Saturday, February 10, 2007

Social Security as a National Pension System

Charles Smith of the Of Two Minds Blog posted part of an email that I sent him concerning my idea of converting Social Security into a national pension system:

Social Security is / was meant to be a supplement to a pension. I think that Social Security could be converted into a pension system if we ended the Social Security and Medicare taxes limitation to the first $120K of income. Then we could fund a full pension and national health care system. The payroll taxes could be reduced for all workers since more would be contributing. The payroll tax is one which wage earners pay. I have never had anyone explain to me why the wage earner under $120K should bear so much of the financial tax burden.

Higher income workers could get a guaranteed pension up to a certain amount set by law, based on their pay during their lifetimes. To make the conservatives happy, you could even allow a percentage (based on age) to be invested in a index fund. As a worker gets older less and less should be invested in stocks and more toward bonds. Management fees could be set by statute and reduced due to the economy of scale.

I want to put my idea into context.

First, Charles has been blogging about the threat that many municipalities, with their pension obligations, will file Chapter 9 bankruptcy. Chapter 9 is very rare. Most of the time, Chapter 11 is used. Here is an article discussing Municipality bankruptcy with the traditional Chapter 11 (large debtor or corporate reorganization).

The reason I am "thinking outside the box" and proposing to convert Social Security into a full pension system is that I am not sure we can afford to leave so many workers without access to retirement and health care. Conservatives have argued and still argue that it is (should be) the worker's own responsibility to save and invest for retirement. I believe this fails on three fronts:

1. The workers were contractually promised a pension so that they did not have to worry about it;

2. Much of the lack of pensions were based on fraudulently taking money from the workers (Enron, et al) or investing in highly speculative and excessively risky investments, much of which was based on fraud as well (ex: appraisal fraud in housing appreciation, which led to controllers suggesting investing pension funds in REITs for higher returns, but as housing depreciates...). I should also note that some of the pension investments in credit swaps and derivatives are above my head, but writers such as Mike Shedlock indicate they may be a bad deal for cities in many cases;

3. Even many educated workers do not understand financial instruments and can easily be duped by financial advisors who will sell them financial "plans" which are not in their best interest. I have seen this in my own life. I would rather not elaborate on this here, but suffice it to say that I have seen elderly people get put into highly risky investments that garnered high fees for the financial advisor, but was completely unwarranted for the elderly person who needed safe returns. This same problem holds true for non-elderly people as well.

The conservatives that I have argued with would say "caveat emptor" (let the buyer beware). In the past, we moved away from such a rule as it was discovered that there were many forms of dishonesty that were sprung on an unsuspecting buyer/consumer. As a result, the courts started putting more responsibility on the seller due to the fact that the seller was in a better position to understand what the consumer was getting into and prevent any harm (example: product liability). The problem with financial torts/crimes is that by the time the tort/fraud is discovered, it is too late to correct the problem because the wrongdoer is long gone or the statute of limitations to sue/prosecute has run.

It is for this reason that I feel that all workers should be guaranteed a pension that is suitable to live out their twilight years in relative comfort. There is enough pain and suffering in this world from disease and brittle bones in our old age. After someone has contributed a lifetime of productivity they deserve some security in their financial planning.

The same holds true for health care; while a large percentage of medical costs are spent on the elderly, I don't see this as "unfair." We will all grow old. We will all die. The least we can do is alleviate some of the suffering that comes before the end of our lives.

I think the best way to deal with these two problems is to put it in the hands of someone who does not have a financial conflict of interest with the worker or patient. Another advantage to a national pension system is that there would be less risk for the worker. A national pension system would be backed by the Full Faith and Credit of the U.S. Government.

I have come to this conclusion after seeing so many people cheated out of their hard-earned money. I just don't think private financial institutions and corporations can be trusted enough with the worker's pension funds to allow the private system to continue. Even where the wrongdoing is discovered and where there is a legal theory to recover, many times (Enron, et al) the assets have been destroyed, cannot be found (in overseas banks), or can be found, but are in overseas banks and in trusts which are sometimes beyond the power of the U.S. courts to force back.

The theory has always been that the worker receives a safer guarantee and that the owner of the business has a greater return due to his putting his capital at risk. But now all of the risk is being thrust upon the worker while the corporate owner continues to receive the return. A national pension and health care system would return some balance to the free market.


I should add that corporate taxes should be levied to cover what the contribution would have been to any worker's pension plan. That way, even if the corporation goes bankrupt or just simply goes out of business, then the worker would still be able to collect his retirement. This would also allow a worker who changes jobs or careers to take his retirement with him (the principle of portability).


Anonymous said...

swmxwwpWe cannot afford a pay as you go system, so how can we dream of a fully funded "pension" plan for all? It is beyond our ability to fund. If each worker were "required" to fund an IRA based on a similar schedule of a pension plan (with a higher percentage of income the older one becomes), the worker would have a pension plan that is funded.

For investors who do not want the investment risk, insurance annuities could be purchased each year that would be actuarially sound. The government is an unreliable manager of pension plans as the municipal system reveals. Private investment accounts would prevent states raiding the pension plans for covering current budget deficits i.e., the State of Illinois has been doing this recently.

OkieLawyer said...

I don't get where you say that we "can't afford" what we have now. You will have to explain why not.

Debra said...

