Concept for making social security solvent

[ziggy]

This is something I have been mulling around in my mind for a few years on how to "fix" social security.

Presently SS is taking in more than it is distributing.  I have read it is somewhere around $85 billion each year.  Sometime around 2020 that surplus will change and outflows will exceed inflows.  Only two ways to deal with that.  Reduce benefits or increase taxes.  The Federal Government has outstanding IOU's to SS for all the surpluses, but for the gov't to pay that back they will need to raise income taxes.  If that doesn't happen then the gov't will need to raise payroll taxes, or reduce benefits, or extend the age of retirement, which is benefit reduction.  So how do we deal with that?

My idea.  Presently there are limitations on how much a person can put into a tax deferred IRA, 401K, Keough, etc., and also their is a an income limitation on those who can actually use IRA's.  There are two types of IRA's, Traditional IRA's which allow you to use pre-tax $ as your contribution, but the earnings are taxed, or Roth IRA's, which use after tax $, but the proceeds are not taxed.

I propose we greatly raise or even eliminate the contribution limitations, and eliminated the income limitations for those who can contribute into a new type of IRA.  The new IRA's would be funded with after tax $, but the growth would be taxed at distribution.  The tax due would be covered with a $ for $ credit against SS benefits due.
If for instance you have $500,000 in this new type IRA, and $100,000 was from contributions, and $400,000 was from growth.  At 59-1/2 you must start making distributions at 7% of the amount in the account.  That would be a distribution of $35,000, and 80% would be taxable, or $28,000.  If your tax rate was 33% then you owe a tax of $9,240.  You don't pay that tax then, but you credit your SS payments due at retirement.  If you retire at 65, you now have $46,200 in tax due, plus an additional $9,240 every year.  If you were due a yearly payment from SS of $24,000, then you don't get any for the first 3+ years, and then at 68-1/2 you only receive $14,760 from SS.  If you live to 78, then SS would pay you $175,540 less than you are due, but you had then benefit of essentially earning money from your IRA tax deferred or tax free.  That is a benefit cut in a manner of speaking, but you used that to pay a tax due.

Social security doesn't pay the government the tax due from you, until the entire debt that the government has to SS is completely paid off, which would be  "NEVER".  If a person put in $5,000 per year for 40 years, earning 7% per year, they would have made a $200,000 contribution, and have a net value in 40 years of over $1,000,000.  That is twice what I figured above.  If they contributed $2,500 they would have essentially what I figured above.

If a person chooses not to participate they get their SS as is.  If 1/2 of the population did this SS would not have to pay out $22 trillion in benefits over the life of those people, which would be about $548 billion every year for 40 years.

No one is hurt, as everybody pays into SS, and everybody gets out what they are due, either as a benefit payment or a tax credit.  If you have bad luck and lose all of your IRA, you still get your SS payments.  If you are wealthy and put in $25,000 per year, well you get no SS benefits, but you also get the income generated on the after tax $, tax free.

[Rickortreat]

The problem with Social Security is the government is incompetant and set up a ponzi scheme, that only works as long as the economy is expanding.

The way to fix Social Security is to fix the economy.  The stock market in not the solution, and Bush's idea to give people ownsership is idiotic.  Here's why:  The stock market is a zero sum game outside of dividends.  Dividends rarely exceed the real rate of inflation, much less make you a real profit.  For everyone who makes money in the market, someone else looses.  The only way to make sure you win is to learn how to trade and watch the market for opportunities.  People should be too busy working to spend time on the market.

Bonds would be the way to fix SS, except that Greenspan and the government cannot control their spending or future obligations and our currency gets devalued over time.  Unless you get a return above the inflation rate, you will loose money over time.

So the first thing you need is a sound currency that doesn't inflate away it's value.  You have to restrict your trade to countries that behave the same way, or you will loose jobs to them.

Once you do this, you can ensure that as long as the society is prodcutive in a real sense, creating more value year after year, then SS money can be put into bonds to finance future prodcutivity enhancements- new power plants, toll roads, sewers, schools etc. Things that people pay to use on a monthly basis.  As the money pays off the debt required to build the infrastructure, it can pay more and more into the SS coffers for retirees.

That's how you fix social security!

 

[westkoast]

The problem with social security is they took ALOT of money from me for it this year and by the time I reach the age to get SS......it will be all gone.  Pretty much I am throwing money away on nothing IMO.

[Joe Vancil]

Ziggy,

      After giving this a LOT of thought, I've decided that I don't like the idea.  It's original, creative, and well-thought out, but were it me, I'd choose not to participate.

     In order to make the system work, you need a benefit that's worth something to me.  Given my choices, if I wanted to avoid future taxes, I'd use a Roth IRA rather than your plan.  After all, what's the advantage in using the Ziggy IRA versus the Roth IRA?  Both use after-tax dollars, but on the Ziggy IRA, I owe taxes on growth, but if I understand the Roth IRA correctly, I wouldn't owe taxes on growth.  If that's the case, the Roth IRA is a no-brainer.

     The benefit of the Ziggy IRA is that there's no limit, which is what makes it most interesting.  In other words, if I were to max-out a Roth IRA, I could still contribute to a Ziggy IRA, which is the only great appeal I see here.  And this would apply mostly to people of wealth vast enough to max-out the IRA and still have money left over.

     Do I misunderstand the Roth IRA?  If so, that might make a difference.

     I must say, though, this is the most creative proposal I've heard - and the only one I even sort of like.  In my eyes, that makes you a better idea-man than anyone currently in Washington, DC.  Congrats.

 

[You pay taxes on a Roth IRA.]

You can invest the money in any approved account and can trade in and out without incurring any taxes, but once the once is withdrawn from the IRA, you are charged at your current tax rate.