social Security.  Benefits payments already exceed FICA receipts today, and this trend will continue as more baby boomers retire.  How can we possibly fix this looming issue?

Simple:  convert the entire program into a 401K.

First, no one over the age of 60 will have any change to their Social Security benefits.  They proceed under the current system.

The remainder of the population will have a new 401SS (“SS” for Social Security) created for them individually.

It is the same as a 401K, but funded via FICA taxes from employers and employees.  These accounts are owned individually, and are managed by the owner using any current private company or tool set (eTrade, etc.).

If the funds are not touched by the owner of the account after creation, the money is automatically invested in US Savings Bonds.

All future FICA taxes (6.5% of pay from the employee and 6.5% of pay from the employer) will be routed directly into the individual’s 401SS account, just like 401K contributions are today.  The federal government cannot access or repurpose FICA funds any longer for use in other federal spending.

For anyone over the age of 50 will have funds equal to the last 10 years of FICA taxes they and their employer paid deposited into the 401SS account, in addition to their future FICA payments.  This is intended to “catch up” those closer to retirement who may have relied on Social Security as it currently exists for their retirement.  This prevents older Americans from being underfunded for retirement in the new system.

For those between 40 and 50, they will have the last 5 years of FICA taxes deposited.

All others younger than 40 will have all FICA taxes deposited into their personal account going forward, but will not be given a “catch up” refund.

These accounts will be the personal property of the owner, and can be invested in any way the individual chooses.  They cannot withdraw funds until age 65, and can choose any current investment vehicle from money markets or savings bonds (safest choice with limited growth) to international stock markets (more growth and risk).

The federal government will see a short term uptick in spending when these accounts are created and older Americans are “refunded” FICA taxes.  After this short term uptick, federal liability for Social Security drops to almost 0.  This resolves the largest looming threat to the federal budget.

Remaining claims against Social Security for disability or orphaned minors, etc. will be migrated to other relevant programs in place elsewhere in the federal budget.  (These items are relatively small compared to benefits to retirees.)

This simple plan solves the issues of unfunded liabilities, and makes certain that “benefits” for future retirees are fully funded.  The money will be there for each person, based on their contributions over their lives and their choices of investments.

There is little risk of “losing it all” in this scenario as the accounts are no more volatile than the individual so chooses.  If they want a guarantee of the funds being there at retirement, then they do nothing when the money is deposited and they will have their entire balance in US Savings Bonds, with as close to 0 risk as is humanly possible.

For those more willing to take risk, they can invest as they so desire and achieve larger interest returns on their accounts.

Also, 401K’s will still be allowed under current rules for additional retirement savings options.

Finally, there is one more little hidden benefit.

All these invested dollars will spur economic growth, improving the economy for everyone.  As investment increases, even in the safest of vehicles, those dollars become available for employers to grow their businesses.  This growth will result in increased income tax revenue, as incomes rise, reducing future deficits accordingly.

Not a bad side effect, really.

As far as Medicare and Medicaid,  I have proposed a plan that addresses both the issue of health care cost inflation and Medicare/Medicaid long term liability.  The details are here.  It is also a very simple plan that uses a system we are all familiar with and has been proven to work already.

As Reagan once said “There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally right.”

These answers are simple.  The American people can be convinced to support them when they realize that they are getting refunded FICA taxes, and can be guaranteed benefits they paid into when they retire.  Everyone like a refund, and younger people will be excited to be more certain of retirement funds for their future.

It’s morally right to give people control of their future, of their money and their health care.  It’s past time for the GOP to advocate answers that are morally right, and simple at the same time.

  1. I think this is a great idea. I’m 58, and I think it’s a good deal.

  2. […] I have written about the nature of the problem of the costs of health care.  (Read more here, here, and especially […]

  3. […] again, I have written about the nature of the problem of the costs of health care. (Read more here, here, and especially […]

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