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petegz28
06-13-2011, 09:42 PM
I brought this up in a thread probably about a year ago. Today a co-worker and I were talking politics and I mentioned this and he thought it was something he could support and participate in.

The plan...

Allow workers to invest what is usually taxed out of their check into a mutual fund that buys US Gov. Securities. Preferabbly shorter to mid maturity securities, into a retirement account. Then for every $ they elect to invest in the fund it offsets the amount of FICA that is deducted from your paycheck up to the amount you would normally be taxed. This would be in addition to any 401k or other retirement plan deductions.

What this does is address the SS problem on many levels for both current and future participants.

1. The Fed Gov will still receive the revenues to fund current SS participants from the additional purchasing of securities.

2. It provides a direct and safer investment for the purchaser.

3. It provides additional tax breaks to anyone who pays FICA tax so it will cover all income levels.

4. This is the gravy if you ask me, it allows the purchaser to fund their own SS at better rates than they would get in traditional SS and makes it harder (at least on the surface) for the Fed Gov to raid the SS lockbox and stuff it with IOU's. Instead of being a SS recipient you are now a bond holder. The difference may seem small but it is huge.

Some might argue this is very similar to the current SS plan but I think what are small differences pay huge dividends. For one the money is put into actual government securities managed by people outside of the government. Secondly since these $'s would be pre-tax deductions it offers additional tax savings for people rewarding them for investing for their retirement via investing in our country. Finally the rate of interest that is paid will more than likely be greater than any unseen and "claimed" interest payments they would receive from the Fed Gov.

Now imagine how this would benefit the purchaser. All interest payments would be re-invested so not only is the purchaser increasing their SS funds, the Fed Gov is actually getting more money back for paying interest on their securities. So esentially the Fed Gov may have to pay higher rates of interest than the current SS plan does but it would recoup those costs via the re-investment and subsequent purchase from the reinvestment.

It still ultimately comes down to the Fed Gov managing the funds correctly but instead of being able to just cut future benefits to people who have paid in all their lives, they would risk defaulting on their debt payments which carries a higher penalty. Plus any risk of default would be more visible to everyday folk who otherwise don't pay attention and it would make it political suicide for a politician to even go down the path.

I think this would be a much better plan. The Fed Gov still gets theirs but the tax payer actually gets something more tangible in return than future promises based on hope. I am sure the plan could be refined but that is the jist.

orange
06-13-2011, 11:27 PM
This makes sense in a way, but it would never happen for one simple reason - you're not allowing Wall Street to grab a share, so who's going to back it?

CrazyPhuD
06-14-2011, 01:48 AM
So my understanding is, if the system was designed the way one would think you could do that. But the system as we have it now is broken. We use today's FICA payments to pay today's benefits(or we are rapidly approaching that point). If you remove someone's FICA payment from the pool it just means that people who are retired won't get paid. Until you unbreak that aspect of the system changing how we do it won't help too much today.

In a sense we are already in the model of 'I'll gladly pay you tomorrow for a hamburger today'.

petegz28
06-14-2011, 06:24 AM
So my understanding is, if the system was designed the way one would think you could do that. But the system as we have it now is broken. We use today's FICA payments to pay today's benefits(or we are rapidly approaching that point). If you remove someone's FICA payment from the pool it just means that people who are retired won't get paid. Until you unbreak that aspect of the system changing how we do it won't help too much today.

In a sense we are already in the model of 'I'll gladly pay you tomorrow for a hamburger today'.

I think you are missing some of the points. For one, SS is a borrow today-pay you tomorrow gig and always will be. Retired people would still get their payment because the FICA tax would be replaced with the purchasing of government securities. So the Fed Gov still gets the money just from a different pipeline and one that is more beneficial to the tax payer.

petegz28
06-14-2011, 06:26 AM
This makes sense in a way, but it would never happen for one simple reason - you're not allowing Wall Street to grab a share, so who's going to back it?

Actually Wall St. will get a share since the plan would be a managed mutual fund. They would still receive their fees but the fees I can almost guarantee you would be cheaper than the overhead of the Fed Gov.

