The Complete Overhaul Social Security Needs to Survive

by Guest_Post March 26, 2012 18:40 PM

Author - Chuck Saletta, The Motley Fool (Source : Click here to read this article on Daily Finance)

AARP's planned and formerly secret Salon-style meeting on the future of Social Security is causing quite a stir. After all, it wasn't that long ago that AARP itself voted to accept the inevitability of benefit cuts, given the deteriorating state of those programs' finances.

And "inevitable" really is the right word to use. Whether you want to believe it, Social Security as we know it is a collapsing program. Its spending on benefits outpaces its tax revenues, and its Trust Fund is expected to run dry in or before 2036, slashing benefits by about a quarter.

If I were in that secret salon meeting, I'd make it absolutely clear that what's needed is a way to:

  • Take care of the people who currently or will very soon depend on Social Security.
  • Move future generations to a far more sustainable retirement system.
  • Provide a smooth transition for those who've paid in but still have many years before collecting.

The Wrong Way to Fix Social Security

There are those who believe that with a few "minor tweaks," the current system can be saved. (You can read my colleague Dan Caplinger's proposal for fixing Social Security here.) With all due respect, Social Security has been "tweaked" -- repeatedly -- over decades, with little to show for it beyond pushing back that inevitable day of reckoning. It's also the same concept that brought us:

  • Tax rates that now sit at 12.4% (less a 2% temporary rollback), from an original 2% total.
  • Taxes levied on income as high as $110,100, up from an original $3,000.
  • Taxability of Social Security benefits (since 1984) for people with sufficient other income.

The suggestion of yet again raising taxes, at this point, starts running into the ugly reality that at high enough rates, one of two things is bound to happen:

  • Those who can figure out ways to legally reduce their exposure to the tax will find it much more profitable to do.
  • Those who can't reduce their exposure to the tax discover that the higher tax rates make it all that much harder to save anything else for their retirement.

There comes a point where the pain inflicted from the cumulative total of those "minor tweaks" outweighs any additional shoring up of the program's own financial standing. If we haven't hit that point yet, we likely soon will.

Here's a Better Answer

One of the key benefits of Social Security is that it's a mandatory retirement-focused program, without which many people would likely have nothing saved for their retirement. Any replacement system would also need some sort of mandatory savings component to it, or else all we'd really be doing is trading one problem (a collapsing system) for another (old-age abject poverty).

Even with that constraint, there are at least two existing retirement programs that can serve as a solid foundation for Social Security's replacement: Chile's equivalent of Social Security and the U.S. government's own Thrift Savings Plan.

Both options would replace the "guaranteed" payment aspect of Social Security with investment-like accounts. Still, as Chile's real-world outcome has shown, over a career-long period of time, the long-run improvements are more than worth the short-term variability.

Chile's program combines a series of investment options with a government-guaranteed minimum pension that in some ways is more generous than a typical U.S. Social Security benefit. The U.S. Thrift Savings Plan does not have a guaranteed pension amount, but it does offer both "lifecycle" funds and very low administrative fees (0.025%) that keep costs down and money flowing toward participants.

Either -- or perhaps a combination of both -- would make a far better long-term plan than the minimum-wage-like benefits of today's Social Security or the $29.02 a day expected after the trust fund is gone.

Remember, too, that the Chilean system is succeeding wildly, and it's based on a 10% mandatory contribution rate. On the flip side, America's Social Security system is floundering, and its fully loaded tax rate (aside from a temporary rollback) is already 12.4%.

What About the Transition?

As great as that future state can be, the elephant in the room is the tremendous obligations of the current Social Security system.

More than $630 billion in taxes flow into that program each year, and the Congressional Budget Office projects that even that will be $60 billion short, just to cover 2012's benefits. Social Security does have a trust fund with around $2.6 trillion that can help soften the cost of a transition, but that transition is still the toughest nut to crack.

