The Purple Plan

"The Purple Plan"

Endorsement

We greatly endorse the description of the problem, and urge readers to view the commentary associated with the plan.  This plan does not fix Social Security.  It transforms it.   While we like the honesty in describing the problem, we can't endorse the details of the plan.  We don't think it will work.

How Does It Work?

The Purple Plan works by phasing out Social Security overtime.  Social Security is replaced by a mandatory savings plan, which is a personal savings account.   Legacy benefits are going to be financed by increases in the payroll taxes on the wealthy and high income earners.

This plan protects existing retirees, and puts significantly higher taxes on late-boomers through the Millennial generations.   The payroll tax system is made significantly more progressive, and widens the revenue reach of the system to all income.

Strengths

Unquestionably the strongest aspect of the plan is the honesty about the problem.   No other plan in the market has anything close to the level of candor in this plan. 

This plan makes clear the cost of personal savings accounts, an additional 8% of wages. 

This plan ends Social Security in a much more sensible way than most plans.  Most plans use phased-in cut-offs.  This plan simply treats future contributions as zero.  This will tend to make the phase-out a much longer process. 

Weaknesses

This plan makes guarantees for which there is no funding today.  As such, it is the promise we make to ourselves that future generations will accept.   That works until they get a chance to vote.  Without a funded system, there are no guarantees.

We don't think the plan would work.  This plan protects about 1/3rd of voters from the burden of the system that they created as younger voters.  The shortfall today is 20.5 trillion dollars according to the 2012 Trustee's Report.  It is virtually impossible to shelter 1/3rd of the country.   There is more detail in our side-blog on plans which end Social Security.

This plan is more interested in preceived fairness than fixing the system.   The plan calls for more welfare to be cast into the a system that has no visibility into need.   The government already has programs for the needy.  Adding another one to provide for people who may be needy in 40 years is simply flawed.

Taxes for this plan will hit younger workers very hard.  You will continue to pay FICA taxes, but you will not get any credits in the system.  This converts payroll taxes from a theoretical tax to a hard-tax.  On top of FICA taxes, tax payers will have to pay 8% to a new system which will replace the function of Social security.   On top of that, we are going to expand the revenue reach of the system from wages of covered workers to all income of all Americans.  So the workers in Galveston County will pay for a system from which they cannot collect.

The government isn't in a position to give guarantees to existing retirees or future retirees.  The nature of politics and government is completely unsuited to projecting the cost of these guarantees.  If people want a personal savings account, they need to absorb the risk.

The plan uses global indexes.   The details aren't precise because the plan calls for investing in global indexes with a government computer at no cost.  Anytime you invest capital there is a cost.  It is unclear whether this plan would use deriviatives to mirror the index, or whether cash would flow through the market. 

Indexed investing is opens yet another boondoogle for corporate America.  In the future, the cost of capital will rise as America has to deal with the issue of financing these promises.  Companies with access to these retirement PSAs should enjoy significantly lower the cost of capital.   The cost spread between those with access to PSAs and those without access will create significant economic incentive to adapt the indexs for political reasons.

The plan includes a guarantee of investment which is a terrible idea.  Guarantees create risky behavior and investment lists concentrate that risky behavior in a select group of companies.  Washington learned nothing from 2008.  See our blog piece, "Guarantees and Private Accounts".

Distortions

There are very few here.  I would question the statement "All investing is done by a single government computer at zero cost."  Given 15 years of industry experience and another 5 years of dealing with deriviatives, I do not believe that anything with the market is free. 

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