Like I said, I am sure there are finer points to hammer out but the basic concept of the plan is to replace FICA with taxpayers buying bonds and treasuries as opposed to just having cash taken from them and put in some imaginary lockbox.

HonestChieffan
06-14-2011, 07:23 AM
The biggest issue is it would keep the government from churning the money like they do now. If you take the FICA cash out of the cash flow they would gag.

Amnorix
06-14-2011, 07:30 AM
So my understanding is, if the system was designed the way one would think you could do that. But the system as we have it now is broken. We use today's FICA payments to pay today's benefits(or we are rapidly approaching that point). If you remove someone's FICA payment from the pool it just means that people who are retired won't get paid. Until you unbreak that aspect of the system changing how we do it won't help too much today.

In a sense we are already in the model of 'I'll gladly pay you tomorrow for a hamburger today'.

Well, yes/no.

The reality is that the money we pay as FICA just goes into the government's general pool of funds. The money paid out by SSA gets paid out of general funds too.

There is alot of bookkeeping around this, but that's the bottom line.

So Pete's plan involves buying government securities instead of directly funding SSA, which is pretty close to what we're doing now (since we issue more in debt than we pay into Social Security, you could argue that all of Social Security is funded by floating debt), the only real downside (from the government's pov) is the lost revenues of FICA, which is now being treated as a debt owed by teh government, instead of a payment of tax TO the government.

So net net it increases the deficit today, no question. By a crap-ton of money. And yes, that is a problem.

But as you say, we need to somehow deal with the SS problem, which is only getting worse, not better.

Amnorix
06-14-2011, 07:34 AM
I think you are missing some of the points. For one, SS is a borrow today-pay you tomorrow gig and always will be. Retired people would still get their payment because the FICA tax would be replaced with the purchasing of government securities. So the Fed Gov still gets the money just from a different pipeline and one that is more beneficial to the tax payer.

Not that you're wrong about any of this, but Social Security revenues in 2008 were over $600 billion. (I derive that by knowing that SS revenues always exceeded benefits paid out until 2010 or 2011, and benefits paid otu were $615B in 2008).

http://en.wikipedia.org/wiki/Social_Security_(United_States)

So you're going to take $600 billion in revenue away from the government, and directly replace that with debt.

Amnorix
06-14-2011, 07:36 AM
Actually Wall St. will get a share since the plan would be a managed mutual fund. They would still receive their fees but the fees I can almost guarantee you would be cheaper than the overhead of the Fed Gov.

Like I said, I am sure there are finer points to hammer out but the basic concept of the plan is to replace FICA with taxpayers buying bonds and treasuries as opposed to just having cash taken from them and put in some imaginary lockbox.

Why in hell would this money go into a managed mutual fund? That's insane. The plan would be far better if it went into a simple indexed fund, which usually has about a 0.01 expense ratio.

Isn't a lockbox, never was a lockbox, nobody ever said there was a lockbox...

FishingRod
06-14-2011, 07:44 AM
I don’t normally support sucking more money out of the pockets of private citizens and giving it to the government but, right now people earning over about $107,000 a year cease paying into social security at that point. The idea that this is some personal account and not a part of the general budget is just not reality. So for the same reason I find the graduated income tax unfair, I think it unfair that in this case the wealthy pay a smaller percentage into Social security than someone making 50,000 a year. Removing this ceiling would fix the problem for a little while but I am confident the Government would just piss the money away someplace else.

petegz28
06-14-2011, 07:54 AM
Why in hell would this money go into a managed mutual fund? That's insane. The plan would be far better if it went into a simple indexed fund, which usually has about a 0.01 expense ratio.

Isn't a lockbox, never was a lockbox, nobody ever said there was a lockbox...

A mutual fund of TIPS if you will. Why is that insane? It would be much better than where it goes now. Point is the money is managed in a mutual fund outside of the Fed Gov.

petegz28
06-14-2011, 07:56 AM
Not that you're wrong about any of this, but Social Security revenues in 2008 were over $600 billion. (I derive that by knowing that SS revenues always exceeded benefits paid out until 2010 or 2011, and benefits paid otu were $615B in 2008).

http://en.wikipedia.org/wiki/Social_Security_(United_States)

So you're going to take $600 billion in revenue away from the government, and directly replace that with debt.

