Wednesday, July 22, 2009

Pension Reform - Social Security

Companies in the USA have almost completely moved away from the traditional defined benefit plan, to schemes that require employees to contribute part of their salaries into a tax exempt fund. This tactic has reduced costs for companies and has essentially been a salary cut. Older workers who were part of the traditional plans received benefits as part of their remuneration package and it was built in to the company budgeting process. That way the workers did not have to worry about their retirement since the company would look after them. Additionally, with the establishment of the Pension Board Guaranty Corporation in 1974 the pensions were protected if the company went bankrupt.

This security blanket is quickly disappearing. Defined benefit plans will be completely replaced over the careers of the latest generation of workers. Then it will be up to the individual to make sure that they are adequately covered for retirement. This is not an easy task for anyone, and in fact since the effective salary has been reduced by eliminating those benefits, there is little extra income to build the retirement fund.

The events of 2008 and early 2009 have shown us that relying on the markets to build wealth can be extremely uncertain as millions of people lost heavily on their 401K plans and IRAs. To assume that individuals can manage these tricky investments properly to grow their retirement funds is risky. With the current state of the social security fund, it will fall on the taxpayer to support those who have inadequate funds to survive in retirement. It’s clear that there needs to be a rational debate on pension reform. What should we do as a caring nation to ensure that the elderly are adequately provided for in the autumn of their lives?

We can start by looking carefully at social security and how the money flows into and out of that fund. Today there is a cap applied so that extremely rich people end up paying a much smaller percentage that the ordinary worker, yet they are provided with the maximum pension when they reach retirement age. By removing that cap the funding issue for social security would disappear and the impact would hardly be felt by the super rich. It seems however that politics always gets in the way of solving problems in a straightforward manner, and there has been a campaign to discredit such a move by casting it as a tax increase that would impact jobs and the economy.

Personally I see it as a perk that rich people have had long enough, and I hope that the cap is removed so that at least one part of retirement security can be protected for future generations.

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