In that halcyon era of the 1960s and 1970s it was commonplace for retirees to be able to look forward to monthly pension and Social Security checks. Those days are long gone, and it seems outlandish that we could ever get back to having pension plans and fully funded Social Security and Medicare, but this proposal is designed to do exactly that.
Summary of the Plan
Solve the Social Security and Medicare fiscal crisis: replace the current FICA tax and employer match with a single flat Social Security and Medicare tax assessed on all income, including salaries, wages, dividends, and capital gains with no exemptions.
Create a private retirement savings plan: employers will no longer match the employee FICA tax, but instead they would make a mandatory contribution of a fixed amount of 7% on each employee’s income towards an individual retirement account. Employees would have an additional 3% automatically deducted from their pay to go into this account unless they opt-out in writing.
Create a fixed monthly pension payment: the final feature of this proposal is that the federal government would offer a new type of Treasury bond that will pay a fixed amount of principal and interest each month over the life of the bond, like a car loan or a mortgage payment. These would be offered for terms of 5 years up to 30 years. This new product would be called the Fixed Income Treasury Bond.
Discussion
The Medicare and Social Security Trust Funds are expected to run out of money in the next decade. This proposal shores up the financing of Social Security and Medicare by replacing the current FICA payroll tax with a single flat tax on all income with no exemptions. This would cover all sources of income, including salaries, wages, dividends, and capital gains. To widen the tax base to the maximum extent, there would be no tax deductions and no exemptions on investment income for charitable trusts or university endowments.
The benefit of this approach is that it avoids having to cut benefits or apply regressive increases in payroll taxes for the working poor and middle class. Social Security has been sold to the public as being a pension plan. Retirees receive monthly payments based on their contributions over their work history. However, unlike a traditional pension plan, the employee and employer contributions are not invested in financial assets. Instead, the revenues from FICA taxes go towards paying current obligations to retirees. This pay as you go policy means that today’s workers are paying for today’s retirees. However, Social Security is not a pension plan but a social welfare program, albeit the most successful and popular government program.
Preserving promised benefits without dramatically increasing taxes on the working poor and middle class means expanding the tax base for Social Security and Medicare. The existing FICA tax is like a flat tax. Over its history, the dedicated FICA tax has been extraordinarily successful in generating sufficient revenues to pay for Social Security and Medicare benefits. This proposal builds on that success by extending the flat, dedicated tax on to all income. The flat tax concept with no exemptions is the key to maintaining a low enough tax rate so as not to distort savings and investment decisions.
Lately, there have been articles in the financial press about workers lamenting the lack of a fixed pension payment that they can receive upon retirement. Too many retirees have no savings or pension and must rely solely on Social Security. This is not necessarily a moral failure to save for retirement. Many Americans earn only enough income to pay for current living expenses. In the past, these workers often received a pension from their employer to supplement their savings and Social Security. Companies have abandoned pension plans, and even 401k matches have come under pressure.
This proposal resurrects the vision of a pension by substituting the FICA tax match that employers contribute with a mandatory 7% contribution to the employees’ private retirement account. Such an investment plan could be like a 401K or an IRA. Employees would have the option of contributing the amount that they desire and can afford, with a 3% automatic withholding unless the employee chooses to opt-out in writing. Corporate matching policies would not have to change.
To prevent financial fraud and excessive fees, there would have to be government regulation imposed on the providers, investment options and the associated fees. This does not have to be complicated as financial firms such as Vanguard, Fidelity, and Black Rock handle retirement investments with ease and at low cost.
To bring back the monthly pension payment, the proposed Fixed Income Treasury Bond would provide a return of principal and interest, like a housing mortgage or an auto loan. The important thing about the Treasury offering this type of financial product is
that there is no risk, or fees involved as there is with an annuity offered by an insurance company. When employees retire, they can decide on how much of their retirement savings to put towards buying a Fixed Income Treasury Bond, and how much to hold back in their retirement savings accounts.
Conclusion
Widespread, bipartisan political support will be needed to address the issues of Social Security and Medicare financing and the crisis for many Americans of not having enough personal savings to supplement their Social Security and Medicare benefits. This proposal contains elements that would be favorable to both sides of the political spectrum. Expanding Social Security and Medicare taxes to include all earned and unearned income may be considered a step too far. Raising the retirement age, reducing benefits and/or raising the FICA tax rate would also draw fierce opposition. There is no easy answer, but here is a proposal that I believe is both efficient and equitable. Over time, the results would be revolutionary as ordinary Americans will have a much more secure retirement income and own a substantial share of the nation's wealth in the form of stocks and bonds.
