A new Social Security System is proposed and evaluated disclosing the potential and problems in using stock market investments as a basis for social security.
Except for periods where market gain was low and inflation correspondingly high, long term investments in the market looked impressively good. An exceptional period in the 1970's where stock market investments were big losers appears to be where high government spending stifled the economy by requiring high taxes which led to low market gain and high inflation.
The New York Stock Exchange (NYSE) Composite Index of end-of-year values for the period 1940 through 2003 were used together with the corresponding values of the Consumer Price Index (CPI) to obtain the annual effective NYSE market gain for this period. This is referred to here as the effective rate of return from stock market investments for this 63 year period and is used to make reasonable assumptions about the level of retiree income that could be obtained from the proposed new system.
The NYSE Composite consists of over 2000 U.S and non-U.S. stocks and the Index is designed to measure the performance of all common stocks listed on the NYSE.
The Consumer Price Index is produced by the U.S. Bureau of Labor Statistics to determine the monthly and yearly inflation rates of a collection of the goods and services bought for consumption by U.S. households.
If you borrow money from a bank and the inflation rate is greater than the interest rate you pay, the bank in effect loses money. The Federal Reserve protects banks by keeping interest rates higher than the inflation rate. If the interest rates are kept too high however, the high cost of credit can generally restrict business development causing stock prices to fall and a recession.
It is important therefore to keep inflation under control. Inflation is caused by people continually seeking more money for their goods and services. Within our economy it seems that there are always many independent adjustments of prices and wages being made so that inflation is ever present. Constraints on these adjustments seem to make the inflation worse. It has become customary for people to expect an annual cost-of-living adjustment in their wages or social security payments.
A table of CPI data enclosed gives the annual inflation rate and cumulative values from 1940 through 2003. It shows that it took $13.15 in 2003 to buy what $1 could buy in 1940. For example, the first class postage stamp that cost 3 cents in 1940 now costs 39 cents.
In a system of free enterprise, competition can limit the price people set for their goods or services. If the price is set higher than what others charge for the same goods or services, a buyer will likely buy elsewhere. Ways of avoiding high inflation therefore include promoting competition and avoiding severe constraints on wage and price adjustments.
Table 4.B15 from the Social Security Administration Master Earnings File gives the number of workers with Social Security (OASDI) taxable earnings and amount of earnings, by sex and age, for the year 2002. These data were used to obtain estimates of transition costs, jump-start costs, and the retirement income of an average worker retiring in 2002 at age 65 assuming that the worker had worked for the last 45 years under the new system.
A worker and his employer each pay 6.2% of the worker's wage in payroll tax, with the annual taxable wage capped at about $100K (the cap keeps increasing). This is called the OASDI tax with 5.3% (10.6% total) going into the OASI Trust Fund for paying retiree income benefits and the other.9%(1.8% total) going into the DI Trust Fund for paying disability benefits.
A worker and his employer also each pay 1.45% of the worker's total wage in payroll tax to pay for Medicare Part A Hospital benefits, while Part B and Part D benefits are paid from General Revenue and premiums paid by beneficiaries. Why not fund Part A in the same way ? It would help the workers and employers, allowing an increase in the workers' take-home pay and a reduction in the cost of goods and services!
Our present Social Security System is too expensive and inappropriate for U.S. workers. Why should it take 3 U.S. workers to pay enough in payroll tax to provide the average retiree an income that is essentially at the poverty threshold? Since the number of workers per retiree is predicted to decrease to 2.1 by 2030, that means the payroll tax will have to be increased to at least 8% for both worker and employer just to maintain that average retiree income. Note that probably the majority of retirees get less than that average value and that a total of 16% in payroll tax will be rough on both worker and employer. Furthermore, the Trustees of the OASDI Trust Fund estimate the total payroll tax will have to be at least 18% in 2079 to pay for scheduled benefits.
A completely new system is proposed here that could be phased-in within 35 years while maintaining, but not improving, our present system until it is phased-out. In the new system the worker and employer would each put 2% of the worker's wage into a retirement account for the worker that would be invested in stocks ,and possibly property, to provide a significantly higher retiree income than provided by the present system, and it would not depend on the number of workers per retiree in any way. On a percent-payroll-tax basis, the new system can provide 6 to 8 times the retiree income of the present system in a healthy economy.
In order to maintain retiree benefits in the present system, workers in the new system would pay the same payroll tax rate as workers in the present system, until the latter workers are well into their retirement years. The 4% of their wages going into their retirement accounts would have to be borrowed from general revenue (income tax revenue) and is the principal transition cost. Payroll tax surpluses could be used to pay some transition costs and borrowing from general revenue could be viewed as simply cashing in IOUs in the Trust Fund. Actually, the Trust Fund has a value of over $2 trillion now and is expected to have a value of over $4 trillion by 2017. (See the details in OUTLOOK.) If we were to start the phase-in in 2010, the Trust Fund and the expected annual Trust Fund increases (from surplus payroll tax) together could be used to pay the transition costs through 2016 and the Trust Fund would still have a value of more than $3.75 trillion! Further, increasing the payroll tax to 16% could be delayed until around 2023 and that increase would then be temporary!
A worker's retirement account would be managed by the Social Security System (SSA) but would be the worker's personal property and could be left to the worker's heirs.
At the start of the phase-in all workers just entering the workforce would go into the new system. Transition costs would be small at first so it is proposed that all workers in the present system under age 30 be transferred into the new system, putting 4% of all OASDI wages already earned, plus compound interest, into their retirement accounts. This transfer would allow the phase-in to be completed in 35 years rather than 45. (The nominal worker is assumed to start work at age 20 and retire at age 65 for analysis purposes.) Using the Period Life Table (on longevity) and assuming a 16% payroll tax rate by the end of the phase-in, a rough idea of the time-line of the phase-in and phase-out is obtained as follows.
Assuming the phase-in is started in 2010, it would end in 2045. Transition costs would essentially peak in 2045 and then gradually decrease, ending 11 years later in 2056. In 2065 those workers who retired in 2045 at age 65 and were still living would be 85 and, assuming the total cost of benefits decreases proportionally as the number of remaining retirees decreases, the total payroll tax could be about 12%. In 2070 those still living would be 90 and the total payroll tax could be about 8%. At age 90 the life expectancy of men is 3.7 years and that of women is about 4.5, so in 2075 we could expect the total payroll tax to be a bit more than 4% (much better than 18%).
This web site was established for the purpose of making people aware of the possibility of phasing in a completely new social security system while maintaining the present system and phasing it out; further to use our capitalistic economy to achieve an important social goal and to use government in more of a service mode to make the assets of this new system the property of the workers, both individually and collectively.
The information presented was largely obtained from the internet. The articles used to describe the significant events affecting our national economy from 1965 through 1981 are referenced for the internet-user to read. Tables giving the NYSE Composite Index data, the CPI inflation data, and the Effective Market Gain data are contained in the DATA page. Derivations of the annuity function, inflated annuity function, and maximum withdrawal rates are included for the mathematical-minded reader.
If you find the information presented here understandable and are interested in providing a better retirement system for the young workers and for all future workers in the U.S., write, email, or call your Congressional representatives of your interest and ask for their opinions. Also tell your friends of this web site and ask them what they think of it. We need to work together to make the right kind of changes in the U.S. and steer it in the right direction.
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