In Chile, the transition was handled in part by selling off state-owned businesses. For the U.S., the labor minister who led the transition for Chile has suggested that the U.S. has assets -- such as huge swaths of the nation's land -- that could also be privatized to help fund the costs, as well.

Regardless of how the transition happens, the pending collapse of America's current Social Security system makes it perfectly clear that the sooner it happens, the better for all involved. If nothing else happens, within the next 24 years, the current system's trust fund will be emptied and benefits cut. A transition starting now -- while there are still trillions in direct Social Security assets to help defray the costs -- will be far less painful than waiting until after the trust fund completely empties. 


Thomas Jefferson's Letter to James Madison - 1789

by Guest_Post February 17, 2012 8:43 AM
The question, whether one generation of men has a right to bind another, seems never to have been started either on this or our side of the water..”

~Thomas Jefferson 1789


Letter To James Madison

DEAR SIR,-I sit down to write to you without knowing by what occasion I shall send my letter. I do it, because a subject comes into my head, which I would wish to develop a little more than is practicable in the hurry of the moment of making up general despatches .

The question, whether one generation of men has a right to bind another, seems never to have been started either on this or our side of the water. Yet it is a question of such consequences as not only to merit decision, but place also among the fundamental principles of every government. The course of reflection in which we are immersed here, on the elementary principles of society, has presented this question to my mind; and that no such obligation can be transmitted, I think very capable of proof. I set out on this ground, which I suppose to be self evident, that the earth belongs in usufruct to the living; that the dead have neither powers nor rights over it. The portion occupied by any individual ceases to be his when himself ceases to be, and reverts to the society. If the society .has formed no rules for the appropriation of its lands in severality, it will be taken by the first occupants, and these will generally be the wife and children of the decedent. If they have formed rules of appropriation, those rules may give it to the wife and children, or to some one of them, or to the legatee of the deceased. So they may give it to its creditor. But the child, the legatee or creditor, takes it, not by natural right, but by a law of the society of which he is a member, and to which he is subject. Then, no man can, by natural right, oblige the lands he occupied, or the persons who succeed him in that occupation, to the payment of debts contracted by him. For if he could, he might during his own life, eat up the usufruct of the lands for several generations to come; and then the lands would belong to the dead, and not to the living, which is the reverse of our principle.

What is true of every member of the society, individually, is true of them all collectively; since the rights of. the whole can be no more than the sum of the rights of the individuals . To keep our ideas clear when applying them to a multitude, let us suppose a whole generation of men to be born on the same day, to attain mature age on the same day, and to die on the same day, leaving a succeeding generation in the moment of attaining their mature age, all together. Let the ripe age be supposed of twenty-one years, and their period of life thirty-four years more, that being the average term given by the bills of mortality to persons of twenty-one years of age. Each successive generation would, in this way, come and go of the stage at a fixed moment, as individuals do now. Then I say, the earth belongs to each of these generations during its course, fully and in its own right. The second generation receives it clear of the debts and incumbrances of the first, the third of the second, and so on. For if the first could charge it with a debt, then the earth would belong to the dead and not to the living generation. Then, no generation can contract debts greater than may be paid during the course of its own existence. At twenty-one years of age, they may bind themselves and their lands for thirty-four years to come; at twenty-two, for thirty-three; at twenty-three, for thirty-two; and at fifty-four, for one year only; because these are the terms of life which remain to them at the respective epochs. But a material difference must be noted, between the succession of an individual and that of a whole generation . Individuals are parts only of a society, subject to the laws of a whole. These laws may appropriate the portion of land occupied by a decedent, to his creditor, rather than to any other, or to his child, on condition he satisfies the creditor. But when a whole generation, that is, the whole society, dies, as in the case we have supposed, and another generation or society succeeds, this forms a whole, and there is no superior who can give their territory to a third society, who may have lent money to their predecessors; beyond their faculties of paying.

