A better solution to Social Security funding

By passing the Social Security Act in the middle of America's Great Depression, President Franklin D. Roosevelt enabled millions of American retirees from that point on to avoid poverty and enjoy a more secure future. But the program now needs some important upgrades to ensure its future viability.

Some of the upgrades that have been proposed are contrary to the original intent of Social Security. Raising the eligibility age to 70 years and raising the payroll tax on workers and businesses to from 6.2 percent to 7.2 percent unfairly impacts younger workers. Many young people already believe that Social Security won't be there for them at retirement. Making them suffer most of the pain for saving it is unfair and unnecessary when other options are available.

In my opinion, the most important upgrade would be to increase the investment return on Social Security funds. Presently, the program's restriction allowing only investment in government bonds has not provided enough return over the years to offset the effect of demographics on an aging population, which results in fewer workers contributing to the system even as more retirees are taking benefits.

Following is a plan to protect the solvency of Social Security for future generations. I first proposed it years ago to Iowa Congressman Jim Leach. It's still viable and I hope it will be considered.

1. Separate the Social Security Fund from the general revenue fund to prevent presidents (and Congress) from understating actual budget deficits.

2. Raise the maximum earnings base (earnings that are subject to Social Security and Medicare taxes) to $250,000 over a three-year period. After that, index the base to inflation.

3. Amend the Social Security law to allow the Social Security Administration to gradually to invest up to 40 percent of its revenue in the U.S. stock market. Historically, a combination of 60 percent government bonds and 40 percent stock investments has returned an average of 8 percent since 1926 - a much better return than the 2-3 percent average return earned on Social Security funds invested only in government bonds, with only slightly more risk.

The stock investment portion could be handled by establishing a separate Social Security Stock Index Fund, run by respected professional no-load fund managers such as Vanguard or Fidelity. This type of fund would be based on the Total Stock Market (Wilshire 5000 Index) and have extremely low expenses (somewhere between 0.04-0.05 percent).

4. Set the estate tax exemption at $5 million for individuals, $7 million for couples (indexed for future inflation), and dedicate the estate tax revenue collected specifically to Social Security, Medicare, and Medicaid.

The above plan would eliminate the need for reducing benefits, raising Social Security payroll tax rates, or raising the benefit age to 70. It would put Social Security (and Medicare and Medicaid) on a sustainable path for generations to come.

During the last few years, even AARP has acknowledged that some Social Security funds will need to be invested in the stock market to maintain its solvency. More importantly, younger Americans would have an increased confidence that Social Security will be there when they retire.

' Norman Barnes, of Hiawatha, is a retired businessman, financial planner and longtime advocate for increasing return on invested Social Security funds to help ensure the program's long-term solvency.