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The end of Social Security?

Page 2 of 3 -- Moreover, many workers won't properly invest their account balances and end up at retirement with little to show for years of contributing. Those workers who invest well will find themselves at the mercy of rapacious insurance companies when they try to convert their balances into retirement annuities (pensions).

Finally, the plans are generationally inequitable. Social Security has a $10.4 trillion unfunded liability, and well-heeled current and near-term retirees should be asked to help pay it. But the commission's plans force today's young and future generations to bear essentially the entire burden. The method is simple -- eliminate most of their future Social Security benefits while maintaining most of their future Social Security taxes.

The president's second initiative, tax reform, has lots to recommend it. The income tax is enormously complex, engendering major compliance and collection costs. But fixing the income tax doesn't require shifting the tax base or reducing progressivity -- the requirement that the rich pay proportionately more than the poor. We can and should keep the income tax, but also broaden its base and lower its rates, while maintaining the share of taxes paid by the rich.

Rather than substitute consumption for income taxation, I favor substituting consumption for payroll taxation. We should do this as one of nine steps needed to properly reform Social Security, albeit in ways that are very different from those the commission proposes. My plan, which has been endorsed by 150 of the nation's leading economists, is called the Personal Security System.

* Step 1 shuts down, at the margin, the retirement (Old Age Insurance, or OAI) portion of Social Security. Current retirees continue to receive their full retirement benefits, and current workers receive all the retirement benefits now owed to them, but that's it. There is no further accrual of Old Age benefits.

* Step 2 eliminates the employee FICA taxes (7.65 percentage points of the total 15.3 percentage point employer plus employee tax), directing these contributions to individual Personal Security accounts. The employer FICA contribution continues to finance Social Security disability, survivor, and Medicare benefits.

* Step 3 uses a roughly 10 percent federal retail sales tax to replace employee FICA taxes and pay off all accrued Old Age benefits. Over time, the sales tax rate falls as more and more of the accrued benefits are paid off.

* Step 4 has married workers split their contributions 50-50 with their spouses/legal partners leaving each with an equal sized Personal Security account. This protects dependents who are secondary earners.

* In step 5 the government matches the Personal Security contributions of low-income workers, making the new system as progressive as it wants. It also contributes on behalf of the disabled and the unemployed.

* Step 6 invests all Personal Security account balances in a global, market-weighted index fund of stocks, bonds, and real estate securities. "Market-weighted index" means buying assets in proportion to their share of the financial market. The allocation of the portfolio is thus determined solely by the marketplace, not the government.   Continued...

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