An Innovative Approach to Social Security Reform

I am posting the following summary on behalf of Mr. Carlton Lee, who has developed an interesting alternative to reducing the cost of Social Security. I have not fully analyzed the plan, but on the surface, it looks workable.

Social Security Proposition 60

A Simple, Voluntary, Common Sense Solution to Social Security

What if there was a way to guarantee individuals at least part of their social security even if the government had no money for benefits?

What if there was a way that seniors could pay off mortgages with the value of their own homes without incurring debt?

What if there was a way that the government could save hundreds of millions of dollars per day by individuals volunteering to give up part of their social security?

There is just such an entity; Social Security Proposition 60 (SSP 60)

Many seniors have three common financial assets; a home, an Individual Retirement Account, and social security. Allowing seniors to combine these assets is the proposal, SSP 60 that would make the aforementioned questions a reality.

The proposal, SSP 60;

– In no way changes any part of the present social security program.

– Does not cost any money.

– Saves the government hundreds of millions of dollars per day.

– Could start today.

– Only requires that Congress change two rules.

– Would be a choice made by each individual

– Creates a no cost means by which individuals could receive part of their social security even if the government had no money for social security benefits

– Activated at age 59 ½, however the proposal would create strong incentives for younger individuals to save through IRAs and owning homes

Our country has two “National Retirement Programs”. One is a Mass National Retirement Program that we call social security. The other is an Individual National Retirement Program that we call an Individual Retirement Account or IRA. Both programs require the individual to have earned income and to pay into the program to receive benefits. Many seniors are receiving benefits from both of these retirement programs and under today’s rules they have no other choice. SSP 60, using the IRA as the key, gives seniors another choice, decline part of your social security and convert your tax deferred IRA to a tax free ROTH IRA.

The mechanics are simple; The IRA custodian would look up the IRA amount, that the senior wished to convert, in the current tax table, for example 200K (status married filing jointly) and finds the tax to be $44,243. The custodian sends an electronic message to the Social Security Administration, to stop the individual’s social security until the individual had accrued $44,243 at which time the individual would again receive their benefits. Using these figures and assuming the average monthly benefit of $1,150, the individual’s social security would stop for approximately 38.5 months.

The senior now has a tax free ROTH IRA which is a good start on a nice retirement. The next concern is an investment opportunity for that IRA that is risk free and relatively high yield and the senior can use the funds while they are invested. Under today’s rules there is no such thing, however SSP 60 using the IRA as the key, highlights just such an investment opportunity. The other financial asset which many seniors have, a home, becomes the risk free and high yield investment instrument for the seniors IRA.

The mechanics are simple; The IRA custodian would have the property title searched and obtains the current assessment. For example the custodian finds a 100K payoff on the mortgage and a property assessment (value) of 400K. The senior (over 59 ½) chooses how much of their IRA to invest. (Maximum investment 400K) Assume the senior chooses 150K, 100K to pay off the mortgage and 50K to remodel the kitchen, help their grandchildren with their education, buy a new car and give a nice donation to the church. The custodian pays off the mortgage, records the mortgage payoff and records an “IRA Lien” which protects the IRA’s interest in the property and off sets the 150K taken out of the IRA to maintain the IRA’s value, thereby preventing this transaction from becoming a tax event. The IRA’s interest in the property is 150K (the investment) divided by 400K (the value) equals 37.5%. The “percent of interest” would stay with the property unless it is changed in one of the following ways; selling the home, investing more of the IRA, paying down the IRA lien, taking a distribution, and/or property improvement.

All of the transactions, involving the IRA would be strictly monitored by the custodian just as they are today.

This concept is considered risk free because there is nothing that could happen to the senior’s home that would in any way jeopardize the 150K that the senior now has in his hand.

The individual senior has been given a choice which allows the senior to combine the three common assets, the home, the IRA and social security to make those assets much more efficient and effective than being kept totally separate as they are today.

Let us now check the status of the senior, the economy and the government.

The senior has allowed his IRA to invest in his home which allows the IRA to share in the value of the home but requires no interest payments, no principle pay back, and no additional taxes. The senior is now able to access the equity in his home without selling or going into debt. The senior has protected the part of his IRA he invested in his home from loss and as the property value increases the value of the IRA increases. The senior has effectively taken part of his social security as a lump sum and the government general fund actually makes money. The senior has converted his traditional tax deferred IRA to a tax free ROTH IRA and paid the tax with money the government is sending the senior each month.

When the senior sells the home his IRA is paid first, just like a mortgage, and the remainder is subject to capital gains tax if applicable. Obviously if the senior’s IRA had a 100% “percent of interest” in the home, all of the proceeds from the sale would remain in the tax free ROTH IRA and therefore not subject to any tax. The senior has paid off his mortgage, thereby effectively increasing his income by the amount of the mortgage payment without an increase in tax liability.

The economy is stimulated everyday by seniors spending there pre-earned money, not credit, for everything from durable goods and education to donations to charities. The economy is further boosted by the incentive created by SSP 60 for young people to buy homes and start IRAs. These IRAs will grow and the number of individuals that have IRAs will increase thus reducing the need for social security. The need for custodians and good investments will create jobs in the financial industry.

The government will save money every day. Given that approximately 55 million people get social security benefits, and the average monthly benefit is $1150, then if one percent of the 55 million declined there social security each month the savings would be approximately 21 million dollars per day. Statistics indicate that 20 percent of the social security recipients do not depend on their social security and would therefore be in a position to decline their benefits for some period. Logic indicates that this same group of 20 percent is receiving well over 20 percent of the 60 plus billion of benefits paid each month. The government would realize a revenue increase from seniors paying off there mortgages and thereby eliminating there mortgage interest deduction. Spending creates demand and demand is what creates jobs; as jobs increase payroll taxes and income tax revenue increases.

