The end of Social Security?
Page 3 of 3 -- Step 7 limits the risk of market downturns by having the government guarantee that at retirement Personal Security balances will equal at least the sum of past contributions adjusted for inflation.
In step 8, each participant's holdings of the global index fund is gradually sold off between ages 57 and 67. The proceeds from the sale are used to purchase inflation-protected annuities (pensions). These annuities are paid out beginning at age 62. Between ages 62 and 67, participants receive additional annuities based on the sale of remaining balances. Participants dying prior to age 67 bequeath their nonannuitized account balances.
Step 9 has the Social Security Administration administer all Personal Security transactions at very low cost. It collects the contributions, manages the accounts, buys and sells the global index fund, and handles the annuitization of account balances at retirement. Wall Street plays no role and collects no fee. The Social Security trustees determine which foreign financial markets to include in the global index fund.
The most controversial aspect of the plan is switching from payroll to consumption taxation. But a moment's thought indicates that this is not only generationally equitable, but highly progressive. The payroll tax is levied only up to a fairly low ceiling, currently $87,900. Bill Gates pays his annual payroll taxes in minutes. But with a retail sales tax, Gates would pay taxes not only on all his earnings, but also on all his current wealth, the minute he spends these funds. Saving or bequeathing earnings or wealth postpones but doesn't avoid the tax. Whenever these funds are spent, they and any accumulated interest, are subject to the retail sales tax. Thus, taxing consumption is an indirect way to tax earnings and wealth.
How about the poor? Wouldn't they be hurt by having to pay higher prices due to the sales tax? The answer is no. In the case of the elderly poor, Social Security's cost of living adjustment would protect the real purchasing power of their benefits. The same would hold for the unemployed and welfare recipients provided their benefits are adjusted for the price rise. Poor workers would also be better off because the burden of the sales tax would be less than the burden of paying employee FICA taxes.
The Personal Security System pulls no punches. It entirely replaces a system that is broke and well beyond its prime. It asks everyone in society, except the poor, to contribute to paying off the old system's bills. And it sets up a new, safe, low cost, progressive, and efficient retirement system that Democrats as well as Republicans can call their own.
Laurence J. Kotlikoff, chairman of the Department of Economics at Boston University, is co-author of "The Coming Generational Storm."