War of Words
columnist: Paul Benedict

Topic: Social Security
Dave Ramsey, Cato Institute's 6.2% Plan, and Transforming Social Security

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CATO Institute's 6.2% plan for privatizing Social Security provides the most savings of all those examined by Social Security's actuaries. Comparing the CATO plan to one which applies Social Security taxes to primary residences illustrates the superior power of this second strategy to rescue America from its debts.

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by Paul Benedict
(libertarian)
Thursday, March 5, 2009

"Ending Social Security by Applying Payroll Taxes to Primary Residences" gave a static illustration of the general principles and possibilities of a plan to transform Social Security while paying off the debts the WWII generation promised the baby boomers we would pay. The illustration uses none of the actuarial assumptions necessary to having the clearest sense of the risks and benefits of adopting such a program; however, one set of assumptions this model of Social Security's transformation need not take into account is the rate of the plan's return adjusted against inflation. That's because the Primary Residence Social Security Transformation Plan (The PRSST) relies on real property as a foundation. However, the CATO institute's graph of the effect of inflation on promised Social Security Benefits, despite inflationary adjustments, really helps point out how bad Social Security is for the next generation (4). The evidence CATO gives only demonstrates further that any transformation of Social Security that involves actual investment power is better than the Bernie Madoff style Ponzi scheme the federal government now mandates.

Actuarial assumptions and their statistically predicated predictions have an historic tendency of falling short of what the future truly holds. Hence, in comparing the predictions made for one of the most dramatic Social Security transformation plans, Cato Institute's 6.2% Plan, to investing in primary residences, it is important to remember that all human predictions can fail and that applying principle, correct principle, is the best way to prepare for the unknown.

The CATO 6.2% Plan, basically, takes half of every wage earner's payroll tax and deposits it into genuine retirement funds composed of bonds and equities. The other 6.2%, the employer contribution, would then be used to pay off the incredible debt Social Security currently owes to current beneficiaries and to those likely to remain within the Social Security system. CATO's plan and the Social Security's own actuarial office, crunch the numbers in great detail. The evidence, tragically, is plain that investing only half the amount of a worker's Social Security payroll taxes properly results in greater benefits than investing the entire 12.4% with the federal government. The CATO plan is the best of the 29 plans advanced because its ultimate goal is to completely end Social Security. The PRSST Plan, though, is better.

To begin with, the Primary Residence Social Security Transformation Plan has such tangible benefits that it need not resort to the expensive concessions of the CATO 6.2% plan. Indeed, the Primary Residence Social Security Transformation Plan's tangible and near future benefits allow a near term reduction in promised benefits that helps smooth transition costs. On principle, any restructuring plan for Social Security ought not to be overly concerned with improving benefits for those already in the system and nearing retirement age. This is because while those who have been in Social Security for most of their adult lives may have felt they had little choice, nonetheless, they've made precious little noise about changing the system to which they have been enslaved. Therefore, let them stay in the current system.

For instance in the 6.2% Plan, (also known as H.R. 530 (109th Congress), those older than twenty-two would receive a "recognition bond" for something like the dollar value of the Social Security benefits already accrued. This bond would then be invested in prescribed equity and bond accounts (p. 2). However, this sudden reinvestment puts a heavy initial strain on the new Social Security system. Since President Obama's America is now very deeply in debt, this isn't such a great idea. As in President Bush's 4% plan (p.6), those over fifty-five would not be permitted to participate in PRSST. Since those over fifty-five are nearing retirement, they should have long since recognized how poor Social Security's promises are and have made other retirement investments. Those that are between 45 and 55 would face the most difficult decisions. The current retirement age for Social Security is 67. With PRSST, if people over thirty-five don't feel they would benefit by choosing Primary Residence Transformational accounts, they would simply stay in the current system. Those who are forty-five would have approximately twelve years of benefits from the Primary Residence Transformational accounts, but they would have very little time to generate significant retirement investments. Still, many middle-aged Americans will choose the instant gratification of the primary residence plan over the less than certain option of nebulous benefits that only begin when they are 67. Hence, because those between forty-five and fifty five would renounce their accrued Social Security benefits to enter the primary residence system, the carrot of zero house payments may engender enough positive cash flow that transitional costs would be manageable.

