October 22, 1998

Social Security
by Al Levit (alanl@ix.netcom.com)

Part 4: One Foolish Actuary's Opinion

As I mentioned in the introduction, I believe that it is too early to pick one winning solution to the Social Security problem. Far more important is that the nation is finally acknowledging the problem and is interested in actually doing something about it soon.

Of course, everyone is entitled to an opinion. So here's mine. Like every other Social Security opinion, it reflects the author's particular age and political leaning. However, in this case, the author is an actuary, so leading his desire is an interest in seeing a system that will stand up financially for the long haul. Once again, this is by no means the only way to achieve long-term stability, but I do think it points us in the right direction. Without further ado, then, here's my five-step plan for shoring up Social Security.

Step 1: Split Funding

Implement the new split-funded system described in Part 3. Specifically:

  1. Take the existing Social Security contributions that active employees are currently paying (6.2% of their pay) and split it into two parts:
    • 5% of pay into IRA-style accounts;
    • 1.2% of pay into the existing Social Security Trust Fund.
  2. Continue to direct the entire employer contribution of 6.2% of pay to the existing Social Security Trust Fund.
  3. Make available Social Security IRAs for individuals for the 5% they're directing in the system.
  4. Use the Social Security Trust Fund to:
    • Pay for Social Security benefits as promised by current law to people now age 55 or over to abide present law.
    • Pay for minimum Social Security benefits to those under age 25 when the new program is adopted.
    • Pay for Disability and Survivor benefits to all in need, as promised by current law.
    • Pay for transition benefits -- between the amounts in (a) and (b) -- for those between 25 and 55 when the new program is adopted.

Step 2: Means Testing

Begin means testing on all benefits payable from the Social Security Trust Fund. Benefits would not be payable if income from other sources exceeded a certain level. Hey, I'll leave it to our leaders to decide the exact level where benefits should be cut back or cut off, but this one is a no-brainer.

I would suggest, however, that the ceiling be tied to the Social Security wage base, which is typically near the 90th percentile (the current Social Security wage base of $68,400 is at the 87th percentile). Thus, for example, benefits payable from the trust fund would begin to get cut back if income were at 100% of the wage base. And no Social Security benefits from the trust would be payable if income were greater than 150% of the wage base.

We need to recognize that our nation's wealthiest don't even see their Social Security checks coming in. They don't need them. With our system unstable, we need to tie these benefits to those truly in need. Even when it is stable, we ought to do the same. It just makes logical sense.

Step 3: Level the Playing Field

Make the Social Security payroll tax payable on all income, not just on income up to the wage base (currently $68,400). As I pointed out in Part 3, I believe that this is how taxes are supposed to work. We need to tax all income in the same fashion. Our present Social Security payroll taxes dramatically favor those in the highest income bracket. That doesn't make much sense.

Step 4: Strengthen the Investment Component

We need to open the opportunity to invest Social Security benefits in our public markets for the long haul. This goes for both our own 5% IRA contributions and for the Social Security Trust Funds. We should be given a large variety of choices for our own IRAs, but I would restrict the trust fund investments to index funds.

I have neither the time nor the data to really determine whether these four steps by themselves would produce a stable financial system for the long run. I'm just one little schmo out here. That said, I've seen some estimates that suggest this mixture would put the security back in Social Security. So yes, we'd want the actuaries at the Social Security Administration to do the real number crunching before any conclusions, but no, it doesn't make much sense to delay longer when there are some clear steps that can be taken to improve things. As The Motley Fool says: It's right out of a fifth-grade math textbook.

So, there's my plan. Let's hear yours on the Retirement message board. There's no question that those who can help make this change are readers and contributors to The Motley Fool.

Fool on,

Al Levit
Fool, Enrolled Actuary