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As I See It

Critical changes to retirement systems needed now

Jimmy Heidel, Mississippi’s renowned economic developer, officially joined Mayor Frank Melton’s administration last week. Actually, Jimmy is sort of joining the administration, but not exactly. His firm — Jimmy Heidel Consultants, LLC — has been contracted to guide economic development for the Capital City.

An interesting factor in this arrangement — city politics aside — is the impact employment with the city could have on Jimmy’s status in the state retirement system.

If he had gone to work for the city directly, he would have forfeited his state retirement benefits since you can’t work for government in Mississippi and draw retirement from the state system at the same time. This policy is unfair and unwise, and there are three reasons we should change it:

• First, retirement benefits are calculated based on the employee’s contribution and longevity and should be paid at the appropriate time regardless of whether the employee chooses to keep working or not.

• Second, if the employee continues to work for the state, more retirement funds will be collected and paid into the system thereby increasing the size of the pot.

• Third, critical shortages caused by teacher, and other public employee, retirements over the next decade are coming, and allowing teachers to continue working after retirement age without reducing retirement benefits would encourage many educators to stay on the job.

While we’re at it…

Mississippi is not the only retirement system that penalizes people for working after retirement. One has to go no farther than Social Security to find a comparable situation. You can claim early Social Security retirement at age 62 with reduced benefits or retire with full benefits at 65. However, if you have earned income above a modest amount, your benefits are cut until you reach age 70 or so.

Social Security differs structurally from state or private retirement. The system was initiated to woo voters rather than provide an actuarially-sound retirement system. Beginning in the 1930s at its inception, Social Security began paying out benefits in excess of what was justifiable and continues the practice today.

The theory of the overly generous benefit structure of Social Security was based on statistical gambling. Most folks didn’t live to age 65 back in the 1930s. Since Social Security isn’t a property right that can be passed on to beneficiaries, it was speculated that all the folks who paid in and died before collecting would adequately subsidize the few who actually made it to age 65.

Surprise, surprise!

Life expectancy has increased dramatically and the system is stressed, to say the least. Should Social Security be changed to a more actuarially sound basis?

Working a little longer

Well, let’s think this through.

Economists tell us there will be a shortage of workers in the future due to the declining birth rate over the past few decades. Add to that the fact that we are living longer and longer and you have a serious social and financial debacle forming up in our future. Will our retirement policies make things better or worse?

It seems to me that several changes to the Social Security system are needed to complement the reality of our situation. First, increasing the retirement age to 70 would go a long way toward getting the Social Security fund out of the ditch. This proposal is not likely to meet with universal acclaim and doesn’t stand much of a chance of passage; however, that doesn’t subtract from the wisdom of doing it. Most folks are still spry and active at 70, and those who aren’t would still have disability coverage available to them.

Second, regardless of whether the retirement age is raised to 70 or left at 65, make no benefit reductions for those who want to work on beyond normal retirement age. That would contribute to solving the upcoming worker shortage and would generate more funds for Social Security since workers would continue to pay into the system with each paycheck. If we’ve worked and contributed to the system, then we should be able to enjoy the fruits of our labors without regard to whether we choose to retire or keep working.

Finally, and even less likely to achieve widespread popularity, I think at least one-half of Social Security benefits should be income taxed when paid to recipients. The employer’s matching Social Security contribution wasn’t taxed when it was paid into the system, and that portion should be subject to personal income tax just like any other retirement benefit. Putting those tax collections directly into the Social Security fund would help alleviate Social Security’s current financial problems.

Fixing the mess

In my view, people shouldn’t have to form corporations to avoid the punitive provisions of the retirement system, nor should they be penalized for choosing to work past normal retirement age.

Taxing the previously untaxed portion of Social Security and raising the retirement age to 70 wouldn’t be popular, but would go a long way toward fixing a system that is likely to face financial difficulty, and possible ruin, over the coming decades.

And we Baby Boomers have mortgages that won’t be paid until we’re 87, anyway, so we’ll be working as long as we can plod along.

Thought for the Moment

Here is my creed. I believe in one God, the Creator of the universe. That he governs it by his Providence. That he ought to be worshiped. That the most acceptable service we render him is in doing good to his other children. That the soul of man is immortal, and will be treated with justice in another life respecting its conduct in this. These I take to be the fundamental points in all sound religion.

Benjamin Franklin — from a letter to Ezra Stiles, president of Yale

Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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