No. of Recommendations: 0
Hi tmeri,

I agree with you in theory, but some refinements are needed to your plan, IMHO:

1. Eliminate social security payroll taxes today.

First, I don't think we should eliminate them, but rather allow employees to choose to redirect their portion of the tax to an 'account' of their choice (i.e. Vanguard, Fidelity, e*trade, etc.). These accounts should remain 'inviolate', IOW, no borrowing against them for any reason (that means no MARGIN trades too!), no withdrawing from them until retirement age is reached (except for disability cases).

2. For the purposes of future SS benefits, calculate them as though everyone quit working today. If you've been working for only 10 years, you'll get the benefits that you would if you quit today. It won't be much, but then you haven't contributed as much as someone who paid SS tax for 40 years.

I would agree with this, but only for those who opt 'out' of the SS system.

3. SS benefit payments according to #2 would be put on the government's books. No more of this phony double-bookkeeping.

Agreed, for those benefits payable to those who opt 'out' of the SS system.

4. Allow everyone who works to contribute to a new kind of tax-deferred account the same amount they would have paid in SS taxes. They will pay income taxes on the amount contributed, just as they would have for SS payroll taxes. (No net change to them.) They would begin withdrawing at their SS eligibility age. Income taxes on withdrawals would be assessed exactly as they are on actual SS income.

I believe I addressed most of this in my comments on # 1. I do wonder why you think taxes on withdrawals should be assessed exactly as they were on SS income? Tax assessment on SS payments is a rather convoluted calculation. IMHO it would be far easier to tax withdrawals in the same manner as from a non-deductible IRA account--you don't pay tax on that portion of the withdrawals attributable to the non-deductible contributions you made, but you do pay taxes, at your ordinary income rate, on that portion not attributable to contributions. IOW, taxation at the higher ordinary income rate is what you pay for the benefit of tax deferral (this is also how annuities now work). It should be the responsibility of the company where the account is placed to track the contributions, and their corresponding ratio to the overall portfolio, reporting this to the account holder on all statements during accumulation phase, and additionally reporting it to the IRS during any withdrawal phases.

The burden of fixing this falls on those paying income tax. That is a large burden, to be sure...

I don't know any of the 'real' numbers, but I believe this is where the problem lies--either income tax would need to be raised considerably, or the deficit would increase substantially (and no, there is no money 'laying around' that could be invested now). Consequently I believe the solution of continuing to have the employer's portion paid into the fund, for transition costs, disability payments, etc. is a good idea. See this link provided by another poster:

What about people who had fewer than 40 quarters of work?

To keep them out of abject poverty, they should be paid SSI. I think you're asking a bigger question here tho, which is, who exactly is 'entitled' to what benefits?

Keep in mind that currently, if a person marries 3 times, each time for the required minimum period, to a person who NEVER works, each of these (non-working) persons is entitled to 50% of the working persons SS bennies--that's 150% of the benefit! Surely some re-thinking has to be done in areas such as this--I use this situation only as an example (but I do know ex-wives who are benefitting from this provision).

Thanks for the thought-provoking post.


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