Many, if not most of, my blog posts and public writing has a kind of negative bent. I usually seem to focus on what is WRONG and not as often on how to FIX what is wrong. This is my attempt to balance the scales a bit and propose my ideas to FIX something that I have, for years, railed against as being broken and in need of a good solid fixing. I am inherently a “fixer.” I want to fix things I view as broken. Thus my views of what thing(s) is/are wrong is/are directly driven by what I see as needing to be fixed. Sometimes, I find something I think is broken but I personally have no ideas how to go about fixing it. This one is NOT one of those cases. In this case I have very specific ideas, developed over years of thinking, and years of learning, education, and research, about how to set about fixing the broken and fucked up system of retirement in America.

Introduction

The US has various and diverse retirement systems in place. All, but one of them, share a common component: all of them except Social Security are voluntary contribution systems. In order to dive into this discussion about fixing a broken retirement system we must first identify some “problems” with the current system. Here is a list of SOME of the possible problems depending on your individual political perspective:

• Depending on your political viewpoint, this diversity of numerous different systems may not be a problem.
• Or possibly, also depending on your political viewpoint, the number of systems could be THE problem.
• Or it could be that the fact that they are all voluntary (except one), and NOT mandatory is the problem.
• Or it could be that the fact that Social Security contributions are mandatory is the problem.

Regardless of your political view, the fact remains that there are problems with the current US retirement system. I love discussing politics, but that is not the point of this blog post, and thus I am going to try to remove as many of the political aspects from this discussion as possible. However, having said that, retirement plans, and even the very concept of retirement planning, is a political minefield, so some discussion and recognition of political influence in this question MUST be addressed. So let’s get those aspects out of the way first, and then we can delve into the meat and potatoes of fixing the issues.

Every person is (or should be, again, possibly depending on your political viewpoint) responsible for building and managing their own future and creating their own retirement nest egg, under that assumption , most of this setup (my proposal) is not a problem. However, there IS one HUGE issue with retirement planning for most Americans: Most Americans are not educated in, or knowledgeable about any or all of the following subjects: investing, money management, wealth growth, or compound interest. How can someone, who knows nothing about the system, be smart about managing their own retirement which doesn’t start until 45 years or more from the time they first start working? The simple answer is that they can’t.

Therefore, in order to fix the retirement system in America one or both of two things MUST happen first. Those two things are either 1) make financial education a standard part of primary education from Kindergarten through 12^th grade (and continuing into college) or 2) force everyone to participate (by weight of law) in at least one retirement system for their entire working life. The first one (financial education throughout all of primary schooling) is my personal preferred method, and would have the most “desirable” outcome in the sense that everyone would thus be “money smart”, but this method would be HUGELY expensive since financial education classes and qualified teachers would have to be added to all primary schools’ curriculums and staffs. The second method is much simpler and cheaper overall and also ensures that no one is “left out in the cold” when they turn 65 no matter their education levels. Unfortunately most individual civil rights and personal freedom advocates (of which loosely identified group of politically minded persons, I am normally a member) would reject this option as violating certain aspects of personal freedom of choice. Both options thus have clearly obvious drawbacks, and both options have clearly obvious benefits. Compromise is thus a requirement for ANY possible fixing of the current situation to actually happen realistically.

Although I am a registered Libertarian, and my personal political leanings would lead me to say: “It’s on them and if they are too stupid to figure it out then they are too stupid to have a nice retirement.” And also: “Let ‘Darwin’ take care of the idiot.” I am also an educated humanist, with moderate levels of education in financial and investment topics, some minor experience as a financial advisor (although I am not currently licensed), and I am personally interested in teaching people how to become smarter, how to be more financially savvy, how to think critically, and how to take care of themselves better, all of which I have done in the past in some professional capacity. So, to that end (educating people on financial topics) I would like to explore some ideas I have, about how to fix the US retirement system.

In order to do this we must establish a baseline of understanding about what types of options currently exist in the American financial system. We must then compare and contrast them with each other and identify and discuss their relative merits and drawbacks. We must then isolate the “desirable” aspects we like and want to retain in our proposed solution, and identify the aspects we do not want to retain in our solution to the identified problems. Onward and upward, let us take a SHALLOW dive into these current systems.

Types of Retirement Systems Currently Available

Currently the systems in place are various combinations of pensions, Individual Retirement Accounts (IRAs…both Traditional and Roth), 401(k) plans (this is the specific section and paragraph of the IRS tax code that covers retirement plans), and the previously mentioned Social Security system. These systems fall into two broad generalized categories. They are: Defined Benefit Plans (DBP) or Defined Contribution Plans (DCP).

Defined Benefit Plans (DBPs)

DBPs are also commonly called “Pension Plans.” These systems often use a fixed formula that factors in final pay rate, length of service with an employer, and payments made from a trust fund specifically reserved for the plan. These plans do NOT have separate individual accounts assigned to each participant. They pay out their monthly checks from a large pool of all the participants’ contributions and entitlements (aka the Trust Fund). This is also called a “Common Fund.” Union Sponsored Pension Plans, Military, and other Government Sponsored Retirement plans are all prime examples of this type of system.

Many people are familiar with how DBPs work. In fact, these types of plans may be the plans that are the MOST familiar to the average American. You get hired at a job, you may or may not contribute a portion of your wage/salary to the common pool (trust fund), and then at retirement, you apply for and then receive a monthly retirement “paycheck” based on the specified benefits of that specific plan. In the case of the US Military retirement system, the individual participant is NOT required to contribute money into the pool from which benefits are later paid out.

However, in many private company pension plans and in some government agency pension plans, individuals are required to contribute a percentage out of every paycheck into the pool/trust fund. School teachers’ pension plans are a perfect example of a typical DBP that requires monthly contributions from participants. The US Military is currently contemplating whether to move to this type of system, away from the current model in use.

Another type of DBP is called an Annuity. These plans originate in two ways. One way is by the individual contracting with an insurance company and purchasing the annuity. The other way is generally originated by a monetary settlement (like a large insurance payout/settlement, a lottery winning, or a large lawsuit settlement). Annuities work just like other DBPs in that the money is invested or held in trust and regular checks are cut from this fund and sent to the beneficiary for their personal use.

Defined Contribution Plan (DCP)

In DCPs, each participant has an account and the eventual payouts are based on the amount of money contributed/invested by the individual who owns the account and how well those investments perform and gain interest over the duration of the investment. Individual Retirement Accounts (IRAs…both Traditional and Roth) are prime examples of this type of retirement plan. These accounts are generally linked (for identification, taxes, and payout purposes) to your individual Social Security Number (SSN).

Hybrid or Combined Plans

There are accounts that combine aspects of both of these systems, but they are not in common or widespread use, with one exception: Social Security. Many of the (non-federal-government-run) plans of this type (that is combined or hybrid model plans) have been subject to extensive lawsuit action due to their perceived (or actual) unfairness. This is mostly why these plans are NOT in common (non-governmental) usage. The federal government’s Social Security System is a kind of hybrid system similar to this setup, but it avoids many of the issues of privately run plans since it is overseen and managed by the federal government.

However, in this particular system individuals have a HYPOTHETICAL individual account with a contributed HYPOTHETICAL balance that is tracked by the IRS and the Social Security Administration every paycheck. Periodic statements are sent to the individual showing that HYPOTHETICAL balance (this periodicity is now usually yearly, but has been as often as every six months in the past).

I said the money is HYPOTHETICALLY under each individual’s name and SSN. I cannot stress the HYPOTHETICAL aspect of this tracking function enough, hence the all-caps on that word. In reality this money is actually comingled and invested with every other contributor’s money into the community trust fund. This trust fund in invested in various US Government bonds. Benefits are paid out using a formula based on both the total amount of contributions (like in the DCP type setup) and also based on specifically defined benefits (like a DBP) which are determined by the US Congress. This is why the Social Security plan can be considered a hybrid type plan.

Social Security payouts are occasionally adjusted for inflation that are called Cost of Living Allowance (COLA) increases. These increases are drawn from the difference in the Consumer Price Index (CPI) over time, but the adjustments are not regular, are not indexed to a specific requirement (they are not actually required by law to meet the difference in CPI since the last increase, which fact can be a very bad thing for the people receiving these payments), and thus are often not even enough to keep up with the inflation that has occurred since the last COLA increase. Congress is also under ZERO obligations by law, or much less, precedent, to consider or actually implement COLA increases at any regular time intervals, or even at all. All of these things are problems for people living on fixed incomes. Especially since an unavoidable FACT of money markets over time is inflation.

Inflation Versus Deflation Versus Stagnation

Inflation versus Deflation versus Stagnation is a complex topic that generally requires advanced education in money, business, and economics to even begin to fully grasp its effects. However, for the purpose of this blog post, I shall attempt to simplify this HUGELY complex interplay of economics and money and establish a basal understanding from which we can operate. In this section, I shall define each of these terms in “layman’s” wording and give a short explanation of each of them and then compare and contrast them while simultaneously evaluating their relative effects on the market and our money.

