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.

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.

Racists Shoot Themselves In the Foot: Part 1

President Bone Spurs reaction to hurricane Maria in Puerto Rico was distinctly less generous than his reactions to hurricane Harvey in Texas or hurricane Irma in Florida. The Republicans in Congress were no better. I don’t know of s single Republican congressman or senator who objected to President Bone Spurs lack of generosity.

But actions have consequences, or, in this case, lack of action has consequences. Since Maria hundreds of thousands of Puerto Ricans have moved to the mainland United States. They are U.S. citizens so they can make such a move no questions asked. Because there are no questions asked it is all but impossible to determine where all of those people ended up which in turn makes it all but impossible to predict what effect those new voters will have on the 2018 midterm elections but I cannot help but think that it will not benefit the Republicans. But there is another effect that all of this movement of people will have, namely that when the 2020 census is taken there will be somewhat more than a congressional district worth of additional Puerto Ricans living in the mainland U.S. than was thought to be the case before Hurricane Irma. This will make a little harder for the Republicans to control the house in the future. Thus the title of this post: Racists Shoot Themselves In the Foot.

John Bolton

John Bolton has not yet taken up his position as President Bone Spurs National Security Advisor but I have read numerous reports that he is an uber-hawk who has, in the past, advocated bombing both Iran and North Korea. This raises very serious concerns since Trump has voiced similar ideas in the past.

There is a very good chance that Trump will withdraw from the treaty with Iran under which Iran agreed to stop developing nuclear weapons in return for which the United States would drop trade sanctions against Iran. Oddly enough such a withdrawal will have very little effect. This is because the European Union is also a party to that treaty and I can guarantee that EU will not also withdraw. That means that the primary effect of a US withdrawal would be a slight disruption of the Iranian economy as they shift the small amount of trade they do with the US, 137 million dollars in 2017, to the EU which would result in a small loss of jobs in the US.

John Bolton, however, would also have us bomb Iran and possibly invade Iran. An invasion of Iran would be a bigger disaster than Iraq, but the the Boltons of the world don’t learn from their mistakes they double down on them instead. Aside from the fact that it would be a very bad idea to bomb Iran it would be an act of war and the Constitution gives Congress sole authority to declare war. The founding fathers explicitly explained why they did that. They did not want a single individual, specifically the President, to be able to take the country to war. This means that bombing Iran without prior congressional authorization would be a blatant violation of the constitution worthy of impeachment.

Next, North Korea. Not too long ago there were leaks coming out of the White House that Trump was considering the idea of bombing North Korean nuclear production facilities to give them ‘a bloody nose’ and thus discourage them from continuing further development of nuclear weapons. I have all of the same objections to bombing North Korea as I mentioned regarding the possible bombing of Iran. But there is a further complication with North Korea. There is no peace treaty with North Korea. What was signed on 27 July, 1953 was an armistice agreement which has held for over 64 years. Bombing North Korea would be a serious violation of that armistice and would have the potential of restarting the Korean War. I think the odds of the Korean War restarting are rather low, mainly because of China. China is still a communist dictatorship as it was in 1953, but China is now much more economically developed and much more involved in world trade. As such they would have much more to lose than in 1953, but both China and North Korea would probably feel the need to demonstrate to the United Sates that US cannot expect to violate the armistice without repercussions. I do not know what those repercussions would be but with two people as unstable and unpredictable as Donald Trump and Kim Jong-un it would be a very tense and dangerous situation.

Where would bombing either Iran or North Korea without congressional authorization go on the list of impeachable offenses that Trump has already committed? While blatant corruption is bad, as long as it does not establish a precedent for future presidents it will cause no long term damage, except, of course, to the reputation of the United States. Similarly with obstruction of justice, while Trump has tried to obstruct justice, he has not succeeded in doing so and if he would actually do something like fire Robert Mueller the repercussions would be enough to deter future presidents. Oddly enough I do not think that getting away with collusion with the Russians would be a problem for the future because I don’t believe there will be a future president with as many financial ties to foreign countries as Trump. But getting American military personnel unnecessarily killed and wounded would put bombing either Iran or North Korea without congressional authorization right at the top of the list. The American people are sick and tired of unnecessary wars and neither Iran or North Korea are serious threats to the US.

So, if you agree with what I said above, I would urge you to go to the websites for your congressman and both senators and leave them a message saying that you object to any bombing of Iran or North Korea without congressional authorization and also that you would object to any such authorization.

Now, I think that there is a very real possibility that that Bolton won’t last long enough to cause real problems because Bolton is very much a hardliner regarding Russia. I don’t know what strings the Russians have attached to Trump but I cannot imagine they like the idea of a hardliner vis-a-vis Russia as National Security Advisor. I think what will happen is that Bolton will become the next NSA but that he will very quickly start to clash with Trump over a number of issues but specifically Russia. As soon as such clashes become known to the public, and this White House leaks like a sieve, Trump will end up firing Bolton. Oddly enough, by having Russia pulling Trump’s strings to get Bolton fired they would be doing us a favor. Such is life under President Bone Spurs.

President Bone Spurs

‘President Bone Spurs’ is what Tammy Duckworth, US Senator from Illinois, started calling Trump after he accused Congressional Democrats of treason for not applauding his State of the Union address. Tammy Duckworth lost both legs and partial use of her right arm when her helicopter was hit by a rocket propelled grenade in Iraq. Trump, on the other hand, got five draft deferments for bone spurs, which miraculously disappeared as soon as he could no longer be drafted.  That was the last straw. I will no longer refer to Trump as President Trump. It will be either just plain Trump or President bone spurs.