What is true of generations succeeding one another at fixed epochs, as has been supposed for clearer conception, is true for those renewed daily, as in the actual course of nature. As a majority of the contracting generation will continue in being thirty four years, and a new majority will then come into possession, the former may extend their engagement to that term, and no longer. The conclusion then, is, that neither the representatives of a nation, nor the whole nation itself assembled, can validly engage debts beyond what they may pay in their own time, that is to say, within thirty-four years of the date of the engagement.

To render this conclusion palpable, suppose that Louis the XIV. and XV. had contracted debts in the name of the French nation, to the amount of ten thousand milliards, and that the whole had been contracted in Holland. The interest of this sum would be five hundred milliards, which is the whole rent-roll or net proceeds of the territory of France. Must the present generation of men have retired from the territory in which nature produces them, and ceded it to the Dutch creditors? No; they have the same rights over the soil on which they were produced, as the preceding generations had. They derive these rights not from them, but from nature. They, then, and their soil are, by nature, clear of the debts of their predecessors. To present this in another point of view, suppose Louis XV. and his cotemporary generation, had said to the money lenders of Holland, give us money, that we may eat, drink, and be merry in our day; and on condition you will demand no interest till the end of thirty-four years, you shall then, forever after, receive an annual interest of fifteen per cent. The money is lent on these conditions, is divided among the people, eaten, drunk and squandered. Would the present generation be obliged to apply the produce of the earth and of their labor, to replace their dissipations? Not at all.

I suppose that the received opinion, that the public debts of one generation devolve on the next, has been suggested by our seeing, habitually, in private life, that he who succeeds to lands is required to pay the debts of his predecessor; without considering that this requisition is municipal only, not moral, flowing from the will of the society, which has found it convenient to appropriate the lands of a decedent on the condition of a payment of his debts; but that between society and society, or generation and generation, there is no municipal obligation, no umpire but the law of nature.

The interest of the national debt of France being, in fact, but a two thousandth part of its rent-roll, the payment of it is practicable enough; and so becomes a question merely of honor or of expediency. But with respect to future debts, would it not be wise and just for that nation to declare in the constitution they are forming, that neither the legislature nor the nation itself, can validly contract more debt than they may pay within their own age, or within the term of thirty-four years? And that all future contracts shall be deemed void, as to what shall remain unpaid at the end of thirty-four years from their date? This would put the lenders, and the borrowers also, on their guard. By reducing, too, the faculty of borrowing within its natural limits, it would bridle the spirit of war, to which too free a course has been procured by the inattention of money lenders to this law of nature, that succeeding generations are not responsible for the preceding.

On similar ground it may be proved, that no society can make a perpetual constitution, or even a perpetual law. The earth belongs always to the living generation: they may manage it, then, and what proceeds from it, as they please, during their usufruct. They are masters, too, of their own persons, and consequently may govern them as they please. But persons and property make the sum of the objects of government. The constitution and the laws of their predecessors are extinguished then, in their natural course, with those whose will gave them being. This could preserve that being, till it ceased to be itself, and no longer. Every constitution, then, and every law, naturally expires at the end of thirty-four years. If it be enforced longer, it is an act of force, and not of right. It may be said, that the succeeding generation exercising, in fact, the power of repeal, this leaves them as free as if the constitution or law had been expressly limited to thirty-four years only. In the first place, this objection admits the right, in proposing an equivalent. But the power of repeal is not an equivalent. It might be, indeed, if every form of government were so perfectly contrived, that the will of the majority could always be obtained, fairly and without impediment . But this is true of no form: The people cannot assemble themselves; their representation is unequal and vicious. Various checks are opposed to every legislative proposition. Factions get possession of the public councils, bribery corrupts them, personal interests lead them astray from the general interests of their constituents; and other impediments arise, so as to prove to every practical man, that a law of limited duration is much more manageable than one which needs a repeal.

