We need to move beyond good intentions and craft public policy that actually works. The first step in building a viable system is to acknowledge that Social Security as it exists today is a failure either way you look at it.
If you look at Social Security as a system of taxation and redistribution, it takes from a single minority male worker and gives to married white women who never contributed. And if you look at Social Security as a forced retirement savings program, it produces such a terrible return we might as well invest in gold. Neither perspective is worth continuing. Social Security as we know it needs to be abolished.
There is a method for doing just that if liberals are willing to accept privatizing half of the contributions and conservatives are willing to accept using the other half as a safety net for those retirees with the least resources. I’m not sure if either faction is willing to make that compromise, but it would be in everyone’s best interest.
Every year we analyze the investment returns for those countries with high economic freedom. We always find that economic freedom produces superior gross domestic product growth that translates into better investment returns. What is interesting to note is how many of the countries with high economic freedom or lower debt and deficit also have privatized their Social Security systems: Hong Kong, Australia, Switzerland, United Kingdom, Sweden, Netherlands, Denmark, Chile, as well as a host of others.
In those countries with privatized retirement accounts, the citizens are thriving. Their legislation can be used as a model for compromise in the United States. Here is how we might implement the best of each way of looking at Social Security.
In broad strokes, the employee’s 6.2% contribution would be put in an inheritable private retirement account. There would be both safeguards on the range of risk for investment choices as well as protections for gradual safe withdrawal rates during retirement. More than 30 countries have vetted good models for those policy issues.
The other 6.2% provided by the employer would be collected as a tax and used to fund the retirement of anyone with inadequate means from their own contributions. This would ensure a safety net and provide a minimum retirement income. It would redistribute income to low earners and also protect retirees from catastrophic loss.
At first, participants close to retirement age would not have anything in their private accounts. But gradually, nearly everyone with a private account would be retiring with more money than current Social Security benefits and the 6.2% safety net tax could be reduced or more of it privatized. The biggest challenge is getting from here to there.
During the transition from our current system to private accounts, there is only half the revenue to support those who are retiring using the safety net. The remainder starts to fund the private accounts of the next generation. The easiest way to shoulder that burden is to means-test Social Security and deny benefits to the wealthiest half of retirees.
We need a private system. Then the money you put in it is yours and does not get spent on someone else’s retirement.
It is a tough to contemplate, but some generation has to be heroic. Earlier generations had to fight World War II. We must battle the leviathan of Social Security and Medicaid and make sacrifices by not taking benefits ourselves to privatize the system for future generations.
Means testing is unfair but necessary. We’ve been deficit spending for decades. Whenever you have years of living above your means, you have to balance it by years of living below your means. Someone has to take the hit financially. The price we pay is only worth it if we can end Social Security as we know it and put America on a firmer financial footing.
Means testing Social Security is better than the proposed alternative tax increases. First, it is not a tax increase. It reduces benefits for the wealthy, which should satisfy both political parties.
Second, it does not burden the small business owners who create jobs and encourage economic growth. Instead, it eliminates benefits for those who already have their wealth. These two groups are not the same.
IRS statistics show that between 2007 and 2009, 4 in 10 Americans with incomes over $1 million vanished. At the same time, the number of millionaires supposedly increased. These statistics show the two groups are very different.
Those who insist we should be heaping more taxes on the rich and point to the growing number of millionaires as some type of proof routinely ignore the fact that in letting the Bush tax cuts expire we aren’t taxing wealth, we are taxing income. Those productive small business owners with higher earnings are a different group from the ultra-wealthy with a higher net worth.
Eliminating Social Security benefits on the basis of net worth is a better solution than tax increases on the basis of net income. It is better to eliminate Social Security for those with alternative means during their retirement than to tax the small business owner whose business profits put income on their tax returns. Those with a high net worth can take care of themselves and don’t need handouts from Social Security. And the business owner needs to be free to start new ventures.
There is plenty of room in this outline for negotiating the threshold of means testing, the level of the safety net and the restrictions for private accounts. These are the areas where compromise should focus.