social security broken by design

Section 3 of letters The US broken by design

Social Security a country lost due to poor education

The present system was created under crisis conditions this tends to be a poor time to create a system capable of lasting thousands of years. Why should we think of the system as having to last thousands of years? Because the longest running government (the Mayans) lasted over 3000 years, and it is more than reasonable that our founding fathers, if they had known about the Mayan government, would have expected the government they were creating to last about 4000 years. Therefore, we need a Social Security system which is capable of lasting well into the future. At least another 3800 years. The system as it stands now will collapse possibly in 50 years or so, and more than likely, take the entire country with it.

First we need a definition of what is social security. The most important thing to note is that it can not be a retirement program. What is needed is be a system to take care of problems outside the control of the average person. In most cases this will probably be a healthcare issue; the reason being catastrophic healthcare costs are way beyond the average family’s income, as well as being outside the ability for most insurances to take care of.

An example would be: a young adult who left home at age 21 headed for college ends up with cancer. This person’s ability to pay for treatment is minimal.

The reasons for having a Social Security system are well substantiated in a free society. There is a point where an elderly person needs help due to circumstances beyond their control.

In addition we need a system that takes care of those who end up in a position where catastrophe has hit their community.

In addition this country depends on entrepreneurs starting new businesses. If a business is started and then collapses just as the person hits retirement age, the enterpriser needs a retirement system. By the time a person hits retirement age, their ability to start over is greatly reduced. We need a compensation system which is capable of taking care of these people.

The problem is that the existing system of Social Security has been restructured into a massive retirement program. There are several reasons why this type of system is not workable.

The amount of money collected is so huge that there is no way to invest the money for long-term retirement compensation. And what makes matters worse the only way this amount of money could be invested properly is if the federal government wants to become a full-time business investing in money in the world. The government’s main job is to run the country not compete with business.

This requires large sums of money to be spent with no return on investment. To understand this better, look at freeways; money is spent to a freeway, money is spent to maintain it, and more money is spent to rebuild it when it’s worn out. This cycle is endless, and there is no return on investment. On the other hand, a business selling trucks gains a profit each time it sells a truck. The buyer comes back to buy a new truck when the truck wears out. Each time a new truck is sold there is return on investment.

When we look at federal the government, the only place to put this large sum of money is into a bank or a firm which will invest the money. So let’s look at these two possible ways of investing money:

1) The Federal Reserve lends money to banks at an interest rate. This interest rate is rather low but at least there is compensation. But maybe that isn’t exactly true. For the federal government, in promoting loans, provides guarantees to the loans made by the banks. This means that one has to subtract all the payouts for the guaranteed loans before verifying the actual interest earned by the federal government. It seems to me that the compensation versus guarantees paid out is probably a negative number. Note; the Federal Reserve does not actually lend out the money brought in by Social Security; what actually happens is the federal reserve creates funds backed by Social Security.

2) Social Security money is invested through financial firms. These firms are wealthy since they are asked to deal with approximately 16% of each person’s non-government paycheck for approximately 40 years. The federal government watches over this like a hawk. Their main concern is to make sure that no risk is taken. The return on investment is dismal. Financial firms on the other hand see profit. They must invest in stocks okayed by the federal government. Up to this point everything looks good. The catch is that investors make transactions, there is a fee for each transaction. So each firm has 10 shares in GM and on a particular day each of the firms sells the 10 shares and buys the 10 shares. The Social Security system still has the exact hundred shares started with; less the transaction charges. In the end these charges reduce the actual earnings significantly.

In addition, security on the money is so tight only large corporations are invested in. In other words, the money cannot be invested in mom-and-pop businesses.

How can we correct this; There is no reasonable way to do without a Social Security system.

The first change is to understand that Social Security should have never become a retirement program. Instead it should have been seen as insurance against problems. If we take this approach then the citizen is responsible for their own retirement package. In this case, if the private retirement package fails, the Social Security system is capable of stepping in and taking care of the problem.

A Social Security system designed in this way would collect the money needed in a year to cover the problems of that year. There would be no investment issues since as the money came in it would be spent. Let’s say that this insurance policy cost about 5%. In addition the system can only be run by those receiving the funds. In other words, no salaries would be paid out of this fund, in addition, all funds paid out could be checked by looking at an online accounting system.

This would put 11% back in the pockets of the average person for their retirement program. The biggest benefactor would be small businesses. The present Social Security system is totally against small businesses since there is no way the federal government can deal with businesses that make under $100,000 a year. The best investment a young adult can make is in a small business they will inherit and grow. In addition, as businesses change him hands from retiring adult to their children, there is great incentive for everybody to work together to keep the business on track.

When you are responsible for your retirement there is a far greater chance that it will grow substantially and your investments will be well-suited to your future. Social Security will be there, and if needed and we know it will be needed.

There is one additional player in this system. The schoolteacher, all students in the K-12 grades should be tested on their ability to create an appropriate retirement program. I will discuss this part of the program later.

The important thing to remember is: The federal government has no skin in the game. If your Social Security money is not invested wisely, the federal employee really does not care. Their retirement package is considered totally separate from Social Security. They do not pay into the plan. So there is no incentive do it right.

In this plan I have outlined above, everybody pays. It’s an insurance policy; therefore, whether you are a government or private employee everyone pays into the system. For within the Social Security system there are people that have just had bad things happen to them. Like the college student noted above. The court has the ability to put a person on Social Security to cover their disabilities. The difference with this program is that if this person finds a way to make a good living, the Social Security benefits would end.

As an insurance program the beneficiaries of Social Security would only receive the difference between how much they made and how much the benefits supply. If a person made $3000 a year and a Social Security benefit was 12,000 a year the person would receive $9000 for that year.

This would bring Social Security back into what the federal government is intended to do, take care of the people of the United States.                                    James Swann  © 2012


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