Inflation

What is inflation? Inflation is the slow (usually, but can be rapid) devaluing of a currency’s purchasing power that is INEVITABLE and UNAVOIDABLE in a strong and growing economy. Inflation is the reality that we all experience on a daily basis, but it is most easily illustrated when mom or dad (or grandpa or grandma) tells us how much cheaper a candy bar or soda was back when they were young. Money loses value over time and thus it takes more money to buy the exact same item(s) as it used to “back in the day.” All goods and services are affected by inflation. Many people (who are not economists or financial professionals) often view inflation as “negative.” Money losing its value IS not really a “good” or beneficial thing from the viewpoint of the users of that money. So this view is not necessarily wrong, but it does reflect a lack of a full or complete understanding of how economics work. Inflation is NORMALLY a side effect of a robust and expanding economy (which is a good thing). Therefore inflation is not necessarily a “bad” thing. Inflation is an unavoidable by-product of a strong and healthy economy. Nothing “good” in this world can be acquired or achieved without some kind of “downside” or drawback. Inflation is the drawback of a healthy, strong, expanding economy.

Economies that are inflationary but not expanding have happened in the past but are generally rare. This type of situation is as undesirable as a major Depression/Deflation event. Pre-World War II, Weimar Republic-era Germany is a prime example of this type of hyper-inflationary economy with no expansion (or in this case actual contraction). This particular episode was nominally caused by excessive borrowing coupled to uncontrolled, excessive printing of money, both carried out by the government. The excessive borrowing was on the part of the previous government (the government of Kaiser Wilhelm before and during World War I) in order to fund their military buildup and war effort. The subsequent excessive money printing was carried out by the successive post-WWI government of the Weimar Republic in a vain attempt to pay off Germany’s war-debts.

Inflation can thus be viewed as “bad” and in some ways it is, but its opposite, Deflation, is even worse. The absence of either of those two things (which is called Stagnation) is almost as bad as Deflation and is definitely much worse than Inflation. Therefore when speaking of money in relation to economics, there are only three possible situations (Inflation, Stagnation, and Deflation) all of which have negative aspects. Of the three possible situations, the LEAST NEGATIVE situation is Inflation…AS LONG AS the economy is healthy. Stagnation is next “least-bad” and Deflation (in ALL economic performance measures) is the worst situation of the three. A “good” (meaning not too high) and standard level of inflation for the US economy is generally around 3% per year. What this means for us as users of this money is that unless your money in savings or investment are making AT LEAST 3% per year in returns then you are losing money (aka buying power) every year. Another way of saying this same thing is this: you MUST average AT LEAST 3% return on all your money EVERY year or you are becoming “poorer.” This FACT is unavoidable and inarguable. Money in your normal bank savings or checking account is making LESS than 1% (usually more like 0.25%) per year. That means the money in your savings account is actually SHRINKING rather than GROWING every year. This FACT is also HIGHLY relevant to our discussion of fixing the broken US retirement system. So we will use this fact later in our proposed solution. Read on.

Stagnation

Stagnation is a situation where your economy is neither growing nor shrinking. Although your money continues holding its same value (which is “okay” rather than negative or positive), Stagnation is NOT desirable from ANY viewpoint of wanting a growing, healthy, robust, expanding economy. Stagnation is “fine” as long as the numbers of workers and the number of jobs in your economy, relative to each other, do not change in ANY way. However, ANY country that has a birthrate that EXCEEDS that same country’s death rate means that ALL those economies MUST have continuous expansion (and thus its side-effect: inflation) to sustain a healthy growth rate in jobs and Gross Domestic Product (GDP). Otherwise, you will see a rise in unemployment directly proportional to the difference between birthrate and job creation. ANY country where the birthrate is LESS than the death rate will see a commensurate shrinking of the available labor pool to fill the available jobs.

Such a situation will require either an economic contraction to match that difference (which is generally considered “very bad”) OR a commensurate influx of permanent immigration or temporary foreign workers (or a combination of both) to make up the difference between the available workers and the number of available jobs. Which situation can be highly politicized and could be desirable or undesirable depending on your political view. Japan is currently in this exact situation: Immigration into the country is viewed as undesirable by the majority of Japanese natives. However, the native birth rate of Japanese people is MUCH lower than the death rate. Japanese people are dying faster than new ones are being born. This means Japan is severely lacking (and will continue to experience this situation for the foresee-able future) in skilled workers and its economy MUST import workers or it will shrink (which it is doing currently) partially due to the native Japanese people’s dislike for importing foreign workers. A shrinking economy means less total money circulating in that economy, less pay for all workers in that economy, significantly less profit for every company involved in that economy, and notably less revenue collected via taxes by the government of that economy. Shrinking economies are ALWAYS bad for everyone involved in that economy.

Deflation

Deflation is generally what happens in economies suffering from effects of major recessions or depressions. During Deflation, an economy generally sheds jobs (shrinks) and its currency decreases in value relative to “fixed” reference points (for instance gold) and in relation to other (less fixed or “floating”) reference points like other economies and currencies. Deflation generally happens when the economy is shrinking which also means there are fewer jobs than before. Although during deflationary periods, it takes less money to buy something, there is also less money circulating/available, and wages plummet. These are all HIGHLY undesirable situations from the aspect of an expanding, robust economy being desirable, and more money and more pay being desirable. The Great Depression is the single worst episode of monetary Deflation and job market contraction in the entire history of the US economy.

Deeper Into the Aspects of DCPs

Now that we have covered the bare minimum of an understanding of economic Inflation, Deflation, and Stagnation, let’s explore a little deeper into the basics of a DCP (when compared against a DBP). Conventional and Roth IRA’s are the two most common and well known varieties of a DCP. In a DCP, the amount an individual contributes directly determines how much that account will eventually payout in benefits. This account balance is ONLY changed by three things: 1) initial contributions, 2) how well the invested money performs in gaining interest, and 3) the amount of the time the money is invested.

Each of these two major system types (DBP and DCP) has specific advantages and disadvantages. In this post I will continue to define and explore each type of system and cover both the advantages and disadvantages of each type of system. My intent is to continue exploring the currently available retirement systems and then to propose my ideas for fixing them. This intent is derived from the wide perception that none of these systems are working “well” for the majority, much less the entirety of the American population. This perception is both true and not true at the same time. But how you view it and whether it is “true” or not, largely depends on your political viewpoint, relative levels of financial knowledge, or complete lack of financial knowledge. My goal here is to remove some of the confusion around the current systems in use, debunk some of the widespread, rampant, misinformation and bullshit surrounding all (or most) of them, and demonstrate a simple and clear “fix” for all of the issues we all currently face with American Retirement.

Advantages of a Defined Benefits Plan

In this type of system, the benefits after retirement are “guaranteed” or promised, regardless of initial contribution amounts and sometimes regardless of length of service or employment. Sometimes they have graduated scales of benefits based on increments of service/employment time. These plans also, often, offer additional, non-monetary, benefits like insurance coverage and other things on top of a monthly paycheck. However, in many of these systems a specific length of service or employment is required before benefits will be paid out.

For example, under the US Military’s Retirement plan a minimum of 20 years of active service is required and the retirement pay is then 50% of the base pay that individual received at the highest rank they held for at least three years prior to retiring. There are currently proposals being discussed to make this system both more participatory (like requiring individual contributions) and inclusionary (like allowing a smaller retirement benefits package after only 10 years of service rather than requiring the full 20 years of service before ANY benefits are offered).

The chief advantage of this type of system is that, typically, regardless of an individual’s starting pay amount, the retirement payout will be commensurate with the pay and benefits of other people who retired at a similar level of responsibility, pay, benefits, and at roughly the same length of employment.

Another major advantage is that in many of these types of systems, the individual is not required to contribute money out of each paycheck or only contribute a small amount, and the eventual retirement benefits are viewed as additional pay/entitlements on top of the regular pay earned by the individual.

The last important advantage of this type of account is that if the market performs poorly the retirement payouts (at least initially) are not generally negatively affected and the benefits and payouts remain unchanged due to the size of the comingled trust fund’s pool of participants.

The viewpoint in favor of this type of system is that the retirement funds are earned through the long service/employment and the individual is thus “entitled” to the eventual retirement pay. Participants often do not have to contribute anything to these plans to get an eventual benefit, although some do require regular contributions. These types of plans are viewed as “safe” due to the relatively large pool of participants and (somewhat) low likelihood of trust fund failure and they are thus favored by many people for the reasons of all of these advantages. However, your dad and grandpa should have told you that nothing in life is guaranteed or safe. This is true. Which is why both of the words “guaranteed” and “safe” referring to these plan types in previous paragraphs are in quotes. NOTHING is totally safe or guaranteed in this world. NOTHING except death and taxes. Anyone that tells you otherwise is trying to sell you something that you probably don’t want or need.

