RETIREMENT SECURITY Social Security taxes have never been higher, but Americans work ten years longer than their counterparts in most other industrialized countries to collect benefits that barely cover essentials. Few companies offer traditional pensions, and those that do default at a record rate. Most “401K” plans fail to deliver returns comparable to traditional pensions. For the first time in generations, many Americans may never retire. Politicians should be looking for ways to increase benefits, lower the retirement age, and reduce payroll taxes. Instead, “progressive” politicians talk about cutting benefits and raising taxes to sustain the current system, while “conservative” politicians talk about cutting benefits and borrowing trillions of dollars to dismantle it. Two Failed Approaches Those who defend Social Security say it can be saved with “small” tax hikes, benefit cuts, and retirement age increases, similar to those enacted during the 1980’s. This is true from an accounting standpoint, but there are several problems with this approach. First, it does nothing to make up for benefits lost as a result of the collapse of the private pension system. Second, it increases the gap between the U.S. retirement system and the systems of most other industrialized countries. Third, because revenue exceeding current obligations is invested in government bonds and used to finance other government programs, additional taxes or program cuts will be required before the bonds mature and benefits are paid. Social Security’s critics propose taxpayers be allowed to invest a portion of their taxes in stocks in exchange for reduced Social Security benefits in the future. This approach also has problems. First, because Social Security revenue is used to pay current beneficiaries, the Government would need to borrow trillions of dollars to make up for revenue diverted into the stock market, raising the prospect of higher taxes and program cuts to pay for the change. Second, recent experience suggests pension funds work best when invested in fixed-rate bonds and other fixed-income securities in amounts sufficient to meet obligations based on actuarial projections. Funds following this approach remain solvent today. Funds that switched from fixed-rate investments to stocks are now defaulting at a record rate, costing taxpayers billions of dollars in Government-funded “bail outs”. Third, while Social Security has low overhead costs, a significant portion of revenue invested in stocks will be lost in brokerage fees. Fourth, the Government’s last attempt to channel large volumes of cash into the stock market (the “401K” program), artificially inflated the value of stocks and contributed to a market “bubble” that eventually burst, costing many their retirement savings. Finally, the two countries that tried this approach in the 1980’s---Chile and the United Kingdom---have been forced to raise taxes because private accounts failed to deliver anticipated benefits. Three Basic Principles Social Security reform proposals should be based on the following principles: 1. Retirement benefits, like wages, are a fundamental cost of doing business. Businesses have traditionally assumed primary responsibility for financing such benefits, through company pensions and Social Security payroll taxes. The primary responsibility for financing retirement programs should continue to rest with businesses. Individual personal savings, while important, should not substitute for what has traditionally been a business responsibility. 2. All Americans are entitled to retirement benefits comparable to those received by citizens of the major U.S. trading partner countries in Europe and elsewhere. At a minimum, benefit programs should be at least as good as those currently offered to Federal Government workers. 3. The Social Security Trust Fund should not be used to finance deficit spending. A Better Approach With the right financing and investment strategy, the U.S. economy could easily generate the revenue necessary to keep Social Security solvent while increasing benefits and lowering the retirement age. Here’s how: 1. Replace the Social Security payroll tax with a gross receipts tax on businesses dedicated to funding Social Security. The problem with Social Security is the way the system is financed, not the ability of the world’s richest economy to generate revenue sufficient to maintain the system. American taxpayers currently finance half of Social Security’s budget through a 6.2 % payroll tax, while businesses contribute the other half through a 6.2 % tax on payrolls. This payroll tax should be eliminated and businesses should instead finance Social Security entirely, through a dedicated gross receipts tax that would ultimately be reflected in price structures in the same manner as any other business cost. Such a tax is preferable to the current payroll tax, because it does not give employers a disincentive to hire in order to avoid taxes, and more importantly, because it will significantly reduce the tax burden on individuals, stimulating the consumer demand and creating jobs. 2. Give Social Security’s trustees the authority to invest in non-government fixed-income securities. Currently, all Social Security revenue exceeding that required to pay current retirees must be invested in government bonds. This facilitates deficit spending and makes future tax increases or budget cuts inevitable. Instead, revenue exceeding current obligations should be invested in fixed-income instruments other than government bonds, in amounts sufficient to meet future obligations based on actuarial projections. This will prevent the Government from using Social Security to finance deficit spending, reducing the tax burden on future generations, and creating a significant new source of investment capital for the economy. 3. Reduce the retirement age to 55 (or 25 years in the workforce, whichever comes first). This will bring the U.S. into line with the retirement policies of its major trading partners, giving taxpayers the same early retirement opportunities as Federal Government workers enjoy today, and creating jobs for younger Americans. 4. Adjust Social Security benefit formulas to double current benefits. This is necessary because Social Security was originally designed to supplement company pensions and personal savings. Since most companies no longer offer traditional pensions, most Americans now live on Social Security and personal savings alone. The additional benefits will partially replace lost pensions. 5. Require private pension funds to use fixed-income investment strategies (fixed-rate bonds or other fixed-income securities). The decision to shift pension funds from fixed-income securities into stocks is the major reason pension funds are defaulting at a record rate. Since the Federal Government insures private pension funds, taxpayers must “bail out” those funds. Prohibiting pension funds from investing in stocks or other variable-rate securities will prevent funds from defaulting in the future.