How the proposal works

New VOLUNTARY funding supplied by some or all of eight suggested sources provides the estimated $225 billion annually (based on an average of CBO and Social Security Trustees’ estimates) necessary to make the current system solvent.  My two favorites of these funding mechanisms are “Social Security U.S. Treasury Bonds” (which take advantage of the U.S. Government’s unique legal ability to issue and rollover debt instruments, coupled with the historical 4.5% favorable interest rate differential between stocks and bonds) and “Social Security Roth IRA’s” (which allow individuals to prosper while supporting Social Security).

A new pre-funded system for participants commencing at their birth with a maximum annual cost of $90 billion (fully-funded) provides these individuals “personal” or “private” accounts on-their-behalf inside OR outside Social Security with $12,000 or $4,000 (depending on assumed long-term interest rates of 6% or 9%).  Retirement age for these recipients is permanently age 64 by using the investment principles of COMPOUND INTEREST and “RULE OF 72” over time.

The U.S. stock market does the “heavy-lifting” as Social Security assets are invested in the S&P 500 Index (or Total Market Index or Extended Market Index) providing a stable infrastructure with solid long-term historical return of about 9% but working well even if this is projected as low as 6% into the future.  (Ancillary effects of this portion of the Proposal are stimulation and strengthening of the U.S. stock market and economy, causing greater U.S. employment and thus greater tax revenue for the U.S. Government, all as LAW OF SUPPLY & DEMAND dictates.)

All “risk,” meaning stock market volatility, is removed through use of a master, or “LEGACY” investment account inside Social Security, which exists to guarantee full benefit payments to all Social Security beneficiaries and grows continually over time with stock market return and mortality among the U.S. population (LAW OF LARGE NUMBERS) as assets from decedents’ personal account portions from this account flow back into the “general” portion of this account.

Disability and Survivors benefits are covered with single-premium disability and life insurance policies issued at age zero and/or appropriate contributions into the LEGACY account, all to be actuarially determined for efficiency and effectiveness.

Inevitable MORTALITY causes the proposed new pre-funded system to gradually replace the current system because as of a specified date only participants in the new system are enrolled in Social Security, meaning the current system fades away with the deaths of its participants.

As long-term U.S. stock market return and mortality strengthen the LEGACY account over time, Social Security ultimately becomes a self-funded program without need for FICA taxation, a result of an ever-growing number of non-withdrawal birth-years (ages zero to 64, and 100 years and beyond) versus a static number of about 35 withdrawal birth-years (ages 65 to 100 years).

Administration of moving from the current to the new system is handled by present Social Security system staff (with some additional training) and upgrading of Social Security system computer operations by using birthdate to determine whether a participant belongs in the current or new system.  This leads to ease of administration for the current and new systems by providing continuity of administrative processes and procedures for both.

 

Ralph Shaw, Sr.

March 9th, 2019