Disadvantages of a DBP

However, there are MANY drawbacks to this type of plan. The first major drawback is that individuals who are more disciplined or fore-sight-ful CANNOT increase their eventual retirement payouts by contributing more into their retirement accounts prior to retiring, especially earlier in their career in order to take advantage of the power of compound interest. If the market performs well (or at least better than expected) individuals participating in a DBP do NOT see ANY increase in their benefits or pay, even though the co-mingled trust fund itself sees better returns when the market performs better than “normal.”

Another major drawback is that any person who does not serve, or remain employed by the entity funding the pension, for the ENTIRE required length of time, loses ALL of the potential retirement pay and benefits immediately upon termination of employment. A perfect example of this is a person in the US military who serves for 19 years and leaves the military service before reaching 20 years, has ZERO retirement at that point. If they serve just one more year they would be entitled to the entire retirement benefits package for their rank and length of service. Most DBP systems are an all-or-nothing proposition.

The individual can not only lose ALL of their benefits while still alive, but they can also NEVER pass on their pension or benefits to their heirs. This is a HUGE drawback of these plans.

Still another major drawback of this system is directly related to the one we just discussed: the complete lack of portability. If you work 15 years at one job and then quit (or get fired or laid off) and go to work somewhere else you have to start over in whatever DBP system the new company uses and you lose everything you had saved up in the old company’s DBP system. This encourages people to stay at one company for decades. Doing this also tends to stifle the beneficial market trend of competition for employees between companies, which competition raises wages, which is great for the individual workers. Therefor, DBPs act as a deterrent to, or an artificial cap on, better pay and benefits, which keeps wages/salaries lower than if these plans were portable. Union sponsored (rather than company sponsored) DBP pension plans overcome SOME (but not all) of this drawback, but if you leave the union for ANY reason, you lose all those union benefits too…so union DBP systems only mitigate SOME of that issue. Unions also help to minimize SOME (but not all) of the loss of higher wages and better benefits these types of plans naturally inhibit due to their collective bargaining power.

Yet another major drawback of this system is that these eventual retired pay and benefits are viewed as “safe” or “guaranteed” by many people working under this system. As we have already discussed, these pay and benefits are in NO WAY “safe” or “guaranteed.” EVER. They MIGHT be “safer” in SOME ways than certain aspects of other plans, BUT these plans’ funds are invested in the EXACT SAME market as every other retirement account (including both conventional and Roth IRAs, but excepting Social Security which is wholly invested in short and long term US Government bonds) and are all, therefore, subject to the EXACT SAME fluctuations in the market, JUST LIKE every other retirement system (except Social Security). Additionally, when a company who sponsors a DBP goes bankrupt the plan they are sponsoring often fails at the same time or shortly thereafter due to the sudden dry-up in continually replenishing investment funds. In fact, MANY pension plans have gone bankrupt through mismanagement, corruption, and corporate bankruptcy. This has happened literally dozens of times in my barely 40 year life span. Every time it happens hundreds and even thousands of peoples’ retirements are completely wiped out. When a failure of this type happens, EVERY person receiving these pay and benefits, immediately and permanently, loses everything they thought they would be getting through their retirement system. This can be, and has been, completely devastating for the people who were counting on that money and those benefits. So much for “safe” and “guaranteed,” huh?

Yet still another major drawback is that since most of these plans do not require contributions from the participants, ALL of the eventual payouts MUST come directly from the revenue of the organization that sponsors the plan. In the case of a civilian for-profit company, these funds come directly out of the company’s profits. In the case of government agencies, these funds come directly out of current and future working citizens’ withheld taxes. Under union pension plans, monthly union dues and other funding sources are invested in the mutual trust fund to grow in order to eventually be paid out.

The last MAJOR drawback of these types of systems are that, often, some/much of/or sometimes all of, the money is invested in the stock of the company that owns and manages the DBP itself. This is doubly dangerous when a company goes bankrupt. Enron is a prime example of what happens when a DBP is partially, or mostly, invested in the same company who owns and manages it, and the company and/or trust fund is mismanaged and goes under. Thousands of people lost both their jobs and decades of retirement investment nearly overnight.[1] People became bankrupt and homeless because of financial mismanagement and several Enron higher ups went to jail but several others walked away with millions of dollars in their pockets, while the average working stiff lost every penny they had.

Another drawback (that could be major or minor depending on your life situation and your viewpoint) is that, some can, but most of these plans cannot be, borrowed against or used as collateral to guarantee another loan.

Another aspect that could be either an advantage or disadvantage to this system depending on your political and social viewpoint is that the individual has virtually no say in what benefits or payment amounts are set at for their retirement. GENERALLY (but not always) these types of specifications are set by a group of people who do not answer to the individuals, whose retirement monies they are managing. This general lack of input extends as far as to the individual having absolutely ZERO say in what funds or types of accounts the co-mingled monies are invested in, no say in who manages the trust fund, no say in what fees or how much are paid to the fund managers, and no say in when or how the funds are moved or re-invested in other accounts. The individual receiving benefits generally has ZERO say in how or by whom, their benefits money is managed before it is paid to them.

Advantages of a Defined Contributions Plan

In this type of system, there are no “promised” benefits or payments levels. But as Enron shows even the promised “guarantees” of DBP plans are inherently worthless anyway, this lack of a “promise” of future payments is not really a drawback in any way, since these plans are no less “safe” than DBP types. However, unlike DBPs, the payouts are generally only monetary with no additional benefits like insurance coverage. Payout interval and amounts are determined by only three factors: initial investment amount, interest gains over the life of the account, and amount of time invested.

As previously mentioned, JUST LIKE Defined Benefits Plans, retirees using a DCP, still have ALL of their money invested in the EXACT SAME public markets as all of the other retirement systems (except SS, which, as previously mentioned, is invested in US Government short and long term bonds). However, unlike a DBP, individual investors using a DCP, CAN, IF THEY WANT, move their money into different funds to take advantage of better interest rates, lower fees, or higher fund performance. They can also have their money split between multiple funds to provide both higher risk/higher reward and lower risk/better security.

A HUGE advantage of these plans over other types (except Social Security) is that they are completely portable. You could work for 15 different companies over your 49 (or more) years of employment and still contribute to the exact same retirement fund no matter where you were at or who you were working for. This is probably the single most important advantage of these types of retirement plans. Thus, with a DCP, the individual does not have to worry about not working the full minimum required length of time to “guarantee” their own retirement. They can change jobs as often as they like or as their life situation requires from zero (one job for their entire adult life) to dozens of times.

An individual with a DCP can actually retire “early” if their accounts, lifestyle, and personal choices make this doable, whereas, a person with a DBP CANNOT choose to retire early. These two major advantages mean that for people who value flexibility, there is clearly only one “good” CURRENT choice in retirement plans: DCPs.

These accounts are inheritable, meaning they can be passed on through a will or probate or the money can be cashed out and distributed to the heirs of the owner of the account. This fact means that wealth can be built across generations which makes everyone better off across those generations. It is a truism of money management and wealth building that the fastest way to increase your money pot is to start with more money in the first place. The FASTEST way to the 1% is by inheriting your money. That is IMPOSSIBLE with a DBP but FULLY POSSIBLE with a DCP.

A disciplined and future-anticipating worker can set themselves up for great success by the time retirement comes along by simply increasing their earliest few years of investments by just a few tens of dollars a month. Even a difference as small as 10 dollars a month can pay HUGE dividends (literally) 40+ years down the road. Through the awesome power of compound interest, their few tens of dollars, invested earlier, work longer and harder for them than hundreds or thousands of dollars invested later in their career. We will explore more of this awesome power of compound interest later, so keep reading.

DBP type retirement systems DO NOT and CANNOT provide this HUGE advantage. Any upswing (or downturn) in market performance is absorbed by the comingled trust fund and is kept within the fund itself and is NOT paid out to beneficiaries. Often though, downturns in the market can mean reduced benefits payouts. Consequently, market upturns are invisible to DBP beneficiaries but downturns are sometimes highly painful to those same DBP beneficiaries. In other words participants in DBPs experience the same or similar downsides to everyone else when the market performs poorly and DO NOT see any upsides when the market performs well.

Another advantage to these DCP type accounts is that they can be borrowed against. Money can (often) be used directly out of the accounts, or the accounts can be used as an asset to guarantee a loan if a life situation arises that requires some sudden cash.

The final advantage (and probably the largest or most important of all the large and very important advantages) of a DCP type system is that even if ALL of the companies you work for your entire career go belly-up and bankrupt while you are working there, your personal retirement is “safe.” WAY SAFER than ANY DBP plan is or would be in the same situation. This is because the company has no control over, has no interest in, and has no say in where and how your retirement funds are invested. Your investments are thus totally and completely safe from the possibility of your own employer going bankrupt. Further, IRAs are generally invested in Index Funds that have multiple companies in them, so even if one company goes under it doesn’t destroy your retirement, even if some slight to moderate damage does happen.

