A Modest Proposal

This proposal is for a new retirement system. This is not a reform of the current Social Security system, but rather a complete replacement of it.

How would it work?

The basic idea is this: At birth every child who is a natural born citizen citizen¹ would have the government put $8,000 into a retirement fund. The money in that fund would be invested in an index fund such as an S&P 500 or Russell 3000 index fund (I would prefer a Russell 3000 fund). This takes advantage of both the high rate of return of these index funds and the power of compounding when started at the earliest possible age. For example, if the future average real annual growth in the fund is 6%, then for every $1,000 invested there would be, in inflation adjusted terms, ~$44,000 65 years later.

What would be the amount of the annual benefit?

The amount of the annual benefit would be determined by the fund administrators. The administrators would set the amount based of the total amount in the fund relative to the number of recipients. That would make this system a cross-breed between a traditional company pension fund, which would be called a defined benefit plan, and a retirement system based on IRAs and 401ks, which would be called a defined contribution plan. The plan administrators should be somewhat conservative in setting the amount of the annual benefit so as to allow for downturns in the economy when the total principal amount in the fund would decrease. At regular intervals the plan administrators would review the health of the fund and increase amount of the payments as appropriate.

Why an index fund?

A 2010 study showed that an S&P 500 index fund outperformed 99.4 % of all mutual funds. Historically the Russell 3000 index has modestly outperformed the S&P 500 index. So it stands to reason that a Russell 3000 index fund would outperform a slightly larger percentage of all mutual funds.

What would be the expected future annual growth rate?

Good question. The Russell 3000 index went from 888.89 on January 3, 1995 to 6792.93 on January 3, 2017. Inflation for the same period was 61.57%. This results in an annual real growth rate 6.19%. Since January 1, 2013 the index has  increased by more than 65%, more than twice the average previous rate, with no significant change in the economy to justify such a large increase. Now, if you include the period since 2013 in the long term average you get an annual growth rate of over 8%. If you don’t include 2013 you get the annual rate of 6.19% referenced above. 6.19% seems a little low while 8% is definitely too high, especially when you consider that the average PE ratio for S&P 500 is more 24. Since the long term average for the S&P 500 PE ration is around 16 it would seem the the stock market is currently overpriced. So I will make an educated guess and say 6.5%, a little above 6.19% and well below 8%. The reality is that there is so much uncertainty about the future that any such estimate would have a huge error bar associated with it.

Why a fund and not an individual account?

It seems reasonable to assume that even smaller a percentage of individuals who are not financial managers would be able to outperform an S&P 500 index fund. An individual account which would allow trading would simply be an excuse for the banks and/or Wall Street to syphon off 1% of the principal in the fund annually. I did consider individual account without a trading option which would pay benefits based on the principal amount in the account, but I realized there was a problem with that idea. Consider two children. One is born on December 9, 2007, the day the stock market peaked just before the housing bubble broke. The other is born on March 9, 2009, the day the market bottomed-out following the bubble. At that point the first child’s principal amount would have declined to $4,292.37. From that point on they would have exactly the same growth in their accounts, but the first child would end up with only 43% of the annual benefit of the second child. In fact, it would be even worse since, if they both retire at the same age, the second child would benefit from an additional 15 months of growth in the fund. It would be very unfair to have such a large difference in the benefit received based solely a person’s date of birth. The only way I can see that would allow for people retiring at the same age receiving the same benefit is for all of the initial money to go into a fund.

Inheritability

One of the key features of this proposed system is that the benefit would be inheritable. But instead of inheriting the annual payments, the heirs would inherit the amount of principal necessary to pay that benefit. I would propose that the benefit would only be inheritable by the children of the person receiving the benefit. That would mean that not only would everyone covered by this plan would have a decent income in retirement, buy also that the second generation of people covered by this plan would inherit a reasonable amount of money from their parents.

Funding of the new system

In the long term the funding of this proposed system would be much easier than the current system, requiring an employee payroll tax between .6 and .8 per cent with no employer contribution needed. Now, when I say long term, I mean long term – 65 to 70 years. This is because of the need to continue funding the current system until the last group of people eligible for the current system reach retirement age. At that point the payroll tax can be gradually reduced for employees and gradually eliminated for employers. But that is for the long term. For the short term there is a very real funding problem since the first people entering the new system will not enter the work force, and thus start paying the payroll tax, for some number of years.

I can think of a number of ways of solving this initial funding problem.

One is to have the Treasury loan the money to the new trust fund, to be repaid as the people in the new system start paying the payroll tax. This has the advantage of requiring no money other than that coming from the employee payroll tax. It has the disadvantage of diverting money away from the current OASI trust fund, which already has funding problems to resolve.

Another is to increase the payroll tax by .5%, .a .25% increase for both the employee and employer. This is probably not a good idea in a sluggish economy and is also probably a political non-starter.

