Where Does the Cash Come From to Pay All the Costs?
This question has also been put in the form of, “How do we create the wealth with which to pay off the debt?” It’s easiest to answer that one first. Think of the common, everyday business decision to purchase a new tool or machine in order to increase output while reducing unit costs. That’s exactly what we’re doing here. Congress today uses 30% of covered payroll to provide our Social Security and Medicare benefits in the Transfer-Payment funding method. By converting to the Retirement-Plan funding method, we reduce the cost of providing these benefits to about 2.5% of covered payroll. The amount we save by reducing the cost of accomplishing this task – that other 27.5% of covered payroll – is the newly-created wealth with which we pay off the debt.
Once we understand where the new wealth comes from, then it follows pretty easily that all we have to do is find a way for markets to convert that stream of cost savings into cash. Once we convert to the Retirement-Plan funding method, the cash to pay our benefits … comes from our portfolio! Just as a retirement plan should operate. We just create a starting portfolio of marketable securities, and then we gain access to the balance sheet as a source of cash. Instead of being limited to the income statement and having to take the whole cost out of workers’ paychecks, we turn this into a balance sheet function and let compound interest (the profits we accumulate from ownership of the economy) do most of the work for us.
We can sign over to a consortium of life insurance companies and public employee pension plans – call it Master Trust – our payroll tax receipts for the next 90 years. Freeze the rate at today’s rate, so we avoid the crippling tax hikes now scheduled by the Transfer-Payment funding method.
Master Trust issues securities evidencing ownership of the revenue stream, and “pre-funds” our personal accounts with the starting balance we need to reach the targeted balance at retirement which will fund our expected benefits.
The stream of revenue will have a present value of $61 trillion. About 44 million retirees already drawing benefits will get a starting balance averaging $408,000, etc. Of the 30% total we already pay in payroll and income taxes combined, 4.7% will now go into workers’ accounts to continue building their personal account to the targeted balance at retirement. The rest of the 30% forms the revenue stream which supports the starting portfolio.
All we need do is manage our liquidity, as the life insurance industry and public employee pension plans have done safely and successfully for centuries. If we just do what we say we’re going to do with the money (keep Congress’ hand out of the cookie jar), the market will easily provide the liquidity we need.
We extinguish the National Debt – we exchange these Master Trust securities for outstanding Treasury securities, too. That helps make a market in Master Trust securities – they will now be the safest securities available. And eliminating Net Interest Expense (plus removing the Social Security and Medicare shortfall) balances the federal budget.
Can the Stock Market Do This For Us Safely?
The key to safely investing in stock markets is to take guesswork out of it. The proven approach is to pay cash for your investments, diversify, and just collect the profits from ownership of the economy. Some years you collect more profits than others, but over the long term you earn the average rate of return and meet your obligations.
Where investors get in trouble is guessing which specific stocks will move, and when. If you concentrate in just a few stocks and guess wrong, or use borrowed money and put arbitrary deadlines on the market to meet your expectations by a certain date in the short term, you can lose.
But if you take the approach of a long-term owner of the economy, spreading a large portfolio across the whole spectrum of available stocks, then just collect the profits each year and reinvest, you achieve the same safe and successful performance enjoyed for centuries by the life insurance industry and public employee pension plans.
There are some enormous safety factors giving us plenty of cushion. That 12:1 waste factor becomes our 12:1 cushion as soon as we convert, plus a 90-year time frame in which to make adjustments, plus that $3 trillion contingency reserve … and much more.
Here’s an example of how easily we can adjust. Out of the $12 we’ve been paying to get a $1 value, let’s say we start out allocating $2 to workers’ accounts (so we double our Social Security benefits), plus $3 to balancing the budget, plus $7 to paying the transition cost (supporting the starting portfolio).
If we find that allocation isn’t sufficient, we can adjust to putting $2.20 into workers’ accounts and devoting $6.80 to paying the transition cost, and just stretch the amortization schedule out to 94 years instead of 90. We’ve got plenty of cushion, and 90 years in which to adjust – it won’t be a problem!
We can follow the example of our esteemed Representatives and Senators. Their financial disclosure forms indicate they have, on average, stock-market portfolios of $1.5 million. If it’s safe for them because their portfolios are big enough to diversify … then they can hardly claim that our $61 trillion portfolio won’t likewise be safe.
Won’t We Be Increasing Our Risk Profile?
No. We will be greatly reducing our risk profile.
Risk management requires considering all the risks and comparing the total combined risk of each alternative course of action. Those who say that the Transfer-Payment funding method is safe because it bears no stock market risk … are tragically wrong. They are only considering part of the story. Here’s the rest of the story.
Yes, Social Security has zero stock-market risk. But it bears the Gigantic, Unsustainable economic risk of this 12:1 waste factor.
Similarly, yes, the Retirement-Plan funding method does bear a small stock-market risk. But it eliminates the Gigantic, Unsustainable economic risk, and provides ample tools with which to mitigate the small stock-market risk.
So the comparison of total combined risk goes like this:
Transfer-Payment funding method
Zero stock-market risk + Gigantic, Unsustainable economic risk =
Gigantic, Unsustainable total combined risk
Retirement-Plan funding method
Small and easily mitigated stock-market risk + ZERO economic risk =
Small, Easily Mitigated total combined risk
We dramatically reduce our risk profile by eliminating the 12:1 waste factor, going from the Gigantic, Unsustainable total combined risk we face today with the Transfer-Payment funding method … to the Small, Easily Mitigated total combined risk we will enjoy with the Retirement-Plan funding method.
And, before you surrender to the “risky” argument, please insist that the “risky” argument advocates answer this question: Do we really need to buy $12 of protection for a $1 risk?
