In 1983 a commission established by the then President Ronald Reagan and led by Alan Greenspan had attempted to bring the house of U.S retirement security into order. The recommendation of that commission was to raise payroll taxes. As Alan Greenspan recounts the story publicly, that compromise was feasible because the Reagan White House had worked with the Democrat Congress to work out a reform compromise behind the scenes before it was put for vote in the Congress. The reality of that compromise, however, was that on the one hand it gave the government more revenue and on the other it saved social security, while giving Congress the flexibility to change the law to change benefits any time it wanted to do so.
The purpose of all taxation is to raise revenue for the government. And the Congress had liked the Reagan-Baker-O’Neill-Greenspan band aid because it could keep on raising government spending by borrowing from the social security trust fund. The current off-balance sheet social security surplus is one large IOU. It is an accruing deficit that Bill Clinton had not balanced in 2000, in spite of all that talk about a lock box by his Vice President Al Gore. Similar to the political expediency of low oil prices that had compromised Gore’s Earth in the Balance, social security could end up becoming the Enron of the United States government when coupled with the recent health care promised to all Americans, compromising the fiscal balance of the United States.
Former President Bush wanted to reform the system by introducing individual retirement accounts. It went by the wayside because of Iraq. Still, establishing individual retirement accounts is the way to go to reform social security. After the Great Moderation in inflation has ended and foreign savings are slowing down coming back to the United States to be put to use in other countries toward their own safety nets and higher standards of living for their own people, America must begin saving again. And establishing individual retirement accounts funded by the same payroll taxes is the correct approach to take.
The present pay-go system relies on the payroll tax contributions of the current workers to fund the current retirees. It links one generation to those that follow. This is how it had begun. But it is time to end that overlapping generations approach with the boomer generation, which is the second generation that is benefiting from FDR’s social security.
Overlapping generations makes life complicated for policymakers by tying retirement security to immigration and population growth. It encapsulates a social value into economic policy before the United States had well-developed financial markets and when markets could not be trusted in the aftermath of the Great Depression: that the working age population must take care of their young and their elderly parents. This, without a doubt, is an important conservative cultural value which was also the result of a time when no social safety net existed. People worked for as long as they could. When they could not, they relied on their life savings and family. But this is not the America of today. And so the country’s retirement security must change with the times.
In today’s America people can have retirement security. They need not work until they drop. Americans live longer. They can retire to work and retire, supplementing their retirement income from annuities with any work of their choice, full-time or part-time or with no work at all. This is true of even the late boomers of the current President’s cohort if not of the late Greatest Generation’s last surviving cohort such as John McCain and Alan Greenspan. So, looking forward, it only makes sense to end social security as we know it with the boomers.
Currently social security payroll taxes have an income cap and Medicare does not. However, most Americans fall below or just above that cap and pay social security taxes on all of their income. The few in the top income brackets do not. This must change for the boomer generation. All working boomers born between January 1, 1946 and December 31, 1964 must pay social security taxes on all of their incomes, without a cap, changing their social security to one of overlapping cohorts rather than overlapping generations, without reducing their benefits or raising the retirement age. Any short fall must be made up through budget deficits.
All those born January 1, 1965 and after must be given individual retirement accounts similar to the federal employees’ thrift plan by crediting to those accounts all of their social security contributions thus far. This would approximately amount to an immediate budget expenditure toward the individual retirement accounts of all workers born between the years 1965 and 1985, because workers born in 1985 would be 25 years old in 2010 and would have just begun paying into the current system. All government employees’ retirement accounts can be merged with their individual retirement accounts. Employers must be exempt from paying their half of social security taxes for all post-boomer generations, giving them tax relief, while the employees must be mandated to save at least what they are currently paying in payroll taxes toward social security. The Social Security Administration must administer the retirement thrift plan accounts, contracting Wall Street firms as the federal government currently does.