Plan For America Q+A: Retirement
Entire contents copyright 2018 by Terry E. Nager, CFP®
1. How does the powerful funding method of the Plan For America work?
To begin, we must first establish the basic facts:
The total amount of the payroll taxes (15.3% of earnings — 7.65% from the employee and 7.65% from the employer) was 1.185 trillion in 2016. Also in 2016, the interest payments from the U.S. Government for the $3.199 trillion that it owes to the Social Security and Medicare Trust Funds was $96.1 billion. The total cashflow to the FAST for 2016 would have been ($1.185 trillion plus $96.1 billion) $1.281 trillion.
The For America Security Trust (FAST) will be sent the entire 15.3% ($1.185 trillion if it was 2016) from each employer or self-employed individual throughout the year via payroll reduction -very similar to the payroll tax and exactly the same amount along with the annual interest payment due from the Federal Government on the Trust funds.
The FAST will set up an account for each contributor and credit the account with 100% of the contribution and then deduct 2% of that amount for the annual FAST charge.
The 2% charge is the only source of funding for the FAST to cover all of its operating expenses as well as providing a 4% minimum guaranteed return to the contributors. However, this funding method is extremely powerful. For example:
- 2% of $1 trillion is $20 billion.
- After two years, there would be an additional $1 trillion which would make the annual charge $40 billion.
- After three years, there would be an additional $1 trillion, the charge would have grown to $60 billion, etc.
This funding stream will grow to the $1 trillion annual mark and beyond. It is the source of money to retire all debt taken on for the funding of the unfunded liabilities as well as the monies necessary to retire all federal and state debt. It will also supply the revenues to ultimately reduce taxation on both the federal and state levels.
2. Under the Plan For America, how will money (15.3% of income) contributed to the For America Trust Fund (FAST) be invested?
The payroll contributions received by the FAST will be placed into a collection of U.S. corporate stocks (large, medium, and small companies) similar to a total market index. With an index-type approach, the cost of administering will be minimized since there will be no cost incurred for investment managers.
Historically, the U.S. stock market has returned about 10% compounded from 1926 through 2016 (according to Ibbotson Associates — a highly regarded source of statistical information on financial markets). Remember, this time period includes the Great Depression, World War II, the high inflation of the 1970’s, the market crash of 2000 to 2002, and the most recent 2008 to 2009 “Great Recession.”
The FAST guarantees at least a 4% compounded rate of return on all invested contributions for the purpose of retirement payouts. The FAST will charge each participant account 2% each year for administering the plan and for providing the guaranteed 4% compounded rate of return.
The amount credited to each participant’s account will be the beginning of the year balance, plus any contributions, less any payouts for retirement or disability, multiplied by the market’s return for that year (whether it be positive or negative) minus 2% for the FAST charge.
3. Is it necessary for the stock market to have 10% returns in order for the Plan For America to work?
The answer is no. If the stock market averages 6%-7% over the longer term, the PFA will work. That means the stock market can average 30–40% less than the longer-term 10% average and still be effective; but there can be no doubt that higher returns will make the results even better.
4. Are United States citizens required to join the For America Security (FAST)?
The answer is no. Each U.S. citizen gets to choose whether he/she wants to stay in the Social Security, Medicare, Medicaid, and ObamaCare programs or opt out of them and into the
FAST plan. If it was required to join the FAST, then it would probably be a constitutional question under the “Commerce Clause.”
Although it is not mandatory, most likely almost everyone will join the FAST because:
- The health care benefits are far greater.
- The retirement benefits are far greater.
- The tax benefits are greater.
- The benefits are more secure.
- The economy will be stronger and more jobs will be created.
5. Is the For America Security Trust (FAST) plan guaranteed by the U.S. Government as are Social Security, Medicare, Medicaid, and ObamaCare?
- The existing federal guarantee for Social Security and the health care programs is what is called the “full faith and credit” of the U.S. Government- that is, the U.S. Government’s ability to borrow money.