Okie, bear with me on this one, as it MAY seem off topic to you, but to me it is not...
Once you start paring away all the technical terms, once you get down to the nitty gritty of SOCIAL CHOICES, and DECISIONS, this is what the picture starts looking like :
There is a Grimm moral fairy tale that relates this story :
In the 19th century already nuclear family (but without sophisticated pension plans, without retirement and nursing homes but WITH old people, nonetheless) the following takes place. Grandpa starts slipping a little bit at home. He slurps his soup. Soon, Mom and Dad, impatient, start sticking his food down next to the dog's, because he's just NOT FIT to be at the table any more. Next thing you know, they come across Junior one day playing with his stick figures, and hear him talking to HIS father, and putting the food down next to the dog's in "play". Shock. Double shock. Grandpa is returned to the dinner table, slurpy soup or not.
The problem with the pension plans, the insurance, and all the Protestant work ethic entitlement is that they leave NO ROOM whatsoever for REAL charity, or solidarity between generations.
And all the pension plans in the world, and the doctoring up of Social Security will NOT take care of an absence of solidarity between generations.
I have no quick fix for this problem. But I do think that some of the fix, paradoxically enough, is going to come through a revalorisation of spiritual experience vs. legalistic hair splitting.

OkieLawyer said...


Thanks for your response. But, let me tell you, not everyone is so charitable. In fact, there are many people who are never reached by charity. Charity, in fact, may only reach 10% of the needy population. What I want are guarantees that cannot be taken away and that are earned by the workers throughout their lifetimes.

Also, what I am trying to impress on you and others who read this is that many people go without a pension as a result of the effective embezzlement of workers pension funds by corporate executives. That one fact alone negates the "charity" argument. Those workers would not need "charity" had their retirement not been taken away unjustly. In the example I give, those workers earned their retirement.

By the way, I understand the religious argument (there is a religious undertone to your argument); but I want Justice, not charity.

You can see some of my religious views under Orphans of God

Debra said...

Okie, your response is one of the reasons that I get so huffed up about the Protestant work ethic.
We do NOT have the same ideas about what charity means, and I think that your ideas are nevertheless related to the Protestant world view...
You will have noticed that I harp on about the Merchant of Venice, and my views are pretty well exposed in the play.
Shylock : all JUSTICE and the LAW...
Bassanio/Portia : mercy and love

Portia : The quality of mercy is not strained ;
It droppeth as the gentle rain from heaven
Upon the place beneath. It is TWICE BLEST ;
But mercy... is enthroned in the hearts of kings ;
It is an attribute to God himself,
And earthly power doth then show likest God's
When mercy seasons justice. Therefore, Jew,
Though JUSTICE be thy plea, consider this :
That in the course of justice none of us
Should see salvation. We do pray for mercy,
And that same prayer doth teach us all to render
The deeds of mercy. Act IV, i

You can see from this speech just HOW MUCH WE HAVE LOST through the secularization of our society, because as I'm sure you realize, EVERY ADVANTAGE HAS ITS DISADVANTAGE.
Portia's speech sets out the cosmogony in which divine right is encapsuled.
Justice is a cheap second class ideal next to mercy in my book, Okie.
I have underscored the FOUNDATION of a living economy in the phrase : it is twice blest, it blesses him who gives and him who takes.
Entitlement doesn't work this way.
The rabbis say it very well :
Three attitudes possible toward your neighbor and your property :
What is mine is mine, and what is yours is mine. That is the attitude of fools and impious men.
What is mine is mine, and what is yours is yours. That is the middle way, some say it is the way of Sodom and Gomorrah... (I say it is the way of Sodom and Gomorrah, and it is the entitlement trap, because it leads to a false sense of tolerance, and everybody playing in his own corner UNTIL war breaks out, as it inevitably does, and the twentieth century certainly showed us how true this is.)
What is yours is yours, and what is mine is yours. This is the attitude of the pious man, and the one who knows what charity (Corinthians, remember ?) is.
By the way, why not come over and play at the Saloon if you have some time ? We're having fun. Ask Dink.

Debra said...

I left another comment on your link.
You know, Okie, you are a very intelligent person.
I am too.
The blogosphere has ONE BIG PROBLEM.
Everybody is so atomized that they go out of reach.
I have not started a blog, because I prefer to be in a group of people where at least I have SOME assurance that I will be read.
I love writing, and am a writer, but I want to be READ too...

mistah charley, ph.d. said...

Could we have both justice AND mercy? Well, only if people with more are content to let others get what they need, not what they deserve

As they say in my spouse's native country, "su casa es mi casa" [actually, this is the joking reversal of the traditional saying] - this relates to the three attitudes in the rabbinical saying

Jesus's parable of the laborers in the vineyard applies here - to briefly remind you if you have encountered it before, the owner hires people at various times of the day. Then at the end he pays the short-timers a full day's pay. The guys who started earliest expect more, and complain when they don't get it. The owner says, "Is your eye evil because I am good?" In other words, if you got what you deserve, why are you complaining about people who got more than they deserve?

Erich Fromm, author of The Art of Loving, pointed out in The Heart of Man: Its Potential for Good and Evil that it is the purpose of all the true religions to help man overcome his narcissism (he was writing in the 20th century - he might have used more gender-inclusive language today)

Whether the religion is Judaism, or Christianity, or Islam, or Secular Humanism [or Randian Objectivism? - no] there has to be a spirit of compassion and generosity for social life to sweeten the harshness of the human condition - that suffering and loss and our own death are inevitable

OkieLawyer said...

mistah charley, Ph.D.:

The only quibble I have with what you said is that Jesus' message was not really economic in nature. My understanding is that the parable is meant to refer to people who come to have faith late in life, versus early in life.

It was not to justify inequality in compensation.