SHOULD WE PRIVATIZE SOCIAL SECURITY?

Should we even consider this Republican idea? Actually, George Bush’s proposal is more about investing retirement funds in the stock market than it is about private accounts for individuals. The Bush approach benefits Wall Street companies, and puts retirement money at risk. Making money in the stock market is not easy. In fact, history shows that 75% of professional money managers under-perform the unmanaged stock indices. We cannot expect ordinary citizens to do better.

Actually there are many things wrong with the current Social Security system that would be cured by privatization. American Panthers would be in favor of privatized accounts for American citizens if interest and principal were absolutely, positively guaranteed. One important drawback of this, or any, privatization scheme is that much of the benefits being paid out today are covered by current contributions to the Social Security pool. If these contributions were put into private accounts a shortfall would result that would have to be made up by tax revenue.

The Guaranteed Retirement Equity Accumulation Trust (GREAT) Accounts can be held at traditional, approved, savings banks. The Bank and its officers must have a legal Fiduciary responsibility for the security of the account. Any losses to principal or interest must trigger an investigation for possible negligence. The accounts must also be insured by the FDIC and then by the United States Treasury.

Both contributions and payouts must be totally tax free, with the banks paying 0.5% annualy to the Federal government for its guarantees and services, as well as to partially compensate for the loss of tax revenue. The account should be paid a real 2.5% annual interest rate. “Real” means “adjusted for inflation”. In other words, the fixed and guaranteed interest rate on the account should be 2.5%, plus the previous year’s inflation. The Bank pays the account and the 0.5% government expense, and can lend out the money at a profit, as it would with ordinary savings accounts.

When the citizen retires, tax-free payments are to be made over a 30-year period, starting at age 60, 65 or 70, at the election of the retiree. Private insurance, additional savings, or an additional government program, will be needed to cover the contingency that the retiree outlives the GREAT Account payments.

The bank must issue quarterly statements that include the monthly payment if disbursement begins with no additional deposits and when the holder reaches retirement age. Any balance left over at the death of the retiree is to be transferred, tax free, to the GREAT Account(s) of the heirs of the deceased. GREAT Accounts will thereby provide the necessary data for advance retirement planning as well as real security and real individual ownership.

The balance in the GREAT Account must be guaranteed to be available for retirement. It cannot be pledged in advance against any expense or debt, or subject to any liens.

When the account balance exceeds $1 million, interest continues to be paid in, but principal payments into the account are no longer allowed. The exception being inherited deposits from another GREAT Account.

The minimum annual contribution to a GREAT Account is 5% of income, deposited directly by the employer. There would be no mandatory employer contribution. Contributions coming from sources other than income, such as gifts or retained earnings, are not tax-deductible. The maximum dollar contribution would be $10,000 for any calendar year. It would therefore be legitimate for a parent to open a GREAT Account for a child at birth, and deposit $10,000, non tax-deductible, for that year. The amounts indicated are to be periodically adjusted for inflation.

The GREAT Accounts will generally be superior to the current hodgepodge of IRAs, Keogh, employer plans and the current Social Security system. Tax-free transfers from these plans, into the GREAT Account will dramatically simplify bookkeeping and the current conglomeration of related laws and rules. A formula can be developed to allow young citizens who have already begun paying into the current Social Security system to opt out of that system and transfer a calculated credit into a GREAT Account.

Survivors Insurance is not necessary since the balance of a GREAT Account can be transferred to a spouse. Additional details will have to wait for a future Newsletter.

LHS