Social Security is a mandatory tax on Americans that is taken out of our paychecks against our will because the American Government doesn’t believe people are capable of managing our own finances. However, hundreds of millions of Americans have already paid into this broken system whether it was by their will or not. This policy would keep in place the existing system for anyone that has paid into it, but set up a new system going forward that would create basically an optional 401k for all Americans using their existing 6.2% SS taxes (and the 6.2% from their employers). Americans could opt out of the program, however, they would have to pay some smaller percentage of said tax to help fund the program, but it would return more of their money to invest as they please.
I propose the following:
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All social security tax goes into an American Retirement Fund, that is a weighted average of the S&P, DOW, NASDAQ, Russell indexes as well as a large portion of government backed bonds, and a heavy dose of I-Bonds in years of inflation over 3% (which return at the rate of inflation). Every payment into Social Security will be worth the amount of said fund at withdrawal. So if the Fund gained 50% in value over the amount put in, then that amount of money will be available to the person on retirement (with compounded interest for all those years). For those that put in less than the required amount per year their contribution will be increased by the amount to reach the minimum required contributions per year. That minimum amount will go up with age (and theoretical earnings). Age 18-23 ($1000/year), Age 24-29 ($2000 per year), Age 30-34 ($3,000 per year), age and age 35+ ($4000 per year). This remaining minimum contribution for those earning under their age contribution will come from “Opt-out” fees (see below), or funded by the general tax fund if there is not enough “Opt-out” to cover the cost.
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A social security opt-out option. Anyone can “opt-out” of social security, returning them 82% of their current SS tax to them monthly, with the remaining 18% still being owed with no benefit to them. You can go between opt-in and opt-out for your the entire life of your employment, however, you will only receive out the gains from your actual contributions when you retire. No more requirement to work to 65 if you’ve got enough to live on in your SS account and no penalties for early retirement. For those that opt-out their businesses will continue to pay into SS as they do today through payroll taxes, which will help off-set low income earners. A self-employed person could only opt out of their 6.2% personally, but would still owe the remaining 6.2% that is not theirs but from their business. In addition, to be eligible for the next year’s opt out, you would have to show that you made savings at least equaling the age related minimum (listed above) in a retirement fund of some sort (or that you have an individual account that is at least equivalent to where you should be based on your age and minimum contribution).
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Increase the maximum Social Security Tax on high wage earners by removing the cap on their contribution to the 168,800 in earnings limit today. Most people in the category will opt out, however that means that 18% of their full social security tax will go to help pay for the low income earners. Their businesses would still owe the payroll tax of 6.2% on their entire salary however. They’ll have more to invest, but will be paying virtually the same into SS that they were before.
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Payouts from this fund at retirement or at time of disability will not be taxable.
How the math works…
Currently individuals pay 6.2% of their salary (up to a earnings cap of $168,800) to SS. This policy would remove that cap so that if you earn $1,000,000 per year, you would pay $62000 in SS “tax” per year, they could opt out and keep $55,800 to invest themselves but they would still owe $6,200 for which they would get no benefit. In addition, their employer or self owned business would owe $62,000 for them as payroll tax that goes directly into the fund to help those of lower income.
The average salary in the US for this year is approximately $64,000, Meaning that average person would be contributing about $4000 per year. If the average rate of return on the American Retirement Fund is 8% (which seems to be about the inflation rated average), then that person would retire with $1.7M (give or take) in their account if they contributed that amount every year for 45 years. Now most earners at the beginning of their careers only earn 20K-30k for their pre-35 years, but even if that’s the case then they would only be putting in about 1550 per year for the first 15 years that would be worth about 55k at the end of those 15 years, and that money would continue to compound. Meaning that someone that worked for 15 years averaging $25k and then 30 years averaging at $64k would end up with around $1M at the end of their 45 years of employment. Even someone who earned 25k for 45 years in a row would end up with $625k in retirement! The interest alone on 625k would provide them around 50k a year without touching the principal!
It basically becomes a 401k for all Americans. The numbers may need to be adjusted for the opt-out fee or the age minimums, but with all the SS money from businesses going into the fund for low income earners I truly believe it would work.
The remaining problem is how to transition from our existing system to the new system.
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Any money paid into the current system will be distributed exactly as laid out in current social security. Whatever your payout at retirement would have been based on how much you put in, continues for all amounts up to the day this new SS is implemented.
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starting on day 1 of the new system, all future SS contributions go into the new system, and benefits will be apportioned based on contributions made between day 1 or this system and date of retirement.
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In the case of the persons death, any balance for gets diverted to their spouses balance, then children then grandchildren. If there are no relatives of the person that died, their balance goes back into the general fund to help fund low income people.
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As for how the fund works, you would have a debit card/checking account directly linked to it to pay all your bills, or make any purchases. Any money you take out is spent, but any amount remaining in continues to gain interest based on the American Retirement Fund rates. Your monthly spending might have to be capped or at least yearly spending to your highest previous salary to keep people from taking out all their money and becoming destitute.