Free Money for Seniors

Some people are irresponsible. They take nice vacations and buy big screen TVs with money they should be saving for retirement. Do we let them freeze in the dark when the day of reckoning arrives? Do we let them live off dog food or take up dumpster diving?

Time to retire and go fishing

Some people are unlucky. They do save for retirement but lose the money to the vagaries of the market. Do we turn away as they become too old to work?

During the Great Depression the government said “No” but it was still a controversial “No,” so they created what looked like a forced savings plan. They created Social Security.

Today the “no” is no longer controversial. Even many Republicans proudly defend Social Security. But the law retains cruft from the days when the idea of the federal government helping the old was controversial. As a result, the program is needlessly complex and possibly regressive. We might do better to replace Social Security with free money for seniors.

When Social Security was first created, it effectively was free money for those who were nearing retirement. But Social Security was set up as a pay as you go scheme. Those who got in early received a windfall. The windfall is gone today, and FICA taxes will likely need to go even higher as we have more retirees per wage earner later this century.

The more conservative and libertarian Republicans realize that the current system is a bad deal for Generation X and have proposed diverting part of FICA taxes into mandatory retirement accounts. In theory this should be a better deal, but the idea is needlessly complex and some proposals had serious moral hazards.

A much simpler approach would be to drop the pretense of retirement insurance and simply give old people free money from the government paid for out of general revenues. If we did so, we could fold the payroll taxes into the income tax to have the flat tax that many Republicans claim to crave while having a tax system that is just as progressive as the current system. This simplification would make life much easier for small businesses. Unemployment would drop, since paying salaries would be far less hassle. Given today’s unemployment rates, this is a rather important feature.

If you want to save for retirement, just save. If you are willing to live like a hippie in your golden years, have fun while you are young. Free money provides a simple safety net, so we can take off the training wheels, helmet, water wings, knee pads, etc. that today’s nanny state imposes on today’s workers.

This leaves us with at least three important questions:

  1. How much free money do we give to aged?
  2. How do we transition from today’s pay as you go scheme?
  3. How do we protect those who do save from being ripped off by Wall St?

If we opt for the generous payment of $1000/month for each individual, our general citizen dividend would exceed what many are receiving in Social Security today. But we might not be able to afford that much, and we definitely cannot immediately transition to such a generous payout to everyone while we wrestle with an enormous federal debt. One possibility is to make the citizen’s dividend age based. But unlike Social Security, make the payment irrespective of your work history and whether you are still working. Perhaps a partial payment that starts at 62 would make sense, to supplement blue collar workers who have to switch to lower paying jobs as their bodies lose the strength of youth. Then ramp up the payment for those over 70 as even part time work becomes problematic for many. We might even have a higher tier for those in their mid 80s or above since even their children are getting old.

We should set the payout so that those who lived a life of unskilled work can retire in comfort without having to save or outsmart Wall St. Those who wish to maintain a higher standard of living will have to save during their careers. Saving can mean anything from buying stocks, putting money into longterm savings accounts, paying off the mortgage, purchasing rental properties, building a business which can be sold or buying a lucrative college education for the children. The government need not know nor set up special accounts or tax loopholes.

As for making the transition, the formula is simple. For those nearing retirement or already retired, they payout should be the greater of Social Security as is or the new free money for seniors program. All we need to debate is where the age cut-off should be for the old Social Security entitlement.

As for Wall St., the government creates artificial volatility by monkeying around with the money supply. The government needs to monkey around with the money supply, however, because it allows banks to practice maturity transformation. If banks had to use long term deposits to finance long term loans, then five and ten year certificates of deposit would have a decent yield. Even without a special tax provision, plain vanilla retirement accounts at your local bank would have a decent yield. And there are yet other possibilities for reducing volatility and directing decent yields to middle class conservative investors. Keep an eye on the sidebar and the blog for future articles/posts on the subject.