Social Security: Lifetime Annuity Vouchers Offer Simple Solution
The Social Security debate is far more confusing than it needs to be. This is largely because voters are not clear about what they want the program to accomplish.
Policymakers have tried to use Social Security to pursue a variety of goals. The current program includes mechanisms to redistribute income (a left liberal objective). Now the Bush administration wants to reform the program to help build an "ownership society". Some view Social Security as a mechanism for rewarding hard work. Though these goals all have merit, the Social Security program is just not the right place to address them, as I will explain.
The issue becomes much simpler if we narrow down our focus to the core purpose of the program - guaranteeing a minimum income that keeps Americans out of poverty in their retirement years.
KEEPING OUR PROMISES
The proposal I discuss should not apply to current retirees - or those scheduled to start getting benefits in the next 20 years. I believe they should get annuities that will pay them the benefits they have already earned under the current rules. Unlike under current law, Americans should have a property right to these benefits.
Would this increase the national debt? On paper, yes, dramatically. But that's only because we don't count existing promised benefits as a legal debt - only a moral or political one. The left liberal argument that privatization would increase the national debt only has any force if one is willing to break the system's existing promises - which left liberals aren't - or shouldn't be - willing to consider.
LIFETIME ANNUITIES
There is a straightforward way to provide a minimum income during the last years of life. Provide every American with a voucher of a certain value, to be cashed in to a private insurance company in exchange for a lifetime annuity. These annuities (already available in the private market) would pay a fixed, inflation-adjusted income for the rest of the beneficiary's life.
The voucher could only be cashed in for an annuity that would pay a certain minimum income, not less than the poverty level - say $12,000 per year. Since it pays for life, the cost of a lifetime annuity is based on the beneficiary's life expectancy. So if everyone gets the same value voucher, everyone will be able to cash in their voucher with about the same number of years of life expectancy remaining.
This means that your Social Security retirement age would depend on your life expectancy. In other words, everyone gets about the same level of benefits for about the same number of years. This is much fairer than the current system, which penalizes those who are unlucky enough to die young - and these are disproportionately the poor and African-Americans.
Social Security benefits would be universal and not based on work history, so there would be no bias against stay-at-home parents. Immigrants would start becoming eligible for a portion of the benefits after perhaps 5 or 10 years in the United States and acheive full eligibility after perhaps 20 or 30 years.
Once the minimum income criterion is met, any excess value of the voucher could be used to buy additional benefits - including cash up front, if the beneficiary desires. Thus, for example, a person with a terminal illness and very short life expectancy would be able to get a large sum to spend immediately - and still be eligible for a gauranteed permanent income if they are fortunate enough to survive.
The voucher values could be set at perhaps $150,000 or $200,000 to provide the minimum benefit for ten or more years. This is far less than the average total value of benefits current retirees are scheduled to recieve - $400,000. So this is a far less expensive version of Social Security.
Of course, average benefit levels would be lower - but then, future Americans would ultimately have more after-tax income to invest as they choose. Retirement planning should be primarily left to the individual, with government only stepping in to gaurantee a minimum level of security.
SOCIAL SECURITY'S OTHER GOALS
The system I suggest does incidentally redistribute income from the wealthy to the poor, simply because it provides the same value of benefits to everyone, while the wealthy contribute more tax dollars.
As for creating an ownership society, that is simply not the proper role of what is essentially a social welfare program. An ownership society is founded on property rights, which fortunately we already have. Forcing people to invest part of their income in certain proscribed investments, as the Bush proposal would, does not foster an ownership society. It merely confuses the proper roles of the free market and the welfare state. Investment should be truly a matter of free choice. Government intervention merely impedes the efficiency of the market.
However, the lifetime annuity vouchers I propose should be a contractual obligation on the government and should be issued at age 18 to eliminate the uncertainty that surrounds retirement planning under the current system. Currently many young adults don't believe Social Security will be there for them when they retire - and certainly they can't be sure of benefit levels.
Rewarding work, again, is a function of the free market, not government programs. When government tries to reward private sector work, it inevitaby distorts the incentive structure. For example, if Social Security benefits are calculated to reward lower-income workers, this could push stay-at-home parents into low wage jobs when their work at home would actually be more valuable.
CLARITY ON GOALS
To find the best policy we must be clear on the goal. The current debate is marked by a lack of clarity on the goals of Social Security. By focusing narrowly on the goal of providing a minimum income to Americans during retirment years, it is possible to find a fairly simple solution - a lifetime annuity voucher of equal value being issued to every American.