The third way is to initially fund the system from general revenue. This is the option which I would prefer. This would divert no money away from the current OASI trust fund, which would mean that any funding problems with that trust fund are problems they would have anyway. The obvious problem is that this would be a new spending program. What would be unusual about this spending program is that there would be a fairly definite date in the future, albeit 65 years in the future, when the spending would end.

Transition from the current Social Security to the new one

There are actually two transitions required.

The first is a bureaucratic transition, new forms, procedures, etc. While a non-trivial problem, it is readily resolved. Bureaucrats know how to do this sort of thing and it should not be a significant problem.

The second is the financial transition. If the public funding option mentioned above is implemented, then the financial transition is trivial. The funding problems for the current OASI trust fund would be no greater than they already are. If any funding option for my proposed new system is implemented which diverts any payroll tax money away from the current system, then the funding problems for the current OASI trust fund would be greater, probably significantly greater. So while there would be no legal linkage between the new and old systems, there would be financial and political linkages.

What about other savings for retirement?

The only other retirement savings program I would keep would be the 401K program and then only to the extent that there is a company matching amount. All of the rest of the current retirement programs, including the 401K contributions beyond the amount matched by the company are really primarily beneficial to people who have sufficient income that they should not need any government assistance in their savings effort. I would encourage people to save for retirement beyond what this program would provide, it’s just that I don’t think the government should be involved in since such involvement has a strong tendency to end up benefiting the financially better off portion of the population.

Note: I have another proposal coming up which would interact with and almost certainly cause changes to this proposal. I will discuss those interactions and changes when I post the other item.

  1. The Supreme Court has never ruled on what is meant by the phrase ‘natural born citizen’. I think it is obvious, a natural born citizen is anyone who is a citizen of the United States by reason of their birth, that is, either their father or mother is a U.S. citizen or they are born in the United States.

Brett Kavanaugh Vs. Clarence Thomas

I think the Republicans believe that if they can just ram Kavanaugh through the confirmation process and have him take up his seat on the Supreme Court then the aftermath will follow the same trajectory as followed the Clarence Thomas/Anita Hill controversy, namely that all of the controversy will fade into the background and that the American people will fairly quickly accept Kavanaugh as being legitimately on the Supreme Court.

I think the Republicans are not only wrong in their belief, but very wrong. I think that for the following reasons:

  • Clarence Thomas came across as somewhat mild-mannered He also did not have any history of drinking problems even as a teenager. That made it easy for people to discount the accusations against him. Brett Kavanaugh, on the other hand, came across as a mean-spirited liar and could quite properly be described as being hysterical in his presentation following Dr. Ford’s presentation.
  • Clarence Thomas was accused of sexual harassment primarily in the form of inappropriate comments and inappropriate suggestions although there was one accusation that he deliberately left a pubic hair where Anita Hill would find it. Brett Kavanaugh is accused of attempted rape, a much more serious offense. The American people were willing to overlook accusations of sexual harassment against Clarence Thomas. I don’t believe they will be willing to overlook accusations of attempted rape against Kavanaugh.
  • The culture has changed. American women are sick and tired of being sexually harassed and sexually assaulted, and rightly so. The #MeToo movement is not going away. The far right is trying to discredit them, but they will not succeed. If anything Kavanaugh is making the #MeToo movement a little bit stronger every single day. Evidence for this is that I recently read that Democratic state and local organizations are being swamped by phone calls from women and walk ins by women asking how they can help in the upcoming election.

In summary, I think that the very attempt to get Kavanaugh on the Supreme Court is going to hurt the Republicans. If he actually gets on the Supreme Court he will be a millstone around the Republican’s necks for as long as he is on the court. Which would be a good thing since there cannot be enough millstones around Republican necks as far as I am concerned.

 

Brett Kavanaugh

A lot of people, especially among Republicans, are saying that even if the accusation that Kavanaugh sexually assaulted a 15 year old girl were true it was just a stupid mistake by a high school student 36 years ago and that we should not hold it against him now. I might agree with that except for three things:

  1. It was sexual assault, not underage drinking or any similar indiscretion of an immature teenager. There is also the fact that the girl was only 15 years old. Since the age of consent in Maryland is 16 even if she had consented to sex it would have been statutory rape.
  2. He has never owned up to doing it.
  3. He has never apologized to the 15 year old girl, now a college professor.

Given those three things what he did absolutely should be held against him now. Furthermore, there should be an FBI investigation and if the assault claim can be verified he should be impeached and removed from his position on the Circuit Court of Appeals. (Note that by ‘verified’ I do not mean the criminal trial  standard of ‘beyond a reasonable doubt’ but rather the civil standard of ‘a preponderance of guilt’.)

