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A National Pension Plan Revisited

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Financial constraints portend a precarious future for the Social Security System (SS), a shortened term for Old Age, Survivors and Disability Insurance (OASDI). Social Security history indicates only a National Pension Plan can provide a suitable and secure financial arrangement for retirees and SS already has the framework for a National Pension Plan.

The reason for the potential social security dilemma is well known; revenue will be insufficient to accommodate the needs of an increased senior population. From the day of its first payment, check number 00-000-001, issued to Ida May Fuller in the amount of $22.54 and dated January 31,1940, Social Security obligated itself to pay benefits that exceeded the contributions from the earliest retirees. The increase in life expectancy and constant cost-of-living adjustments additionally strained the Social Security fund. The government greatly increased payroll taxes (FICA) to assure Social Security operated in the black. After substantial increases in the payroll tax during the Reagan administration, the payroll tax remained insufficient to satisfy future demands. The near future retirements of the "baby boomers" will greatly decrease the worker to retiree ratio, and the Social Security "trust fund" will be empty in the third or fourth decade of the 21st century, or possibly earlier.

Retirees deserve more than the present Social Security system has afforded them.

The government created Social Security to meet immediate demands, consistently altered the system to meet growing demands and now is in a dilemma of how to meet future demands. Social, cultural and economic factors change, and a retirement plan must be able to adjust to the changes. It is obvious that a new system is required that can respond to the exigencies of a dynamic economy. The present economic crisis (not predicted by conventional economists) intensifies the problem and verifies the need for a more secure and stable retirement system.

A chilling scenario awaits a nation with an aging population and reduced birth rate.

This chilling scenario has partly arrived; wages have been relatively stagnant, while an increasingly aging population solicits more social security funds. Fortunately, inflation remains low - dampened by a prolonged recession, controversial statistics and decreased global demand for many products. Unforeseen elevated unemployment, predicted to remain for a lengthy time, complicates the budgeting for the OASDI.

That's not all: Not prominently considered is that as the population ages and births decline, family life changes. Modified lifestyles and cultural patterns evolve and the new patterns will force industries to reconfigure production. Changing demographics will modify consumer preferences in clothing, housing, entertainment, food, and partially reorder the consumer economy. The changes might be slow and adaptation might enable absorbing the shocks. Nevertheless, the economy will be perturbed.

Another overlooked condition. The present social security beneficiaries must either directly use their investments for expenditures and slowly use up their assets, which they gamble to remain at adequate price levels, or transfer equity investments to fixed income investments and live from fixed income interest. Low interest rates, unsteady stock market and the push for private retirement plans mystify the choices:

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It's all patchwork and contradictions.

The exit of the 'baby boomers' from the work force leads to increased investment demand for fixed income securities. This drives up the price of fixed income securities and drives down their yields, resulting in less retirement income. The patchwork proposition that investment of social security funds in equities can assist in maintaining the social security fund and yield greater benefits for retirees is not proven, and might prove counter-productive. For this concept to be effective, the employed workers, through their Keogh plans, will purchase the securities that the retirees sell to turn their assets into cash or fixed income investment.

In effect, the employed workers through their own Keogh plans must maintain high security prices and will still finance retirees in a similar manner to the "pay as you go" plan. In addition, two severe stock market declines in ten years have softened the call for turning social security into an investment scheme. Still unknown, and not discussed too loudly, is how will SS be able to meet its present obligations if FICA funds are diverted from the 'trust fund' to investments.

The Social Security problem arises from the failure to recognize that the present system had built-in-problems from the start and patch-work cannot repair them. With corporations deserting their original pension commitments and the U.S. government's Pension Guaranty Corporation rescuing the insured, with the stock market falling periodically and investment at these occurrences going strongly into U.S. government bonds, it is obvious that America's citizens are depending upon their government for an assured retirement income.

By using a major portion of the taxed FICA contribution to provide present benefits, Social security is unable to create sufficient reserves for future retiree benefits. On paper, FICA, and not rather the general revenue fund, finances SS. However, to workers, the FICA payment is only another form of taxation, and the result is the same as if they paid FICA to the general revenue fund. Many workers never recover their total payments after retirement. To them, the FICA payments are the same as any tax.

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Moving money from one accounting line (Social Security Fund) to another (general revenue), while maintaining the same result, resonates as a sleight of hand operation. It is a 'smoothie,' but the benefit of the change is that Social Security will become a true retirement plan, by actuary and financially. However, going from a 'pay-as-you-go' plan to a true retirement plan, does not automatically solve the SS financial problems. Only a properly calculated ingestion of money can place a retirement plan on a sound basis. The proposed change focuses on this calculation. This focus more carefully scrutinizes means to improve the retirement plan and resolve the financial issue.

Proposals for keeping the retirement system solvent continually circulate without decision. Nevertheless, we have a lack of discussion on what may be the most critical failure of the Social Security retirement plan - It operates as a 'pay-as-you-go' plan rather than as a true retirement plan. Changing its stature from 'pay-as-you-go' to a true retirement plan might establish a social security system that is competitive with an annuity of a private industry plan and yield advantages that private industry plans cannot provide.

Can Social Security Function as a Pension Plan?

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Dan Lieberman is the editor of Alternative Insight, a monthly web based newsletter. His website articles have been read in more than 150 nations, while articles written for other websites have appeared in online journals throughout the world(B 92, (more...)

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