Wednesday, December 22, 2004

Special K For Social Security

Laurence Kotlikoff has a somewhat more ambitious reform plan, which he spelled out last month in the Boston Globe. The Academy paraphrases the highlights of his Personal Security Accounts:

1. 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.

2 Eliminate 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.

3 A 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.

4 Invest all Personal Security account balances in a global, market-weighted index fund of stocks, bonds, and real estate securities. With the government guarantying that at retirement Personal Security balances will equal at least the sum of past contributions adjusted for inflation.

Kotlikoff goes on to note that his plan is much less regressive than the current payroll tax system with its cap on wages being at about $90,000. People with lots of money would pay a sales tax on every dollar they spend. Max Sawicky should like that.

It also eliminates individual accounts' transaction and management fees, and market risk (at least to the untrained eye, heh heh) so the Paul Krugmans of the world should sign on.

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