The viewpoint in favor of these types of plans are as follows: They are completely portable, they are safe from internal company meddling, they are safe from congressional “borrowing,” (more on this one later) they allow the individual who owns the account more flexibility, and give them more power in managing their own money (but only if they want it). DBPs cannot provide ANY of these advantages. AND these advantages are definitely the largest and most powerful advantages of ANY retirement account currently in use INCLUDING Social Security which has several drawbacks these DCP accounts do not suffer. Additionally, not only do DCPs generally have the most desirable advantages they also have the smallest and least detrimental drawbacks of any retirement plan currently available. Read on to see what those disadvantages are.

Disadvantages of a DCP

Unlike in a DBP system, under a DCP system the individual MUST fund their own retirement. There is no company trust fund that funds it for you. There are no company profits that fund it for you. There are no other taxpayers contributing to it for you. There is also no offer of additional benefits like insurance coverage. Basically you HAVE to make money to be able to invest money in these accounts. If you spend your life panhandling or on unemployment you probably will not be making enough money to invest in these types of accounts. Most people would view these things as disadvantages. Instead of working for 20 years or more (for the US Military say or for a union) and not having to pay a dime into your “retirement account,” and getting a nice paycheck for the rest of your life, you must instead pay a chunk of your own hard earned and precious money into an account that you “shouldn’t” (and sometimes can’t depending on which DCP you are using) touch for 40 years or more (there are exceptions to this generality).

Additionally, DCPs are more susceptible to market fluctuations (both positive and negative), due to their individualized nature, than larger groups of participants’ co-mingled trust funds are. Thus if the market performs poorly for extended periods of time (which is unusual, but can happen: The Great Depression and the Great Recession both lasted multiple years with long term market effects that lasted for decades after they were officially “over”), there is the possibility that an individual will, not only, NOT be able to retire on time, but might not be able to retire at all. Especially if the long term market downturn is unfortunately timed, for instance, in the last few years just before retirement. This is a “true” situation CURRENTLY, due to the way these retirement plans are restricted by current federal laws (or the lack thereof in some cases). Later, in this blog post I will propose ideas to correct these current issues. A DBP plan mitigates SOME of this issue through the use of a much larger (than one individual) co-mingled pool of participants.

Now that we have discussed the advantages and drawbacks of both the two major types of retirement systems, let’s look at the advantages and disadvantages of a hybrid system of both DBPs and DCPs.

Hybrid Systems Like Social Security

In a hybrid system, such as Social Security, which combines aspects of both the other major systems, the intent was/is to keep or enhance some of the advantages of the other two systems but also to counteract some of the disadvantages of those same two systems. In theory, this is a great idea. In actual practice and reality, private systems are easily mismanaged and in the federal system Congress has too much influence and access to the system to make it actually work like it was designed to. Let’s explore some of those advantages and disadvantages.

Advantages of a Hybrid System

In a hybrid system, like Social Security, we keep SOME of the nicest and most desirable advantages of the DBP and incorporate ONE of the advantages of a DCP.

From the DBP system types we get the beneficial and desirable larger pool of co-mingled funds (and therefore “safer”) type trust fund. We also keep the idea of a specified “guaranteed” benefits payout upon retirement. In the case of Social Security, the guarantor is the US Federal Government, which is a much more powerful and stable entity than any for-profit corporation and any union. For Social Security to ACTUALLY “fail” financially, the US government would actually have to collapse or lose its power to levy taxes. As long as the US Congress has the power to levy and raise taxes, Social Security will only fail if the US Congress WANTS it to or LETS it fail.

From the DCP system types, we get the universal portability of this retirement system. No matter what job you work or what company you work for, YOU pay into this plan and it goes with YOU, WHEREVER you go, as long as you are working. That is an important caveat, but the obvious gaps there are covered by several systems currently in place (which I will only discuss minimally) and I will also discuss some proposals (later in this same blog, but also minimally) to cover the rest of the gaps not currently covered.

An additional advantage of the Social Security system is that, in this government-run setup, we don’t have the problems of companies owning the plan and going bankrupt and taking the plan down with them. And, by law, the Social Security Trust Fund must be invested in both long and short term US Government bonds, rather than the relatively more unpredictable and relatively less stable public markets (the relativity is ONLY to the US Government bonds and is NOT relative to anything else in this reference). In order for Social Security to actually fail or go bankrupt one of two things MUST happen: 1) Congress must fail to pass taxing levels that keep the trust fund solvent or 2) the entire US government must fail. More on this issue later.

Disadvantages of a Hybrid System

Unfortunately, we also still have some of the major drawbacks from the other systems and have some additional downsides due to the nature of the setup and control of Social Security itself. First, although we have a large pool of contributors to ensure long term stability and solvency, there are a couple of problems: 1) Congress has access to the money and has multiple times in the past “borrowed” AGAINST (NOT FROM mind you. They are NOT the same thing) the funds to fund their “creative accounting,” bullshit, deficit-budget, chicanery in sometimes shady, and always detrimental-to-the-SS-fund-and-US-taxpayer ways. And 2) Social Security is NOT funded for the individual, by the individual. By that I mean, Social Security does NOT have an individual account for each individual and does not keep dirty, greedy, meddling, Congressional, dick-beaters (of any gender, so let’s also include “pussy-pokers” for equity’s sake) off of it.

Problems with the US Social Security System Itself

Only ONE of the four separate Social Security trust funds takes in more money per year than it pays out. The other three are all currently running deficits. As of 2012, the lowest deficit any of the three was running was 4% or 14.5 billion dollars MORE paid out YEARLY than taken in. The highest deficit being run by any of the Social Security trust funds was a 28% deficit which translates to 31.2 billion dollars MORE paid out than taken in YEARLY. However, from 1937 through 2009 overall Social Security has taken in more than it paid out in all but 11 years.[2] Despite all of this, and contrary to popular, bullshit belief, Social Security IS STILL CURRENTLY SOLVENT, and will remain so until around the year 2035, and also despite all the irrational, unfounded, slavering, fear-mongering, anti-social welfare programs happening over at the party of anti-science morons who worship at the altar of the shrunken, erectile-dysfunctional, cocks of fat, old, white, male oligarchs (aka Republitards…err Republicans).

These claims of Congressional theft of Social Security are unfounded, bullshit, propaganda, perpetrated upon gullible morons who have not bothered, cannot be bothered to, or are incapable of performing even the most rudimentary research and fact checking. Don’t be one of THOSE lazy dumbasses. You will be ridiculed by myself and everyone else with even the most basic fact checking abilities, AND you will DESERVE that ridicule for your idiocy. I will not spare your touchy-feely, tender little, delicate snowflake feelers. Willfully ignorant people SHOULD be ridiculed for remaining willfully ignorant in the face of the modern era with EVERY bit of information a mouse click away. Google is your friend. Learn to use it, and more importantly learn to fact check. Learn the difference between facts and bullshit beliefs. There is no such thing as “alternate facts.” Alternate facts are bullshit and lies that morons WANT to BELIEVE are “true” even though they aren’t. Just because someone WANTS to believe something is true or factual doesn’t actually make it true or factual. Further, believing “alternate facts” and confusing them with REAL facts makes you a fucking dumbass. Don’t be a fucking dumbass. It’s not cool.

The reality is this: on or before that 2035 year I already mentioned, Congress will need to pass a bill raising the level of Social Security taxes from about 12.4% where it currently sits, to around 14-15% to compensate for the difference of over 10 million fewer babies born in Generation X compared to the Baby Boomer generation. Implementing the increase before, and gradually, would obviously be more optimal and desirable, than implementing it suddenly and at the last possible date, since doing so earlier will alleviate SOME of pain that would be associated with a sudden 2-3%+ increase in taxes for every working stiff in America. Especially since SS taxes are NOT withheld from capital gains (which is how the 1% makes their vast majority of their money). What does that mean to us as middle-class Americans? That means that ONLY people who actually work an actual job pay into Social Security. Those who inherit their money and never work a “real” job a day in their life, NEVER pay into Social Security. (But, then again, they don’t need Social Security since their retirement “cushion” is more than FULLY overstuffed already, from being lucky enough to be born into the families of robber baron thieves.)

(Note: I am not personally or politically anti-capitalist per se [a Latin phrase that means “specifically” and is pronounced “purr-say”…see I just made you linguistically smarter than you were 1 minute ago]. Reading my stuff is beneficial to everyone. Besides, I am funny and caustic at the same time. Admit it.] Even though some of the things I have written here may seem to indicate that I am anti-capitalist.)