It still would have been the same amount. I fail to see the relevance of this. It is all debt. FICA money is money owed BACK to the people at some point or others. So WTF is the dif?

Amnorix
06-14-2011, 08:11 AM
I donít normally support sucking more money out of the pockets of private citizens and giving it to the government but, right now people earning over about $107,000 a year cease paying into social security at that point. The idea that this is some personal account and not a part of the general budget is just not reality. So for the same reason I find the graduated income tax unfair, I think it unfair that in this case the wealthy pay a smaller percentage into Social security than someone making 50,000 a year. Removing this ceiling would fix the problem for a little while but I am confident the Government would just piss the money away someplace else.

It never was reality. Anybody who understands Social Security knows that it's not reality now, and never was reality.

Amnorix
06-14-2011, 08:19 AM
A mutual fund of TIPS if you will. Why is that insane? It would be much better than where it goes now. Point is the money is managed in a mutual fund outside of the Fed Gov.

No point in paying anyone umpteen billion in management fees. Just have it be indexed. Otherwise you risk mismanagement and all kinds of abuses. Think about it -- after 10 years the managers would have like $6 TRILLION to manage. Even at 1% that would be an annual fee of $60 billion. The gross revenues of the largest US bank, for all its operations around the world, is JPMOrganChase, at $100Billion.

But wait, after 20 years it's 12 Trillion under management, and $120 billion that we're paying bankers to manage the funds.

BUT WAIT, clearly at times they shoudl sell this and buy that. MORE FEES!! BONUSES FOR EVERYONE!!!

Besides, indexed funds generally outperform managed funds over the long haul anyway, once you net out the trade fees, management fees and tax costs for changes in position.

Amnorix
06-14-2011, 08:23 AM
It still would have been the same amount. I fail to see the relevance of this. It is all debt. FICA money is money owed BACK to the people at some point or others. So WTF is the dif?

Err....we're not paying any interest on the FICA money that is "owed back to the people at some point". We pay alot in interest on our debt already. You will add more.

<TABLE class=data1 summary="Interest Expense on the Debt for this Fiscal Year"><TBODY><TR><TH colSpan=2 scope=col>Interest Expense Fiscal Year 2011</TH></TR><TR><TD>May</TD><TD>$30,858,726,707.77</TD></TR><TR><TD>April</TD><TD>$28,895,123,159.28</TD></TR><TR><TD>March</TD><TD>$24,460,282,823.69</TD></TR><TR><TD>February</TD><TD>$21,759,253,957.26</TD></TR><TR><TD>January</TD><TD>$21,122,729,715.18</TD></TR><TR><TD>December</TD><TD>$104,700,174,845.03</TD></TR><TR><TD>November</TD><TD>$19,396,316,137.56</TD></TR><TR><TD>October</TD><TD>$24,142,491,931.22</TD></TR><TR><TH class=tot>Fiscal Year Total</TH><TD class=tot>$275,335,099,276.99</TD></TR></TBODY></TABLE>

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm


Also, you say "owed back to the people". As a technical matter, I don't believe that's correct. The government could cancel the Social Security program tomorrow and you would have no right to collect SS income just because you paid into it all these years. I don't believe there is any guarantee as to how much, or whether, you get any SS payments at any specific point in time, so if the program is cancelled, you're out of luck.

Or if, more realistically, you "fail to qualify" for SS at retirement because means testing is adopted (an idea I loathe, by the way), then you still have no right to receive any payments.

Amnorix
06-14-2011, 08:25 AM
Another problem with your plan, though one I would love to figure out how to deal with -- what happens if the budget is balanced, or at least not so far into the red as to support the amount of forced "SS" payments.

In the late Clinton Administration era, the government was actually paying down debt, and the issuance of new debt was dramatically lower. Then where does the money go?

