Part 1 of this essay argued that entitlement programs such as Social Security were a political lie perpetrated on American citizens. It proposed to solve the Social Security problem by treating contributions as bank deposits, earning interest equivalent to 30 year US Treasury securities, with each contributor maintaining a personal Social Security Investment Account balance. In this Part 2, that thought experiment is expanded and some of the administrative details and fundamental advantages of this proposal are discussed, in addition to necessary protections.

On Its Conservative Nature

As noted in Part 1, many will argue this concept is not in keeping with conservative political ideology. As a Libertarian leaning Constitutionalist I agree. From a practical standpoint, this proposal refuses to let the perfect be the enemy of the good. It shifts Social Security from being a big government program, what some of us might call a Ponzi scheme, to being a forced savings program. As conservatives, we may not like the idea of being forced to save a portion of our income. We prefer the save versus spend decision to be the individual’s alone. While not a fan of moral relativism, it is clear that a forced savings program with a clear inheritable account balance owned by each individual is far superior to our current program of forced taxation to pay for uncertain future benefits. At its core this proposal avoids perpetuation of the entitlement lie. By giving each citizen a clear and unambiguous account balance, it prevents the government from taking our assets through political subterfuge. By requiring interest be paid at the 30 year Treasury rate, it reduces the governments ability to take our assets through the pernicious effects of inflation.

From an individual financial investment perspective, it is inherently conservative. Most financial planners will advise that when you are young, your investments should be of a higher risk nature with the probability of a higher return. Only a very small proportion of your investment assets should be placed into highly conservative (and thus lower risk) tools such as Treasury securities. As you age, a higher and higher proportion of your assets should be shifted from high risk investments to low risk investments. If high risk investments go bad in your 20s, you have plenty of time to recover. If investments go bad in your 50s and 60s you may not have the time to rebuild your retirement nest egg. This proposal places a very small amount of your assets in a conservative investment when you are young. It naturally grows over your working life based on additional contributions and the power of compound interest to become a significant asset as you reach retirement age.

On Its Impact on the National Debt

Today, the National Debt has ballooned to over $14 trillion. Of this, $2.4 trillion is the amount held by Social Security’s Old Age and Survivors Insurance Trust Fund. But as we have seen, this averages only $56,000 per current beneficiary, and around $12,000 per participant when non-retirees are included. The promise of future Social Security benefits is essentially the greatest unfunded pension liability in the world – in an amount that likely well exceeds $10 trillion. By some estimates, if properly accounted for, it would more than double the National Debt as reported by the Treasury Department. It is reasonable to ask what might happen if the existing program were converted to a Social Security Investment Account program as proposed and the National Debt were effectively doubled overnight. Would the world financial markets panic? Would interest rates and the government’s interest expense skyrocket as investors sold their Treasury securities?

On the contrary the effects would be nothing but positive. First, it should be obvious that unfunded obligations, including government obligations, are harmful. Yet political refusal to quantify the lack of funding transforms harmful into dangerous. In contrast, full transparency of such obligations is inherently good. This program would not really double the National Debt overnight. Rather, it would bring the light of day to what investors already know – and what less enlightened of our fellow citizens do not know – that the National Debt is significantly higher than currently stated. [While it is outside the scope of this essay, it must be noted that the unfunded liability of Medicare dwarfs Social Security – this too must be solved.]

Second, it would bring certainty and clarity to individuals in regards to their future Social Security benefits. By paying a market based interest rate on each individual account – based on the 30 year rate demanded by sophisticated institutional investors – it will protect each account from the ravages of inflationary monetary policy. It will also force more financial discipline on the government as politicians could no longer hide the true scope of the debt resulting from their spending excesses.

On Marriage and Family Contributions

Prior to World War II societal norms still provided for a working husband and father, a stay at home mother, and a low divorce rate. I personally fell in love with and married a woman who wanted to stay at home and care for our children and our household. But the Social Security Investment Account must address society as it is today.

As a single worker, all contributions (both paycheck withholding and employer contributions) will be added to your personal account balance. When you marry, one-half of your contributions will immediately be diverted to your new spouse’s account. Similarly, if your spouse works, one-half of their contributions will be diverted to your account. In this way, the financial results of decisions about family structure will be shared equally with both spouses. If the marriage ends in divorce, the account balances will assure a fair distribution of family benefits earned during the marriage.