This principle, that the earth belongs to the living and not to the dead, is of very extensive application and consequences in every country, and most especially in France. It enters into the resolution of the questions, whether the nation may change the descent of lands holden in tail; whether they may change the appropriation of lands given anciently to the church, to hospitals, colleges, orders of chivalry, and otherwise in perpetuity; whether they may abolish the charges and privileges attached on lands, including the whole catalogue, ecclesiastical and feudal; it goes to hereditary offices, authorities and jurisdictions, to hereditary orders, distinctions and appellations, to perpetual monopolies in commerce, the arts or sciences, with a long train of et ceteras; renders the question of reimbursement, a question of generosity and not of right. In all these cases, the legislature of the day could authorize such appropriations and establishments for their own time, but no longer; and the present holders, even where they or their ancestors have purchased, are in the case of bona fide purchasers of what the seller had no right to convey.

Turn this subject in your mind, my dear Sir, and particularly as to the power of contracting debts, and develop it with that cogent logic which is so peculiarly yours. Your station in the councils of our country gives you an opportunity of producing it to public consideration, of forcing it into discussion. At first blush it may be laughed at, as the dream of a theorist; but examination will prove it to be solid and salutary. It would furnish matter for a fine preamble to our first law for appropriating the public revenue; and it will exclude, at the threshold of our new government, the ruinous and contagious errors of this quarter of the globe, which have armed despots with means which nature does not sanction, for binding in chains their fellow-men. We have already given, in example, one effectual check to the dog of war, by transferring the power of declaring war from the executive to the legislative body, from those who are to spend, to those who are to pay. I should be pleased to see this second obstacle held out by us also, in the first instance. No nation can make a declaration against the validity of long-contracted debts, so disinterestedly as we, since we do not owe a shilling which will not be paid, principal and interest, by the measures you have taken, within the time of our own lives. I write you no news, because when an occasion occurs, I shall write a separate letter for that.

I am always, with great and sincere esteem, dear Sir, your affectionate friend and servant.


A Note From Gen-No On Inter-Generational Tension

by Guest_Post January 25, 2012 8:12 AM

Author: Colin Smith, in an email regarding commentary on inter-generational tension

My parents' generation gave us everything on a silver platter, but Washington sold the entire country out over the last 100 years. So now a lot of people in my generation are still a strain on their parents financially with un/underemployment.

How are people in that generation going to react when that trend continues AND conservatives in my generation start saying we should phase out social security? Many of them will get sick and tired of being told to put THEIR American dreams on hold for the next generation, like they had to when my great-grandparents and grandparents let us all down politically.

My extremely selfish, narcissistic generation is being asked to sacrifice for the future now. I don't know if we're capable, frankly, because many of us were never taught what really matters.

You want to fix social security? Start teaching people that loving capitalism has nothing to do with loving all the "stuff'. It's not about "stuff" or how much of it you can get. It's about how best you can serve your fellow man, so that you can accumulate wealth and give back to God, country, family, friends, and the least of society (most of all). That will fix the attitude, and social security is an attitude problem.


Social Security - January 2012 and Beyond

by Guest_Post January 17, 2012 4:14 AM

This article is reprinted with the permission of Bruce Kasting.
Then full article and other work may be found at :


The January 2012 numbers for Social Security (SS) show a mixed picture. The results mirror what is going on in the economy. There is clear evidence that revenues at SS are recovering; there is equally clear evidence that America’s social expenditures are rising at a rate that exceeds the rate of recovery.

The following numbers are adjusted for any consequences of the 2% payroll tax deduction for 2011 and 2012. As a reminder, the Treasury pays into to SS every month an amount equal to the 2% shortfall. The country ends up more indebted, but there is no net consequence to SS.

Clearly, the problem is that benefit payments are increasing more rapidly than revenues. There are two contributing forces pushing up costs, (1) 10,000 additional people sign up for benefits every day of the week and (2) inflation (COLA) is rising. The January 2012 YoY increase in benefit payments was $4.1B. Of that amount, approximately $2.1B is attributable to inflation; the balance of $2B is due to more folks getting checks.

