Social Security 2.0 Turning Crisis into Opportunity Burton Leed

Passing the Torch to the Next Generations: the Vocational Training Portal.

Social Security is the Janus of the work force working life. The worker starts his/her career with a paystub containing Social Security deductions. The worker’s last paycheck contains the same deduction. This makes Social Security a perfect candidate for a Vocational Training Portal. The Portal is intergenerational when viewed by both age extremes of the work force. In an era of diminished training by large enterprises. Social Security is able to step up and fill some of the void. This Portal can be financed exclusively by the tax forgiveness of the retiring workers. At age 65, an Income Tax holiday should be granted to any prospective retiring worker willing to train his replacement(s) for up to 5 years of training.

The Master training the Apprentice could receive his current income plus social security while the apprentice learns the Master’s profession. For many prospective Masters, this is an irresistible windfall. To the Apprentices, it means a new career. Many larger organizations may also add consulting fees to the Master/Trainer’s income. Vocational Training is largely a void in the current U.S. economy after the Great Recession.

The idea is the passing of skills and knowledge from one generation of workers to the next. Society benefits immensely through the smooth skill transition between generations. The stock of intellectual capital is retained to a greater degree, as skills and knowledge passes between masters and apprentices. Best of all, a dynamic of upward social mobility occurs as new job prospects fill places in organizations, business big and small. So many in the Boomer generation long for retirement, and so many in the Millenial generation need the first job or a step up in their careers.

Enterprises large and small are able gain greater continuity using the SS2.0 Portal. Large Tech companies need to fill management and technical skills. Law firms need to groom new senior partners. Farmers and small enterprises often search in vain for a way to find a new business owner within the family or outside. Most important, those performing manual labor have an urgent need to retire when the human body can no longer perform arduous heavy labor using the hands and the human back. Manufacturing jobs increasingly have an heavy technical component which needs to transfer from generation of workers to generation of workers. In all endeavors of the workforce, skills need to pass from generation to generation.

A society which organizes the transfer of human intellectual capital across generations will be immeasurably richer. A society which brings In newer, younger employees to existing trades, businesses and all government agencies will promote a dynamic of upward social mobility, as existing positions are freed and newer, younger blood enters the organization

Reducing National Debt, Increasing the Benefits of Social Security 2.0

SS 2.0 seeks to make all Recipients a vested owner in a Defined Benefit Plan. Those plans will be managed by legions firms who have already 100 year depth of experience in Defined Benefit Plans. For more than 30 years, it has been said that few dare to touch or reform Social Security. For that same 30 year, the conversation has centered obsessively on cuts to the Retirement Benefits. In that political environment, the American Public, behaving as rational actors, rejected the calls for cuts. The plain purpose of SS2.1 is to change the conversation to an increase in the Retirement Benefit to 75 percent of preretirement income. This is a conversation we can have once we accumulate the $11.5 Trust Fund. (a)

The basic mechanism which grows the Benefit level is a swap of the Bonds of the Social Security Trust Fund for Treasuries and other secure U.S Agency paper. The swap will happen between the Treasury and the Social Security Fund, using the Bonds of the Trust Fund exchanged to Treasuries. The Bonds held by the Social Security Fund will be issued at a coupon rate of 4.0% to match the historically low yield now present. Future investments will be made by exchanges of the new Treasury 4.0% Bonds for other conservative U.S  and other investments. Equities will be avoided so there is no repeat of the debacle involving the British and Chilean Social Security funds whose Recipients were allowed to buy equities in Defined Contribution plans.

As U.S. Treasury and Agency interest rates exceed 4 percent over time, new investments in the Trust Fund can be made from Trust Fund income, consistent with the need to pay Benefits from the Payroll Tax and existing Trust Fund accumulations.  The actuarial assumptions now show a depletion of the Trust Fund by 2035. A better rate of Fund Income growth will shorten the depletion of Trust Fund assets.

If long term interest rates and other allowed investments exceeded 7 percent, there would be far less of a depletion of the Fund. Most Defined Contribution pensions achieve a long term rate of return on assets exceeding 7 percent. At 7 percent, the Social Security Trust Fund would double in 11 years or quadruple in 22 years and 8 times in 33 years.  The most modest goal should be a Trust Fund of $10.4 Trillion under Low Cost Demographic assumptions.

 

Demographics.

Through the end of December 2013 is shown below by calendar quarter. Social Security Trust

The expectation over the next 35 years is that the SDI fund and the OASDI funds will deplete without changes in demographics like higher birth rates, same or stable mortality and similar patterns of net immigration to the U.S. The U.S. has the most control over immigration, the least over net births/mortality. U.S. population is somewhat manageable in this regard. The same can be said for the rates of return on the Trust Fund. The High Cost assumptions as the Actuaries call them, low births, longevity increasing, and unemployment are manageable with some common  sense , careful changes in U.S Immigration, which do not displace U.S workers or seek to depress wages. The same may be said about common sense approaches to Minimum Wage. Income and Demographics are quite manageable.

Breaking the Income Cap.

