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Who’s brave enough to take these 3 easy steps to unshackle retirees?

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Did you ever see one of those slow moving car crashes on TV? You know the kind I’m talking about. It’s the ones where you can see there is no other end than for the two vehicles to meet in a steel shredding collision. It’s so frustrating.

You shout at the screen, knowing the actors driving those cars can’t hear you. But you shout nonetheless. If only either one of them makes the smallest of a turn away from the other automobile, the two metal projectiles will peacefully pass each other, neither aware of the fatal fate that would otherwise await them.

I was reminded of this feeling the other day when I was speaking to an Ivy League finance professor about his latest research.

We digressed for a short discussion on how to fix Social Security.

He harrumphed, “Fix it? The thing’s been a Ponzi Scheme ever since it was created. Anytime you offer a current payout to an initial class that is greater than their contributions, you have the definition of a classic Ponzi Scheme. There is no fixing it, so don’t bother shouting. Just sit back, relax, and enjoy the inevitable catastrophe.”

Well, he’s a professor. He used to dispassionate objectivity.

Me? I, like many of you, live life in a real world. We aren’t mere spectators to this looming car crash, we’re passengers in those very cars!

Financial advisors, particularly those who specialize in retirement, offer the best hands-on experience when it comes to trying to solve the problems posed by Social Security (see, “A Fiduciary Solution to the Social Security Problem,”, September 9, 2015).

Here’s what surprises me, though, about many practitioners. As smart as they are, the popular Social Security memes constrain their collective creativity.

I could understand politicians succumbing to the “Third Rail” mentality. When professionals surrender to political-think, however, they nullify the one thing that sets them apart from every other commentator on the subject — their front line experience.

When you coax them out of their politically correct shell (as good reporters must), they find themselves free to think outside the box. That’s when their best ideas come to the surface. That’s when you see just how easy it is to forever rid ourselves of this Depression-Era albatross.

I’ve been able to distill three “starting points” to any serious discussion of coming up with a solution to Social Security. No, this isn’t a detailed plan.

Instead, it represents three parameters that must be met in order to come up with a convincing answer to the question that has vexes our nation for more than thirty years (i.e., 1983, the first and last time Social Security was at a similar crossroads). Mind you, the following only pertains to the retirement portion of Social Security.

No. 1: The baby boomer (and older) generation must be exempt from any changes to the program. 

Let’s be honest. Any “1983-like” solution merely kicks the can down the road. We don’t want that. We want a permanent solution. That means we need to make fundamental changes in what the program is for and how it does it. As such, it is highly likely current retirees or those nearing retirement would be irreparably harmed by such changes.

This isn’t fair to them. It’s not their fault the government made promises it couldn’t keep. They played by the rules and they shouldn’t be punished for it. Therefore, their promised benefits should be grandfathered in and they should be exempt from any Social Security “fix.”

No. 2: Meet Social Security 2.0: Transitioning from a Defined Benefit Plan to a Defined Contribution Plan. 

Corporate America realized decades ago that, like any other Ponzi Scheme, defined benefit (i.e., pension) plans were not sustainable. Private firms got out of the pension business when the getting out was good (during a historically rising stock market during the Reagan Boom).

Unfortunately, public pension plans didn’t. On a state-by-state level, we’ve seen how this has bankrupted municipal budgets. Social Security is no different than these state plans. Left as it, sooner or later it will bankrupt our federal budget. There is simply no arguing the math. Still, we cannot just end it.

We need to transform it. The idea of offering a retirement savings vehicle through a government-based program in addition to the one offered through private businesses will continue to have its merits.

Imagine every employee having two 401k plans – a plain vanilla limited version offered through Social Security, and a more flexible one offered through their employer. The savings numbers can be quite compelling (although the details will present a challenge, but we have behavioral finance research to help us iron those out).

No. 3: There’s no other end-game for Social Security than a bail-out. 

By retaining the benefits for everyone above 50 while at the same time transitioning Social Security from a defined benefit to a defined contribution program means the program will have liabilities far greater than its assets.

There’s no way around this other than a Federal Government “bail-out” of those retirees who benefits remain grandfathered. Heck, if it was good enough for a handful of big city “too-big-to-fail” banks, it out to be good enough for those folks in the heart of America who trusted their government.

There you have it: Three easy, albeit hard to swallow, opening parameters to any eventual fix to Social Security. They offer a little bit for liberals to like and conservatives to hate, and a little bit for conservatives to like and liberals to hate. What does that mean? That means it’s a political non-starter.

But we already knew that.

What it really means is, when enough people are so upset with the inability of the political establishment, we now know a very good beginning to start at when it comes to nudging those onrushing cars ever so slightly to avoid a smashing conclusion.

See also:

How to calm a panicked client? Look at stable assets

Social Security at 80: 8 savings strategies to share with clients 

How much income do retirees really need?