I am a Libertarian. I don’t have a problem with capitalism. What I DO have a problem with is ethics and morals. Or more accurately I have a problem with the total and complete lack of ethics and morals that is continually and repeatedly demonstrated by, and in favor of, the business oligarchs that actually run America’s economy and political system for the benefit of NO ONE BUT THEMSELVES. Nothing can be done or analyzed in a vacuum. ALL actions and thoughts can be analyzed in whatever way you want, BUT the ONLY legitimate way to view them FULLY is in how they affect EVERYONE. Therefore, no action whether political, economic, or personal is exempt from ethics and morals. Actions that ignore the effects on others are INHERENTLY unethical and immoral. Actions whose end results are negative for others are INHERENTLY unethical and immoral. But, this post is not intended to discuss the murky Sisyphean (look him up it is a fascinating story: Sisyphus is his name in Greek mythology) depths of ethics and morals. Thus, ethics and morals are a topic for another blog post at another time and NOT this one. AND, I digress. So, I now return you to your regularly scheduled rant, rather than this tiny little side-show rant.)

This Social Security dis-function has NOTHING to do with ANYTHING except two things: 1) the way Social Security was setup in the first place and 2) the number of babies born in the generation immediately after WWII ended (the so-called Baby Boomers). Currently, at the time of this blog post’s writing, there are around 76 million Baby Boomers that have already retired or will be retiring within the next 10 years (there were over 78 million Baby Boomers born, but over 2 million have already kicked off this mortal coil for whatever lies beyond). The Baby Boomer generation’s children (Generation X, which is my generation) barely counted 65 million babies strong. Combine those two numbers and what you get is 65 million (or a bit fewer) people’s taxes that must fund 76 million Baby Boomers’ Social Security (give or take somewhat depending on death rate for both groups). Both of these issues are simple math problems. But math never seems to be a strong suit for the US Congress (or the general US population for that matter). I say that FULLY tongue in cheek. Pathological Aversion bordering on Allergic levels of Phobia might be better terms to use in reference to Congress’ feelings about math and balanced financial sheets that run in the black.

Why? You might ask. Well, this is due to the fact that Social Security is not “pre-funded.” Pre-funded is how a person with an IRA (of any type) or a DBP that requires contributions from every paycheck, are funded. A worker pays into the system for their entire working life and then when they retire their money is there, ready, and available for them to use. Social Security does NOT work that way. This has NOTHING to do with the previously mentioned bullshit conspiracy theories of Congress “raiding” the Social Security Trust Fund like many people ignorantly repeat. That has never happened. Congress has NEVER raided the Social Security fund. EVER. Not once. Congress HAS, a couple of times, borrowed AGAINST the fund” but they have never actually taken any money OUT of it. Borrowing against it is like using your vehicle title as a guarantee to secure a personal loan from a bank. If you don’t pay it back the bank will repossess your car. If you pay it back on time your car stays in your garage/driveway. Social Security NEVER lost any of its funds through borrowing against it. Congress paid back and is paying back the money it borrowed with taxpayer dollars every year but NONE of that money actually came out of the Social Security Trust Funds. EVER. The Social Security Trust Funds are just one of many US Governmental assets that all help to secure that public debt. This use of the SS Trust fund as security, enabled Congress to get a lower interest rate via secured loans rather than the higher (and therefore more expensive) interest rate loans that otherwise would have been used.

Where and From What Social Security’s Problems Actually Stem

So if Congress never borrowed money out of the Social Security Trust Funds why are they “going broke?” Let’s explore the reasons. Social Security was passed by Congress and signed into Law by President Franklin D. Roosevelt in 1935 and took effect in January 1937. It paid its first benefit that EXACT SAME MONTH. That was, is currently, and will continue to be, for the foreseeable future, the biggest problem the Social Security plan has ever had or will ever have. Additionally, people who never paid into the system have been, and still are, eligible for benefits. This is still true today, especially in regards to the Disability trust fund and both of the Medicare trust funds, but still including the Retirement trust fund also. Especially early on in its history, people were grandfathered in without ever paying into the system or having paid very little into it. More on why all of those are problems later, but some of you might already see why those things are problems. There IS a point to be made for grandfathering in and including people with disabilities but we aren’t going into that argument here in this post. Disabled people getting SSDI are NOT the problem. People who never worked, and never paid into the system, and are receiving benefits from the system ARE the problem.

In 1937 the very same month it started taking money out of every worker’s paycheck, Social Security began payouts. That same first year, more than 53,000 people received benefits payments from Social Security. That means those 53,000 people all paid ZERO dollars into the Social Security trust fund, but still got paid benefits out of that trust fund. Those first year payouts totaled more than $1,278,000.[3] What that means is that the IRS and SSA started paying people before they ever collected a dime in revenue. THIS is why the system is broken. They started paying people out of a trust fund into which those same people NEVER contributed.

That same year (1937) the total population of the US was nearly 130 million people.[4] BUT, between 17-20% of work-eligible Americans were unemployed (over 7.7 million) out of the total available work force of more than 38.5 million. This was the height (or depth if you will) of the Great Depression. That year, the percentage of pay collected from every check by the IRS for the SSA was 2%.[5] The average yearly wage for that year was $1713.00.[6] Although there is ONE VERY SMALL upside: the SSA only paid out about 15% in that first year of what they collected by the end of that same year. So the first year (and most years thereafter, Social Security has taken in more than it paid out). That is…right up until the largest, most populous generation of Americans ever born (the Baby Boomers), started retiring.

However, as of March 2017, some, just-released, new, data shows that Millennials may have overtaken the Boomers as the most populous generation ever. This is good news for my generation because our math looks like this: 65 million Gen Xers supported in retirement by 78 million and counting Millennials. That means unlike the Boomer generation who have FEWER workers funding their SS checks, we Gen Xers have 13 million MORE workers funding our SS checks (if the SSA survives Congressional incompetence past 2035 that is). The first Generation X retirees should start being eligible for their Social Security checks in the year 2030. But I personally will not be eligible until 2041 so unless Congress fixes the SS issue before 2035, my, and my wife’s, retirement will have to be funded entirely by ourselves (toward which end we are both working our asses off, incidentally.

Congress COULD have set up Social Security to be pre-funded and doing so would have meant that the IRS and SSA collected funds for 55 years (retirement age “back then”) before EVER PAYING A SINGLE DIME in benefits. This money would have grown for that 55 years through the HUGE power of compound interest and Social Security would have had TRILLIONS upon TRILLIONS of dollars sitting in that trust fund by the time 1976 rolled around and the first person who had paid into the fund for their entire 39 year working life (back then…now it is about 49 years) was eligible to begin drawing benefits. The Social Security Trust Fund has AVERAGED a gain from ONLY taxes of over 174.6 BILLION per year since 1937. Using that yearly average as a baseline, if Congress had made Social Security totally pre-funded rather than mostly annually-tax-funded, there would have been AT LEAST $30,490,732,516,553.35 in that common trust fund by 1976 when the first retirees started drawing benefits (using the average rate of gains the SS trust fund has seen over that time period: 6.5%). That is over 30 TRILLION dollars. That number represents nearly 2 full years of the current ENTIRE Gross Domestic Product (GDP) of the US.

But Congress did NOT choose this logical and reasonable option. Instead they chose to start paying benefits before they actually collected a single dime of taxes to support those benefits. THIS is the single reason why Social Security has issues now. And THIS is why the Social Security problem is a simple math problem. Congress SUCKS hairy, urine-soaked, billy-goat-balls at math, logic, and reason. But that’s what we get for electing lawyers and religious, bible-thumping morons instead of mathematicians, scientists, and professors I guess. We get the leaders we elect and thus deserve rather than the leaders we NEED and SHOULD HAVE. Instead of electing our best and brightest, we elect the worst, dimmest, dumbest, least intelligent, and most corrupt. We elect the lying-est, cheating-est, slimiest, professional liars, thieves, and rich oligarchical “businessmen” robber barons to rule over us…and then we tell ourselves that those slimy shitbags will clean out the very same swamp that aborted them into their despicable, deformed, deficient, existence for the added misery of all of us. And then congratulate ourselves when they destroy the very systems and safeguards meant to protect us from the exact type of shitbags we elected. But, yet again, I digress. Get back on topic, Ranticus!

Another important factor in this discussion is that the Social Security trust funds have varied greatly in interest rate gains over the entire span of time they have existed. These have ranged from about 2.2% at their inception, to a low of barely 1.9% in both 1947 and again in 2016, up to a high of about 13.8% in 1981. [7], [8] Social Security has taken in $13.8 trillion and expended $11.3 trillion since 1937.[9] This indicates that excluding interest gains there is at least $2.5 trillion more in the fund than has been spent at the present time. The average interest gains of the Social Security Trust Funds since 1937 have been around 6-7% for the entire duration of its existence. By way of contrast, the stock market (where all the other retirement plans are mostly invested) has averaged an increase of over 8% for the entire time of its existence. This is 1-2% more than the average of the Social Security Trust Funds gains which are all invested in short and long-term US Government Bonds.

