Sec. #5: Calculations to Combine SSR with the new AIWA
The AMERICAN INDEPENDENT WEALTH ACCOUNT (AIWA) personal-wealth-building retirement system will mesh well with, and carryover from and with, Social Security retirement.
The reason for this "meshing well" between the systems is that the Social Security Administration and/or the IRS already, in the normal course of business, accumulate the financial and demographic data needed.
The AIWA system will be very low cost to operate because of this "already accumulated" data.
After the completion of the "phase-in" period mentioned in section four, point 28, all of what had been Social Security tax withholding from paychecks, matching money from employers, and payments from self-employed individuals, will be deposited into the AIWA accounts of Americans.
The accumulated money in all AIWA accounts, will be invested in a national "mutual fund," called the Wilshire 501.
Home-managing Americans, who do not receive actual paychecks for their work will also have AIWA accounts. This means they do not have withholding or "match" money as would someone working for a salary or wage. So how do they receive their Wilshire 501 investment shares? One of two ways, or a mix and match of the two.
The first, and probably the best, is to have actual cash transfers from general Federal revenues to the AIWA accounts of the participants. The money will be used to purchase 501 shares at the then market value.
A second approach, is to simply issue 501 shares to the participants AIWA accounts at the then going market price. This approach will have roughly the same effect on the market value of each 501 share as a stock dividend.
The political process will decide how to best make this home manager portfolio-building decision, to maximize all shareholder value.
The following outlines is something of an "actuarial computation structure" that would need to be applied to "convert" to the AIWA/AFIF/SSP system.
The real question(s) center on the following:
Presently, Social Security (SS) retirement is something of a pay-as-you-go, quasi-defined benefit payment plan, based on an individual's lifetime earning "contributions."
Social Security, as an AMERICAN INDEPENDENT WEALTH ACCOUNT (AIWA) privatized system, will be more of a quasi-defined contribution personal investment plan.
All AIWA "contributions" paid in by all working Americans, or on their behalf, will be invested in the same national "mutual fund." The "shares" in this mutual fund will legally be the property of the individual owners, and purchased from what had been SS retirement tax withholding. (See the introductory comments above).
On 12/31/17, the most recent date available as of time of this writing, the Social Security "Trust Fund" had $2.8+ trillion dollars "in the bank" to cover future "benefit" payments. The $2.8+ trillion is called the "Total Asset Reserves (TAR)." Each year, payroll taxes collected are added to the TAR, benefits are paid out.
Table IV. A1. from the Trustees Report 2018 estimates benefit payments running from 2018 to 2027, plus other matters. The yearly benefits will very soon start exceeding incoming payroll taxes, and start a fast, and sizable, drain on the $2.8+ trillion Total Asset Reserves.
Table IV. A1 shows cost associated with total benefit payments in 2018 estimated at $853.6 billion. Benefits in 2027 are estimated at $1506.4 billion. A 75%+ increase.
The Total Asset Reserves are estimated to be gone in 2034 or '35. At that time, if present trends continue, payroll taxes will go up substantially, "benefits" will be cut substantially, or some combination thereof. (Please see the 3/15/19 comments by former Federal Reserve Chairman Alan Greenspan in point 6 in section 4).
The following structure, if implemented soon, can turn the situation around markedly. Assume the AIWA system goes into effect 1/1/2020.
As of 1/1/2020, the relevant population in question will be divided into two groups. (SS and other actuaries will be heavily involved in making mortality and dollar/cost/expense calculations in this process).
Group one, all people currently signed up for and collecting SS retirement as of 11:59 PM 12/31/2019. 42 million would be a good number to use. Group two, those in the workforce/home management force, but too young to collect.
Group one will shrink in size everyday, starting 1/1/2020, because of normal dying. As the group one 42 million get older, the rate of "die off" will accelerate. This acceleration in death rate, will mean that the amount of money needed from TAR and incoming payroll taxes to pay benefits will decline at an accelerating rate. Actuaries will have to make the appropriate estimates.
New people, moving from group two to group one, will be added to the benefit rolls as time progresses. The following are the basics of how these new "signees" will be "calculated in."
For a time, (Two years? Five years? Ten years? To be determined by actuaries) there will be a "phase-in" period. Assume ten years for example. An example 55 year-old American would still have about ten years to work.
Assume the 55 year-old has 33 years of SS retirement tax paid in since starting career work after college. The dollar amount of the 33 years of "tax pay ins" will be tallied for all individuals and recorded for future benefit payments during retirement. (The Social Security Administration accumulates this information everyday for all working Americans).
In year one (2020) of the ten remaining work years, perhaps 10% of the SS taxes being paid in by this American, or on his/her behalf by an employer, will be deposited into his/her AIWA account. 90% will go into the TAR. (The exact percentage calculated by the actuaries).
The 90% of his/her SS withholding tax money will be added to the Total Asset Reserves within the SS system to "cover" the benefits being paid to those still alive in the 42 million group one, and those new retirees, shifting into group one from group two. (The example 55 year-old would be part of group two, along with millions of others).
In year two, 2021, perhaps 20% of the SS withholding taxes would go to individual AIWA account, with the 80% balance being added to the Total Asset Reserves.
Year three, 2022, 30%/70%. Year four 2023, 40%/60%, and so on, until after the end of ten years, the full 100% of SS tax withholding and employer match, will go into each individual American's AIWA account.
Thereafter, each American, when entering retirement, will have the balance in his/her AIWA account to support him or herself for life. (For a time after conversion to the AIWA system, most Americans will have a portion of their "tallied up" contributions being paid to them from SS).