Solution #9: Make Social Security a Defined Contribution Program
By now we should all be aware that the Social Security trust fund is depleting, and the most recent estimate is that it will be bankrupt by 2035. Most Millennials and Gen Z'ers assume, perhaps correctly, that they will never see a penny of this.
Economists warn that if not reformed, Social Security can only be saved by 1) benefit cuts, 2) delayed retirement age, or 3) raising taxes on earning (younger) people. What few congressmen are brave enough to even talk about this problem are only meekly tinkering around the edges of a system that is fundamentally flawed, and must be reformed into something sustainable for future generations.
So, what should we do about it? I say, none of those three things.
The first principle: when you are in a hole, the first thing you do is to stop digging.
We should end the concept of a DB pension, which shifts all the investment risks and demographic risks to the taxpayer, and convert everything to a defined contribution ("DC") plan. This conversion can be done without much problem, many corporations have done it so it's just an actuarial exercise. Each participant has his or her accrued pension liability converted to a present value, and that present value is deposited into his DC plan in the form of newly-issues 20-, 30-, and 40-year US Treasury Bonds. Going forward, all FICA contributions by both employer and employee go into the DC plan just like in a 401k plan.
Those age 50 and above can elect either to keep their accrued pension benefit or to convert it to a defined contribution plan, just like a 401k but with an added benefit: if you die, your estate gets to keep the funds (under Social Security, if you die your estate gets nothing). But the idea of continuing to accrue a growing defined benefit pension ends and is replaced with a defined contribution system. Finally, you would OWN your retirement account, it would no longer a government Ponzi scheme.
It is insane to talk about increasing taxes to pay into a broken system. This is what government does all the time ... asking for more money because the previous money was spent unwisely. Where else but in government would ANYONE get away with this? (Answer: nowhere). No new taxes!
It is also insane to ask people who have been for decades planning towards a retirement to tell them their retirement date has been postponed. No pushback of retirement dates!
It is also insane to ask people who have been for decades planning towards a retirement to tell them their retirement date has been postponed. No pushback of retirement dates!
Also, in my proposal the retirement of the pension liabilities in the conversion process would be financed by a Treasury issuance of 20-, 30-, and 40- year "retirement bonds" into the defined contribution accounts. That spreads the refinancing risk and gives us decades to grow out of our problem, if government would just quit running massive deficits.