Implementation: Recutting the social security pie (Part 3 of 3)

 Hello Readers,

In this series so far, I introduced a premise for (and reasoning behind) a policy, which would involve dividing up the social security funding allocation pie. I believe that we should divide up the pie into four separate (but not necessarily equal) slices:

1. Funds paid out all to current retirees
2. Funds reserved for specific generations of retirees
3. Funds diverted to personal investment funds
4. Funds diverted to paying down any outstanding national debts

In this post, I will put forth a possible mechanism or strategy for implementing this pie-cutting process in a manner that will be fair to current social security beneficiaries but also address the needs of current (and future) generations of workers.

To begin this process in a politically tenable and socially agreeable manner, we need to start at the current baseline and move incrementally toward the goal(s) of this reform.

Currently, the social security pie is nominally set to give 100% of the funding allocation pie to slice number 1 (Funds paid out to all current retirees). However, the baseline according to ssa.gov's 2012 annual report summary:

"...The trust fund ratio, which indicates the number of years of program cost that could be financed solely with current trust fund reserves, peaked in 2008, declined through 2011, and is expected to decline further in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086."

In essence, social security will not survive in its current form past 2033 (before anyone born in the 1970's or later starts collecting). Thus, it does not seem unreasonable to aim for reform to be fully implemented by 2030. In the graph below, I have offered one possible trajectory for social security fund allocations.

I would recommend implementing the various slices slowly at a rate of roughly 1% per year. I would introduce slices 2 and 3 (the generational and personal slices) starting in 2014, and I would cap their percentages at 15% and 10% respectively. In this way, no more than 15% of an individual worker's social security payments would go to their generational trust fund. Likewise, no more than 10% of an individual worker's social security payments could be diverted to a personal retirement account. 

Similarly, I would recommend introducing slice 4 (the national debt slice) starting in 2018 at a capped rate of 1% and let the cap grow to 10% in 2028. Starting in 2029 and beyond, I would recommend allowing slice 4 to fluctuate between 0% and 10% based on some reasonable measure of the federal government's deficit spending over the preceding decade.

While I am not in a position to determine which metric this slice 4 percentage is tied to, I would simply hope that the calculations would be clearly defined in such a manner that deficit spending results in a reduction in the amount of money allocated to social security spending. Thus, Congress would be heavily incentivized to reduce deficit spending (and thereby proportionately increase the amount of spending allocated to current retirees). Similarly, it would encourage current retirees to hold members of Congress accountable for short-term deficit spending.

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In summary, I believe that each of these implementation timelines should be slow enough that there will not be any huge/unexpected shock to the economic system. Also, in the long-term, this will: (1) ensure that at least some small part of an individual's retirement funding will be secured regardless of when they are born or how many current workers there are, and (2) ensure that reducing the national debt is no longer simply an exercise in letting future generations resolve the issues of today.

I look forward to your thoughtful criticisms and suggestions on this matter.

Regards,
Sean

This "Recutting the social security pie" series:
Introduction: Recutting the social security pie (Part 1 of 3)
Reasoning: Recutting the social security pie (Part 2 of 3)
Implementation: Recutting the social security pie (Part 3 of 3)