What should we do to handle our bankrupt Social Security system and other federal programs? In short, we should freeze benefit accrual under the current system. In other words, we should pay current retirees and current workers (when they retire) every penny now owed but not let anyone earn rights to extra benefits under the old system.
Next, we should require all workers to contribute 10 percent of their pay to a Personal Security Account (PSA). Half of the contributions of married or legally partnered workers would be contributed to their spouse/partner's account.
The government would make matching contributions on a progressive basis to the PSA accounts of the poor, the disabled and the unemployed. All PSA contributions would be combined and invested by a computer (not Wall Street) in a market-weighted global index fund of stocks, bonds and real estate.
At age 59, each PSA participant's account balance would be topped up in case it didn't equal what had been contributed adjusted for inflation (i.e., the government would guarantee a zero real return) and gradually sold off, on a cohort basis, to purchase Treasury inflation-protected bonds.
These bonds would be used to pay cohort members a PSA pension that's proportional to their share of all the cohort's PSA account balances at the time of conversion.
This Personal Security System reform would more than eliminate Social Security's unfunded liability and let us gradually eliminate the FICA tax. Today's and tomorrow's workers will end up far better off under this reform compared with their fate if Social Security's ink-red blood continues to pour out of the current system.
Laurence Kotlikoff is a professor at Boston University (BU) and professor of economics at BU. He is also a fellow of the American Academy of Arts and Sciences, a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society and was formerly on President Ronald Reagan's Council of Economic Advisers. Follow him on Twitter: @Kotlikoff.
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