Is the Rate of Return Assumption Reasonable?
Yes, we can easily meet the 6.5% rate of return forecast used in these calculations. An Ibbotson study showed that over a 75-year period from 1926 through 2001, the U.S. stock market earned an average annual compound real rate of return of 7.62%. We’ve had several downturns and rebounds since then, and are right back on that long-term trend line.
And remember, that performance included three periods when our government practiced bad stewardship (living beyond our means, borrowing heavily and trying to cheat our neighbors to shift the consequences onto them) along with two periods of good stewardship (balancing the budget, paying down debt and dealing honestly and generously with our neighbors).
The stock market annual return averaged about 15% during periods of good stewardship vs. 2% during periods of bad stewardship. By eliminating the 12:1 waste factor, we usher in an era of sustained good stewardship.
So we will easily achieve the 6.5% forecasted real rate of return used in these calculations. Consult the benefits listed in FAQ #6 and reflect on what those economic conditions will mean for jobs, sales, costs and profits … and you will share our confidence that we can easily hit the target.
Has This Been Done Before?
Yes. County employees in Galveston, Matagorda and Brazoria counties of Texas withdrew from Social Security in the early 1980’s and converted to personal accounts. They have done quite well. Alaska state employees did the same, with similar successful results. The nation of Chile also converted to personal accounts, with successful results.
And then there’s the centuries-long history of life insurance companies and public employee pension plans, who have successfully met their obligations by investing in ownership of the economy. We know this works. It has been proven safe and successful.
You might notice just a whiff of hypocrisy on the part of our political class. They closed the window in the mid 1980’s, no longer allowing groups of public employees to convert from the Transfer-Payment funding method to the Retirement-Plan funding method. Meanwhile, the political class makes sure that they themselves participate in ownership of the economy through their $1.5 million portfolios.
Hmmmm. Is it too cynical to wonder about their motive? Looks like they get to participate in ownership of the economy while locking out most of us … saying they are protecting us. Righhhht.
It’s okay for them to have ownership of the economy because they have $1.5 million portfolios which are large enough to be safe. But somehow it wouldn’t be safe for us workers to participate in ownership of the economy … with a $61 trillion portfolio? Really?
We can also quote a higher authority for confidence that this will work. The ER solution is faithful to biblical principles, as the following shows.
God’s Economic Principles
- Do not be a servant to debt.
(Exodus 20, Deuteronomy 15:1, Proverbs 22:7)
- Work and save to provide for our own needs in retirement.
(Proverbs 6:6-11, 2 Corinthians 9:6-7, 1 Timothy 5:8)
- Invest in enterprise and trading (stock market) to make our capital increase; as a minimum, earn interest at the bank!
(Parable of the talents, Luke 19:12-27, Matthew 25:14-28)
- Fire any steward who produces no increase!
(Parable of the talents, Luke 19:12-27, Matthew 25:14-28)
- Provide an inheritance for our grandchildren.
We’re 0-for-5, aren’t we? Our government is servant to massive debt. Our government takes our FICA savings and spends them. Our government does not invest our FICA savings. We have not fired this steward who produces no increase. And we hand our grandchildren a massive debt.
It shouldn’t surprise us that man’s way has created a big mess. Nor should it surprise us that using God’s economic principles can immediately solve our unsustainable fiscal path!
- Do not be a servant to debt.
How Will This Affect the Global Economy?
- Immediate economic recovery (customers have more buying power from increased Social Security benefits plus high confidence about long-term challenges being solved)
- Avoid future catastrophe (the waste factor rising to 23:1)
- Reduce healthcare costs (in addition to Medicare no longer shifting costs onto others, there are other consequences of freeing up resources which can also reduce our healthcare costs)
- Reduce pension costs (by getting our money’s worth out of Social Security and Medicare through compound interest, we won’t need as much from other sources)
- Pay off all the debt and balance all the budgets without raising taxes or cutting programs (by freeing up resources, we do this for Federal, State & Local gov’t)
- Sustained economic growth (unleash our abundant savings rate, 12x what we need)
- Huge civil-rights victory (take away the tool that has been used to hold minorities back)
- Huge victory for sustainability (our debt violates the principle that present generation should meet our needs without compromising ability of future generations to meet their own needs; ER solution remedies this violation)
- Foreign policy gains (get out from under foreign creditors; make US $ reliable; make US competitive and generous; also, Europe and Japan face the same demographic challenge with their social insurance programs and can use a customized version of the ER solution to rescue their economies from their own unsustainable paths)
How Long Will It Take To Implement the ER Solution?
We can go live in six months if we put business people in charge. We don’t have to create some monstrous new bureaucracy, just facilitate the life insurance industry and public employee pension plans opening up new accounts to cover our Social Security and Medicare book of business.
They already operate on the same scale as Social Security and Medicare, and they open new accounts every day. All we need to do is have people choose which life insurance company or public employee pension plan they want to handle their account, and GO!
Calculate the balance due. Issue the customer’s units of participation in the stream of payroll tax receipts to the life-insurance company or public employee pension plan handling their account. That life-insurance company or public employee pension plan issues a legally enforceable annuity contract to the account owner. We keep paying the taxes we already pay. Master Trust pays the designated amounts to the designated accounts, just like payroll deduction.
Every step of the ER solution is a transaction we already perform hundreds of millions of times in America every month. We know this works. We just need to get Congress out of our way.
Yes, there is some cooperation needed. That will be eagerly forthcoming once we explain the gains people will enjoy.
Six months, if we put business people in charge who believe in it and actually want it to work. (For example, me and the team I would pick. I know we can do it in six months.)