- The so-called trust funds for Social Security and Medicare do not provide any security because the politicians have taken all of the money out of them and put in notes (which are IOU’s of the Federal Government). The problem with these notes is the fact that the
- U.S. Government is $20 trillion in debt and is running deficits of $500–600 billion. Therefore, in order for the government to get money out of the trusts, the government would have to redeem the notes but it has no money and the only way to get the money is to borrow more.
- The U.S. Government backing for the FAST under the Plan for America in accord with the contract is to guarantee the FAST bonds with the “full faith and credit” of the U.S. Government.
- As you can plainly see, the government-guarantees in both cases are the same; it is the ability of the U.S. Government to borrow money.
This is not to say that the Plan For America with its FAST is just as risky and likely to fail as are Social Security, Medicare, Medicaid, and ObamaCare.
- Remember, the annual 2% of FAST assets that represents an annual cash flow that is increasing by over $20 billion each year is the means by which the FAST will pay off all of the bonds (debt) that it will incur from taking over the government’s unfunded liabilities. Therefore, it is unlikely that the FAST will ever have to rely on the federal guarantee or government’s ability to borrow to pay off the FAST bonds.
- The Federal Government, on the other hand, has no such growing cash flow source and is, therefore, very likely to continue to borrow ever greater amounts of money until its borrowing capacity is gone.
6. How are the retirement benefits calculated under the Plan For America, and how do they compare to the benefits under Social Security?
The PFA guarantees that each year’s retirement benefit will be the greatest of the following three options; therefore, it will be at least equal to Social Security and most likely will be far greater.
- Option 1 — The present level of Social Security retirement benefits calculated for the participating individual.
- Option 2–4% of the total of all contributions made to the For America Security Trust (FAST) with a 4% compounded annual rate of return.
- Option 3–4% of the amount of the participating individual’s FAST balance at the end of the previous year.
Now, let’s look at some numbers:
Example 1: A 26-year old works for 40 years at $25,000 per year, never gets a raise, retires at 66 years of age, and has not needed loans to pay for health insurance premiums.
Option 1 — Social Security annual retirement is expected to be $1,112 per month or $13,344 per year subject to annual cost of living increases.
Option 2 — 4% of all contributions made to the participating individual’s FAST account along with a 4% compounded annual rate of return.
- Annual earnings $25,000 multiplied by 15.3% = $3,825 annual contribution ($3,825 X 4% compounded over 40 years= $378,011).
- 4% X $378,011 = $15,120 annually or $1,260 per month is the guaranteed minimum subject to annual market return increases.
Option 3 — 4% of the amount of the individual’s FAST balance. 4% of all contributions made plus the average market rate of return over last 91 years or 10% annually and subtracting the FAST charge of 2% to arrive at a net 8% compounded.
- Annual earnings $25,000 multiplied by 15.3% = $3,825 annual contribution ($3,825 X 8% compounded over 40 years = $1,070,162).
- 4% X $1,070,162 = $42,806 or $3,567 per month becomes the guaranteed minimum because it was the value when retirement was elected. Also, it was the highest value of the three options, therefore, it is the payout for that year.
Example 2: Same as above except the participant needs an interest-free loan to pay for her health insurance premiums.
Option 1 (same as above)
Option 2 (same as above) except:
- The cumulative interest-free loans that would require the excess earnings (over the 4% guarantee) would go to repay the FAST for the health insurance loans. This would prevent earnings increases for retirement.
- It is possible, although unlikely, that the Social Security matching guarantee would trigger an increase.
- Therefore, whenever the retiring participant’s FAST account has under-performed the FAST portfolio (net of the 2% charge) by 2% or more, then the payout for that participant would be 5% of his/her balance rather than the normal 4%.
