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Letís K.I.S.S. Social Security Goodbye

 (An Investment Grade White Paper on Social Security)

 

Introduction: 

          As an investor, Iíve always wondered why Social Security is such a problem. Whatís so difficult about managing this particular Trust Fund, and why is it so different from any other investment account that pays out a constant stream of income to retirees? The private sector does it routinely (defined benefit pension plans are not anything new, nor are deferred fixed annuities), so whatís the big deal? NaÔve, oh yeah, big time! 

          Is Social Security failing because it hasnít been invested soundly, because it is too large, or is there another reason? The most obvious problem is politics, and the most common way of dealing with the issues is to cast blame in every direction. I have no interest in calculating how much has been wasted or mismanaged by whom, nor do I intend to waste even one sentence on finger pointing. We have a very solvable problem that can be fixed relatively quickly and in a surprisingly painless manner. Benefits are likely to increase in the process, jobs will be created, and not one of the mythical dollars in the non-existent Trust Fund will go missing! 

The Problem(s) and the Needs:

          Actually, there really is no Social Security Trust Fund, and there are no Investment Managers involved. Thatís right, no stocks and bonds, or anything elseÖjust no investments at all. What we have is a gigantic Government designed, controlled, and manipulated Ponzi scheme.  An illegal entity (in the private sector anyway) that has worked incredibly well for years, in spite of congressional tinkering and pork barrel political influences. There has never been a plan for funding the benefits. We need one, and we need one that isnít a dumpster for every other politically sensitive entitlement scheme that waltzes down the aisle.

          We need to simplify the benefit structure as well, to make it just a retirement program and not a Widows and Orphans Protection and Healthcare Society. But we canít eliminate all the unnecessary bells and whistles until we remove it from the political sphere and create an independent federal agency responsible for several things: (1) calculation and administration of benefits for retirees including claims, complaints, and questions, (2) proactively looking for and investigating instances of fraud, (3) qualification of and communication with retirement benefit providers in the private sector and monitoring their operations, etc., while still doing absolutely no investing.

          Without doubt, we need to re-explain the purpose of the Program to participants. This is a supplemental retirement program, and while it is generous, it is intended to be the foundation of a retireeís total retirement package, a benefit floor. Employer sponsored benefit programs and individual savings and investments are expected to make up the bulk of every citizenís retirement program. Social Security will assure that every one has something, but individual savings plans must be more vigorously encouraged.

          The retirement benefit itself should never be subject to the income tax, regardless of what the retiree earns elsewhere. Contributions to Social Security must continue to be mandatory, and there must be an actual Trust Fund that can only be managed by professional investment managers... perhaps in the form of the old and standard FIXED ANNUITY.

          Finally, we need to deal with Health Care and Health Care reform separately from the Social Security Retirement Program. They are two totally different problems, and the health care issue is much more complex and totally out of the range of my expertise. But there can be one possible tie in, as follows: 

  • The SSRP (Social Security Retirement Program or Plan) is funded from employee payroll deductions up to a certain maximum. Thus, the obscenely overpaid out there just donít pay enough! Under the new SSRP, any total annual compensation package (meaning salary, bonuses, gifts, soft dollars, royalties, stock options, etc.) in excess of $1,000,000 will be assessed 1%; packages over $5,000,000 will be hit for 3%, the over $10,000,000 crowd get nailed 6%, and so on. And these numbers are at the time of agreement, not of actual receipt. So if you pay that Heissman Trophy Quarterback $100,000,000 over 10 years, the SSRP gets its cut when it hits the newspapers.
  • 50% of this money will be directed toward another (new) Trust Fund that will be used to help fund Medicare and Medicaid Benefits. The other 50% will go to the SSRP Trust Fund, until that fund has a comfortable surplus.

The Private Sector can do it!

         We have all the tools and expertise in place now to fix this financial mess without ever making the drastic mistake of delegating investment responsibility to the general population. Allowing individuals to pick and choose from a selection of funds will undoubtedly fail, will continue the mythology of Wall Street brilliance, and will exacerbate the retirement income problem for future generations. As tainted as our Financial Institutions are, as self serving and conflicted as they have been proven to be, they still do have the wherewithal to deal with the Social Security problem. But we need to get them back to the basics of investing. We need to create a non-commissioned and non-competitive environment for the sole purpose of providing a floor of Retirement Income (not a portfolio of securities or a high net worth) for plan participants. 

