2005 Year in Review

A Plan For Social Security

First of all, it should be a principle of any plan that it pays for itself. The regular federal budget is going to be over $400 billion in deficit. It is foolish to borrow money so that people can save money.

Another principle is that whatever plan is put in place at least maintains current benefits for retirees.

There have been several ideas for changing Social Security. The most prominent ones are increase payroll taxes; increase the retirement age; reduce benefits; or personal accounts. Personal accounts don't do anything to help Social Security.

President Bush has stated that he will not increase payroll taxes, although a small increase would increase the fund and eliminate the need to reduce benefits.

But, he has a point. The payroll tax is a regressive tax, that is, it is paid more by lower earners than the rich folks. This is because you only pay the payroll tax up to $90,000. So, amounts over $90,000 are tax-free as far as payroll taxes are concerned.

Benefits are, however, progressive. In order to provide a safety net for those who have not made very high wages during their work years, their benefits are increased to a more livable amount.

I suggest that we both make the tax even on the rich, the middle class and the poor and also use an element of President Bush's plan to increase the return on the Social Security fund.

First, the $90,000 limit on paying payroll taxes should be eliminated. There is no reason that the cost of the nation's retirement plan should be weighted on the backs of the middle class and poor workers. Those who make over $90,000 can afford to help fund an essential program which provides a safety net for many in our society.

The other part of the solution is for the Social Security to invest a portion of its funds in the stock market. The greater historic return of stocks over Treasury Bonds would substantially increase the fund and eliminate the potential shortfall. Perhaps 25% of payroll taxes could be put into the stock market.

To avoid manipulation of the stock market, the money could be spread across all stocks automatically and be based on market capitalization. Thus, if Microsoft makes up 5% of the stock market, the fund would use 5% of its funds to buy Microsoft stock.

This would be a much more efficient and cost-effective means of increasing retirement funds compared to personal accounts. The cost of the fees in managing the small personal accounts under President Bush's plan would be very expensive.

In addition, the cost to business in creating another payroll withdrawal would be a burden for businesses, particularly small businesses.

This plan also eliminates the danger to individuals, inherent in personal accounts, due to the ups and downs of the stock market. Certainly, the government would also have the risk of the stock market falling. However, the government has the ability to cushion these shocks by conservative use of the fund. It can build surpluses during good times and pay them out during down periods.

Eliminating the earnings limit on payroll taxes and investing a portion of Social Security funds would greatly increase the Social Security funds. It would make sure that those who have paid in so much of their hard-earned money into the fund would get the safety net benefits that they deserve.

I think it is likely that this plan would allow an increase in Social Security benefits. With all the wealth in this country, isn't it time to stop thinking about reducing benefits for the poor and middle class and actually increase benefits to a more livable amount?

Wouldn't this plan be both conservative and compassionate?

by John Legler, Guest Columnist
February 16, 2005