Social Security Proposition 60 is a win win win proposal. It is simple and inexpensive, everything needed is in place today if Congress would change two rules we could start today allowing seniors to help themselves, help the economy, save the government social security benefit payments and increase tax revenue.

All of the details, rules and requirements of “Social Security Proposition 60” are covered in another dissertation along with different financial scenarios. That dissertation is to long for this brief; however it is available to anyone interested.

Carlton Lee


13 Responses to An Innovative Approach to Social Security Reform

  1. KBCraig says:

    It should be titled, “Deck Chair Rearrangement 60”.

  2. Carlton Lee says:

    Sir could you explain what you mean by the title deck chair rearrangement?

    • KBCraig says:

      Surely you’re familiar with the phrase, “Rearranging the deck chairs on the Titanic”.

      The looming disaster is not lessened by complicating the decor.

  3. Carlton Lee says:

    My error for not being clear. I certainly am familiar with the phrase, my question is; how does the analogy of the Titanic relate to SSP 60?
    Carlton Lee

    • Elango Elephan says:

      A good start to repairing a broken government.

      The above” deck Chair” guy apparently thinks that all can be fixed by sinking the Titanic without re-arranging the deck chairs so the passengers could access the lifeboats!

  4. DougJ says:

    I really like this idea but I have a question. If the government allowed us to do this and a person had all of their IRA invested in their home, how would you take a distribution from your IRA?

    • Carlton Lee says:

      Thanks, this is a great question most people never get anywhere close to this point.
      To answer the question we must first discuss IRA distributions. Congress does not care about the money that is taken as a distribution, where it is or even if it exists, all Congress wants is a number representing the amount of the distribution on line 15a of form 1040. In other words all Congress is interested in is having the amount of the distribution declared as income. Therefore the individual would be able to take a distribution using only a little arithmetic. As an example use the scenario in the blog; the individual invested 150K of their IRA in their 400K property and therefore their IRA has a 37.5% “percent of interest” in their property. Let’s assume that the 150K is the individual’s total IRA. There are 5 actions listed in the blog that would change the “percent of interest”, and taking a distribution is one of those. Therefore to take a distribution the custodian would convert the “percent of interest” to dollars by first checking the current property value and we will assume that the value has not changed and the assessment is still 400K and 400K X 37.5% = 150K (the IRA value of investment). Next I will assume that this individual just turned 70 ½ years old and now must take a Required Minimum Distribution (RMD). The first year the RMD is approximately 3.7% of the total IRA value. Therefore the custodian multiplies 3.7% X 150K = $5550 the amount of the distribution. The custodian then reports that distribution to the IRS and sends the individual a form 1099 indicating that amount. The individual adds $5550 to any other amount on line 15a of the 1040 and Congress (the government) is happy. The distribution must now be taken from the investment to make the individual happy. The custodian subtracts the distribution ($5550) from the IRA value (150K) = $144450 the new “IRA value of investment”. The custodian then computes the new “percent of interest” (144450 / 400000 = 36.1%) which would stay in place until the next time one or more of the 5 actions occur.
      As a side note however, the individual could take advantage of the other part of SSP60 and use his social security to convert the traditional IRA to a ROTH IRA and eliminate RMDs and taxes.

      Thanks again I really appreciate the questions.
      Another good question would be; “what happens if the individual’s home value declines”? Here some special rules come into effect to protect the IRA.
      Carlton Lee

      • DougJ says:

        OK, I’ll bite. What does happen when home value declines?

        • Carlton Lee says:

          Thanks for asking.
          One of the objectives of SSP60 is to access the home’s value as cash without going into debt while at the same time protecting the IRA. Therefore to protect the IRA one rule is that the IRA cannot receive from it’s investment in the home less than it invested. For example let’s again use the scenario in the blog; and assume the only thing that has changed is the assessment on the home which has dropped to 375K. If we figure the “IRA value of investment” using the IRA “percent of interest” of 37.5% we see that 375K X 37.5% = $140,625 and that being less than 150K (the amount invested) is not allowed by the rule. Therefore the actual “value of investment” would be the higher of the calculated “value of investment” or the actual investment amount which in this case would be 150K and the distribution would be taken from that number. Using the previous scenario we have a distribution of $5550 and subtract from 150K = $144450 now the “percent of interest” is refigured using the new assessment, $144450 / $375000 = 38.5%. Let’s assume for a minute that the assessment dropped below the IRA “value of investment” and for some reason the individual had to sell and had to sell for less than the “value of investment”. If the individual does not have the cash to make up the difference between the sale price and the “value of investment” then the difference becomes a distribution. All this is to keep individuals from taking funds out of their IRAs without being taxed. Again if your IRA is a ROTH the tax is a non issue however you would still use the rule to keep as much in you ROTH as possible. SSP60 allows seniors to convert their traditional IRAs to a ROTH IRA using their social security, saving the government billions of dollars each month and saving the social security program.

  5. Unrelated to this topic, I mean to compliment you on your letter to the editor of December 1, 2011. Good stuff.

    Aside from being unjust and punishing merit, so many citizens are quick to criticize the incompetency of government at all levels but don’t wonder or know why.

  6. Tyler says:

    Most importantly,Mr. Lee has developed and presented a very deliberate and attractive proposal that should be seriously considered by Congress.

  7. Tyler says:

    Most importantly, Mr. Lee has developed and presented a very deliberate and attractive proposal that should be seriously considered by Congress.

  8. money advance loan

    An Innovative Approach to Social Security Reform | Tidewater Liberty

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