On Retirement Distributions

One of the real benefits of Social Security is the guarantee of a sustenance level income for the elderly. It would thus be too drastic to allow retirees to extract their entire account balance at a certain age. Rather, mechanisms ensuring long term income streams would be appropriate. One option would be to allow each participant to purchase a private annuity at age 65 using part or all of the funds in their account. Likely some minimum portion of this annuity would be government guaranteed (and yes the provider would thus be regulated). A competitive market would in fact develop to provide such annuity streams in exchange for retiree funds.

As a true welfare program, a minimum sustenance income could be guaranteed by the government. Even Hayek argued that “There is no reason why in a society that has reached the general level of wealth which ours has attained the first kind of security [which he previously defined as "…security against severe physical privation, the certainty of a given minimum of sustenance for all”] should not be guaranteed to all without endangering general freedom.“ [From Chapter 9 of The Road to Serfdom.] Should particular retirees, having suffered repeated financial set backs during their or their spouse’s working lives, not have the accumulated funds to purchase the sustenance level income stream, the government could become the provider of last resort. The need for diligence in avoiding the granting of a too rich benefit is clear.

Above a statutory minimum annuity type benefit, available funds could be made accessible for purposes determined by the account holder. It is their money and they should save, invest or use it as they see fit. The range of possibilities should be endless and might include starting a small business or making other investments, helping a younger family member purchase a home, charitable endeavors, travel, and plain old conspicuous consumption. And of course they should have the option of conserving this asset as a family inheritance.

On Inheritance

One of the great defects of the current Social Security program is the variable nature of the benefits available to participants based on life expectancy. In fact there is an inherently racist and sexist component to this variability. On the one hand, life expectancy for black males is approximately five years less than for white males. On the other hand, life expectancy for white males is approximately five years less than for white females. Thus the average black male receives Social Security benefits for ten years less than the average white female. Under the current program, once the participants are deceased, while spousal benefits may continue, there is nothing to inherent. Under the Social Security Investment Account, any remaining balance at death would be inherited. The key advantage of inheritance would be the generational growth of wealth rather than the wasting of assets in a government program.

On Additional Uses

The Social Security program was originally designed to ensure sustenance level income for those reaching an appropriate retirement age. Of course it was expanded many times over the years and is now a web of different benefits provided for different reasons. The primary benefits for retirement are paid from the Old Age and Survivors Trust Fund and as can be gleaned from its name involves benefits paid for reasons other than just retirement. There is a separate Disability Trust Fund and fully 15 percent of your contributions are directed to this fund. The scope of this essay will not call into question any particular benefit payable under the current Social Security laws and regulations. The concept of an inheritable Personal Investment Account can provide for similar such provisions. For instance, a non-working spouse can receive Social Security benefits as a result of the death of a working spouse. Under the Personal Investment Account, the non-working spouse would have an account of their own (fully one-half of the working spouses contributions) and would inherit their spouse’s account.

In the form of a Personal Investment Account, Social Security could also be a vehicle to provide additional economic security benefits. Under normal circumstances, federal unemployment benefits are typically available for a period of 26 weeks (as I recall from my youthful days of seasonal employment the normal benefits only lasted 13 weeks). During more trying economic times, politicians typically extend these benefits in an effort to assist those struggling to find employment (and let’s be honest, they also naturally seek to curry political favor with those receiving the extended benefits). Up to 99 weeks of benefits are currently provided. One problem with such extended benefits is that it encourages and rewards the small percentage of citizens who prefer to live on public benefits. If unemployment benefits resulted in a deduction from one’s own Personal Investment Account after say 13 weeks, perhaps a greater incentive to work could be instilled in this small minority. Certainly in the broader sense it would conform to the conservative’s sense of personal responsibility. Similarly, accumulated funds could be used to pay for medical expenses not otherwise insured for.

In Summary

There is no perfect solution to the problems of entitlement lies such as Social Security. Perpetuating the lie by increasing contributions or altering benefits every decade or so is no solution. Draconian changes such as eliminating the program entirely are not politically tenable. Half measures such as partial privatization will suffer from the typical struggles of political compromise. A Personal Investment Account approach should be considered as a conservative alternative. Conservative in terms of personal financial planning, the building of wealth that can be shared from one generation to the next, and as a pragmatic political move away from big government liberalism and towards a renewed culture of individual responsibility.

David Butler is happily married to a Blue Star Mom, a proud father of two young men, and a small business executive living in Danville, CA.