.. if their investments fail. The biggest advantage of this IRA style approach would be that Americans will finally be in control of their own retirement fund. This proposal has many advantages for politicians and voters of all ages. There would no longer be debates about retirement ages and you could make your own choice on when to retire.
The debates on the how to measure the rate of inflation with the CPI to would no longer affect benefit payments. The stock market could flourish from the added revenue of future retirees. The increase in investing also could improve the state of the American economy. There are a few drawbacks for this type of reform. The biggest is deciding how to finance Social Security for people retiring before this reform, since Social Security is run as a pay as you go system. Social Security is considered a pay as you go system because people paying Social Security now are paying for the already retired citizens. Financing the retirement for people before the reform isn’t a proble, since the baby boomer generation is creating a $50 billion a year surplus.
The baby boomer generation has also created a $500 billion surplus from recent years which will be enough to finance the their retirements. The other option is for the government to invest Social Security trust funds in the stock market. The advantage of this is that if market trends continue the government will generate gain an additional after inflation interest rate of about 7%. Although this option has many problems that will keep it from being a solution. This option would give the government a massive control of the private economy.
It is hard to believe that the government will be able to keep a hands off approach when it controls huge blocks of stock in companies. The American public doesn’t have enough faith in the government to trust that it will be able to invest such a large sum of money without being swayed by political pressures. The new demand for the stocks will decrease the demand for bonds thus raising bond interest rates which could hurt the economy. This approach also doesn’t have a plan of action for slumps in today’s volatile market. Recently, the White House’s 13 member Social Security Advisory Council released three reform approaches.
These reform proposals are different variations of investing Social Security taxes in the stock market and the use of private savings accounts. In each proposal by the Advisory Council on Social Security the benefits of retirees are maintained and taxs are also held at the same rate. The most popular of these approaches was supported by six of the members. This plan would keep Social Security a government-run retirement system. It calls for a study of investing up to 40% of Social Security surpluses in the stock market.
This plan is strongly backed by labor and retiree groups, but it may not be accepted because of fears of government ownership of the stock in private companies. The least favorite proposal among the council is only supported by two members. It would require all workers to put 1.6% of pay into mandatory government-run individual accounts that offer a choice of stock and bond investments. At retirement, account balances would be paid out as annuities for the life of the employee. Few people are strong supporters of this variation, but it could be come a model for compromise among the councils three proposals.
The final approach is supported by five of the council’s members. This plan would divert into savings accounts 5 percentage points of the 12.4% payroll tax paid by workers 54 or younger and employers. The remaining 7.4 percentage points of tax would help fund a the basic Social Security plan. This plan could become the standard plan for radical reformers, but it is likely that it will not be supported by congress. The private savings accounts could be good for the economy. Instead of spending almost all taxes from today’s workers immediately as retiree benefits, the money will be placed in savings accounts that will grow by 2.5% of the GDP every year.
This rate will be maintained as long as stocks and bonds maintain the returns they have generated in the past century. My own proposal under ideal conditions would not use the approach of investing in the stock market. I am not that excited about investing in the stock market because I don’t believe that today’s bull market will last. Although in order for my most aggressive type of approach to work there would have to be a substantial tax increase and an adjustment of the CPI, and I could never get enough support for my proposal from the wealthy or the retired citizens. In order to make a proposal that would have any chance of making it through the house and the senate I have already compromised on investing in the stock market to reduce the increase in taxes and to keep from decreasing benefits substantially. I propose that to begin reforming Social Security we need to first adjust the CPI. This would cut down on the benefits for those receiving Social Security payments. Then I would propose that a law be passed to keep the governments hands off this money so we can gradually work our way away from the pay as you go system into a system that would insure everyone over 35 would be receive benefits under the traditional system.
Everyone under 35 would start having by having 4 percentage points of there Social Security tax put into individual IRA’s. The percentage of the Social Security tax that is put in the IRA’s would be gradually increased until the benefits for everyone over 35 have been paid for. After everyone over 35 have had there benefits accounted for in the budget the amount of the Social Security tax invested in IRA’s will stop at 8.5 percentage points of the 12.4% rate. The left over Social Security tax will then be invested in government Treasuries, or it would pay for a basic insurance plan that would be provided to the public. The amount of the tax invested in either of these areas would completely depend on America’s demand for benefits from the insurance. This insurance would cover the same goals of the current system, and it would provide an allowance to anyone that doesn’t meet a minimum benefit level from their IRA’s. Government Essays.