What About Bob? Pension Talk in 2035

In 2011, the state of Illinois public pension was on the brink of disaster, with unfunded liabilities upward of $100 billion. By adjusting the benefits and contributions of current workers, the disaster was averted for those then retired. Those workers of 2011 "did their part" and are still working today, many of them into their 80s and 90s. They knew that it was more important to keep the seniors of 2011 in comfortable retirement so that taxpayers would not be burdened with the false promises of past politicians.

Now the year is 2035 and we look backward for lessons as Social Security is on a similar brink. While there are differences, there are many similarities: politicians promised too much, past generations did not adequately fund those promises, and the number of current workers is not keeping up with the growth in retirees. Even today, the retirement age is only 67 and those seniors vote. Politicians are caught in a bind and so we turn to President Michelle Obama, this nation's first female president and husband former president Barack Obama, both natives of Illinois. Knowing the "Illinois Lesson" well, President Obama calls an ordinary American to discuss what he can do. We will call our Everyman "Bob."

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Phone rings. Machine voice: "Call is from Out of Area"

Bob: "Hello?"

President: Bob, this is President Obama, do you have a moment?

Bob: Mrs. President, it is an honor.

President: Bob, as a fellow Illinoisan, I am sure you remember the Great Pension Reform of 2011?

Bob: Sure do! We almost went broke until the two parties got together to fix the problem.

President: Well, Bob, that's why I am calling you. I am coming back to Chicago to launch a new reform of Social Security based on the Illinois Model. I'm sure you know that Social Security is on the brink of fiscal disaster?

Bob: Heck, yes. Everyone here is just worried sick that "Social Security won't be there."

President: Exactly. We want to make sure that your Mom and Dad [both on Social Security] are taken care of so you don't have to put them up in a room.

Bob: So, Mrs. President, no one else has a plan, and your party put a clause in there protecting the future Social Security benefits of retirees. I believe that was passed after the Scare of 2011 in Illinois by self-serving politicians eager for votes?

President: (Chuckles). Yes, we politicians can be self-centered and we don't always do the right thing. Sometimes, though, we do. I hope to do the right thing now even though it won't be popular. "Shared sacrifice" is never popular.

Bob: Mrs. President, I appreciate your honesty. It's refreshing coming from a politician.

President: OK, Bob, I know you are a busy accountant so I'll get down to business. Our plan to rescue Social Security will require some sacrifice from you and other current workers. You won't be alone, we are asking all workers to pay for their future Social Security benefits and those of your Mom and Dad.

Bob: (Silence).

President: Are you there, Bob?

Bob: (Coughs). Yes, Mrs. President, I was just wondering what you had in mind.

President: As you know, the bond rating of the USA is slipping and your children will pay the price. Plus we want to make sure your parents are comfortable in their retirement. It is your generation's turn to become the Next Greatest Generation.

Bob: (Stiffens) Go on.

President: Bob, let me make myself perfectly clear: your parents' will receive their benefits and you will receive benefits. In fact, you will be given choices that you did not have before.

Bob: Choice is always good.

President: Bob, I know you are self-employed and also employ several other people. In the past, we have asked you to contribute 7% as an employer and deduct 7% from your employees. I know that means you pay 14% for your own self-employment contribution.

Bob: It's hard and, I'll be frank, I'm not very happy paying it because a lot of people say "Social Security won't be there."

President: That's where they are wrong, Bob! It will be there for you, your parents and your children but we must reform it -- just as we did back in 2011. The first step is to double your contribution and that of your employees. I know that sounds difficult but the money will stimulate the economy and it will preserve 100% of your parents' Social Security benefits.

Bob: Mrs. President, that is 28% for me and every one of my employees!!

President: That's the difficult part but, again, if workers don't do it, we may need to tax everyone in the country with a Value Added Tax (VAT) that hits nonworkers (the poor) and workers alike.

Bob: I don't know. What about that constitutional amendment preserving benefits?

President: Bob, open your history books! In 2011, we kept your benefits but merely required that you pay more for them. We also gave you the choice to opt out and accept a smaller defined contribution plan.

Bob: Yes, but as I recall they doubled payroll taxes of Illinois state employees only and then doubled them again three years later when the actuary guys ran their numbers. That means my payroll tax would be 56% before I got to anything else!! (Voice rises)

President: Please, Bob, do not call it a tax. It is NOT a tax; it is a "contribution." True, we only hit state employees back in 2011 because their retirees were in trouble. But Social Security covers everyone in the nation so we have to ask ALL workers to share in the sacrifice. And, remember, you can opt for the trimmed down defined contribution plan.

Bob: But that won't allow me to retire. I can't handle that tax plus the other taxes, even with all the loopholes I know as a CPA.

President: Again, let me make myself clear: it is not a tax. We may have to call it that if this is challenged but we hope that won't happen.

Bob: Mrs. President, you encouraged us to get an advanced education and I have a B.S. in business, MBA and CPA. I didn't start my career in earnest until I was age 30. I am now 50. When can I retire?

President: About that. We will have to raise the retirement age to 70. Remember we already raised it once, from 65 to 67 when Social Security was in crisis back in the 1980s.

Bob: So, let me get this straight: I pay FOUR times as much but I still get to keep all my benefits?

President: Yes, up to a maximum of $106,800 X 80% or approximately $85,000.

Bob: Why the limit?

President: Sometimes you reach a point when enough is enough. Besides, you know that most people don't make that much.

Bob: But what is wrong with working hard and making more than that?

President: There is nothing wrong but fairness requires those who are better off to help those who are not so well off.

Bob: I have my doubts, Mrs. President. You say my benefits -- all of them -- will be there when I retire?

President: Absolutely. I promise.

Bob: Will they be adjusted for inflation, because I can't retire for another 20 years.

President: Your benefits will be adjusted for half the rate of inflation after you retire.

Bob: Wait there. My maximum benefit is $85K now and you don't adjust that until AFTER I retire? Are you saying that in 2055 my maximum benefit will still be $85K even though inflation will eat away at that figure? Even at 4% inflation, that means my benefit is a fraction of what you promised yesterday!

President: You are quick, Bob. Most people don't understand the effects of inflation. But it's the only way we can guarantee everyone 100% of their benefits in some form, today's dollars, future dollars, whatever.

Bob: I'm a businessman, Mrs. President. How can I compete with outsourced accountants who can undercut me? As I recall, a lot of businesses fled Illinois after 2011 so it wasn't all peaches and cream.

President: That is just Republican scare mongering. The population of Illinois may be smaller, older and less "productive" according to my opponents, but my 2034 U.S. Happiness Study found that the people of Illinois were happier than other people based on 63 different criteria adopted from the OECD in Europe.

Bob: Really?

President: Remember, Bob, no matter how poor you feel, you can't put a price on happiness. So "don't worry, be happy" my friend.