Historical and Current Status of Social Security Tax Rates

The IRS and Social Security Administration have collected taxes on income at various (but always increasing) rates since its inception. From 1937 through 1949 the first $3,000 of income was taxed at a rate of only 2%. From 1950 through 1953 this rate increased to 3%. From 1954 through 1956 it went up to 4%. Starting in 1957 it began to increase more frequently but in generally smaller increments until 1990 when it reached its current point of 12.4%.[10] At which point it has been stable since that year. The amount of earnings taxed has risen in spurts since 1937 from the initial $3,000 I previously mentioned to $127,200 where it stands as of January 2017.

All this might seem esoteric and only tangentially related to the topic of how to fix the current retirement system, but I will incorporate that last percentage of 12.4% into my suggestion for how I think we can fix these systems. That 12.4% is the number that all working people pay into the system. For self-employed people they pay the entire amount. For people who work for other people (employees) half of that amount is taken from their paychecks and the other half is paid by the company they work for. So please remember this 12.4% number.

Politicization of the Topic and Mis- and Dis-Information About Social Security

In the discussion about our various retirement systems, there is a word that is thrown around and highly misused. That word is: privatization. This word has come to have highly negative connotations by certain people who are generally politically left-of-center leaning. The negative connotations generally revolve around the idea that “privatization” means an end to all retirement plans for everyone except the top earning 5-10% of Americans (those who make more than $140,000 per year as of 2017). By way of contrast, for people who are generally right-of-center leaning, this very same word has come to mean: “getting rid of the nasty socialist-bordering-on-communist system of social security where the government forces everyone to participate in a system that we (right wingers) think is literally the work of the devil.” Both of these viewpoints are simultaneously absolutely correct and also complete, total, and utter bullshit. They are both examples of each side completely exaggerating, unrealistically propagandizing, and mis-portraying what the other side is saying and then totally mis-construing and glossing over their own political view’s real-world ramifications, actually intent, and the political ammunition they derive from those two gross mis-characterizations.

Further, discussion about and around Social Security also include the fact that nearly EVERY Congress and nearly EVERY President since 1937 have borrowed against (not from, mind you) the Social Security Trust Funds. Although this borrowing against is fiscally a net gain or loss of ZERO dollars, It does cause some issues that are of the “kick the can down the road” and “let someone else deal with the problem” type of situation. When the government borrows money from itself (aka the American Taxpayer) what it is really doing is raising taxes on future workers and citizens. Borrowing money from or against things like the Social Security Trust Funds forces future Congresses to raise tax rates at some point later in time to cover the borrowed funds and the money lost from having to pay back that borrowed money plus its required interest. This is a very deep and convoluted process and concept, but I have tried to simplify it as much as possible for the sake of this blog post. So, yes, there are WAY more numerous, and WAY more complex things going on here, but they are not the point of this post. I am not going to go into detail about them here. Suffice it to say Congress and the Presidents have been mostly kicking the can down the road on Social Security for 79 years now.

Social Security Math

As we have already established, the other major issue with the Social Security Trust Fund is that there are about to be WAY more people retired and drawing social security than there are people working to cover it. This is not strictly “true” in the sense that there will still be more people working than retired. In order to understand this however, we must do some math and comparing of numbers. Retirement in the US currently generally only lasts from ages 65 through 110 (or death, whichever comes first). This span is only about 2 “generations” long. (For the purposes of this blog post we are talking about societal generations rather than human biological generations. Societal generations are about 20-25 years while human biological generations are normally considered to be about 30-35 years roughly.)

“Working age” in the US is from about age 16 through about 67. Which span is 51 years, or just about to slightly more than 2 full societal generations long. This means that there is actually (and probably will be for the foreseeable future) more workers than retirees. If all the generations were equal in size then there would be roughly about 2 workers for every retiree. Remember that 12.4% we talked about earlier. Here is where it becomes critical. The problem is that only 12.4% of each worker’s pay is going into the trust funds. This would mean that if retirees needed the same monthly paycheck amounts as younger working age citizens, there would need to be more than 8 workers (100 / 12.4 = 8.06) working full time to fund each retiree’s retirement at any given moment.

However, we need to pull in another piece of information to actually figure this out. American retirees actually only “need” about 70% of their pre-retirement income to maintain their previous levels of comfort and lifestyle by most common estimations. So our math actually results in just over 5.5 active workers (actually 5.642) per retiree at that same 12.4% rate of funding. For those of you who have been in the weeds with these numbers before, yes, I recognize this isn’t all of the pieces of the puzzle. But I am establishing a baseline here. Remember that number of 5.6 workers per retiree, because we are about to get into the weeds on Social Security Math.

The Baby Boomer generation started in 1946 and continued through 1964. There were over 78.8 million American Baby Boomers at their population peak. There are currently still over 76.4 million of them alive. Those boomers started retiring in 2008 (early retirement started at age 62 for them). The last of the Boomers should start drawing their first SS checks by 2029. Here is how we calculate the Baby Boomer Generation: Starting in January of the year 1946 and ending in December of 1964, using the total number born (78.8 million) and dividing by the years of time span (18) we find an average birth rate of Boomers of just less than 4.38 million per year. 2.4 million of them have already died, so an average of about 4.24 million (and decreasing due to continued deaths) should be retiring every year starting in 2008. The last of the Boomers should start drawing their first SS checks by 2029. This means that as of December 2016, 33.92 million (33,920,000) Boomers should have retired using our average number. This is not quite half of the total population of Boomers. Therefore, as of December 2016, there needs to be a minimum of 191.38 million (actually 191,376,640) full time workers to continue to fund ONLY the Boomers that have already retired. The math looks like this: 33,920,000 x 5.642 = 191,376,640). This is not ENTIRELY true since there are a few trillion extra dollars hanging out in the Social Security Trust Fund (2.5 trillion if you remember from earlier). So that will help cover some of the boomers but the math remains the same.

Unfortunately, according to the US Bureau of Labor Statistics (BLS) there are currently ONLY about 124.73 million full time workers in the US and another 26 million part time workers.[11] Why is this? Well the largest part of the problem is that the next generation (Generation X) was more than 10 million fewer people by population size over roughly the same number of years: 18 years of the Baby Boomers versus the 17 from 1964 through 1981 for Generation X. There were only about 66 million persons born in the US during the Gen X time frames. But theoretically, we need over 5.6 workers for every retired Baby Boomer just to maintain financial status quo.

Gen Y (or Millennials, roughly born between 1981-2000) are as numerous as the Baby Boomer generation but only started entering the workforce in 1997-98.[12],[13] So due to the much smaller population size of the next generation after the Baby Boomers (Gen X) and the fact that the subsequent generation (Gen Y/Millennials) has only just barely matched the population size of the Boomer generation, we have barely 145 million currently eligible workers to cover the 76 million current and upcoming retirees by the year 2029. We need 191 million plus, but we only have 145 million or so available workers. Therefore we have only about 76% of that required amount actually working, so that $2.5 trillion “extra” currently in the SS trust fund account must make up the difference…AND it is not nearly enough.

The generation after the Millennials (which has not yet been named) is on track to match or exceed both the Boomer and Millennial population numbers and will help make up some of that difference, but the problem still remains one of math. Only 12.4% of every workers pay is going into Social Security which means that there MUST be more than 5.6 full-time workers for EVERY single retiree at any given moment in time to keep the Social Security Trust Funds solvent. The math and US BLS data clearly shows that we are very short (46.63 million full-time workers short to be exact) on JUST the full-time workers we need RIGHT NOW to cover the less than half of the Boomers who have already retired. I sure hope these Boomers start dying faster or else the SS trust funds are going be empty REAL quick. (I’m only half joking here…and maybe not even half…maybe more like only 10% joking. Note: I’m not actually wishing Boomers would die. My parents are Boomers and I like most of the Boomers I have met, but the math is incontrovertible and inflexible.)

What Do We Need to Do to Fix the Issues with Social Security?

So what can we do to fix this issue? Before we go into that, let me pause right here in the middle of this thought and remind you about something I talked about earlier.

Remember much earlier in this post when I said “later in this post I will talk about why paying people benefits right from the start, people who didn’t pay into the system would be a problem?” Remember that? Well this is that part. Right now. Because now we are in a situation where for AT LEAST 39 years (from 1937 through 1976) there were people who NEVER paid into or did not fully contribute to the Social Security system, who received benefits. Right from the start, there were people who never paid in that got something out of the system. That’s just flat out bullshit. The people that paid in but didn’t fully contribute (because of the time they had already lost)…the time less than 39 or 49 or 51 years of full-time work (depending on what era you were or are slated to retire in) obviously got less than they would have received had they worked full-time for 49 years while paying into the system, but they still got more out of the system than they ever paid into it…unless they died “early.”

According to a study from the Urban institute, even average people who work full-time for the full 49 years of possible full time employment and then draw Social Security benefits, receive AT LEAST 33% MORE than what that person has paid in over their lifetime. A person who worked LESS than the full 49 years of full-time would be getting an even higher percentage back than that 33%. According to that study, a person who retired in 1960, for example, after contributing for only 23 years would actually draw more than EIGHT TIMES what they paid in.[14] Do you begin to see the problems inherently programmed into this system right from its inception?

