I don’t know many people who would turn down a guaranteed source of income when they are retired. Social Security was supposed to be something everyone could count on when they are too old to work. As a member of Generation X, I’m fairly certain I’ll receive a 30 percent “pay cut” to my Social Security benefits since the system is underfunded at this time. It’s like adding insult to injury since my generation has faced pay cuts, layoffs and job struggles throughout our lives.
I recently read about the Purple Social Security Plan proposed by Laurence J. Kotlikoff, a professor of economics at Boston University. His plan is simple and transparent. The plan would require all workers younger than 60 to contribute 8 percent of their earned income to a PSA (personal security account). Although I don’t agree on every point of the Purple Social Security Plan, I do agree that it’s time to freeze the existing Social Security system and offer a secure savings system for all workers.
Paying current retirees
According to the plan, current Social Security beneficiaries should continue to receive their full benefits. I think retirees in their 80s and 90s should receive full benefits, but retirees between 65 and 75 should take a reduction in their benefits since they are disproportionately benefiting from the current system.
Having some control
The PSA balances are invested in index funds that include government bonds, stocks, real estate trusts and other assets. I think people should have some flexibility to invest at least a portion for their PSA. I’d like it if workers could elect to have 3 percent of the money diverted into a Roth IRA account to invest as they please. That way they could also access some of their own money for emergencies, to buy a house or for college.
Leaving money to heirs
No one can inherit a Social Security payment when a person dies. But with the Purple Social Security Plan, participants who die before turning 70 can bequeath unconverted balances to their heirs. If the plan was tweaked to allow people to put some of their contributions into a Roth, that would also be advantageous to parents who want to leave their children money.
I’d continue to contribute to my Roth IRA in addition to having money taken out and saved into a PSA. The plan takes into consideration the poor, unemployed and disabled by having the government match their contributions. It also calls for government guarantee of the PSA balances so that the retiree at least receives what they put in, adjusted for inflation. With so many baby boomers nearing or in retirement, it’s becoming clear the current Social Security system can’t support the burden of that generation. Many people act as though Social Security should serve them like a personal savings or investment account. Unfortunately, Social Security is more like an insurance policy to serve as a safety net for people who live longer than the actuary tables predicted they would live. It’s time to turn Social Security into that it should have been: an actual retirement savings account.
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