Though I fear I'll never see another balanced budget in my lifetime...

petegz28
06-14-2011, 10:32 AM
Err....we're not paying any interest on the FICA money that is "owed back to the people at some point". We pay alot in interest on our debt already. You will add more.

<TABLE class=data1 summary="Interest Expense on the Debt for this Fiscal Year"><TBODY><TR><TH colSpan=2 scope=col>Interest Expense Fiscal Year 2011</TH></TR><TR><TD>May</TD><TD>$30,858,726,707.77</TD></TR><TR><TD>April</TD><TD>$28,895,123,159.28</TD></TR><TR><TD>March</TD><TD>$24,460,282,823.69</TD></TR><TR><TD>February</TD><TD>$21,759,253,957.26</TD></TR><TR><TD>January</TD><TD>$21,122,729,715.18</TD></TR><TR><TD>December</TD><TD>$104,700,174,845.03</TD></TR><TR><TD>November</TD><TD>$19,396,316,137.56</TD></TR><TR><TD>October</TD><TD>$24,142,491,931.22</TD></TR><TR><TH class=tot>Fiscal Year Total</TH><TD class=tot>$275,335,099,276.99</TD></TR></TBODY></TABLE>

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm


Also, you say "owed back to the people". As a technical matter, I don't believe that's correct. The government could cancel the Social Security program tomorrow and you would have no right to collect SS income just because you paid into it all these years. I don't believe there is any guarantee as to how much, or whether, you get any SS payments at any specific point in time, so if the program is cancelled, you're out of luck.

Or if, more realistically, you "fail to qualify" for SS at retirement because means testing is adopted (an idea I loathe, by the way), then you still have no right to receive any payments.

Well see then we are talking theft. That is why you remove that possibility by making the SS recipient a bond holder. As far as the interest goes, the Fed Gov gets a lot of that back from re-investments on interest paid. They pay me interest, I re-invest it right back into more gov securities, they get it back.

I am not saying this is a perfect plan. I just think it is a better plan, it removes some of the pitfalls you mentioned, it benefits the tax payer more and seems to be a lot more of a legitimate gig, if you ask me.

petegz28
06-14-2011, 10:36 AM
Another problem with your plan, though one I would love to figure out how to deal with -- what happens if the budget is balanced, or at least not so far into the red as to support the amount of forced "SS" payments.

In the late Clinton Administration era, the government was actually paying down debt, and the issuance of new debt was dramatically lower. Then where does the money go?

Though I fear I'll never see another balanced budget in my lifetime...

That is an interesting point that can be debated but let's get back to reality for the moment.

Amnorix
06-14-2011, 11:45 AM
Well see then we are talking theft.

It's a tax. By definition taxes aren't theft, htough I understand the argument.

That is why you remove that possibility by making the SS recipient a bond holder. As far as the interest goes, the Fed Gov gets a lot of that back from re-investments on interest paid. They pay me interest, I re-invest it right back into more gov securities, they get it back.

errr...so our debt is a good thing? Yeah, that's nutty.

I am not saying this is a perfect plan. I just think it is a better plan, it removes some of the pitfalls you mentioned, it benefits the tax payer more and seems to be a lot more of a legitimate gig, if you ask me.


We certainly need a better plan than what we have now. On that we can definitely agree.

petegz28
06-14-2011, 12:08 PM
It's a tax. By definition taxes aren't theft, htough I understand the argument.



errr...so our debt is a good thing? Yeah, that's nutty.



We certainly need a better plan than what we have now. On that we can definitely agree.

Debt is not a bad thing when managed properly. Yes, FICA is a tax but we know the FICA $'s are being used for things other than SS. That is one of the problems with the tax. When looking at the purpose of SS for the majority of people FICA is a tax whose $'s are returned to you at a later point. So since the fundamentals are the same, i.e. they take a tax and payout vs. they sell bonds and pay out, it comes down to what method serves the taxpayer the best. Note I say the taxpayer and not the Fed Gov. The system we have now serves the Fed Gov's best interest and not the taxpayer.