Turn Federal Pensions into De Facto 401(k)s

It's one of the worst kept secrets in Washington that entitlement spending constitutes most of the federal budget. How exactly does that break down? Here's a brief outline of entitlement programs as a percentage of total US government spending in 2003:

Social Security: 23% Medicare: 12% Medicaid: 7% Other Means-tested entitlements: 6% Mandatory payments (pensions, etc.): 6%

Together, these five categories consumed 54% of the federal budget. By comparison, in 2008, the US government spent 21% of its budget on the military, which is frequently mis-cited as the largest sector of federal government spending (although it is the largest sector of federal government discretionary spending).

We have already touched upon the first category, social security: raise the national retirement age to 70. Although we plan on revisiting that, today we would like to bring up the final sector: mandatory payments, specifically pensions.

Currently, federal pensions are disbursed based on a guaranteed payout system. If you work for 20, 30, 40, etc. years, you are guaranteed a predetermined monthly payment. We used to call this a pension system, but we stopped doing that as fewer and fewer companies offered pensions, opting instead for 401(k) plans.

Why not follow the lead of those companies? The federal government should stop offering a guaranteed payout to its workers after they retire. Instead, the US government should determine how much would be required for the employee him/herself to invest each year for the next few decades at 7% annual interest to receive the same predetermined payout in 20, 30, or 40, etc. years as they are now guaranteed. Every salary should then be increased that amount (after taxes, of course). This would provide a short-term expense for the federal government (the increased salary), but long-term savings, as Washington would not be on the hook for enormous quasi-salary payments to former employees who are no longer in public service (no more pension payments).

A natural concern: most federal employees won’t invest that money. An easy solution: automatically place that money in a 401(k)-like instrument. For bookkeeping purposes, it’s the same thing. For employees, it provides similar a similar retirement plan.

This requires a definite sacrifice by federal employees. They must make the hard choice to forgo a guaranteed pension when they retire. But such a sacrifice will provide great returns to our kids, as the pensions of retired federal employees will not burden future federal budgets. The patriotic sacrifice of these employees will further secure the future of the nation they proudly serve.

Raising the National Retirement Age

For many Americans approaching the age of 65, retiring then is a birthright. That's the age when social security has historically provided full monthly payouts to retirees.

But that age was actually changed in 1983, or rather, Congress legislated to change that age gradually beginning in 2000. As a result, everyone born between the years 1943 and 1954 will be entitled to their full social security payouts starting at age 66; for those people born in 1943, they turn 66 this year. For people born in 1960 and later, they are entitled to full payouts when they turn 67.

Yet even with this delay of the national age of retirement, social security is in danger insolvency. It is estimated that social security payouts will exceed social security taxes collected sometime in the year 2019. For a time, there will be sufficient funds to honor all social security obligations in the social security trust fund, which the federal government has developed over the decades by investing in US bonds the difference between the social security taxes collected and the social security funds paid out. However, those funds will eventually exhaust themselves. The Social Security Administration estimates this will happen by 2041; the Congressional Budget Office estimates by 2052.

Either way, we know we're on borrowed time. Had we made the hard choice to push back the national retirement age more aggressively in 1983, we wouldn't be in this situation now. And as a result, we're left with even harder choices to make now. But if we make those harder choices today, we'll save future generations of social security beneficiaries from making choices that are even worse. Our sacrifice will be their support.

Our suggestion: push back the retirement age aggressively. Today, if we begin to push back the national retirement age to 73, we will restore long term solvency to the social security trust fund, saving the program for future retirees and saving our tax dollars which almost certainly would have gone to bolster the gap in social security funds.