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February 04, 2005

More Social Security

I should clarify a little after having a talk with a colleague earlier. I believe that the government should provide workers with a no-risk retirment pension. On a whole, some people would be better served by a riskier personal approach and clearly some people will not be better served. The law of averaging is important, but try telling that to someone who has no money when they retire because they made bad investment choices when they were 35.

I read the WSJ article that some others have been talking about, and one of the amazing things to me was the very high payroll taxes in other countries that have privitization. The US payroll tax (employer+individual) is 12.5%. In many countries it was near 18% and in some it goes into the 30%'s.

Considering that, it more than makes sense for Democrats to be in favor of raising the payroll tax to some number, keeping the risk-free 12.5% portion intact, and having individuals funnel their money into IRAs or 401K account for the rest of their payroll taxes. IRAs and 401K's already exist, so this is an easy fix.

An even better idea, though it is redistributive so I doubt the Bush administration would allow it, would be to eliminate the cap on payroll taxes for high income wage earners. Then, allow low income earners to retain the benefits of the current social security sytem but allow them to put 2% of their 12.5% contribution into a personal savings account or an IRA.

So, basically, someone that makes $500,000 currently only pays about $11,000 in payroll taxes, or 2.2% of their income. Someone that makes $50,000 pays $6,250 which is 12.5% of their income. I would propose making the person that makes $500,000 pay the full 12.5%, which would be $62,500. With that extra $51,500, you could not only shore up the current system but you could basically fund the guy who makes $50,000 to divert $1,000 a year into his IRA.

When the guy that makes $50,000 retires, he will have a social security pension that he has paid 84% of his payroll taxes towards and a private account that he has paid 16% of his payroll taxes towards. Upon retirement age, he would be responsible for purchasing an annuity that covers 16% of his benefit costs each month -- if his retirement account has the money. If not, Social Security would make up the difference so he still gets 100% of the benefits of the current system. If he does have the money, though, he purchases the annuity and gets two checks each month -- one for 84% from the Social Security administration and one for 16% of current benefits from his private annuity.

This worker could then do whatever he wants to with the remaining money in his retirement account (if his investments panned out and he made more than the old social security system -- if not he still gets 100% guaranteed so there is no loss to the individual worker). I would personally recommend just purchasing a larger annuity. In my plan, the worker's heirs or a charity of his choice (including the US government, if he chooses) would inherit the 16% annuity when he dies. Under Bush's plan, you must buy an annuity when you retire for the amount of benefits you foregoed when you diverted money into a private account, and then the government gets the annuity when you die! Some deal that is.

So that is my plan to both keep the current system solvent and to encourage a true ownership society. Either raise the payroll tax for everyone and force them to put that new tax revenue in an IRA/401K/savings account or eliminate the cap, ie make payroll taxes a true flat tax for everyone and use the extra revenue from wealthy Americans to finance partially private accounts while still guaranteeing the minimum benefit people currently get.

It's ultimately too bad that Bush will insist on a my way or the highway approach. Democrats would be wise not to enter into a "compromise" with Bush hoping to get a plan like this because he will just misconstrue their words of encouragement and support to solidify passage of his terrible plan, which lest we forget, in the end has a goal of eliminating risk-free guaranteed retirement pensions for the average American worker.

Posted by Chris at February 4, 2005 06:05 PM

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