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“Social Security benefits are considered to be only one part of a complete approach to retirement planning. In contemporary parlance, Social Security benefits are described as the ‘foundation’ upon which individuals can build additional retirement security through company or personal pensions and through savings and investment.” - Social Security Administration

The solution is simple: Refinance the national debt with personal accounts that will add a pension component to the Social Security insurance program at no extra cost or risk.

Problem: Social Security Trust Fund

“During the recent Social Security debate, there was one question that was neither asked nor answered. ‘How does Congress intend to pay back the money that it borrowed from the Social Security trust fund?’

Despite what several politicians have tried to claim, the Baby Boom generation will not bankrupt Social Security. Many years ago, these workers realized that their upcoming retirements would place excessive strain on the Social Security system, so they devised a plan to avoid burdening the next generation. They agreed to pay additional taxes over the course of their careers in order to establish the Social Security trust fund, and this money was to be used to help finance their eventual retirements. However, politicians decided that it would be easier to borrow from Social Security than to balance the budget, so Congress spent the entire $1.598 trillion trust fund.

Instead of addressing this issue, some politicians would rather borrow even more money from Social Security in order to invest in the stock market. Such drastic reform is unnecessary, and it will do nothing to solve the actual problem. After all, the only crisis facing Social Security is the fact that the trust fund must soon be repaid.” (“A Lesson from Nature”)

Problem: Corporate Pensions

“In order to stop the hemorrhaging in the system, to put the insurance program on a sound financial footing, and to best protect the benefits of millions of workers and retirees, the Administration believes that comprehensive pension reform is critically needed. If we do nothing or merely tinker at the margins the inevitable outcome will be a continued erosion of this important retirement security leg and continued large losses for participants, premium payers and potentially taxpayers.” (PBGC Senate Testimony)

Solution: PACT America Proposal

The government must find new financing for Social Security trust fund in order to pay the promised benefits for the Baby Boom generation. Instead of asking foreign governments or other wealthy individuals to buy these bonds, we could add a pension component to the Social Security system that would allow working Americans to take over this investment with individualized pension accounts. These personal add-on accounts would either supplement or replace the traditional employer based pension program.

To avoid burdening the taxpayers with insolvent pension plans that get dumped on the government, we should restructure the way these plans are insured. Instead of collecting a minimal insurance premium, the government should require corporate pensions to start making annual collateral contributions on behalf of each employee. These contributions would be invested in an employee owned PACT America account that would supplement the employer based plan while providing the employee with a new level of retirement security. Not only would PACT America accounts protect the government from excessive pension liabilities, the bonds in these accounts would also serve to repay the Social Security trust fund.

Furthermore, many companies have started to move away from pensions and towards 401(k) accounts. Smaller companies cannot usually afford to administer a pension program, and larger companies have found the inherent liabilities of a defined benefit plan to be undesirable. Therefore, defined contribution plans such as the 401(k) have gained immense popularity. However, 401(k) accounts typically penalize single mothers, lower income workers, and minorities due to the fact that many of these individuals cannot afford to contribute at the same level as their coworkers. Since the company typically matches 401(k) contributions, the employees who can afford to make the largest contributions are actually receiving higher levels of compensation. There is no reason to unfairly penalize certain demographics, so companies should now be required to make a minimum annual deposit into an employee owned PACT America account in order to erase the current inequalities in these defined contribution plans.

According to the Social Security Administration, the effective interest rate on the $1.6 trillion Social Security trust fund was 5.7% for calendar year 2004.

http://www.ssa.gov/OACT/ProgData/effectiveRates.html

By refinancing the Social Security trust fund through comprehensive pension reform, American workers could immediately start earning 5.7% on their retirement savings. Furthermore, these workers would then be protected against a loss of pension due to corporate layoffs, scandals, or bankruptcies. Therefore, the PACT America program would finance the Social Security benefits for the current generation while providing future generations with a solid investment.

One option that holds particular promise is to structure the program so that returns are indexed to inflation. This will achieve results similar to the recently commissioned Series I Savings Bond. The rate of return for an I Bond is calculated by combining a 30-year fixed rate with a semiannual inflation rate. Therefore, the I Bond is engineered to return a fixed rate over inflation, and this provides investors with a guaranteed real rate of return.

The PACT America proposal contains several simulations that assume a fixed base rate of 4.5% plus an inflation rate that is capped at 3.5% to protect taxpayers from excessive liabilities. Furthermore, these investments will not be subject to debit interest during periods of negative inflation (deflation). Therefore, the maximum possible annual return is 8.0%, and the minimum annual return is 4.5%.

The PACT America program will be largely self-financing. The maximum annual return of 8.0% will only apply if the annual rate of inflation is 3.5% or higher. The American taxpayers are currently paying an average annual interest rate of almost 8.0% on over $500 billion worth of Treasury Bonds regardless of the current inflation rate. Therefore, the PACT America program could finance over $500 billion in government debt at rates that will be no higher than taxpayers are currently paying. In fact, if inflation were less than 3.5% in a given year, the American taxpayers would actually save money with the PACT America program.

As previously noted, the $1.6 trillion Social Security trust fund is earning an annual interest rate of 5.7%. Therefore, PACT America accounts could finance another $1.6 trillion in debt at no additional expense to our taxpayers if the average rate of inflation stays below 1.2%.

Social Security faces a projected shortfall of more than $3 trillion over the course of the next 75 years. The PACT America program would contain assets of over $2 trillion simply by financing the repayment of the Social Security trust fund and assuming the debt currently held through 30-Year Treasury Bonds. Since interest is reinvested in the program, this $2 trillion would compound, and we could refinance over $3 trillion of the national debt in just over 10 years. Therefore, the PACT America program would be able achieve the partial advance funding that Social Security will require in future years without putting the system at risk.