Industrial Plan

As soon as you say the words ‘Industrial Plan’ the Republicans will start screaming ‘government interference in the economy’ at the top of their lungs. But the fact of the matter is that we already have an industrial plan. But it’s a plan that has been implemented piecemeal over a few decades with little or no thought about how the pieces fit together.

For example, there is a federal subsidy of home installation of solar panels. In a rational world that would be considered part of an industrial plan. So would the federal subsidy of methanol. So far so good, we are subsidizing a renewable source of energy and a bio fuel.¹ But we also subsidize oil, it’s called the oil depletion allowance and it is a tax deduction available to owners of oil stocks. Now those three subsidies combined make no sense, but as I said there has been little or no thought as to how the pieces fit together.

So the first step in developing the AWCP industrial plan would be to research and document the existing industrial plan. Once that is complete the next step would be to simplify the existing industrial plan as much as possible. Only then would there be any move by the AWCP to make any additions to the industrial plan and you can make a good case for making no additions, just let the market determine the winners and losers without any interference from the government.

 

The American Working Class Party Platform

The American Working Class Party (AWCP) is a purely hypothetical party I created so I could control the AWCP platform.

This post lists the proposed planks in the AWCP platform. When I write up the details for a plank, I will update this post to provide a link to the post for that plank. I may also occasionally update this post to add new planks.

By the time I have completed AWCP platform you will have a very good idea of what what my political beliefs are.

Secession Procedure

War Tax

New Social Security System

Libel Reform

Industrial Plan

Big Banks

National ID

High School Curriculum Reform

Tax Reform

Corporate Short Term Thinking

Value Added Tax – Part 1

Value Added Tax – Part 2

NAFTA

Medicaid

Gun Control

Guaranteed Minimum Income

Illegal Drugs

Workers Rights

Military Spending

Ideas already out there which I support

  • Free College
  • 15$ Minimum Wage
  • Single Payer

 

 

 

Inverse DOMA

Now that the Republicans have full control of the federal government and managed to steal a supreme court nomination from Obama I think that DOMA, or a slightly tweaked version of it, may well rear it’s ugly head again.

What is interesting is that there is at least one government agency with regulations similar to DOMA, but with important differences.

My first job after I got out of the Army was with what was then the Veterans Administration, now the Department of Veterans Affairs, as a claims examiner at the VA Chicago regional office. I started with education cases and was later given disability and pension cases. Most people are aware of the VA disability program and most are also aware of the education program, but I would guess that most people are not aware off the VA pension program. That is a means tested program which pays a modest monthly benefit to indigent elderly veterans. If a veteran died and was married his widow could receive a widow’s pension.

By the early part of the twentieth century a problem had developed with the widows pension program. Single young women were having death bed marriages to elderly civil war vets. When the vet died shortly thereafter the widow could receive widows pension for the rest of her life or until she remarried. To solve this problem the VA implemented a regulation such that the VA would not recognize a marriage unless at least a year elapsed before the veteran died or that the widow had a child as a result of the marriage.

Superficially this is just like DOMA but there are large differences between the two. DOMA prohibited all Federal agencies from recognizing a gay marriage. In addition DOMA allowed states to refuse to recognize a gay marriage performed in another state. The VA regulation, on the other hand, was narrowly written to solve a specific problem in a specific program. Also, while DOMA showed animus towards gays, the VA showed no such animus towards the young women other than preventing them from gaming the system.

Another problem that came up in the widow’s pension program was related to provision mentioned above that if a widow remarried her widow’s pension would be terminated. What some widows started doing was to do things to convince her friends and neighbors that she had remarried without actually getting married. To illustrate the problem consider a widow named Mary Smith who gets romantically involved with a man named John Jones. She would change her legal name to Mary Jones. She would get a new driver’s license in the name of Mary Jones. They would put Mr. & Mrs. Jones on the mailbox. They would tell everyone, except for the VA, that they had gotten married but they would never actually be married. This would allow them to avoid the stigma of an unmarried couple living together while allowing her to continue to receive widow’s pension. As a result of this type of conduct the VA implemented a regulation stipulating that if a widow ‘held herself out as being married’ then the VA would treat her as if she had actually remarried and terminate her widow’s pension. This is the inverse of DOMA and the previous situation where the VA would refuse to recognize a marriage unless certain conditions were met even though the state in which the marriage was performed recognized the marriage without those conditions. Here the VA would treat a widow as if she had remarried even though she was not legally married in any state.

I actually processed a case like this towards the end of my time at the regional office. I wrote up a decision terminating a widow’s pension retroactive five years. Any decision generating a large repayment was automatically sent to the VA central office in D.C. for review. Shortly after making that determination I transferred to the VA data processing center at Hines, Illinois so I never found out the result of the review. Since the evidence was solid, plus the fact that my boss had to cosign the decision, I firmly believe that central office held up the basic decision to terminate the benefits. On the other hand I would not be surprised to find out that they adjusted the retroactive date of the termination. The VA would probably never get back the full amount due in the first place, plus, the widow in question was not exactly flush with money. I suspect that they adjusted the retroactive termination to be a few months instead of five years. That would be enough to make repayment hurt a bit without actually bankrupting the couple. That would be fine with me since I doubt whether widows receiving pension were terribly well informed of the prohibition against ‘holding yourself out as being married’. If anything it was probably buried in a two or three page document filled with legal jargon which the widow received when she first started getting widows pension. Such documents are like the terms and conditions you agree to when you access a website, rarely actually read by anyone.