          We canít allow the Institutions to use their fee laden, unproven, product creations to provide retirement benefits when what we really need is their old fashioned skills with stocks and bonds... the old safety net, slow growth approach to amassing income generating wealth. There is no need to risk the whims of the marketplace when income is what people need in retirement. The Trust Fund needs to generate guaranteed income, and there isnít a mutual fund of any color alive that can legally do that. In fact, the proper financial solution would never look in the direction of a Conventional Open End Mutual Fund, an Index Fund of any kind, or any other of the huge array of peripheral types of products, contracts, and speculations that exist today, period. On the day I retire, Uncle, I want to know precisely what my monthly supplemental income will be...without worrying about whatís going on in the financial markets. Yes, we know how to do that, it just doesnít involve the glitz that Wall Street likes to sell! 

          K. I. S. S. the complications and competitions goodbye! This is an easy job for an old concept...an old concept with a whole bunch of new rules. And even with strict qualifications for a financial entity to become a Social Security benefit provider, hundreds of banks, insurance and annuity companies, and brokerage firms would qualify. And we can even let them make a large sum of money in the process.

Investment Rules:

           Any established and profitable Financial Institution will be able to offer a single Social Security Retirement Program. Every participating institution will use the same general plan to provide the benefit levels established by the Social Security Administration in pretty much the same manner as they are now. Each approved entity will establish one segregated Trust Fund that will be allocated at least 75% to Fixed Income Securities of various types, but of only Investment Grade Quality. Only pure securities (no zero coupon, hedged, or gimmicked varietals) are eligible for inclusion. The remaining 25% may be invested only in Investment Grade Value Stocks (including ADRs, and managed, non-index, CEFsÖboth of appropriate quality and income potential). In other words, a very conservatively managed (100% immediately vested) Group Pension Plan (with a named manager, not a committee). One manager, with appropriate research and administrative staff, backed up by assistant managers, a dedicated trading operation, etc. Researchers will be looking for Investment Grade Securities, not the next series of high risk and high media attention IPOs.  (The SSRIA is another alternative.)

Asset allocation is determined using the Cost Basis of the securities in the fund. [Failure to do this is what makes defined benefit plans so unpredictable and expensive for corporations, particularly those with Cash Out benefits. Here we are dealing with a total contribution amount and a monthly benefit amount. There is no Market Value number entitlement involved. The fund generates the income needed for the retirees. Income generation is king. Market Value is not particularly relevant in securities where quality and income is maintained.] 

There is no (we can predict the future) allocation to Cash or to other artificial product orientated classifications of capitalization, global presence, sector analytics, etc. (other than a reserve for the next three to five months of benefits). Managers are expected to operate within acceptable diversification standards within both the fixed income and equity asset allocations. This is not new. It is an old fashioned method that has always worked to provide retirement benefits. It still does. No two funds will be identical on the inside, but they all should be able to get the job done. At the SSRP, Income is Job One! 

Why ďOne Size Fits AllĒ is Acceptable Here:

Yes, this is entirely different from my normal Investment Management methodology. I despise mass-market investment products of all kinds; I hate the fact that todayís financial professionals know little about investing in individual securities, and Iíve written volumes documenting how the Financial Institutions have created this environment for their own bottom line benefit with no concern for the individual investor.

But this situation is totally different from the management of an individualís investment program. Every participant actually makes the same, formula required, contribution to the plan, and each anticipates receipt of a pre-determined monthly dollar amount, an amount that will vary only with the amount deposited and the age retirement is selected. It may even be possible to specify a minimum monthly amount for every participant. 

This is a 'melting pot' plan. Rich or poor, executive or laborer, you get a supplemental income based on the same rules and requirements. And rich or poor, you will be expected and encouraged to contribute to your own, self directed IRA program.

Providers:

All eligible providers will be required to accommodate Social Security Retirement Accounts, and will do so through a separate organizational entity or department with no other responsibilities. Every provider will be allowed to charge a management fee of 1% of the market value of the Trust, quarterly, and in arrears only. There can be no other fees or charges of any kind, including marketing, trading fees, or anything else. Each provider is solely and legally responsible for providing full and complete benefits to the participants in its managed Trust Fund, to the total extent of its corporate assets, above and beyond the Trust Fund. Providers will, as an employee pool of first resort, hire any displaced persons who are no longer needed in the newly streamlined federal Social Security Administration. The Pension Benefit Guarantee Corporation will insure all of the individual Trust Funds. 

The contents of the Managed Trust Funds are expected to be different, but no competitive statistics or propaganda can find its way into any advertising, which is limited to a simple statement of availability. It is expected that some funds will operate at more of a surplus some years than others. Itís OK. When the Federal SSRP Administration determines that a significant surplus exists, 25% of such surplus can be made available to the Health Care Trust Fund

Providers will be required to share the wealth with others in the industry, so that each becomes experienced, respected, and capable of handling the growth and responsibilities of the Trust Funds they manage. The Social Security Administration will monitor Fund asset size and membership to assure parity between providers. There will be no sales commissions of any kind. Participants will choose from a list of qualified providers, and their employers will deposit participantsí payroll deductions accordingly. The participant/benefit provider relationship is a permanent one, for life, in the interests of facilitating the goals of the program, and of keeping the system as simple as possible to administer.