So back to our question: How do we fix this GIANT, HUGE, ENORMOUS, MASSIVE, and ONLY-GETTING-BIGGER-EVERY-SECOND, problem?

First, the ONLY possible way to keep the Social Security Trust Funds solvent in the interim is to raise taxes, reduce the benefits payouts, or increase immigration of working age people by 47 million people (on top of the ALREADY HERE 11-12 million illegal immigrants who are already paying into this system without ever being able to draw any benefits out of it…but that is yet another blog post for another time) or some combination of all three, IMMEDIATELY! There are literally no other solutions possible to fix the current mess known as Social Security. Let’s examine all three of those options.

In order to raise taxes enough to keep the funds solvent we would have to, AT LEAST, more than double them. In order to reduce benefits enough to keep the trust funds solvent we would have to, AT LEAST, cut them in half. We could do both and only increase taxes by 25% and then also cut the benefits by 25% which would functionally work the same as doing only one of the other things. Or we could increase immigration by 23.5 million people and raise Social Security taxes by 12%. Or we could raise immigration by 23.5 million people and cut retiree’s SS benefits by 12%. Or we could increase immigration by 15.67 million people, cut retiree’s benefits by 4%, and also raise Social Security taxes by 4%.

Now having established what the issues are and what the only possible solutions are, let me ask you which of these three solutions do YOU think is potentially “doable” politically? Which of these three solutions do YOU think are most likely to get through Congress and signed by a President at ANY given point in time? Do YOU think the current Congress and President would be willing to raise taxes by 12%? Do YOU think the current Congress and President would sign off on allowing millions more immigrants than are already here in our country? Do YOU think the current Congress and President would be ABLE to pass a law that cuts the benefits for the highest voting rate population in America (over 65 years old) without MAJOR repercussions to their job security (that is Congress’ and the President’s)?

Hopefully, all you readers out there are smart enough to realize that the answers to ALL THREE of those questions is a single thunderous NO!

Congress can barely bring itself to raise taxes in increments of a couple of percent without the angry masses (all ages, but mostly the young, working age taxpayers) breaking out the figurative pitchforks and torches. Likewise, Congress can hardly cut the benefits of the single most popular Government Program in the history of the US without those same (but this time mostly older and mostly retired or soon to be retired) angry masses also breaking out their figurative pitchforks and torches.

My proposal will combine aspects of both (Conservative and Liberal) sides’ ideas and multiple aspects of all three of the retirement systems we reviewed earlier in this post. Further, my idea will raise taxes hardly at all and cut benefits hardly at all and increase immigration hardly at all. BUT it DOES require doing ALL THREE of those things together in addition to some other changes.

My Proposal

Before I lay out the skeleton of my idea and then flesh that skeleton out, there are a couple more preliminary pieces that need to be put into place. We would start that preliminary setup with three Laws passed by Congress. The first law would be retroactive and mandatory for every person under the age of 25 at the time of its passing. That means that anyone 24 years, and 364 days old or younger would be moved under jurisdiction of this first law immediately (as of the immediate following January after the law was passed and signed). Anyone whose birthday is the day BEFORE this law is passed would be allowed to remain under whatever system(s) they already had in place for their retirement. But would have the OPTION of participating in this plan from the day of the plan’s inception either, in addition to, or instead of, continuing with the plans they already were participating in. Let’s call this plan the American Universal Retirement Plan

This first law would permanently shift every citizen with a job of any pay amount and over the age of 16 (and anyone under the age of 25 at the time of the law passing) onto this system. Every person who subsequently (after the passing of this law) turns 16 and enters the employment marketplace would also be mandated to participate (just like Social Security). This participation would be at the exact same rate as Social Security currently is: 12.4%. However, instead of going into a large, co-mingled, General Trust Fund like in Social Security, all of these 12.4% contributions would go to their own individual DCP type Roth IRA account. This would mean that the noticeable effect on an individual’s paycheck would be EXACTLY NOTHING. Nothing would change in the individual’s paycheck. The gross pay amount would be unchanged as would the net pay amount. However, this shift has the DISTINCT advantage of two things: 1) the individuals account would be “safe” from Congress’ greedy little fingers dipping into it and raiding the funds or borrowing against it for whatever bullshit Congress wanted to waste money on and 2) it would move those individual contributions directly into that specific individual’s Roth IRA account and make it completely portable just like Current Roth and conventional IRAs and Social Security are and UNLIKE Defined Benefit plans.

The second law would make EVERY financial advisor in the entire US, REQUIRED to be a fiduciary for their clients. Currently this is not the case.  What is a fiduciary you ask? In layman’s terms a fiduciary is a person whose FIRST financial responsibility is the best interests of the fiduciary’s CLIENTS rather than the current setup where most financial advisors are NOT required to actually look out for the best interests of their clients, but instead only look out for their own financial best interests. Their clients’ best financial interests are only a secondary thing and only get attention when they happen to run parallel with the primary interest of lining the financial advisor’s own pockets. This law would also cap the fees and pay of these fiduciaries to prevent gouging and overcharging by unethical account managers, unlike the current systems in place in the US at the present time.

These two laws would be NECESSARY and intrinsic to the plan for this system to work. If either of these two precursor laws were not passed and in effect BEFORE the system was ready the entire proposal will fail.

A third law would increase immigration into the US. I would propose not really changing much about the current system under this law EXCEPT tying the yearly immigration numbers to the difference between the economy’s total available full-time jobs and total currently available full-time workers with accounting for families’ size and the average number of workers per family in the entire US. So if there were an average of 1.5 full time workers per average family and the economy had 1 million unfilled full-time jobs, this law would allow about 666,000 people to immigrate into the country.

Desirable Aspects of the American Universal Retirement Plan

So let’s list the desirable aspects of a US Universal Hybrid Retirement Plan:

1. Total and complete portability
2. Total inherit-ability of the account and its money
3. Minimum of 6.2% contribution from every paycheck just like the current Social Security system (Zero change in taxing levels)
4. Employer match of 6.2% to equal the previous system’s 12.4% Social Security contributions (Zero change in taxing levels)
5. A legal fiduciary requirement for ALL financial advisors in the entire country and commensurate strict and heavy handed enforcement of those requirements
6. Out of reach of Congress’ greedy fingers and unethical and bullshit fiscal mismanagement and budget shenanigans
7. Safe from greedy, unethical, immoral corporate mismanagement
8. Relatively safe from market fluctuations and unforeseen disastrous happenstance since they are to be invested in a quite stable and safe mix of both market based index funds and non-market based government bonds
9. Relative freedom of adjustment by the individual account owner (meaning the owner CAN change what is invested where and how much, IF THEY WANT TO) but also allowing a person to turn over management to a fiduciary whose ONLY job is to manage the money for the benefit of the CLIENT ONLY.
10. Cap fees at a maximum for the financial advisors via the previously mentioned fiduciary law
11. Mandatory participation in order to prevent people from wasting their money and ending up with no retirement at all.
12. Some level of defined benefits payouts
13. The ability to retire early if capable based on the individual’s account balance
14. The ability for the account owner to use some of the money within, or borrow against, the money in the individual retirement account in an emergency.
15. Increase the maximum allowable yearly contribution to this account (Roth IRA) from the current $5,500 per year for those under the age of 60 to a much higher allowable amount (let’s say $15,000 for the sake of a starting point)

Under my proposal, the basic underlying structure of the plan would be a Defined Contributions Plan. But we would add the mandatory component from the current Social Security System and the current rate of taxation/contribution. This is actually NOT a tax under this type of scenario. It is merely governmentally-enforced contribution to YOUR OWN retirement. Anyone that thinks that is a tax is a fucking moron. Even my fellow Libertarians can ONLY object to the “being forced by the government” part of it since it isn’t actually a tax where you money is being taken and given to the government for their use for the “common good.” The government would ONLY be forcing you to contribute to your own future well being. However this fact and this system would have HUGE long term and lasting POSITIVE effects on the entire US economy and every individual within it through growing the wealth of every single citizen and the inherit-ability of these invested monies. UNLIKE all the current systems in place. We would also add some of the desirable defined benefits traits in the sense that simple math would allow us to specify a monthly minimum benefit payment amount based on the standard number of working years and the known minimum wage levels throughout that working time period. We would also be adding the “larger and therefore safer” pool aspect to this plan even though the money would be in true individual accounts. This would be via the partial investment in government bonds. Although government bonds return 1-2% less yearly on average than the general stock market, these bonds are “safer” than the general stock market as previously discussed. A good mix of both market based Index funds in the general stock market and non-market-based government bonds would thus be quite “safe” and also return an average of between 7-8% over the entire life of the account.

Now let’s discuss actual numbers and dollars and cents.

