Swamppundit

I have some Napoleonic advice for President Bush: If you wish to transform Social Security with private accounts, transform Social Security with private accounts.

The swamp-draining idea I am about to articulate regarding Social Security and private accounts is not new and original. It is, however, unspoken. It is the elephant in the room. It is what a plan that would actually save/reform/transform Social Security with private accounts would look like.

Before stating the obvious plan, I should state some obvious points:
--- Demographics have made any 100% “pay-as-you-go” scheme of paying for government retirement plans untenable.
--- Demographics, the increase in the standard of living of many seniors, and common sense has made any “pay-as-you-go” scheme that is not means-tested in someway untenable. (Wilma Worker is a working person making less than $40,000 a year who pays rent on a small apartment. Shirley Senior is a retired person living in a paid-for $500,000 home making over $60,000 a year in pension benefits and investments. Do Democrats really think FDR would approve of a scheme that forces Wilma Worker to pay a tax to fund a government program that gives money to Shirley Senior?) People under 30 ought to be marching in the streets over this; and many people over 60 should be embarrassed. But, the tricky part of means testing is how to do it without unduly harming those current elders (or near-elders) who rightfully planned on having a full Social Security benefit; and how to do it without diminishing everyone’s motivation to save more and more of their own money for retirement.
--- untenable: adj. Being such that defense or maintenance is impossible:
--- Private Accounts are not magic. Merely diverting the same dollars from Social Security to private accounts is not going to solve Social Security’s solvency problems. The road to solvency must involve an infusion of new money into the system.

The last thing I need to do before stating the plan is to define what is, and what is not, a “tax.”

Scenario One: John and Mary have a visit with their friendly financial advisor who teaches them the facts of life about retirement. After the visit they immediately choose to start putting 4% of their income into an IRA.

Scenario Two: The Nanny-State passes a law that forces John and Mary to put 4% of their income into an IRA.

Question: If the IRA’s in both scenarios are identical, on what basis would the 4% in scenario two be termed a “tax”?

Answer: It is clearly not a tax. It is government regulation and meddling into private financial matters, but it is not, repeat not, a tax. It is also a government regulation that is financial common sense for virtually everyone.

Here is the plan: Have the Nanny-State order everyone to put 4% of their income (cap the annual contribution at $8,000) into a special IRA that cannot be commingled with other IRA’s. This 4% is not a diversion of money currently paid in Social Security taxes. This is new money. If people wish to honor this obligation by diverting money currently going to other retirement saving devices, fine. If employees wish to negotiate with their employers to have the employer fund the new IRA, fine. Since this money never becomes the government’s money, it is not a tax, and this plan cannot properly be called a “tax increase.”

The only restriction on this special IRA is that it cannot be touched until age 70. (Should the person die before age 70, the IRA would go to his or her heirs.) At age 70 (this age need not be the age at which the person retires, or the age he or she starts receiving social security), the entire amount must be used to buy a life-time annuity for as much monthly income as can be purchased in the private marketplace. For every two dollars of monthly income generated by this annuity, the person’s Social Security benefit is decreased by one dollar. (Should it be possible to buy an annuity for twice the Social Security benefit without spending the entire IRA, the individual is free to spend the balance however he or she wishes.)

I’ll leave it to the actuaries and the economists to do the math, but when the dust settles, Social Security becomes so forever solvent that the only question remaining is how rapidly Social Security Taxes can be reduced. There are no transition costs; there is only a delay before the benefits of the plan kick in. Once that delay is covered, Social Security Taxes start a long downward trend.

The key parts of the plan are phasing means-testing in gradually and excluding all savings outside the mandatory 4% IRA from any means-testing formula. The obvious downside to this plan is that 2 generations of workers will be forced to both save for their own retirement and pay a tax to pay for someone else’s retirement. The blunt response is that demographics have put these generations (and future generations) in a hole. There is no painless way out, and this plan balances the pain of getting out of the hole with more money for them to spend in retirement than under the current plan. It also produces more overdue progressivity into the system.

Finally, the safety net of Social Security remains unchanged. No one would ever receive less under this plan than under the current plan no matter how poorly they invest their IRA. In time, virtually everyone would receive more … with a tax decrease, not a tax increase.

C E Sutton

P.S.: There are 4 numerical variables in this plan: 4% contribution; $8000 cap; age 70; and a 2-for-1 benefit reduction. Anyone who runs a computer model who wants to argue that those numbers should be different may well have a very good argument. This plan can accomplish great things regardless of how the details are tinkered with.