Benefits:

Only two benefit payment plans will be available: (1) a fixed life annuity and (2) a lesser, fixed life annuity with a spousal or partner benefit. There will be no life insurance, disability insurance, and so on. All the pork will be gone. The amount of these retirement benefits will be calculated in the same manner as they are today, based on the amount contributed, duration of participation, etc.    (The SSRIA is another alternative.)

Because individual retirement contributions will now be pooled and invested, the amount needed to provide benefits will become less and less instead of more and more. Beginning in the second year after implementation, Social Security salary deductions will be reduced 10% per year until they are roughly 40% of what they are today, and at that time, there will be no additional employer matching contributions. During this same five-year transitional period, all taxation of withdrawals from conventional individual retirement account (to retired persons only) will be reduced to zero. 

Finally, any citizen of the United States, working or not will be able to make a tax deductible contribution of up to $5,000 annually to a conventional IRA program, whether or not he or she is a participant in any other type of retirement plan. An additional after tax $5,000 can be contributed to a Roth IRA as well. There are no income restrictions, period!

Existing Social Security Recipients:

If we are serious about solving Social Security, this isnít as difficult as one would think, and arguments could be made for several methods. But in keeping with the K. I. S. S. principle, letís start with the oldest Social Security recipients first and work backwards. Politicians on both sides of the aisle can be heroes to their elderly constituents. Every year, every Social Security Retirement Program provider will be required to use 1% of the Trust Fund to annuitize existing retiree benefits. The Social Security Administration would coordinate this benefit buyback with the private sector in a seamless fashion (we can hope, canít we.). The objective of the exercise would be to have every Social Security check issued by the private sector within 5 years. It is likely that the federal government would have to chip in a few billion to accomplish this.

Existing Social Security Account Holders:

While this major transitional process is being tended to, keep in mind that no new dollars are entering existing Social Security Accounts. All Social Security participants are funding their new retirement accounts with thousands of different financial institutions. Starting with participants age 60 at the inception of the program and working lower, existing balances will be paid back as follows over the same five year period. Each year, participants will be required to elect either to: (1) apply up to 50% of their existing Social Security Balances to their Federal and/or State Income Tax obligations until it is used up with the balance going immediately into their Trust Fund account, or (2) to have their entire Social Security Balance deposited to their Trust Fund Account over a five year period.

New SSRP Accounts: The Rules

Very few rules are needed. Every employee, regardless of how he is compensated, is required to participate, including government workers at all levels right up to the President. Absolutely every citizen, and every non-citizen in any capacity, who is working in the United States must contribute

There is no ownership of SSRP deposits. Accounts can't be borrowed against, assigned, or touched in any way until retirement is elected to start on the January 1st of the year following the attainment of age 60. Age 60 is the first year of eligibility, but participants can continue to contribute to the SSRP and choose to retire at any age. This holds for both men and women, employed or not at the time of election. Retirement benefits will be slightly smaller for women than they are for men, recognizing the differences in life expectancy.

Every participant will be able to name up to three human beneficiaries, entitled to receive a lump sum payment from the SSRP in the event of the participant's death. The lump sum is equal to the sum of the contributions the participant has made to the SSRP in his lifetime. The distribution must be rolled over into a conventional IRA if there is one, or into a ROTH IRA if there is not. Any conflicts will be settled solely by an arbitration panel within the Social Security Administration. 

If any of this makes sense to you, it's really easy to contact your congressman at:

 http://www.visi.com/juan/congress/

BUT, don't expect to get a real live response... I've tried. We really need too power wash congress!

Your Contributions (These ideas may or may not support my own, but they are certainly better than either what we have now or the politically motivated changes that are being proposed):

"I suggest changing the rules to permit Social Security funds to be invested directly by the Feds in the same market investments as are currently proposed for individual accounts. This would: spread the risk (over individuals and generations) as befits an insurance program; provide an even better rate of return than individual private accounts due to reductions in administrative expenses; eliminate an added paperwork burden on taxpayers." [Bill B., April 29th, '05]

"Social Security is not in deficit; it is currently running large surpluses, and will into the foreseeable future.  To truly reform Social Security, we need to do the following: end PAYGO, which siphons-off payroll taxes to pay general obligations; eliminate the ceiling on income subject to the payroll tax; invest payroll tax surpluses in Ginnie Maes, Fannie Maes, and Freddie Macs, so the funds can earn a decent return (and) benefit America; stop allowing government workers and other to fund alternate, more favorable, retirement programs, in lieu of making their contribution to Social Security; make benefits commensurate with contributions. [Larry B., April 30th, '05]