A National Pension Plan – Revisited

Financial constraints portend a precarious future for the Social Security System (SS), a shortened term for Old Age, Survivors and Disability Insurance (OASDI). Social Security history indicates only a National Pension Plan can provide a suitable and secure financial arrangement for retirees and SS already has the framework for a National Pension Plan.

The reason for the potential social security dilemma is well known; revenue will be insufficient to accommodate the needs of an increased senior population. From the day of its first payment, check number 00-000-001, issued to Ida May Fuller in the amount of $22.54 and dated January 31,1940, Social Security obligated itself to pay benefits that exceeded the contributions from the earliest retirees. The increase in life expectancy and constant cost-of-living adjustments additionally strained the Social Security fund. The government greatly increased payroll taxes (FICA) to assure Social Security operated in the black. After substantial increases in the payroll tax during the Reagan administration, the payroll tax remained insufficient to satisfy future demands. The near future retirements of the “baby boomers” will greatly decrease the worker to retiree ratio, and the Social Security “trust fund” will be empty in the third or fourth decade of the 21st century, or possibly earlier.

Retirees deserve more than the present Social Security system has afforded them. The government created Social Security to meet immediate demands, consistently altered the system to meet growing demands and now is in a dilemma of how to meet future demands. Social, cultural and economic factors change, and a retirement plan must be able to adjust to the changes. It is obvious that a new system is required that can respond to the exigencies of a dynamic economy. The present economic crisis (not predicted by conventional economists) intensifies the problem and verifies the need for a more secure and stable retirement system.

A chilling scenario awaits a nation with an aging population and reduced birth rate.

This chilling scenario has partly arrived; wages have been relatively stagnant, while an increasingly aging population solicits more social security funds. Fortunately, inflation remains low – dampened by a prolonged recession, controversial statistics and decreased global demand for many products. Unforeseen elevated unemployment, predicted to remain for a lengthy time, complicates the budgeting for the OASDI.

That’s not all: not prominently considered is that as the population ages and births decline, family life changes. Modified lifestyles and cultural patterns evolve and the new patterns will force industries to reconfigure production. Changing demographics will modify consumer preferences in clothing, housing, entertainment, food, and partially reorder the consumer economy. The changes might be slow and adaptation might enable absorbing the shocks. Nevertheless, the economy will be perturbed.

Another overlooked condition. The present social security beneficiaries must either directly use their investments for expenditures and slowly use up their assets, which they gamble to remain at adequate price levels, or transfer equity investments to fixed income investments and live from fixed income interest. Low interest rates, unsteady stock market and the push for private retirement plans mystify the choices.

It’s all patchwork and contradictions

The exit of the ‘baby boomers’ from the work force leads to increased investment demand for fixed income securities. This drives up the price of fixed income securities and drives down their yields, resulting in less retirement income. The patchwork proposition that investment of social security funds in equities can assist in maintaining the social security fund and yield greater benefits for retirees is not proven, and might prove counter-productive. For this concept to be effective, the employed workers, through their Keogh plans, will purchase the securities that the retirees sell to turn their assets into cash or fixed income investment. In effect, the employed workers through their own Keogh plans, must maintain high security prices and will still finance retirees in a similar manner to the “pay as you go” plan. In addition, two severe stock market declines in ten years have softened the call for turning social security into an investment scheme. Still unknown, and not discussed too loudly, is how will SS be able to meet its present obligations if FICA funds are diverted from the ‘trust fund’ to investments.

The Social Security problem arises from the failure to recognize that the present system had built-in-problems from the start and patch-work cannot repair them. With corporations deserting their original pension commitments and the U.S. government’s Pension Guaranty Corporation rescuing the insured, with the stock market falling periodically and investment at these occurrences going strongly into U.S. government bonds, it is obvious that America’s citizens are depending upon their government for an assured retirement income.

By using a major portion of the taxed FICA contribution to provide present benefits, Social Security is unable to create sufficient reserves for future retiree benefits. On paper, FICA, and not rather the general revenue fund, finances SS. However, to workers, the FICA payment is only another form of taxation, and the result is the same as if they paid FICA to the general revenue fund. Many workers never recover their total payments after retirement. To them, the FICA payments are the same as any tax.

Moving money from one accounting line (Social Security Fund) to another (general revenue), while maintaining the same result, resonates as a sleight of hand operation. It is a ‘smoothie,’ but the benefit of the change is that Social Security will become a true retirement plan, actuarially and financially. However, going from a ‘pay-as-you-go’ plan to a true retirement plan, does not automatically solve the SS financial problems. Only a properly calculated ingestion of money can place a retirement plan on a sound basis. The proposed change focuses on this calculation. This focus more carefully scrutinizes means to improve the retirement plan and resolve the financial issue.

Proposals for keeping the retirement system solvent continually circulate without decision. Nevertheless, we have a lack of discussion on what may be the most critical failure of the Social Security retirement plan – It operates as a ‘pay-as-you-go’ plan rather than as a true retirement plan. Changing its stature from ‘pay-as-you-go’ to a true retirement plan might establish a social security system that is competitive with an annuity of a private industry plan and yield advantages that private industry plans cannot provide.

Can Social Security Function as a Pension Plan?

Payroll taxes of workers, rather than general revenue taxes, support retiree income. Social Security determines the formula that shifts a portion of wage earners to retiree income. No matter how it is sliced, diced or construed, the present OASDI system is almost a National Pension Plan; the government raises funds by taxes and distributes these funds to give retirees a fixed income. The system only needs improvements; a more just retirement income for everyone and a certainty that the funds will always be there.

