For Restoration…

Restoration of Values

Comparison of Retirement Schemes Existing in the U.S.

In the tussle over the continuing budget resolution of October 2013, the Secretary of Treasury testified to Congress that the government shutdown and the failure to increase the national debt limit would jeopardize the payment of Social Security and Medicare benefits to the elderly. To clarify his warning, it was stated that these programs are partially self-funded but may be subject to administrative shutdowns and failures if the government fails to meet its financial obligations.[1] An examination of the current status and evolution of US national debt led, however, to the conclusion that, shutdown or no shutdown, the failure of the government to meet its obligations is unavoidable, because “the debt increase is caused by secular growth in government services, not temporary military expenditures or cyclical economic fluctuations.”[2] The debt as a share of GDP has risen steeply since 2008:[3] Moreover, various people have calculated that the debt cannot be paid and the fraction of GDP consumed for interest on national debt will reach not many years from now an unsustainable value.[4] At that point those dependent on Social Security will be left high and dry. This conclusion will surprise many, because the program was supposed to be a contributory pension scheme. In reality, as attested by the Supreme Court, the payments are entirely discretionary: the government can change (or terminate) them at any moment.[5]
Rigorously speaking, only public assistance old age benefits, like SSI, are non-contributed pensions. All pensions of people that work are contributed pensions. In the private sector, companies deposit a part of an employee’s salary into a fund from which his pension will be paid. Another part of the salary is paid to the Social Security Fund. (For some historic reason, the latter sum is divided in two: half appears on IRS Form W-2, the other half does not.)
In the Social Security and the traditional corporate pension schemes, the beneficiaries have no control over the money. The alternative is presented by IRA-s and the more recently offered corporate pensions in which the employees exert control upon the funds allocated for their retirement. Erroneously, only the latter are usually referred to as contributed pension plans.
Social Security has been touted as superior to the private options for two reasons. First, it is guaranteed by the government. Thus, the former Congressman Charles Rangel stated that one should not leave the nation’s retirement system at the mercy of the stock market. That view is rather ignorant, because the stock market is a reflection of the state of the economy and creation of value by the society, which is coincidentally what drive the government’s tax receipts. Therefore, government’s ability to pay is correlated with the stock market. Anyway, as mentioned above, the implication that the government’s retirement scheme is superior in safety is not valid. Indeed, the assurance offered by the strongest defenders of Social Security was that it is secure until 2036,[6]. which means that a worker born in 1968 should not expect to receive his pension in full.
The second argument is that Social Security is the best financial arrangement in terms of return on investment. It was even said that it is not really a contributed pension because the total received by an individual in retirement is significantly higher than the amount contributed during working years. Mr. Steve Liesman of CNBC put the benefits to contribution ratio at 3. To prove superiority, however, this ratio must be compared with the results of alternatives in which the contributions were privately invested. I made such a comparison in 2013. Having had a variegated career, I was able to base it on my own experience.
I worked for low pay for six years, for better salaries for 15, and again for less over the last 11. During all these years I paid into Social Security, but only during the middle period I deposited about the same percentage into an IRA and also participated in two company pension schemes.. (The number of years worked reflects the fact that I was more than thirty years old when I came to the U.S. as a political refugee. Because I came with $13 as all my wealth, my retirement income comes from my subsequent earnings.)
I started withdrawing from my IRA before the required age of 70. In seven years I took out in total more than 75% of my original deposit. The balance left in June 2013 was 4.6 times the deposits.
During the last three years of the middle period (higher salary), I deposited into a retirement scheme called TIAA-CREF. The university matched my contributions. At 65, I began drawing a pension from there. Compared to the alternatives (IRA and, especially, Social Security) this had the shortest time to grow. When I began receiving benefits, I selected an option in which the payments were initially smaller, but have increased 3.5-4% annually. Up to the middle of 2013, the monthly payments added up to three times the deposit. Based on the monthly payments at that time and the life expectancy for men that have reached the age of 65 (17.7 years), and also assuming there was no further increase, I would receive during the rest of my lifetime a sum 2.2 times my deposit, for a total factor of 5.2. (As it turned out, in 2014 the payments increased by 10%.)
From the first (and longer) part of my middle period, I receive benefits from the highly rated pension plan of a major corporation. The total amount received so far has been by 40% higher than the amount received from TIAA-CREF, but the two pensions converge (from a ratio of 1.8 in the first year to one of 1.2 in the twelfth year). The ratio of total salaries received from the company and from the university was greater than 2, whence the defined benefit[7] company plan is the less satisfactory.
