RETIREMENT: NEW IDEAS FOR SOLVENCY

A lot of attention has been given to Social Security recently, especially as it has been offered as a pawn in the ongoing battles over reducing or eliminating federal budget deficits.

The present bone of contention, out of which I have taken huge bites, is the proposed “chained CPI” a revised method of calculating the annual Cost Of Living Adjustment (COLA) to beneficiaries. In brief this revised formula would reduce the level of growth of monthly benefits. Since the current formula over the past four years has produced only two years in which a raise came about, I have argued that changing an unfair formula into an even more unfair one is simply…uh…not fair.

That aside there still is the question of the future solvency of SS when projections are that full promised benefits can only be paid until about the year 2033, barring some action to make adjustments.

Some of the common adjustments that have surfaced as a possibility would limit the program in a variety of ways: higher retirement age, means testing, etc.

But now comes a published paper that advocates expanding Social Security instead of contracting or limiting it in any way.

Steven Hill, Robert Hiltonsmith, Joshua Freedman, and Michael Lind produced this paper published by the New America Foundation’s Economic Growth Program. Their proposals are very bold and mainly would entail having a two-part SS, SS Part A essentially incorporating the present main portion of SS which is Old Age Insurance, and SS Part B which would be a guaranteed payout similar to the defined benefits pensions most major companies used to offer, and which many levels of government continue to offer their employees.

They are not dogmatic. Indeed this is the concluding paragraph from the executive summary of their paper. ( hereafter Growth Paper)

Other reforms might achieve similar results by different methods. Any strategy that expands the reliable and efficient public share of retirement security in America would be an improvement over today’s system, which is biased toward the affluent and skewed toward private savings. Our purpose in proposing the Expanded Social Security Plan is to challenge the conventional wisdom about Social Security and to provoke a debate about whether and how to expand the public element of the American retirement security system. At present the discussion is dominated by those who want to privatize or shrink Social Security and those on the defensive who propose merely incremental reforms to preserve it. We seek not merely to move the ball, but also to move the goalpost in order to enlarge the boundaries of the national conversation about the future of retirement security in America.

The entire paper can be found here: http://growth.newamerica.net/sites/newamerica.net/files/policydocs/LindHillHiltonsmithFreedman_ExpandedSocialSecurity_04_03_13.pdf

They describe the current system of providing retirement income as a “three-legged stool” composed of Social Security, employer based plans, and private savings. They maintain that private savings largely consist of home ownership, but since the housing bubble burst many homeowners no longer have the luxury of depending on their equity as a reliable source of funds.

Interwoven into all this, according to the authors, is how investments through employer established retirement plans are chancey at best, with the evidence of the ravaging of 401K accounts during the recent recession supporting this view. On a personal note during that period I listened to a number of people close to me speak of how their accounts were diminished by tens of thousands of dollars.

Even with today’s booming stock market, whatever was lost at that time can never be regained even if the dollar value has rebounded to the highest level previously achieved.

However, these plans presuppose that working people actually use them and fully fund them when they do buy in. Neither is true.

Then there is the problem that was explored by PBS Frontline series the other night in a piece entitled The Retirement Gamble. http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

The people who produced that took the view that investors do not get a full return on their money due to high fees charged by investment companies, especially for mutual funds which are marketed relentlessly. There was even a suggestion that instead of mutual funds, investors would profit more from putting their money in index funds.

 A number of examples were presented and the former head of the Vanguard Funds, known for just about the lowest fees in the business, was highly critical of the companies that not only assess high management fees, but who also add on duplicate or nebulous and unmerited ones.

Part of the program was devoted to advocating that financial advisors, as indivduals, should acknowledge that they should have a fiduciary relationship to their clients and ensure that role contractually, which very few do. As a fiduciary the advisor would be bound to make any investments or changes for the primary good of her client, not merely to line her own pockets earning commissions. When a fiduciary association is clearly established the law imposes certain duties on the fiduciary to protect whomever they are representing.

Of course interviews with the heads of investment of such major players as Prudential and Wells Fargo showed them pooh-poohing certain findings that put their methods in a bad light.

What goes unsaid in the Growth Paper is the idea, floated frequently, to privatize Social Security entirely, making ensuing generations fully responsible for their own retirement income. Since it is evident that the percentage of folks eligible for these plans today fall woefully short of availing themselves of them (not to mention not fully funding them, borrowing from them, etc.) I would assert that privatization would be a disaster.

The Frontline program may or may not be completely on the mark. yet it does lend a worthwhile caveat to current or future retirement investors on some potential pitfalls they should avoid.

The Growth Paper surely offers an alternative for the future of Social Security that I have never considered, and probably most people belong in the same category. Can I fully endorse it? I’ll defer my answer. The data incorporated into the paper is intriguing and much of it has throughly credible sources. But the authors admit to making some broad assumptions that could be off target.

What I do find encouraging is that, despite the enormous amount of work and thought that must have gone into this paper, the authors do not insist that their way is the only, or even the best way forward. They are willing to listen to other ideas. But the mere fact they seek to expand Social Security to ensure a better retirement for a large segment of our population instead of going in the other direction puts a hell of a lot of points on the scoreboard for them.

Everyone else is playing catch up.

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Comments

  • anonymous  On April 26, 2013 at 5:18 PM

    Expanding government – the liberal answer to every problem. An answer that NEVER works

  • anonymous  On April 26, 2013 at 5:23 PM

    BTW, this proposal is pure fantasy. Conservatives want to privatize and this proposes to expand it.

    What world do you live in?

    And you wonder why progressivism is a failure

  • anonymous  On April 26, 2013 at 5:44 PM

    We’re at a point where the UCA going down is at least 50-50 and you think were going to expand government again

    You are truly delusional.

  • Devildog  On April 26, 2013 at 7:44 PM

    I think I may have a better idea. Why not have employees and employers pay into S.S. as they do now but when employees reach 65, whether they continue to be employed or not, as a reward for having reached that age, would receive from Part B an amount of money each month that when added to SS Part A would ensure that each person over 65 would receive the same amount of money from the Federal Goverment, Part B, of course, to be paid out of general revenues. What could be fairer than that, especially since those who paid less into SS Part A and received less would be equalized with those who paid and received more. Something like 50k or so comes to mind.

    UMOC lauds the authors as not being dogmatic, not insisting their way is the only way or even the best way and that they are willing to listen to other ideas. I hadn’t realized until now that UMOC thought those attributes were virtues.

  • anonymous  On April 26, 2013 at 11:01 PM

    Dog, this is a non-starter. UMOC, Tourist , et.al. solution to what is a serious entitlement issue is to create another huge entitlement.

    That this is considered to be a solution by leftist whackos tells you how much of an ode to intellectual insanity progressivism is.

    I have a bigger chance of conceiving a baby with Katy Perry than anything like this even being proposed by any serious politician

  • Fran Bertonaschi  On April 28, 2013 at 9:01 PM

    Social Security is an entitlement just like Life Insurance is an entitlement or Auto Insurance is an entitlement: you pay a premium to participate and receive a benefit when the time comes. I guess calling people “leftist whackos” for advocating better retirement benefits for everyone gives you one up on the name-calling, but it doesn’t do much to address the issue of insuring a decent income for future retirees.

    • toadsly  On May 1, 2013 at 11:12 AM

      Exactly, Fran!

  • Devildog  On April 29, 2013 at 11:38 AM

    Tourist, are you still alive? If so, email Reg Henry and tells him so.

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