Social Security, modified to be a national pension plan, has the capability to provide a secure, stable and advantageous pension for retirees. Security results from the strength of the government system. Stability results from the guaranteed income. The added advantages: Government control allows quick adjustment of retirement benefits according to family status, cost of living and total income.

If the nation accepts the original objective of the Social Security system as “to pay benefits that provide a minimum degree of social security,” and realizes the obligations to the retirement community with SS functioning as an income distribution plan, then SS becomes a national pension plan financed from the budget. A modified framework for the Social Security system uses the forecasted expenditure for Social Security as a budget item in a unified budget. One modification would be to have tax revenue support the budget item termed Social Security Benefits. The individual’s W-2 tax form would become an accounting entry for determining future benefits.

Placing SS benefits in a unified budget, and making certain that general tax revenue finances the budget item, has several advantages:

(1) The present payroll taxes are regressive and unfairly affect lower incomes. Income taxes are progressive.

(2) The Social Security budget is mandatory. If it increases, other budget items can decrease in order to maintain taxes at the same level. Taxpayers will not complain if the Social Security budget increases, as long as their total tax bill remains constant.

(3) Since Social Security is a major portion of the Federal budget, other budget items will be forced to compete with it and will have increased scrutiny. Wasteful and unnecessary budget items will be “under fire.”

The SS system cannot escape the fact that its outlays are beginning to exceed its revenues.

How will its own budget be balanced?

As of now, the distributions of payments to retirees are well accepted. Continuing those distributions and refining them as economic changes occur are a matter of priority, and Social Security deserves high priority. After all, Social Security payments are only a transfer of payments from children and grandchildren to their elders – a family affair. Instead of family wage earners directly supporting their parents, the wage earners will be indirectly supporting them. In other words, no matter the costs involved, as long as they are reliable and sensible, the public will be prepared to pay them.

The costs of the retirement program have a greater return than other government programs. As mentioned previously, its payments instantly recirculate in the economy and do not prevent the economy from moving forward. Defense programs often result in production of weapons of dubious benefit to the economic structure. Many government programs are wasteful, resulting in no advantageous to the American community. Foreign aid either subsidizes purchase of American goods or moves money and resources out of the country.

Securing the National Pension Plan

The American constitution states that everyone is created equal, and America does everything to make its citizens unequal. Why is a Wall Street broker, who already earned huge sums during a lifetime and has sufficient funds for retirement, worth any more to the public than other workers who worked hard and received insufficient earnings to secure a satisfactory retirement? A National Pension Plan equalizes public benefits and enables private pension plans or other retirement income means to complement the public plan.

Regardless of previous income, aren’t retired workers who worked equal years and hours and exceeded some minimum wage in each year entitled to near equal public pensions? This concept conjures a socialist vision of equalizing the wealth. No relation. Government operations – medical, defense, and schooling all provide equally for citizens. Earnings don’t determine Medicare benefits. Retirement income deserves equal treatment, with qualified workers receiving a basic income that allows for acquiring the staples in life – food, housing and clothing. The Department of labor can determine what constitutes a basic income.

Preparing huge sums for a financial future clouds the future and skews the present. There is only one guarantee; the U.S. populace will fulfill an obligation to their retired parents and grandparents. The National Pension Plan makes Social Security more relevant, more simple, and more equitable. By making it a budget item, its solvency is resolved. Rather than treating Social Security as an adjunct to America’s economy, it is preferable to integrate the needs of the retirement community into the needs of the entire society. A responsible society distributes resources and shares sacrifices.

Dan Lieberman publishes commentaries on foreign policy, economics, and politics at substack.com.  He is author of the non-fiction books A Third Party Can Succeed in America, Not until They Were Gone, Think Tanks of DC, The Artistry of a Dog, and a novel: The Victory (under a pen name, David L. McWellan). Read other articles by Dan.

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  1. Deadbeat said on December 14th, 2010 at 12:09am #

    When I have more time I’ll respond in details to the numerous ERRORS that the author of this article makes. It is clear just from skimming this article that he lacks the background and information about Social Security. I don’t think even Dr. Allen Smith makes the number of errors as this author. Dr. Smith’s error has to do with how he spins the trust fund scenario. But this author is just plain clueless.

    For example the “demographic” shift of the baby boomers going into retirement should have been offset by the PRODUCTIVITY gains that the baby boomers generated over their working lives. In addition, the dependency burden was greater for the pre-baby boom generation than it was for the baby boomers and will be for the post boomers and workers are having fewer children. There is plenty of money in the society to take care of aging boomers. This has NOTHING to do with the number of retirees. That is the canard from Peter G. Peterson and his paid shills and minions whose goal it is to destroy Social Security.

    In addition putting Social Security “on budget” will only permit greater raiding of the system. The so-called “unified budget” was done in 1969 by Johnson in order to hide the cost of the Vietnam war. That’s how the U.S. reported a “balanced budget” that year.

    There was a reason why FDR made the SS tax regressive. He wanted workers the FEEL the burden of paying the payroll tax so that they would DEMAND a return knowing that they paid into the system and contributed to their own retirement. What happen, unfortunately was that the Greenspan commission over charged the payroll tax in order to make up for the shortfall due to Kemp/Roth — the 1981 tax cuts for the rich.

    If the author was being historically honest he would demand a rollback of the 1981 tax cuts and return the top tax rate to 70% and restore the 14 tax brackets that captured higher end income. That would be one way to curb the Wall Street bonuses.

    There’s more but I’m short on time.