If you’re below a certain age, your annual Social Security statement is accompanied by a fact sheet titled “What young workers should know about Social Security and saving.”
The fact sheet explains that the Social Security Trust Funds are due to go broke by 2037 and that, as things stand now, payroll taxes won’t cover “the full benefit amounts scheduled.”
“However,” it says, “this does not mean that Social Security benefit payments would disappear. Even if modifications to the program are not made, there would still be enough funds in 2037 from taxes … to pay about $760 for every $1,000 in benefits scheduled.”
Benefits won’t “disappear”? Well, that’s reassuring!
The fact sheet presents this potential 24 percent haircut for Americans around my age as a worst-case scenario. Prudent souls will recognize that, with fewer workers and more beneficiaries who live longer, it may be the best case.
I fear the temptation to “fix” Social Security by giving Washington more authority is too great (witness the result of the year-long health-care debate). Pension reform for 300 million-plus people is most likely to result in bigger government, higher taxes, lower benefits.
But what about reform for 5 million, 10 million, even 20 million Americans at a time?
What I mean is a kind of “Race to the Top” for Social Security reform, in which states compete to devise solutions for the program on a smaller scale.
Give state governments two years to draft plans for people younger than a certain age; people above a certain age would remain in Social Security. Actuaries would set the appropriate cut-off, but let’s assume it’d be around age 50.
The feds would allow the best plans, or maybe any plan that’s sound, to move forward. They could be experiments for a federal reform or simply a devolution of power to the states.
Why would a state even want to participate? Because, in the states whose plans were chosen, jobs would be exempted from the federal Social Security payroll tax, a total 12.4 percent for employee and employer.
That would free states to create their own payroll taxes to replace a portion of the federal tax. But states would have every incentive to keep from replacing the entire amount, making themselves as attractive to employers as possible.
Talk about a job-creating stimulus. How would it work?
To gain broad support, I’d leave the ideological direction of the plans to the states themselves. They might be more progressive, perhaps by using means testing or graduated tax rates. But I would expect many states to be more free-market, with true private accounts.
Is it wise to let people invest more of their savings, given the losses sustained by some 401(k) accounts? There are of course risks, which states could address in designing their plans.
But long-term investments that are risk-weighted for the investor’s age and retirement plans can still provide a better return than Social Security has in the past. And given our national finances, there’s also risk in counting on Social Security.
The plans could be only for state residents, open to people in any state (like existing 529 college-tuition savings programs), or designed to draw new residents. They could be designed to take in state employees as a way to transition out of similarly unsustainable public pension plans.
Now, why would citizens want it? For one, it would allow for true reform that enhances personal freedom and limits government, which will be far more difficult to do nationwide.
It might also make government more responsive. In Georgia, a congressman has 14 times as many constituents as a state representative does.
This is, I admit, a radical proposal. But we need to consider ideas that are big in ways other than their price tags.