flaunting the third rail

The third rail in many railway systems (tubes, subways, metros, etc.) is electrically charged, and fatal if touched; unless you’re contemplating suicide, stay away from it.

In American politics the third rail is Social Security (SS). The people most affected are the fastest growing segment of the population (older people); they have very strong lobbies (AARP); a lot of sympathy (we’re all planning to get old + Congress’ average age is 57); and they turn out in droves and vote in both primaries and general elections.

After reading Monique Morrissey’s testimony before Congress and talking to a few people I thought SS was a sustainable program, needing only minor rate increases, and that Governor Rick Perry’s Ponzi claim was specious. But...

SS beneficiaries receive significantly more than they + their matching employers invest; to make this sustainable, the system counts on a reasonable return on invested capital, a certain mortality rate, and more people contributing than consuming (i.e. disproportionately younger, income-earning population).

This is similar in design to a Ponzi Scheme, so it is reasonable for Gov. Perry to make his claim. Plus here’s Alex Tabarrok at Marginal Revolution quoting three Noble Laureates who agree with Perry, and argue that people are having fewer babies and living longer (= more older people, fewer SS contributors), and economic growth has slowed (a lot); all of which affirms that Social Security as-is is no longer sustainable and in a literal sense, fraudulent, especially to younger contributors.

The "fix" strategy is to pare things back a little - increase the contribution percentage, implement a means test, delay eligibility, and significantly reduce the amount of benefit paid. Does this make the return worth it for seniors? Can they live on this reduced benefit? Are Republicans right that it should be self-managed? Can the public do better on its own? I say, "Yes."

The President is fumbling the ball all over the place, has a largely vision-free and uninspired record thus far, and could very well lose the 2012 election. This is no time to be timid or take half measures. He could overcome his legislative impotence and take a bold step to redefine entitlement - he could propose that we face reality and sunset Social Security.

The first question in all of our minds - how will this affect me? Well, if you're:

1. Over 50: Three changes - increase in contribution percentage (+2%), a means test for recipients, and an increase in the retirement age (+1 year). You keep paying in, and you will receive what was promised until you die.
2. Over 35: You stop paying into the plan, and you get the current value of your historical contributions back in a locked, tax-deferred US Treasury Bond that you can access upon retirement. All your very important future contributions into this nest egg are tax deferred.
3. Under 35: Sorry, and thank you - your contributions will go towards your parents’ and grandparents’ retirements. You are encouraged to contribute towards your own retirement with tax-deferred deductions of up to 15% of your annual salary. You have the option of buying the same US T-Bonds, or a number of other tax-deferred instruments.
   
4. Federal employee: The same (#1-3) formula will apply to federal employees for their pensions - we will increase salaries slightly to compensate for this, but per the scheme above, times are tough, and we can't afford this benefit anymore.
5. Elected official: Historically, the President, Vice President, Congress, etc. received pensions to discourage, well... bribery. We will continue to offer this pension to elected officials as long as it is their ONLY source of income.
   

This is a long sunset - it will take about 40 years for those who are now 50 to die, at which point Social Security dies with them.

Advantages:

1. Take the government out of the pension business.
2. Screw everyone a little bit - spread the pain.
3. Create a palatable, self-managed savings scheme for American workers.
4. Offer tax-deferred T-bonds as a secure retirement investment, that are also a way for the Feds to raise money, put more of America’s debt in the hands of Americans, who have the greatest vested interest in ensuring its repayment.

This is a dramatic step to be sure, but real leaders face issues head on; they don’t patch things up and leave them for future generations to deal with. Will this be the only step in the “face and deal” process? Nope - MMO (Medicare/Medicaid/Obamacare) also needs to be rationalized, consolidated, and made available as a basic service to all Americans in a way that encourages well-being and good health vs. the current system which funds visits and procedures and tests, but that’s for another post :).

If President Obama has a hope of not just winning, but winning a decisive mandate, he must LEAD. He should not marry this to taxes for jet plane owners or any other silly ploy. He should set the precedent for proposing simple, clean legislation that deals with our most important problems one at a time.

Start with entitlements, show that you're bold enough to go where others have feared to tread, and that you have our nation's best interests at heart, with no fear of the political consequences.