Cypress 401K

Last night President Obama renewed his calls for a so-called “middle class tax” cut that would all but kill Social Security:

“Right now, our most immediate priority is stopping a tax hike on 160 million working Americans while the recovery is still fragile. People cannot afford losing $40 out of each paycheck this year. There are plenty of ways to get this done. So let’s agree right here, right now: No side issues. No drama. Pass the payroll tax cut without delay.”

And yet only two paragraphs later, he said this:

Alas, in calling for a renewed payroll tax holiday, President Obama continues to raid Social Security and imperil the retirement account that many Americans have paid into and continue to depend upon.

On the one hand, he raids the Social Security trust fund, while on the other he attacks Republicans for threatening Social Security.  Republicans ought not let him get away with such transparent chutzpah.

As I wrote for Engage America, this is a big mistake and potentially a catastrophic one for America’s largest entitlement program. Indeed, put yourself in the position of those “innocent Americans” and law abiding Americans–Generation X, who will grow old just as Social Security goes belly up.

Generation-Xers are in a world of hurt—and it just keeps hurting.  His home, like more than 11 million other homes, is now worth less than the mortgages on them. College education for his 2.2 children doubles every nine years, with student loan debt surpassing credit card debt for the first time ever in 2011. Retirement is out of reach. His 401(k) has flat-lined. His working-age kids have a 25% youth unemployment rate, the highest ever recorded. And after more than twenty years of playing by the rules and paying into Social Security, it won’t be there for him when he retires. Social Security is greatly underfunded, having promised $7.7 trillion more in benefits over the next 75 years than it can afford to pay with its payroll taxes.

Social Security’s own actuaries predict that it will not have enough money its coffers by 2037, the time many of today’s Gen-Xers retire. This year it paid out $46 billion more than it took in. It will get worse. When Social Security was started, there were an estimated seventeen workers paying in for every one retiree. That ratio will plummet to just over 2.1 by 2031. We designed the system for the 1930s, when one’s golden years of retirement only lasted two years; unless reform is taken, it will not survive to 2030 when retirements are projected to be 30 years.

Alas Congress’s short-term fix for our economic woes —a 2% payroll tax holiday—adds insult to injury. With SocialSecurity running out of money, only in Washington does it make good sense to take $33 billion more out of it. “Until now it was understood the payroll tax was supposed to do one thing. It wasn’t supposed to be a stimulus mechanism. Now the payroll tax is this variable thing that goes up and down according to other economic conditions,” says Charles Blahous, a Social Security trustee. In other words, SocialSecurity just got a whole lot less secure.

So what’s to be done? Fearing Social Security’s financial health, some Texans imagined a different future for themselves and their children, a future that we should all consider now that Social Security is troubled. The last timeSocial Security was in serious trouble—in 1979—Galveston County Attorney Bill Decker invoked little known provision within the Social Security law which allowed municipalities to exit the Social Security after a 2-year waiting period.

Galveston’s municipal employees approved creating a privately-run, privately-funded alternative retirement plan. Matagorda and Brazoria countries quickly joined in. Since then, public employees in these three countries have seen their retirement savings grow every year, even in the Great Recession’s jaws. Over 5,000 retirees enjoyed market retirement yields averaging 7.5%, compared to SocialSecurity’s meager 2%. Someone earning $51,000 annually would retire with a lifetime income of $3,800 monthly, roughly 90% of pre-retirement income, compared to the $1,500 monthly they would get under Social Security. Lower-income workers benefit: A worker making $18,000 yearly gets $1,400 monthly from Galveston’s Plan, but only $782 under SocialSecurity. The yields are better because they are tied to better assets than governmental promises, which were never good for that much anyways.

Two hundred countries and cities wanted in. They began planning to copy it. But Congress, in 1983, intervened and obliterated the 2-year provision. Congress could intervene again, if it so chose. Still Galveston’s Plan could be adopted by America’s six million public employees who are part of some state or city retirement plans not covered by Social Security. Reducing those pension funds’ liability would help cities immensely. By reducing the pension funds’ liability, the benefits are enormous.

Its elegance is its simplicity: workers’ payroll taxes are deposited into personal retirement accounts that are then used to buy commercial banking and life insurance products, such as annuities, government bonds, or commercial bonds.  Financial decisions are undertaken to minimize risk, but also to pay out more than Social Security. Its successes are plain to see when you consider the payouts it offers compared to SocialSecurity. A lower-middle income worker making only $26,000 at retirement would receive $1,007 monthly under SocialSecurity, but $1,826 under Galveston’s Plan. A middle-income worker making $51,200 would get $1540 from Social Security, but $3,600 from Galveston’s Plan. And a high-income earner who maxed out his Social Security contributions would receive $2,500 monthly compared to $5,000 to $6,000 monthly under Galveston’s Plan.  These benefits might explain why all but five out of 15,000 chose to participate.

Generation Xers know self-sufficiency and given a choice, they, too, would participate in a Galveston-style Plan. These latchkey kids raised themselves in an era of rising divorce rates. As men, they were flexible, adapting to technology. They put in the hours. Can they adapt to a new Social Security? Giving them ownership of their futures—the very thing that they have always wanted—is a good start.