A lock box for everyone!
As for where the
money should go, I suggested what the President's proposal calls the
"stable value" investment choice -- investing the money in government
securities. This option wouldn't generate eye-popping returns for
the worker -- instead, you'd get a few percent a year, depending on
where interest rates were -- but when you retired, your money would be
there, waiting for you. No need to tax your kids to death, no
need to worry about politicians raiding the "lock box" to fund their
pet projects, and no fiscal crisis.
It's tough being ahead of the curve!
My column
suggested a painful strategy for implementing the plan: double the FICA
tax at the outset, freeze the existing tax-as-you-go Social Security
system and maintain payouts for current pensioners, and fund the
personal-account system fully right off the bat. Tough medicine,
but hear me out. The FICA tax would initially double, but it
would immediately start going down, because the existing
publicly-funded system would have no new participants -- and existing
participants die every day. Every time someone bought the farm,
our taxes would go down.
So you'd have
fewer and fewer oldsters to pay out of the Social Security trust fund
as it exists today -- until a few decades down the road, there'd be
none left, and the entire population would be working under the
personalized-account system (retiring on money they themselves put
away). People who had already paid into the current Social
Security system would simply have their balances frozen at what they've
paid in. (That means you'd get credit for the FICA taxes you've
paid since you started working.) They'd start accumulating funds
in their personal accounts from now on. So you'd have a
transitional period of about 50 years, with people participating in
both systems, until all the old-system pensioners were gone.
Democrats, chill out!
Think it can't be done? Think again -- because it already has been done, albeit not exactly the way I'm suggesting. This article from the National Center for Policy Analysis briefly describes the public pension system in Chile, which is -- you guessed it -- a privatized system, and it works much better than ours.
Personal
accounts aren't just for third-world countries, either. If you
work for the State of Arizona, as I do, a percentage of your paycheck
goes into the Arizona State Retirement System (participation is
mandatory). The state invests your money and holds it until you
retire or leave state employment. And when you leave, they send
you a check. I've been working for the state for a little over
three years -- 20 hours a week at a modest salary -- and I have
something over a grand in the system. That's not much, but it's my money, earned by me and saved by
the state. The state matches what the employee contributes, and
their half gets vested over the first ten years of your
employment. So I won't get their half in its entirety unless I
work for the state until November 26, 2011. The "something over a
grand," however, is what I put in myself; so the state cuts me a check
for that amount if I quit tomorrow.
The Democrats in
Congress, and their liberal allies, are all up in arms about the idea
-- but I don't get why. They've mounted a very effective campaign
to convince people that personal accounts are a bad idea. Last
week, I got an e-mail from the AFL-CIO's Working Families e-Activist
Network, stating that such a plan would require "huge cuts in
guaranteed benefits."
Well, if my plan
(or that of President Bush) were adopted, the benefits would no longer
be "guaranteed" in the sense that Social Security benefits are
currently guaranteed -- but that's misleading. As I mentioned
above, by default, you'd get the "stable value" plan, under which your
FICA tax payments would be invested in government securities -- US
Treasury notes. Those may not technically be guaranteed, but
they're about as close to a lock as there is, in the world of
investing. Any finance student can tell you that the return on US
Treasury notes is called the "risk-free rate of return," because there
is absolutely no way Uncle
Sam is going to default on his debt. (He may run up a lot of debt --
regardless of which party is in the White House -- but it does get paid
back.)
Investing your
money in stocks isn't a sure thing -- but over the long term, it's
pretty close.
There's a lot of
disagreement about the exact extent to which the
Social Security system is in trouble, but there is no doubt that it's
going to have to be fixed at some point. It's not that it can't
be done -- it's just a matter of having the political will to make it
happen. If Washington had taken
my advice 20 years ago, we'd be almost halfway through the transition
period to the fully personalized pension
system -- and the FICA taxes, after the initial doubling to cover both
systems at once, would have come back down several percentage points as
the old retirees died off.
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