RE: What are the values you would have underlie Social Security

[Michael Jones <powderfinger99@yahoo.com>]

Bob,

I am a Gen-X professional worker in the telecommunications
field. I graduated from a four year university with a college
degree in engineering.

I have been saving and investing since I was a college student.
I do not consider myself to be wealthy, but I will become wealthy
do to the power of compounding interest. I expect
to accumulate more than enough wealth that I will not require any
retirement benefits from Social Security.

I represent perhaps millions of people in my age group who probably
will not need Social Security and most likely have already written
the whole program off. The issue of Social Security reform is
generally not on the radar screen for most young people.

Why should I even care? That's a good question. After all, I have
already taken steps required to secure my own future. The main
reason I am concerned is due to the changes I see happening in
the business world which will affect the future of worker economic
security. We have a unique opportunity right now to dramatically
improve the economic wealth of all workers. Or, if the opportunity
is passed over, an even larger economic rift will be created between workers:
haves and have nots.

In the past, worker economic security primarily depended upon ones
ability to increase wages. Over the past 20 years, wages have not
increased that fast. And at the same time, taxes and inflation have risen.
The result is that the average worker is falling behind. My own
wages have increased faster than the average due to the demand for
high tech workers. After factoring in taxes and inflation, though,
the increase is still relatively small.

Over the same time period, capital has increased in value many times
more than wages. Why? Well, I'm not an economist, but I could point
to many reasons: increased company competitiveness, end of the cold war,
increased productivity, lower costs of business, sound fiscal/economic
policy.

What I have concluded from this, is that the average worker will not
be able to reap all the rewards of his own work unless he has a stake
in the equity of his own company or of others. Wages are only
one form of compensation, and increasingly wages will become a
smaller part of compensation (though still the primary part).
Companies will make up the difference of stagnant wage increases by
making workers take on some of the risk of business through stock ownership.

This change in the business climate upsets some groups, such as unions.
They do not want to assume any of the risk of business nor do they want
to assume any risk in their pensions (such as Social Security).
I suppose we could have a debate about if this is the right direction
for the country. However, I don't see anything that will change
all these forces of competitiveness.

How does this fit into Social Security reform? Well, proper reform
could offer millions of people access to capital who would otherwise
not have access. There are millions of people at all income levels who
do not accumulate wealth (for various reasons).

I would especially be concerned about low wage/low wealth
workers, who get a bad deal from Social Security now and an even
worse deal in the future. If the Social Security system continues
as it is now currently structured, there will be increasing pressure
to "lift" the benefits of these workers as the system gets squeezed.
The Social Security system as it is currently architected does not
create wealth. This means that the only way to increase the benefits
of the needy beneficiaries is to take the money either from other
beneficiaries or take more money from current workers. The government
could also cut other spending, but this option is typically not
taken by government.

The bill will become due. And sooner than you think. What are the
options? I could see government increasing the payroll tax, lowering
the benefits for "wealthy" beneficiaries, taxing other peoples IRA's,
401K's, or even Roth IRA's.  The money has to come from somewhere.
One thing I believe will happen: the tax burden on the current workers
will be higher than it is now. This will have the effect of lowering
the "return" on earned income (wages) even more. As I discussed above,
wages are already squeezed as it is right now.

How can you protect yourself from the low wage growth, higher tax burden
economy of the future? Invest in capital.

The current Social Security system is trying to maintain a balance between
a "retirement program" and a "safety net". Unfortunately, it does not
provide a reasonable retirement (based upon contributions) nor does it
provide an adequate above poverty level benefit. For the program to maintain
credibility, even Bill Gates should get a pension benefit because the
contract is UNIVERSAL. Anyone who pays into the system should be entitled
to a benefit. At the sametime, there is another promise which insures the
low wage worker a minimal benefit.

How can the government reconcile these conflicting goals? By designing
two different systems that each satisfy one goal.  The 9 principles
compiled by Robert M. Ball, former Social Security Commissioner, would
fall under the two programs as follows:

Retirement System

2. Benefits are paid as an earned right, with eligibility
   for benefits and the benefit rate based on an individual's
   past earnings.

3. Benefits are wage-related.

4. The system is contributory and self-financed, with contributions
   from wages specifically ear-marked for Social Security.

6. Benefits are not means-tested.

9. Participation in Social Security is compulsory.

Safety Net

1. The program is nearly universal in coverage - 96 out of
   100 jobs are covered.

5. The benefit formula is redistributive, paying lower-income
   workers a higher percentage of their pre-retirement earnings
   than higher income workers.

7. Initial benefits are wage-indexed, reflecting improvements
   in productivity and thus in the general standard of living.

8. Once they begin, Social Security benefits are inflation
   protected, with annual cost of living adjustments tied to
   the Consumer Price Index.


Once the principles are separated in these two groups you will notice that
the first group looks very much like what an IRA/401K or private pension
plan accomplishes. The second group looks very much like a traditional
redistributative safety net government program.

If the two programs were to follow a model similar to the Chilean model,
they could work as follows:

- The retirement account would be setup and owned by the worker. Contributions
would be made throughout his/her lifetime. The monies would be invested in
private investments such as bonds, and mutual funds (at the choice of the
worker).
- If the worker had bad luck for whatever reason, the difference between his
account and a predetermined above poverty level benefit would be paid out
of general revenues (redistributative).

It is important to note that the worker who did well with his investment
account would not be punished by having to pay for the small percentage
of workers who didn't do well.  All workers would pay a general revenue tax
which essentially serves as the "insurance" policy for those workers who
encounter bad luck (ignoring transition costs, the revenue tax could be
a portion of the current payroll tax). The worker who did have bad luck
would not be left out since he is guaranteed a minimum benefit
(the government would make up the difference between the minimum and
his retirement account).

I am getting off track here since I didn't want to actually propose a
detailed solution. But, it should be clear what we are facing. The good
news is that there is still time to hold off the crisis without significant
pain.

Michael