- See example on website of the 26-year old woman in the section entitled “What does the Plan For America do for you?” Her payout on retirement is $18,901 instead of $15,120 as shown in Option 2
Option 3 (same as above) except excess earnings over 4% would be used to repay the loan.
7. How does the For America Security Trust (FAST) determine investment return on participant contributions?
The FAST places all investments into a portfolio of only U.S. corporate stocks made up of large, medium and small companies similar to what is called a “total market index.”
The amount credited to each participant’s account will be the total return of the FAST investment portfolio minus 2% for the FAST charge and then multiplied by the individual participant’s percentage of the total FAST account.
Historically the U.S. stock market has averaged about 10% compounded annually from 1926 through 2016.
For retirement income purposes, the FAST guarantees a 4% compounded annual rate of return on each participant’s account.
8. What is the “draw-down” and how is my For America Security Trust (FAST) account protected against this happening to my account?
"Draw-down” is something that can happen to a retirement account if it is invested in the stock market and there is an extended period of terrible market conditions similar to what occurred during the Great Depression of the 1930's.
If the account is paying out 4% of the guaranteed amount (as the FAST does) and the account keeps going down year after year, then the point will be reached when the account
value would be too low to recover and the payout would stop. The account would have lost all of its value and could no longer pay out any amount.
To protect the FAST accounts from “drawdown,” there is a provision in the Plan for America that calls for an interest-free loan to be extended by the FAST to any account that falls below 60% of the guaranteed value for determining the payout. The loan is repaid in years of positive market returns that result in the account growing beyond the 60% mark. The 60% was chosen as the threshold because 6% (4% for the guaranteed payout and 2% for the FAST charge) is the minimum required and 6 is 10% of 60. Therefore, 10% is the maximum that could be drawn on the account in any year that it was down to the 60% minimum. The importance of this is the fact that the account base will never be put into a position that it could not recover from.
9. Why would an economic downturn likely be much less severe if the Plan For America was in effect?
First, the vast majority of all health insurance premiums would be paid through the For American Security Trust (FAST). Even if people lost their jobs, they would not lose their health insurance (because of the interest-free loans available to them).
- The health care industry is about 1/6 of the U.S. economy and would not be greatly affected by an economic downturn because people’s health insurance would remain intact.
Second, retirees would still receive their payouts each month even if there was a stock market decline. Although the payouts might be reduced, they would never go below the minimum guaranteed. In most cases, the payouts would be far greater than social security; accordingly, retirees would not be facing financial ruin.
- The cash flows from the retiree monthly payments going into the economy would also limit the severity of an economic downturn.
Third, the FAST contributions from all of the working contributors would likely be in excess of
$1 trillion per year. The interest-free loans from the FAST to the accounts that fell below the 60% “draw-down” level (see Question 8-R) will all be used to purchase shares in the stock market index. This would help to keep the stock market from going into a serious decline.
10. Will more money be taken out of my paycheck under the Plan For America (PFA) than is taken now for Social Security and Medicare?
The answer is NO. Under each program, a total of 15.3% of your earned income is contributed. Presently, under the Social Security/Medicare plan, one half of the 15.3% (7.65%) is paid by you and the other half (7.65%) is paid by your employer.
Under the PFA, the same 15.3% would be contributed to your For America Security Trust (FAST) account, but the contributions would be tax deductible for you. You most likely will end up with more money in your pocket from tax savings (depending upon your tax bracket).
Currently, your contribution to Social Security/Medicare is not tax deductible. Participation in the FAST plan will provide more after-tax money for you each year because your contributions ARE tax deductible.
11. If my contributions to the For America Security Trust (FAST) are tax deductible, then will I have to pay taxes on the money when I start to receive the monthly payments?
Fortunately, the answer is no. This money will never become taxable to the contributor or to his/her heirs. The contributions are tax deductible, the account grows with no taxes being taken out, and the retirement payments will be tax free.
When the contributor dies, the payments will continue to his/her heirs on a tax-free basis with no estate or inheritance taxes.