We crossed a big corner at SS in 2010 when the first annual cash flow deficit was reported. SS will never again see a cash surplus. The only question is how rapidly the deficits will rise. It’s a bit early in the year for me to provide a credible 2012 forecast for SS. My read of the January numbers confirms my suspicions. The improvement in the economy will be trumped by increasing benefit costs. Net-net, a modest deterioration in the cash position is my base case. I think SS will produce a $56B cash shortfall in 2012 (2010 = -49B, 2011 – 47B).

The expense side of the SS equation can’t be altered. The only variables that make a difference are interest rates and the economy (jobs).

The interest rate side of the equation is easy to contemplate. SS’s income from interest is going to decline in 2012 and beyond. Ben Bernanke’s ZIRP, QE and Twist have seen to that. Ben has made it clear that interest rates will remain at historical lows for well into the future. SS is America’s biggest saver ($2.6 Trillion), it will therefore pay a price as the low interest rate environment is endlessly extended.

In June of this year, SS will re-invest its maturing bonds (and any cash it has) in a new strip of securities that have maturities from 1 to 15 years. The interest rate for these Special Issue Treasury Securities is set by a (stupid) 60-year old formula. This year, the formula will produce a yield for the new investments that is the lowest in history. In the next few years, all of the high coupon bonds will be rolling off. The old bonds will be replaced with much lower yielding assets.

This simply does not add up. SS will have to significantly revise downward its projections for interest incomes (there is no way the Fed is going to back off ZIRP anytime soon).

The economy is much harder to ponder. As of today, there is a case than can be made for continued job growth. But for how long? America has a bad habit of slipping into a recession every four years or so. The last one was in 2008, so we’re due. I think that the US will muddle through the first part of 2012 with continued modest job growth. However, a slowdown looks to be in the cards by the end of the year. As of today, there are a dozen economic headwinds that will kick in as of 1/1/13 - all of the Bush tax cuts, the SS payroll reduction and a substantial cutback in government spending (the sequestered amounts).

If we experience a recession in 2013, and the Fed maintains its low interest rate policies, it will be a very bad year for SS. The cash deficit would explode under these conditions. It could easily exceed $100b. The wheels will come off of SS’s cart. As we are seeing now, it is extremely difficult for SS to bounce back in good times. it will be impossible if we hit another economic slow patch.

This is precisely the scenario I’m anticipating for 2013. It will be a decisive year. If we end up going down an economic road as I have described, then SS will fall into full deficit (operating cash deficit + interest income). That would happen circa 2015. The Social Security Trust Fund is forecasting this event but it believes it will happen in 2021. When people realize that the Trust Fund has topped out, and the implications are understood, significant changes at SS will follow.

I point readers to a raging debate going on in Japan. To cover the growing deficits at Japan’s equivalent of SS, consumption taxes are being increased from 5% to 10% on everything purchased in the country. This massive tax increase is far too low to cover the problem. To bring balance to the system, VAT taxes have to rise to 17%.

Japan is in a different situation than the US. Its population is even older (and aging more rapidly) than ours. As in many other examples, the US is about ten-years behind Japan. But we are catching up quickly. In just a few years, America will have a similar raging debate on SS. We too will be faced with a dilemma. Either taxes have to raised, or benefits have to come down. The alternative is that the US follows Japan into the land of 200% debt-to-GDP. Unlike Japan, The US can’t survive at that rate. We will blow up before we get to 200%.

We won't see any reforms in America’s entitlement programs in 2012. The election will see to that. The immediate priorities of 2013 will not include SS. The other problems facing the economy will be more pressing. But by 2014, the jig will be up. By then, there will have been so much damage to SS that a very significant set of changes will be required to minimize what will then be seen as a systemic risk.



Deficit | Payroll taxes