Nov 20, 2023

Social Security plus

The U.S. provides diverse retirement options, from 401(k)s to Social Security. This system can work very well, providing even those who have earned a modest income the ability to retire financially secure.

It works especially well for people who understand money and investments enough to make reasonable financial decisions. If you work most of your adult life, save 10% of your income and invest heavily in low-cost indexed equities, you are virtually guaranteed to be able to maintain the lifestyle you had while working.

But life is messy. Even successful people will not save and invest well; they divorce, lose their job or become disabled; and to add insult to injury, they then take Social Security at their first opportunity. But even with the best of planning, one may just outlive their savings.

One of several problems with this system is that it puts too much responsibility on the employee to essentially manage a life-long personal pension plan with some vague promise that with some luck, they will survive.

Often one is asked to estimate how long they will live and what their expenses will be. Yeah, no problem here - my electric bill will be about $4,000 a month and I expect to die at 83, hit by a Greyhound bus. They're mostly ridiculous questions for a thirty year old - or anyone. What happens when one lives another twenty years longer that life-expectancy tables predicted? I guess they're just out of luck.

And if you do it right, you will probably die with a large amount of money for your heirs. Like I said, it's a crazy system.

Today's retirement system faces a fundamental challenge. We've transitioned from employer-managed, risk-bearing defined-benefit plans to employee-controlled defined-contribution plans, requiring that workers fund their own retirement, shouldering most of the associated risks.

For example, today's system provides little opportunity to take your life savings and lock it up so that you can never lose it all. For all its problems, Social Security does just that. Benefits are inflation adjusted and last as long as you live.

My thoughts for fixing at least some of the problems with these defined-contribution plans is that the government establish a voluntary, self-sustaining Social Security-like pension. I call it Social Security plus. It’s not in place of Social Security, but rather an additional saving alternative. Here’s how it might work:

  • Pays out a fixed, inflation-adjusted income for life based on your contributions, a sort of hybrid defined-pension, defined-contribution personal pension plan.
  • Contributions are voluntary and tax-deferred. Employers may choose to match donations, as they often do for 401(k)s.
  • Benefits can only be taken at a high minimum age (I suggest 70) regardless of employment, health or other circumstances, and contributions can never be withdrawn, just as Social Security is today.
  • Independence is critical. The agency receives no government funding and is actuarially sound, similarly to a defined-benefit pension plan. And the agency is free to invest as private pensions do.

It's also critical that the fund can't morph into funding other needs. Organizations struggle to keep their hands off any pot of money, but this system is doomed if if becomes another social equity funding for the latest meme injustice. This is a personal retirement pension savings plan, not a redistribution program.

For those who are comfortable with savings and investments, they may well do better doing it themselves via 401(k)s and IRAs. Remember, there is a lot of good in today's system, such as the ability to maintain control of your savings.

This system has drawbacks, most notably that due to its undefined payout period, its payouts will be conservative. And regardless of intentions, the Federal government becomes its the insurer of last resort, which in reality is about the only way to ensure it never fails.

Ensuring lifetime security for people that could live decades longer than imagined is difficult and expensive. But this model is a means to avoid some of the bigger problems with today’s defined-contribution system that requires workers to spend a life-time preparing for their later years. For those who struggle to save and invest - a majority of workers - this is a way that one can easily save money that virtually guarantees a better retirement.

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