12. Is it possible to contribute more than the 15.3% of earned income to the For America Security Trust (FAST) account?
The answer is YES!
- First, for those that have earned income beyond the 15.3% of the tax cap (for 2018 it is $128,400), they can elect to contribute the 15.3% on all earned income with no upward limit and, remember, all contributions to the FAST are tax deductible.
- Second, everyone, whether they have earned income or not, can contribute up to $100,000 each year on a tax-deductible basis in addition to any 15.3% of payroll contributions.
These contribution limits have been structured this way with a two-fold purpose:
- First, the 15.3% of earned income up to the payroll tax cap of $127,200 is there because it represents the amount that is currently taken from worker’s paychecks. Working Americans will have the benefits of the FAST and it will not cost any more than they are currently paying for Social Security and Medicare taxes.
- Second, the provision for the 15.3% of earnings over and above the $127,200 cap is there to encourage more money to come into the FAST as are the additional contributions of up to $100,000 annually. The more rapidly that the FAST grows, the more rapidly our nation’s debts will be reduced and paid off.
NOTE: The $100,000 annual maximum is there because the purpose of the FAST is to benefit primarily low and middle-class Americans, not to provide a massive tax shelter for mega-wealthy billionaires.
13. Why are the benefits under the Plan For America (PFA) much greater than under Social Security?
This is an easy one. The benefits under the PFA are much greater because the participants enjoy the best parts of two worlds. The For America Security Trust (FAST) offers 1) stock market returns for growth as well as 2) government guarantees for safety.
14. How does the death benefit from Social Security compare with the Plan For America (PFA) plan death benefit?
- Social Security: The actual cash death benefit from Social Security is very small, only $255. There is a provision for the surviving spouse and/or dependent children to receive monthly benefits until the children are no longer dependent and the spouse passes away. After the final benefits are paid out the Social Security Administration keeps all money that was paid in through the contributor’s lifetime.
- Plan For America: Under the PFA, the death benefit is the same as the living benefit. The heirs continue to receive the tax-free payments that will likely increase through the years for the rest of their lives and then pass it on to their heirs estate tax free.
15. What protection will the Plan For America (PFA) retirees have from the ravages of inflation?
The PFA inflation protection features:
- The For America Security Trust (FAST) assets will be 100% invested in an index of the stock of U.S. corporations (large, medium, and small companies).
- According to Morningstar/lbbotson, a highly regarded investment data service company, U.S. stocks (large company stocks) have about a 10% compounded annual rate of return over the last 91 years (1926 through 2016), and small company stocks have an even higher rate of return (12.1%).
- The rate of inflation for that period of time was 3%.
- Taking the 10% return and subtracting 2% for the annual FAST charge results in a net return of 8%.
- The 8% return easily surpasses the 3% historic rate of inflation.
- The FAST guarantees at least a 4% rate of return on retirees’ investment accounts which also surpasses the 3% historic rate of inflation.
- Finally, the FAST also guarantees that the payout to retirees would be at a minimum at least equal to what they would be under Social Security, which is indexed to inflation.
16. What kind of report will the For America Security Trust (FAST) send out to the participants and how often?
Initially, the FAST will send out at least one report per year, which will indicate the current value of the individual’s account and how the trust has performed in each year since the beginning.
The report will also show the expected retirement benefits under each of the three methods of calculating those benefits.
- First, the total of all of the participant’s contributions to the FAST with a 4% compounded annual rate of return multiplied by 4% will be the guaranteed minimum annual retirement payout.
- Second, the amount of Social Security that the participant would be eligible to receive would be the other guaranteed minimum payout.
- Third, the accumulated value of the participant’s account at the end of the previous year multiplied by 4% would be the retirement payout for the coming year.
- The actual payout to the individual would be whichever of the three methods of calculation produces the highest number.
It is anticipated in the future, as the FAST is fully established, that each individual’s account value would be available electronically and, therefore, accessible on a more frequent basis.