CATO's 6.2% plan could be adapted to include similar cost saving provisions involving middle aged workers renouncing Social Security benefits, but since the retirement annuity provides a more distant benefit, many fewer of these older workers would choose to participate. It is the tangible reality owning one's primary residence free and clear that is the incentive for workers to first, vote for the Primary Residence Social Security Transformation plan, second, participate in large numbers, and third, willingly sacrifice for the next generation's increase in tangible benefits. Also, unlike the 6.2% plan that involves continually expanding (Tier I to Tier III) Wall Street and Madison Avenue retirement accounts, workers could contribute as much income to paying off their homes as they desired (p. 8). Hence, a middle age worker could begin receiving the benefits of no rent and no house payments as early as he or she desired.

Once a worker's primary residence has been paid for, they would have available "Tier III" style retirement options described in CATO's 6.2% plan (p. 8). However, at this stage workers would have only 3.1% of their payroll taxes available for contribution. They could, of course, contribute from their house payment savings an amount greater than 6.2%. Sadly, it will be a generation, at least twenty years, before each worker will have the largest amount of their payroll taxes at their own retirement fund's disposal. That is the pain this generation must face because of the failure of our forefathers. That is the burden others have placed on us without our consent. Nonetheless, to the extent this is extremely disagreeable; we ought to forbear passing such a horrid slavery on to others. As such a system is disgusting to us, we ought to labor all the more so that we are not ourselves even worse villains to those Americans who follow after us. Nevertheless, as pathetic as the burdens placed upon us are, the Primary Residence Transformational Plan will allow workers far greater benefits than Social Security as it now stands. Not the least of those benefits is the right to pass on wealth to the next generation. How wonderful; rather than leaving the next generation twenty-two trillion dollars in debt, perhaps we can leave them twenty-two trillion of today's dollars in net wealth.

The CATO Institute's 6.2% plan also envisioned a change to price indexing rather than wage indexing as a measure of inflation. This is an increased benefit. Again, this is counter productive. We ought to seek the end of Social Security; we should not work to improve the benefits of the program at further cost to future generations; 22 trillion dollars in promises is ENOUGH! However, the new minimum benefit policy CATO suggests is very positive. There is no question that any Social Security beneficiaries who would receive less than this minimum benefit would end up on the government payroll in some other way, and those close to retirement who are still working will be comforted by an assurance of at least a modest piece of retirement insurance. Depending on deficit projections, the minimum benefit might be made available to those older than fifty-five who are not permitted to opt into Primary Residence Transformational accounts.

Despite some of its more expensive provisions, in 2005, Social Security's own Office of the Actuary found that, over the 75 year actuarial window, the 6.5% Plan would save tax payers 6.3 trillion (p. 5). However, the OACT assumed a 6.5% return on investments in equity and 3% to 3.3% on bonds (p. 3). Although, as CATO points out, the 6.5% is historically low, convincing anyone looking at their 401K today that 6.5% is a conservative and certain estimate would be a challenge. Even in economic boom years, Americans would be correct to look askance at a plan that takes 6.5% of their payroll and invests in bonds and equities while they daily face the insecurity of home payments in excess of 25% of their income. Such a plan is not based in sound financial principle. Dave Ramsey, an illustrious proponent of the exponential wealth explosions that can begin with paying off all debt (actually that's step 2), only discusses savings plans after one is debt free. That is sound financial principle. All retirement planning must begin with individuals becoming debt free. Hence, the Primary Residence Transformational Plan for Social Security gets America debt free before tackling the twenty-two trillion dollars it owes the boomers.

This is one of the great strengths of the investment in a primary residence. No matter what the fluctuations of the housing market is over the next 10-12 years, participants in the PRSST will have a yearly benefit generally equal to 25%-31% of their current salaries. The amount of money that Americans will not have to pay the banks the landlords will remain significant, even if the economy turns around and inflation prevails. If on the other hand, deflationary pressures continue to contract the economy, the monthly expenditures avoided by avoiding rents and mortgages would only increase.

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©2009 Paul Benedict, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Thursday, March 5, 2009
Last modified: Sunday, March 15, 2009

The views expressed in this article are those of Paul Benedict only and do not represent the views of Nolan Chart, LLC or its affiliates. Paul Benedict is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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