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.

***Update***

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).