Dual Choice: Trillions Of $$$ Of Wealth For America’s Middle Class

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For most Americans, Social Security is becoming a very expensive but lousy investment. More and more Americans are paying 5-figures – over $10,000, including both the employer and employee shares – into this program. More than half of all Americans pay over $5,000 per year into the system. The return on investment is less than 1% for most workers, and for many it is a negative rate of return. Opponents of reform state that investment returns are irrelevant because Social Security is an insurance and welfare program. That might be acceptable if the FICA taxes that fund Social Security were still only a few hundred dollars per year like in the 1960’s and 1970’s for most workers. But today, 30% of Americans pay more in FICA taxes than in income or property taxes combined!

If you go to a reliable Social Security calculator like the one at the SSA, you can get a good approximation of your future benefits under existing Social Security law. For most individuals, results are less than what you could amass investing in a 50/50% blend of stocks and treasury bills (based on historical returns). The real return for most people from Social Security is NEGATIVE, which lags behind what you can get from conservative income investments or a diversified dividend-paying stock portfolio.

Not everybody should opt-out of the Social Security system. Those who do not have any knowledge of investing and are not going to spend any time learning in the future; those with sporadic work histories; very low-income workers who are risk-averse – these are people who probably will do as well with traditional Social Security as they would in a private account system.

The problem with the Bush Administration's Social Security proposal was two-fold: at one end, it was threatening to people who didn't understand it and those who preferred the security of a guaranteed benefit versus the 401(k)-style defined contribution plan in which individuals invest their Social Security taxes in fluctuating financial instruments. But Bush's proposal also did not offer much of an enticement to those individuals who wanted 100% control of all of their Social Security contributions, that is, the entire 12.4% FICA tax split between employee and employer (fully-paid by the self-employed). In classic Washington paralysis, the Bush reform proposal antagonized vocal, entrenched interest groups receiving large sums of federal money while simultaneously failing to energize the beneficiaries of the change. This was a prescription for political disaster.

Social Security reform needs to have only 5 simple and basic planks:

• Any individual can opt out of the current system, with accumulated benefits frozen.
• Individuals who prefer the current system of a defined benefit plan with a guaranteed payment at retirement can stay in the current Social Security system, with no changes to their scheduled and accumulated benefits.
• Individuals can elect to save the entire 12.4% of FICA taxes in domestic and global asset allocation stock and bond mutual funds, treasury bonds, or bank CD's. They would also be allowed to save half their FICA taxes in personal Social Security Retirement Accounts (SSRA's) while sending the other half to continue funding a reduced Social Security benefit.
• Individuals can also elect to save their FICA taxes in private-sector defined benefit plans run by insurance companies instead of contributing the monies to Social Security or a market-fluctuating defined contribution plan.
• Any shortfall in revenues will be met out of general revenues, which can easily finance the shortfall from individuals opting out of Social Security by instilling limitations on future government spending.

The first plank energizes individuals by giving them a huge and vested stake in taking control of their FICA contributions. For the average American worker, full-privatization would mean an annual tax cut of approximately $5,000. Many middle-class families would receive $10,000, especially two-income families. This is a powerful incentive that is much more attractive than the Administration's 4% FICA diversion combined with Rube Goldberg-like 'loan paybacks' and debits against future benefits.

The second plank neutralizes a large portion of the political opposition. Those who want the safety and guarantees of the present system can continue in it as if nothing changed. Americans who want their FICA taxes back under their control should not be held hostage to those who are indifferent or uninformed on the issue. By letting the former stay as they are, the issue is neutralized. What rate of return those who stay in the current system receive – wage or price COLAs, interest credits based on treasury bonds, etc – and the size of their Social Security benefits, can be determined at a later date.

The third plank insures that proponents of change have a vested stake in reform. A straight refund of the FICA tax is a substantial sum to many Americans who do not trust future Social Security 'guarantees' that can be taken away by future politicians. Controlling $10,000 or more in annual savings for many individuals and families who have trouble maximizing their 401(k) contributions or funding an IRA is a tremendous boost to tens of millions of middle-class Americans.

The fourth plank gives those who do not want politicians entrusted with their retirement account the option to have a defined benefit plan managed by a private company which can offer a higher rate of return (and larger retirement benefits down the line).

Finally, any shortfall in revenues – always the bugaboo of reform opponents – will be met by limiting all non-defense discretionary spending to the lower of the inflation-rate or private sector GDP growth. Given a choice between spending increases on bridges to nowhere or the largest tax refund in history to America's middle class, the choice would seem to be a no-brainer. Better to run a deficit by returning large chunks of taxes to the rightful owners of those future assets if they so choose, rather than pilfering the money and spending it bit-by-bit on government pork projects. This severs the demagogic link opponents of reform use to claim that any change threatens current or future Social Security retiree's benefits.

Actually, this "Dual Choice" reform proposal for Social Security is not a novel idea. Until 1983, all municipalities had the option to opt-out on behalf of their employees. Private employers were prohibited from doing this on behalf of their employees because most did not have widespread mutual fund access or 401(k)-type programs in place for their workers. Under Dual Choice, all Americans would be able to control their 6.2% share of Social Security taxes as well as their employers' share of the FICA tax – a combined 12.4% of salary, up to the wage limit. SSRA's would become the hottest investment vehicle since IRA's in the 1980's and 401(k)'s in the 1990's. The funds would compound their grow tremendously if deposited into Treasury-approved, diversified, asset-allocation mutual funds run by accredited investment companies (mutual funds, brokerage firms, insurance companies, etc).

Individuals would be allowed to invest in FDIC-insured bank CD's and U.S. treasury bonds. Of course, these investments do not generate a much larger benefit in retirement than sticking with the current defined benefit Social Security plan, though they would allow individuals to have personal control over their nest egg in very safe investments instead of relying on political promises 30 years down the road. Alternatively, diversified mutual funds comprising both domestic and international stocks and bonds would provide safety and high-growth potential. The government would certify only non-leveraged, diversified, low-risk stock and bond funds as 'SSRA-eligible.' Most mutual funds would jump at the chance to manage the steady cash flows that would flow monthly – and would have powerful incentives to minimize costs and insure good portfolio performance.

Depending on how many Americans chose to opt-out of Social Security with all or part of their FICA contributions, up to $750 billion is available annually to flow into the global financial markets. While this is a large sum, the size of the U.S. and Western developed capital markets -- plus the double-digit growth in the economies and capital markets of devekoping markets including China and India -- makes investing these sums into global stock and bond markets workable. Current estimates show the global stock and bond markets increasing in size from $90 trillion in 2013 to $150 trillion by 2020. With non-U.S. economies and capital markets expected to grow faster than the mature economies and financial markets of the U.S. and Europe, this opportunity to invest globally offers a way to accumulate substantial assets over the decades as well as to hedge the negative short-term consequences of globalization, outsourcing, and layoffs.

If properly packaged, Social Security reform becomes the largest middle-class tax cut in American history. The GOP or Democratic Pary can become the party that saves Social Security, empowers individuals to take back money that is rightfully theirs, and cuts taxes for tens of million Americans who in the past reaped much smaller gains from federal income tax cuts. Individuals saving via SSRA's would also be able to free up money for other pressing needs: health insurance, college education, etc. Social Security reform goes a long way toward expanding on the Reagan legacy. It is a bolder, more dramatic, and potentially bigger political and economic windfall than the tax revolution of the 1970’s and 1980’s. The economic and financial blueprints are already in place. The American people will be receptive to a plan encompassing non-compulsory, voluntary control and ownership of Social Security assets.

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Updated 10-14-2013 at 11:24 PM by AdminMCA

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