“If you could build a startup to replace social security, how would you do it? What do you think the biggest challenges would be?”
There are many problems with the social security system. The most obvious are:
- Funding: There’s not enough being put in to match what is coming out. This is a classic example of expenses being higher than revenues. It is partially a result of population and demographic issues. This will be somewhat alleviated by the Millennials, but continue to be exacerbated by the Baby Boomers. It is also partially due to the ineffective and wasteful administrative nature of government.
- Return: When I put money into social security I don’t get a rate of return on my money. This is because the government uses social security funds to spend on other things. Also, individuals (or organizations) are not able to invest their social security taxes. The government believes you are too dumb to invest your own money…at least that is what the policy leads me to believe.
So, on to my thoughts on “privatization”.
First, as much of a libertarian as I am, I don’t think it is practical to replace social security with a private enterprise (start-up). That said, I would privatize portions of it (on a fixed fee) and require bidding every five years to insure the money management and disbursements were handled in the most efficient manner possible.
Second, I would make a number of revenue and investment changes. Here they are (open for discussion and critique):
- Reduce payroll taxes to 10% total (5% employee and 5% employer). Payroll taxes are currently the most regressive tax in America (other than “sin” taxes), and these taxes are causing an increasing wealth gap and really hurting the lower-middle class. *This helps a number of social issues and will improve the overall economy (see the payroll tax holiday from the previous recession).
- Extend the payroll tax and cap the Medicare tax at $1 million of payroll rather than the current limit of $117,000. *This fixes the revenue issue.
- Require social security funds and Medicare funds to be set aside and separately managed by independent money management firms and administrators. *This cuts administrative costs (reducing overall expenses) and increases the overall rate of return (boosting revenue.) We should require those firms to manage these funds with 75% short-term bond funds and all other funds in highly liquid index funds with a maximum fee of .35% per year for money management and a max fee of $1.50 per participant for administration. *By the way these companies have the best automated reporting around and this bidding would be incredibly competitive.
- Require the government to immediately seed the fund with the amounts needed to fulfill the next 10 years (assuming a 3% rate of return).
Clearly, there are a lot of numbers in this that would have to be run and I am sure my percentages would have to be closely analyzed to insure stability in the system. I am completely flexible around the numbers and percentages as long as the theory remains intact; grow revenues and lower expenses by outsourcing, grow the economy and the base by lowering payroll taxes and simplifying government administration.
What do you guys think?
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