Currently the Federal Minimum Wage is set at $7.25 per hour. So let’s do the math: (All figures based on a single person living alone making ONLY minimum wage for their entire life for demonstration purposes). So it looks like this: $7.25 per hour x 40 hours per week x 52 weeks per year = $15,080 in gross yearly income. This amount puts this hypothetical single person in the current 15% tax bracket. That means their gross pay becomes $12,818 net after taxes. And because Roth IRA contributions come out AFTER taxes they are NEVER TAXED AGAIN even when you start taking distributions upon retirement. But wait! Our hypothetical person is an employee so we need to add 6.2% back in because we aren’t actually holding out the Social Security with holdings like we were under the “old” system. So their tax rate is not actually 15% but only 8.8%. I have just reduced your REAL WORLD taxes by 6.2% with my system. Keep watching. I will not only reduce your taxes AND increase the amount of money that goes into your Roth IRA, but I will show you how this plan can make you rich on barely minimum wage your entire life. Don’t believe me? Keep reading.

Under this new system your take home pay jumps from barely $12,818 per year to $13,752 per year a change of nearly $20 per week (actually $17.96). We will now withhold $16.40 from every weekly paycheck, $32.80 from each bi-weekly paycheck, or $71.06 from every monthly paycheck to make the 6.2% Roth IRA contribution. The hypothetical minimum wage worker is now actually taking home $1.56 per week more than under the current system. Next we will add in the employer’s 6.2% match to equal the previous system’s 12.4% total contribution to Social Security. We are now adding $1,705.25 per year into each minimum wage earner’s individual retirement account. Using our previously established average of 7.5% yearly growth rate for a 50/50 mix of investments in government bonds and stock market index funds, and compounding the money in the account annually, the hypothetical, minimum-wage-for-life-earning individual will have over $821,000 in their retirement account by the time they are ready to retire. If we increase that amount by the $1.56 per week I previously saved you and make your pay change NOT ONE BIT, ($81.12 per year) we actually end up with $860,190.65 by the time that minimum wage earner retires. An employer match on that $1.56 more per week results in nearly $900,000 in the Roth IRA by age 65. All this without our hypothetical worker ever making more than the CURRENT minimum wage. Let me repeat that. A person who worked minimum wage their entire adult working life and NEVER got a raise could have nearly a million dollars by the time they retire without changing their current paychecks NOT ONE LITTLE BIT.

Why did I use a minimum wage worker who never got a raise their entire life? For the very reason to conclusively demonstrate how FUCKED UP the current system is. If a person retires at age 65 and lives until age 100 they must survive 420 months and draw monthly retirement checks for those 420 months. While working their entire minimum wage life, our hypothetical worker made barely $1,146 per month after taxes and socked away nearly $900,000. During retirement, this exact same minimum wage worker would be drawing monthly paychecks of AT LEAST $2,143 EVEN IF THEY LIVED TO 100 YEARS OLD for the entire 420 months and their $900,000 would not even be gone at that point because of compounding interest over the intervening 35 years.

Let me put this in perspective: A minimum wage worker can make NEVER MORE THAN the CURRENT minimum wage their ENTIRE life, have their paycheck NOT CHANGE ONE BIT from their current paychecks, and have $900,000 in their retirement account after 49 years of working. Now let me increase your perspective a bit: Our hypothetical minimum wage worker deposited $933.75 per year into their Roth IRA. That is a total contribution of barely $45,753.51 and yet through the HUGE power of compound interest over that same 49 years, that $45,000 (and some pocket change) grew to nearly a million dollars. That is FUCKING COOL. And the best part of all of this is we don’t change ANYONE’S current paycheck…NOT ONE PENNY. Now imagine that this person got a raise to boost them up above that measly, shitty $7.25 per hour rate at ANY point in their working career. Ask yourself: Do you think millionaire status for EVERY working American is possible under this scenario? Because I do. The difference between $900,000 and $1,000,000 in that account over 49 years is barely $209.23 per year, $17.44 per month, or $4.02 per week. So let’s round this thing up and add that $4.02 per week to the $16.40 that equals the current Social Security withholding. We will now contribute $20.42 per week to the hypothetical minimum wage worker’s Roth IRA and make that worker a true millionaire by the time they retire.

Let’s look at that $1 million for a minute. At that same, unchanged, yearly investment return percentage rate (7.5%) that 1 million is making $6,250 AVERAGE PER MONTH in interest. That means that upon retirement you could draw $6,000 per month in retirement benefits from your account and YOUR Roth IRA WOULD CONTINUE TO GROW the entire time you were retired. If the retiree was doing this (taking $6000 per month in retirement distributions) and leaving that extra $250 in interest this would result in that account to grow to over $1,010,000 by the time the retiree was 100 years old. This account is now inheritable by the retiree’s spouse and/or children. This money would be in addition to their own personal Roth IRA accounts they already had. This is EXACTLY how rich families get rich, get richer, and stay in the 1%.

I have now democratized the power of compound interest by switching people to using Roth IRAs rather than that bullshit Social Security system we are currently forced to use. I have made EVERY American a millionaire by retirement age and changed their weekly paychecks ONLY by FOUR FUCKING DOLLARS. For reducing their weekly paycheck by less than the cost of ONE pack of cigarettes, less than the cost of ONE McDonalds value meal, less than the cost of ONE 12 oz bottle of beer, I have made every, individual American a millionaire by retirement.

Any increase in pay is captured by the same mandatory percentage of net pay deposit into the account. Every. Single. Working. American could be a millionaire and more by the time they retired under my proposal. This would cost them barely over $20 TOTAL and only $4 more than they already pay into the system per week and is totally feasible for EVERY worker. The $20.42 figure is barely 7.7% of every weekly paycheck. I don’t think I can say this enough times: My proposal can make millionaires out of every working American by the time they retire and I will have made their retirements safer, more secure, more individualized, and WAY more beneficial for everyone and I will have only reduced their net pay by 1.5% from what it currently is.

On top of that, one full generation from birth to retirement is all I need to transform the ENTIRE monetary and financial demographic of the ENTIRE United States. Every individual person would be a millionaire by the time they retired. And their retirement account would be able to pay them nearly 6 TIMES the monthly amount they were making during their working life.

Retirement would be COMPLETELY pre-funded for EVERYONE. No pension liabilities that must be made up by raising taxes. No fear of corporate bankruptcies. Imagine the growth rate of the US economy when every able-bodied person can work 49-51 years, retire and live forever off LESS THAN JUST the interest gains on their invested money. Imagine the amount of disposable income that could be plowed into research and development. Into medicine. Into charity. Into anything.

Earlier I said I would cover the holes left in the system by current and my new proposed system. Here is my idea: Divert 1% (0.01) of every worker’s contribution into the Social Security Disability fund. That would equal $2.66 per week minimum wage worker and result in well over $329 million per year (even assuming no one makes more than minimum wage). That is a full 1/3 of the entire current Social Security Yearly disbursement amounts. We would never have a problem taking care of ANY less than fully physically able-bodied American ever again. Divert that same 1% into the Veterans Administration fund. The possibilities are nearly endless.

Footnotes

[1] http://usatoday30.usatoday.com/money/energy/2002-02-06-enron-pensions.htm

[2] https://www.ssa.gov/history/tftable.html

[3] https://en.wikipedia.org/wiki/Social_Security_(United_States)

[4] https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=total+population+of+the+US+in+1937

[5] https://www.dol.gov/oasam/programs/history/chapter5.htm

[6] http://www.thepeoplehistory.com/1936.html

[7] https://www.ssa.gov/OACT/ProgData/effectiveRts1940-79.html

[8] https://www.ssa.gov/OACT/ProgData/intRates.html

[9] https://www.ssa.gov/history/hfaq.html

[10] https://en.wikipedia.org/wiki/Social_Security_(United_States)

[11] https://www.bls.gov/cps/cpsaat08.htm

[12] http://www.cnn.com/2013/11/06/us/baby-boomer-generation-fast-facts/

[13] http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/

[14] http://www.politifact.com/truth-o-meter/article/2013/feb/01/medicare-and-social-security-what-you-paid-what-yo/

References

https://en.wikipedia.org/wiki/Retirement_plans_in_the_United_States

https://www.dol.gov/general/topic/retirement/typesofplans

http://www.investorguide.com/article/11703/4-types-of-retirement-plans-and-employer-sponsored-plans-igu/

https://en.wikipedia.org/wiki/Social_Security_(United_States)

https://www.dol.gov/oasam/programs/history/chapter5.htm

https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=population+of+the+US+in+1936

http://www.thepeoplehistory.com/1936.html

https://www.ssa.gov/OACT/ProgData/intRates.html

http://www.cnn.com/2013/11/06/us/baby-boomer-generation-fast-facts/

http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers

/http://www.politifact.com/truth-o-meter/article/2013/feb/01/medicare-and-social-security-what-you-paid-what-yo/