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November 7, 2011

Implementing the Social Security Solution

Back in September, Common Sense Capitalism presented a plan on saving Social Security. The plan, mainly privatized, called on all taxpayers to be eligible for their share of Social Security taxes each year. The stipulation is that for every $1 they would get back, they would need to invest $2 in a private, qualified retirement account. Additionally, their employer would be eligible for a partial refund if they contributed to their individual employee's retirement account.

Before I present my scenario, I want to add a few new points to my solution.

1) The employer can put up to half of its tax liability into its employee's qualified retirement account, then they would be eligible for that refund plus an additional 25% of their total Social Security tax liability. This would leave 25% of their Social Security tax in the system.Link

2) The solution, in order to calculate a broader economic impact, needs to lift the cap on Social Security taxes to unlimited.

Here's a spreadsheet summary of my analysis, assuming that one person earns the average wage in America from 1980 to 2014.

In the end, the individual worker would invest twice their Social Security tax in their retirement and end up with almost $626,000. In an average economy, investors can gain an 8% return on conservative investments. For a worst case scenario, we'll assume a gain of 4%. In our worst case scenario, the average worker would earn $25,000 in fixed income for the year. That's $2,100 per month compared to an average SSI payment of $1,082 per month. In the average case, income would be $4,200 per month. For two person households, this income is more than adequate.

Your thoughts? On Wednesday, I'll expand my analysis to the entire economy under the new plan. I will try to include the number of current beneficiaries as well as the number of disabled Americans.

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