The proposals to remove the cap on incomes over $117K make the most sense in context of what we outline as reforms. Granting the high income earners unlimited benefits, utilizing the Vocational Training Portal allowing 5 years of tax free income during Vocational Training, will make the removal of the Income Cap fairer and more politic. The upper 20 Percent of Wage Earners garner almost half of  Personal Income. Social Security Taxes on the removed Cap would be enormous and change all projections, potentially doubling contributions.  The impact of the higher contributions will be noticeable outside of OASDI. SDI, Unemployment, and Medicare will be most buoyed by breaking the Cap. Those are the most urgent Actuarial needs of Social Security, short term. To the critics of adding new taxes, the overall tax picture of Social Security 2.0 is tax neutrality when the Tax Forgiveness of the Job Training Portal (1). The incomes of the Apprentices will be approximately 80% of Mentors, according to plan. No one should expect to pay the higher payroll tax without the all important feature of a Defined Benefit Plan.

 

 

Constant Dollars of Personal Income FRED. Assume no Cost of  Living Adjustments and 3.75% Return. OASDI Statement See Note (1)

The Black Swan Fund.

The most difficult events to understand and manage are the most unexpected. The last 20 years has seen many challenging events to our economy and nation. For Social Security, the contributions to the Fund can be maintained best, if there is a provision for the most unpredictable events. Contributions to the Fund will be enhanced greatly by increasing the Income of the Trust Fund and by stabilizing the demographics of the base of Contributors. Unforeseen economic  future events are the gravest of threats and are part of economic cycle.  Current Policy has 2 major counter-cyclical engines:  Fed Purchase & Interest Rates and Deficit Spending. With SS2.0 we can add the Black Swan Event Fund which contains the superior earnings on the New Trust  Fund can be the new source for the Black Swan Event Fund. This Fund will provide such needed relief as Supplement Extensions to Unemployment Insurance. The  enhanced Earnings of the Trust Fund will provide both flexibility and relief to the Fed, which has stepped up and done more than was intended during the Great Recession.

Superior Earnings of the Trust Fund will be the amounts in excess of Long Term Cost of Capital. That amount is the Earnings Income needed to accomplish the approximate doubling of the Retirement Benefit.  When 5% Long Term Cost of Capital is reached, the excess over 5% may be contributed to the Black Swan Fund, thereby bolstering all non-retirement and Medicare parts of Social Security. As said, once the Bonds of the Social Security Fund are re-created as U.S. Treasuries, 4% Coupon, the Fund will be able to double in 38 years.  Many years past have seen much higher rates, notably the early Eighties.  An 8^ return  is one that is historically one that can be exceeded for almost 20 years, 1980 to 2002.

Personal Income January 2014 $11,025 Trillion  

Incomes equal or greater than $117,000 ( 92 % of Top Quintile)

 

CBO Distribution Analysis

Income LevelHouseholdsTotal Personal Income

$138,7005,900,000$818,380,000,000

$206,2004,800,000$992,640,000,000

$866,7001,100,000$898,370,000,000

Total Income over $117,000$2,694,370,000,000

Replacing The Trust Fund and Increasing the Benefit

The Social Security Trust Fund could accrue a $34 Trillion Fund. The income at a very

modest rate of return is enough to double current Retirement Benefits. The calculations

assume the windfall of breaking the income cap were re-invested at modest current

Rates and no change in demographics, no benefits are subtracted from this Fund

Benefits of $600BN current would amount to $22.55 Trillion over 18 years.

The Trust funds should increase by at least $12 Trillion.

(a)Potential

Marginal Income from Breaking the Cap

Current Benefits Taxes @ $503.9BN

The 18 Year Generation Roll-forward of National Personal Income growth of based on Social Security Actuaries Income Growth of all Wage Earners Benefits @2 Percent Actuaries Report                    

@3.75 percent compounded annualized Treasury Yield, this sum would equal $11.056 Trillion in 18 years. This would assume existing benefits are paid from payroll contributions in place

and considered sufficient byactuaries until at least 2035. Actuaries assume exhaustion of currentTrust Fund by 2035. This calculation demonstrates Current Growth of the Fund

at conservative assumptions of income growth since 2008, 10 Year Treasury Rates and

a stable, not a growing U.S. population. The incomes of the top quintile have been growing at roughly 12% since 2008 as opposed to Average Income growth of 3.5% in the chart above.Income Quintiles

 

                                                Income Quintiles

	All households	Lowest fifth	Second fifth	Middle fifth	Fourth fifth	Highest fifth	Top 5%
Households (in 1000s)	121,084	24,217	24,217	24,217	24,217	24,217	6,057
Lower limit	$0	$0	$20,260	$38,515	$62,434	$101,577	$186,000
Mean number of income earners	1.3	0.4	0.9	1.3	1.7	2.0	2.1
Tenure
Owner occupied	65.4%	42.5%	55.6%	65.2%	76.7%	87.0%	90.1%
Renter occupied	33.2%	54.7%	42.7%	33.7%	22.5%	12.6%	9.5%
Occupier paid no cash rent	1.4%	2.8%	1.7%	1.1%	0.8%	0.5%	0.4%
Type of household
Family households	66.5%	40.1%	58.4%	68.3%	78.8%	86.8%	88.2%
Non-family households	33.5%	59.8%	41.6%	31.7%	21.2%	13.2%	11.8%
Breakdown of family households
Married couple families	48.7%	16.7%	35.8%	48.3%	64.5%	78.2%	82.2%
Single-male family	4.9%	3.9%	5.6%	5.9%	5.4%	3.5%	2.4%
Single-female family	12.9%	19.5%	17.0%	14.1%	9.0%	5.2%	3.6%

SOURCE: US Census Bureau; Income, Poverty, and Health Insurance Coverage in the United States: 2011, table HINC-05^[19]