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February 20, 2005

A modest proposal for Social Security reform

I had lunch with an old friend the other day who had an interesting idea about fixing social security. His suggestion was to create a new type of IRA that would be mandatory -- every employee or taxpayer would be required to contribute a certain percentage of their income annually. To protect inexperienced investors from making foolish choices, the range of investment options would be limited and the fees regulated. This new programs would be in addition to the existing Social Security system, which would remain as it is. Perhaps, like Social Security, individuals and their employers would both be required to contribute -- say 1% of wages or income from each, equal to the 2% annual contribution in the President's voluntary individual accounts.

This plan would address several shortcomings of Bush's proposal while retaining many of the benefits:

  • Unlike the President's proposal, which would divert contributions from the SS system to private accounts, these new accounts would increase the overall US savings rate, adding to the flow of capital available for investment.

  • While these new accounts would amount to a new (or increased) payroll tax, it would be an odd sort of tax since the government would not be getting any of the money. Rather it would be forcing individuals to save for their own retirements.

  • Like the President's plan, these new, mandatory investment accounts would promote the values of an "ownership society" and would allow even the poorest workers to accumulate personal wealth that could be left to their families on their death.

  • Like the administration's plan, this new plan would not directly address SS' "solvency issue", but it would increase the overall level of taxes and forced savings available to finance future retiree benefits. And, like the President's plan, this new system would result in personal account balances which would cushion the impact of the inevitable cuts in SS benefits under the existing system. (Or rather the cancellation of at least some of the future benefit increases required under the current SS law.)
All in all, it's an interesting idea, and one I have yet to hear proposed elsewhere.

February 20, 2005 at 02:22 PM | Permalink


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