The comparison shows that Social Security is worse for the level of payment than the IRA or TIAA-CREF (a defined contribution plan[7] with high quality management), but better than the defined benefit plan. Given a choice, I would not have put the money into Social Security.
I expressed my concerns in a statement made during a town meeting with our Congressman, Mr. Steve Israel, in the spring of 2013, and in a letter that I subsequently sent him. I proposed that Social Security be reformed. To avoid money being spent on something else, the deposits should not be taken by the government, nor should the deposits and disbursements be part of the national budget. Financial or insurance companies, or consortia thereof, should compete for this business. Some government-approved board can determine which companies are to be trusted with investing the money deposited by people. All those who enter the system from the time of adoption of the new arrangement should have their deposits placed in those funds. The current trust fund being projected to be depleted in 25 years, it ought to be able to cover most of the payments received by retirees during the transition period. Because the trust fund is actually a fiction, however, I wondered in the town meeting whether a special 1% tax with a firm termination deadline of 25 years might help cover the missing funds. People told me, however, that the Congress of 25 years later will find a way to keep this levy and use it for something else. Perhaps someone has a solution to that.
In his written reply, Mr. Israel stated that Social Security has not added to the national debt, it has provided a critical source of income for many, the funds are invested in instruments backed by the full faith and credit of the U.S.A., and, if invested privately, the funds “would have been devastated during the collapse of 2007 “ (the Rangel argument). The last point is less damning than it seems: both my IRA and the TIAA-CREF were affected by the 2007 “collapse” and by an earlier one in 2001-2, but have recovered afterwards each time. His other claim is also invalid: any scheme in which people contributed would provide them retirement income. As for the funds being invested, Mr. Israel’s assertion was false; the money not paid to existing retirees has been spent as it came in, producing only IOU’s. The two Social Security trust funds are the single biggest creditor of the government, holding 16.5% of the national debt.[3] He did not address, however, the point most vexing to me: why Social Security pays me less than two other alternatives?
It seems strange that most members of Congress so doggedly defend an inferior model like Social Security. There has been one proposal to adjust it slightly, made by senators D. P. Moynihan (D, NY) and J. B. Kerrey (D, NE). Their plan allowed one percentage point of the worker’s income, matched by the employer, to go into an IRA-like private investment fund (partial privatization). Mr. Moynihan calculated a substantial accumulation of capital up to retirement age, from which a pension could be drawn afterwards.[8] Even that minor change was too much for their colleagues to accept.
Two reasons may be discerned for this attitude. First, Social Security is by design an instrument of wealth redistribution and most of the corrections offered (some already implemented) to “save” it, exacerbate this feature. Privatization would remove this possibility.
The main reason, however, is the desire of the government to have control over the citizenry. The goal is to have people totally dependent of government for their livelihoods and ultimately their lives. The Social Security setup makes even people on the losing side of the redistribution curve dependent on government for their pension. Both major political parties are guilty of that. The Democrats openly press for redistribution and control, whereas the Republicans go along while protesting to the contrary. For example, the money withdrawn from paychecks for Social Security is called by politicians of both parties a payroll tax, rather than a payroll contribution, which suggests that it naturally goes into the general pocket of the government. The pension can then be presented as a benefit or entitlement, rather than a return on money invested by the worker. The Republicans have strengthened this perception, when they advocated cutting the payroll tax in order to combat a recession. They should realize that Social Security contribution should not be treated like a tax that can be cut. There are plenty of taxes to choose for cutting.
A reform giving workers control and responsibility over their Social Security pension will solve the financial problem and will have important social and moral benefits. Thus, it will help restore in the citizens the spirit and mentality of the free man, rather than that of the ward of the state as it is now. It will also eliminate a misconception which makes many younger people who work and contribute now to begrudge the old for not dying sooner, instead of living on the charity of the government. There is not much time left. The insolvency of the current arrangement is inevitable.
As another improvement, when the individual will control his federal pension fund, the transfer of money from those that paid larger sums during their active years to those who contributed less will also cease. This will result in a more honest reckoning of the national costs of public assistance. Those who need help can receive it undisguised.

[2] Bryan Taylor, GFD, Paying off government debt. Two Centuries of Global Experience</strong,
[3] Drew DeSilver, Pew Res. Ctr., 5 facts about the national debt: What you should know,
[4] Ronald Cooke, Will America Ever Pay Off Its Debt?,
[5] Flemming vs Nestor, 363 U.S. 603 (1960),
[8] (a) Craig Copenland, Jack VanDerhei, Dallas L. Salisbury, Social Security Reform, Evaluating Current Proposals (June 1999), ; (b) Daniel Patrick Moynihan , “Building Wealth for Everyone,” New York Times, May 30, 2000

One response to “Comparison of Retirement Schemes Existing in the U.S.

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