July 28, 2001
The most important concern in any reform effort is equity. At the very least, the current progressive nature of benefit distribution must be replicated in any private investment plan.
The vast majority of the current proposals fall short of this, as they call for the investment of a certain percentage of payroll taxes. As benefits are calculated based on the average income in society, these proposals would leave the vast majority of individuals worse off in terms of real benefits received. This cannot be allowed.
There are ways around this problem, which also guarantee that insurance for non-retired survivors, disability insurance and health insurance are separated from the debate on retirement insurance. Let me offer the following proposals:
Transfer the responsibility to pay non-retiree payroll taxes entirely to the employer. In doing so, split the survivors insurance account into survivors of retirees and survivors of non-retirees. I estimate, based on the number of non-retiree survivors, that 6% of OASI taxes would cover their insurance. Therefor, payroll taxes corresponding to 2.65% of income below the income cap and all HI costs above the cap could be transferred to employers, with the provision that they may decrease gross pay but not net pay to offset this cost.
In the same way, to provide for an equitable distribution of funds for personal retirement accounts, transfer payroll tax responsibility for an additional 1% of income to the employer, with a corresponding drop in gross wages.
The employer would then invest an amount for each employee based on 2% of the average taxable income of either the firm or of society. If the latter option is taken, firms with a higher than average income would pay a surtax on their total payroll tax payment, while those with incomes less than the average would receive a tax credit.
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I am deeply concerned with the administrative costs which are inherent with privately managed accounts. These costs should not be taken from account income. Rather, so that employers have an incentive to find the lowest cost system, I recommend the following provisions:
- require that employers finance the costs of administration.
- allow employers to offer their employees the option of investing their funds in the voting stock of the employer. This would greatly increase national savings and investment at little cost and, by specifying that voting stock be used, would allow workers a greater stake in the company and more control of their monies.
- for employees covered under organized labor contracts, allow them to designate their labor union to manage their accounts, whether investment accounts or employer voting stock.
I am deeply concerned that much of the attention to this issue comes because of the perception of some tax payers that they are penalized by the redistributional aspects of the program. There are two ways of ending this perception.
The first is to eliminate redistribution - which some suspect is behind the effort to create investment accounts. I predict that no plan will path that even remotely has this effect. Further, if it were to pass, it would fail as it would put seniors back into poverty at unprecedented rates.
The second alternative is to correctly account for revenue received. To do this, credit all employer contributions on an equal basis, regardless of income - as described above. If this is accomplished, the entire system could be privatized without loss of equity.
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Finally, no investment strategy will solve the real economic problem with society, the baby bust of recent years. To put it bluntly, the latter cohort of baby boomers and Generation X are having less children. To save Social Security, this trend must be reversed. The President's plan to increase the child tax credit is a step in the right direction. However, it does not go far enough. The tax credit for each dependent spouse and child should be increased to actually cover the cost of child rearing - to $6,000 per child. In doing this, the personal exemption for children could be abandoned. This credit should be paid regardless of income and should be paid with each pay check. Full time workers would get the full credit, while part-time workers would get $3,000 per child, per job - but no more than $6,000 per child or dependent spouse. Nothing short of this will turn the tide on the population bust, or save the system.
Good luck in your efforts,
Michael Bindner
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