The annual FAST report would also contain a proxy (a form for voting). The initial year of the FAST, the participants would have to vote for each of the five first-time trustees. Each year thereafter, the vote would be for one trustee to replace the one going off of the board unless circumstances caused there to be more than one trustee to leave the board in any year.
The number of votes that each participant would have would be the number of dollars in his/her account rounded to the nearest whole dollar.
17. Under Social Security, there are restrictions regarding how much an individual can earn (until a certain age is reached) without reducing the Social Security payout. Are there any restrictions under the Plan For America (PFA)?
The answer is simple. Unlike Social Security, there are no restrictions on any earnings whether it is earned income or investment income.
The benefits that flow from each individual’s For America Security Trust (FAST) account belong to that individual and, under the contract that the FAST will have with the federal and state governments, those benefits cannot be restricted by arbitrary government rules or taxation.
It does not matter how much money a FAST retiree earns; it will not cause his FAST payout to be subject to taxation.
18. At what age can and individual start receiving his/her For America Security Trust (FAST) retirement payout?
Age 60 would be the earliest age (in a non-disability situation) where a FAST plan retiree could begin receiving monthly payouts.
- The decision would be up to the individual based upon how satisfied with the amount of payouts he/she would have at that age.
- There is a potential drawback to taking it at that early of an age if the individual plans on continuing to work. Like Social Security, once you elect to begin receiving benefits, you cannot switch back and forth between receiving benefits and deferring them.
- Under the FAST, once you elect to begin the payouts, then you will receive the payouts for the rest of your life.
- However, any earned income will still be subject to the 15.3% tax-deductible contribution up to the Social Security cap (presently $128,400). Optionally, the tax-deductible contributions can be extended to 15.3% of all earned income just like a pre-retirement individual. Also, up to an additional $100,000 can be contributed on a tax-deductible basis just as a pre-retirement individual.
- Importantly, every dollar contributed produces a four cent permanent increase to the retirement payout on a guaranteed basis and is likely to be much more depending upon market performance.
Any retirement payouts that were received as the result of an inheritance commences at the time of the inheritance. The age of the beneficiary does not matter.
19. Why is it important that all of the companies listed in the For America Security Trust (FAST) index be required to be US domiciled (US based) corporations?
This requirement is in place because, as the name suggests, the FAST or
For America Security Trust is to benefit the American people.
This requirement is important for two reasons:
- It provides for uniformity, because all of the listed companies would have to comply with the same corporate law and accounting standards.
- It benefits both the retirees as well as the working participants by recycling the tremendous capital flows back into the US stock markets.
- All of this capital investment would help to provide employment opportunities for American workers.
- Also, the steady investment flows would give support to the stock market, especially during times of economic weakness, in order to stabilize market returns and support retirement payouts.
20. Why is it important that the estate beneficiaries of the For America Security Trust (FAST) payouts be U.S. citizens, trusts set up for the exclusive benefit of U.S. citizens, bona fide U.S. based charitable organizations, government entities within the U.S. such as city, county, state or federal, or the FAST itself?
This requirement is important because the FAST is “For America” and the intent is to keep recycling the capital through the U.S. economy to not only benefit the current participants and retirees, but also future generations of U.S. citizens.
The exceptions to this rule would be:
- A spouse of a U.S. citizen that was not a U.S. citizen, he/she would continue to receive the retirement payout for the rest of his/her life.
- Dependent children of the deceased participant that were not U.S. citizens would continue to receive benefits until reaching adulthood.
- This does not mean that non-citizen spouses, children, or other heirs would be deprived of value from their inheritance. They would have the opportunity to sell the future payout cash-flow stream to a U.S. citizen for its fair market value.
Again, the intent is not to deprive any rightful heir of his/her inheritance but to keep the cash flows providing liquidity and growth to the U.S. economy, especially considering the fact that these cash flows are perpetual.