Donald Trump is Toast – Part 3

Trump’s real estate empire is based on his name. Every Trump property has Trump’s name in it. So it is not simply the Turnberry golf resort in Scotland, it is the Trump Turnberry golf resort. Now there is nothing wrong with that, nor is it unusual. The Hilton hotels are named after Conrad Hilton, the founder of the company. For Trump, however, this may present a problem. Once all of the information that Mueller has been collecting becomes public and it is revealed that Trump has been cheating on his taxes, laundering money, stealing money from the Trump Foundation, obstructing justice, colluding with the Russians and who knows what else I think the Trump name will turn to dirt. He may be able to limit the damage somewhat while he is still President. However, I am not so sure how well he can do that and after he is out of office I definitely think that occupancy rates at all Trump properties will decline sharply, if not outright plummet. That will probably result in the entire Trump real estate empire crashing and burning.

If that does happen, I want the concession to sell marshmallows to all of the people who want to roast them over the burning embers of the Trump empire. I may roast a few myself.

Donald Trump is Toast – Part 2

Donald Trump has said multiple times in the past that there was a bright line that Mueller could not cross, namely that Mueller could not investigate Trump’s personal finances, nor investigate any of the Trump companies, nor investigate the finances or companies of any of Trump’s children. On March 15 this NY Times article said that  “The special counsel, Robert S. Mueller III, has subpoenaed the Trump Organization in recent weeks to turn over documents, including some related to Russia”.  To me that clearly crossed that bright line yet Trump’s reaction was not what you would expect, namely he did nothing. I think I know why he did nothing.

Robert Mueller is a smart man. He knows that Trump has been wanting to fire him since the day he was first appointed. He also knows that the Republican congress cannot be counted on to take any action against Trump were Trump to fire Mueller. So what I think Mueller did was to write up preliminary reports about obstruction of justice and collusion with the Russians as soon as he had collected sufficient evidence to justify such reports. He has then periodically updated those reports as new evidence was obtained. Specifically, he updated both reports immediately before issuing the subpoenas referenced in the NY Times referenced above. He then told Trump’s lawyers about the existence of those reports and that those reports would be immediately sent to Congress if he, Mueller, was fired. I doubt that he told Trump’s lawyers a single detail about what was in the reports, just that they existed.

This has put Trump into a severe psychological bind, namely that Trump knows if he fires Mueller he gets severely screwed right know but if he allows the Mueller investigation to continue to its conclusion he gets even more severely screwed in the future.

I have read that some people think that Trump is beginning to suffer from dementia but I don’t think that is the case. I think the constant severe psychological pressure is what is causing Trump to become more and more mentally unstable.

I hate to think how I would react to such pressure, but then I would never cheat on my taxes, launder money, defraud a charitable foundation, obstruct justice, and collude with the Russians.

 

Big Banks

The official policy of the AWCP would be that there is no such thing as a bank too big to fail. If any bank were to become insolvent the FDIC would step in and clean up things as much as possible under the existing laws and regulations. The only way the federal government would inject any capitol into an insolvent bank would be in return for sufficient equity in the bank to give the government control of the bank.¹

Once the government had control of the bank it would not operate the bank but it would fire all of the top management and then break the bank up into three to five regional banks which would be prohibited from becoming part of any nationwide bank in the future.

Another reason for making it official policy that there was no such thing as a bank to big to fail is that I read a while back that there were companies with links to the banks such that if the bank failed the company would fail. It is tempting to think that the CEOs of any such companies were incompetent, but I suspect that the bank gave them a financial incentive to do so, all the while assuring them that the government considered them to be a bank too big to fail. By stating this policy in advance the government would be encouraging the companies to break any such links they have to the banks.

Any administration that would implement such a policy would have to consider the possibility that the companies with links the the big banks would not sever those       links but that rather that the companies and banks would present a united front basically saying that if the bank goes bankrupt the companies go bankrupt.

Obviously an administration cannot either buy out or bail out a bank unless Congress appropriates sufficient money. There are four things Congress could do:

  1. Congress could do nothing, that is Congress would not allocate any money for either buying out the bank or bailing out the big bank. This would not be the ideal solution but it would be acceptable. It may well cause financial chaos, but it would rid the country of a bank too big to fail.
  2. Congress could allocate money only for buying out the bank. This would be the ideal solution.
  3. Congress could allocate money and leave it up to the President whether to buy out the bank or bail out the bank. On a practical basis this would be the same as #2 above.
  4. Congress could allocate money but specify that it can only be used to bail out the bank. You might think that this would force an adminstration’s hand but that is most probably not true. When Congress passes a bill and sends it to the President he has ten days to either sign the bill or veto it. This means that a president could wait until the tenth day before vetoing the bill and sending it back to Congress. Since there is no such thing as a slow-motion financial crisis this would have the effect of being the same as #1 above.

As you can see an administration that wants to rid the country of banks too big to fail would be in control in the event of a financial crisis. Note that in the event of a financial crisis not all of the big banks would fail at exactly the same time. This would mean that a President who stood his ground when the first bank failed would be in a much stronger position vis-a-vis Congress when the other big banks failed.

¹ I am assuming that the process of buying out a bank would consist of buying a majority of the shares on the open market.