Policymakers have tried to use Social Security to pursue a variety of goals. The current program includes mechanisms to redistribute income (a left liberal objective). Now the Bush administration wants to reform the program to help build an "ownership society". Some view Social Security as a mechanism for rewarding hard work. Though these goals all have merit, the Social Security program is just not the right place to address them, as I will explain.
The issue becomes much simpler if we narrow down our focus to the core purpose of the program - guaranteeing a minimum income that keeps Americans out of poverty in their retirement years.
KEEPING OUR PROMISES
The proposal I discuss should not apply to current retirees - or those scheduled to start getting benefits in the next 20 years. I believe they should get annuities that will pay them the benefits they have already earned under the current rules. Unlike under current law, Americans should have a property right to these benefits.
Would this increase the national debt? On paper, yes, dramatically. But that's only because we don't count existing promised benefits as a legal debt - only a moral or political one. The left liberal argument that privatization would increase the national debt only has any force if one is willing to break the system's existing promises - which left liberals aren't - or shouldn't be - willing to consider.
LIFETIME ANNUITIES
There is a straightforward way to provide a minimum income during the last years of life. Provide every American with a voucher of a certain value, to be cashed in to a private insurance company in exchange for a lifetime annuity. These annuities (already available in the private market) would pay a fixed, inflation-adjusted income for the rest of the beneficiary's life.
The voucher could only be cashed in for an annuity that would pay a certain minimum income, not less than the poverty level - say $12,000 per year. Since it pays for life, the cost of a lifetime annuity is based on the beneficiary's life expectancy. So if everyone gets the same value voucher, everyone will be able to cash in their voucher with about the same number of years of life expectancy remaining.
This means that your Social Security retirement age would depend on your life expectancy. In other words, everyone gets about the same level of benefits for about the same number of years. This is much fairer than the current system, which penalizes those who are unlucky enough to die young - and these are disproportionately the poor and African-Americans.
Social Security benefits would be universal and not based on work history, so there would be no bias against stay-at-home parents. Immigrants would start becoming eligible for a portion of the benefits after perhaps 5 or 10 years in the United States and acheive full eligibility after perhaps 20 or 30 years.
Once the minimum income criterion is met, any excess value of the voucher could be used to buy additional benefits - including cash up front, if the beneficiary desires. Thus, for example, a person with a terminal illness and very short life expectancy would be able to get a large sum to spend immediately - and still be eligible for a gauranteed permanent income if they are fortunate enough to survive.
The voucher values could be set at perhaps $150,000 or $200,000 to provide the minimum benefit for ten or more years. This is far less than the average total value of benefits current retirees are scheduled to recieve - $400,000. So this is a far less expensive version of Social Security.
Of course, average benefit levels would be lower - but then, future Americans would ultimately have more after-tax income to invest as they choose. Retirement planning should be primarily left to the individual, with government only stepping in to gaurantee a minimum level of security.
SOCIAL SECURITY'S OTHER GOALS
The system I suggest does incidentally redistribute income from the wealthy to the poor, simply because it provides the same value of benefits to everyone, while the wealthy contribute more tax dollars.
As for creating an ownership society, that is simply not the proper role of what is essentially a social welfare program. An ownership society is founded on property rights, which fortunately we already have. Forcing people to invest part of their income in certain proscribed investments, as the Bush proposal would, does not foster an ownership society. It merely confuses the proper roles of the free market and the welfare state. Investment should be truly a matter of free choice. Government intervention merely impedes the efficiency of the market.
However, the lifetime annuity vouchers I propose should be a contractual obligation on the government and should be issued at age 18 to eliminate the uncertainty that surrounds retirement planning under the current system. Currently many young adults don't believe Social Security will be there for them when they retire - and certainly they can't be sure of benefit levels.
Rewarding work, again, is a function of the free market, not government programs. When government tries to reward private sector work, it inevitaby distorts the incentive structure. For example, if Social Security benefits are calculated to reward lower-income workers, this could push stay-at-home parents into low wage jobs when their work at home would actually be more valuable.
CLARITY ON GOALS
To find the best policy we must be clear on the goal. The current debate is marked by a lack of clarity on the goals of Social Security. By focusing narrowly on the goal of providing a minimum income to Americans during retirment years, it is possible to find a fairly simple solution - a lifetime annuity voucher of equal value being issued to every American.
posted by TallahasseeJoe @ 5:37 PM
