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The third reform is retirement. First, there must be financial transparency at all levels of government. Retiree pension and health care benefits must be fully accounted for. The Social Security trust funds must be accounted for separately from the general fund and the trust funds’ debt will be canceled.
Second, Social Security Old Age and Survivors Insurance or OASI will achieve solvency over the “infinite horizon” – not just 75 years. The financing adjustments proposed to achieve solvency are as follows. The 90% “bend point” in the primary insurance amount formula used to calculate Social Security benefits will be reduced to 40%. Cease taxing Social Security benefits. Won’t reducing the 90% bend point to 40% seriously reduce OASI benefits? Beneficiaries will be held harmless. OASI will make up the difference if the actual supplemental income for families received, the benefit of making OASI benefits tax-free and the typical cost savings from switching from the current Medicare/Medigap insurance to Medicare Choice is less than the reduction in OASI and Social Security Income benefits. Additional changes in the PIA formula may be needed. “Transfer” Medicare premiums to Social Security. Premiums currently paid to Medicare will be paid to Social Security instead. Social Security benefits have Medicare premiums deducted. The deducted amount will remain with Social Security rather than being paid to Medicare. The net monthly benefit paid to beneficiaries will remain the same. The revenue that Medicare loses will be made up by levying a 2.8% employer-paid tax on all compensation – that is, wages and benefits without maximum – except retirement contributions. Index the number of working years required for full benefits for the expected lifespan after 2027 when the normal retirement age reaches 67. Reduce miscellaneous Social Security benefits. Cancel the death benefit and make other minor changes in benefits. Enroll all new public employees – federal, state and local – in Social Security.
These changes will result in the accumulation of large surpluses in the early years. Where should those surpluses go? Use the surpluses to fund new Social Security Individual Investment Accounts (IIAs). By putting the surpluses into Individual Investment Accounts, we keep the money out of reach of the U.S. Congress so they won’t be able to spend these surpluses like they spent past Social Security surpluses. But we don’t want people to take much risk with this money because if they lose this money, they lose this portion of their Social Security retirement. Therefore, the allowable investments will be limited to investment-grade debt like corporate debt, mortgage debt and bank CDs. No equities and no government debt will be allowed so governments can’t force people to lend them money from their IIAs. Some foreign, non-governmental debt will be allowed. Individuals will make the investment decisions. In practice, people will likely opt for low-cost bond mutual funds. The government must not guarantee investment returns. To do so would be to encourage risky behavior because if the individual won, they’d keep the profit. But if they lost, the government would cover their losses. Social Security will compensate for changes in market interest rates. When market interest rates rise, IIAs will get an additional contribution. When market interest rates fall, IIAs will be taxed. Spouses will split couple’s contributions and benefits equally. Reduce the minimum number of required credits.
Retiree benefits will be paid by a U.S. government inflation-indexed lifetime annuity. Also, the changes made to Social Security must be made to Railroad Retirement Tier I. Replace the current 10.6% OASI payroll tax with a 7% employee-paid tax on all compensation – that is, wages and benefits without maximum – except retirement contributions.
Change the Social Security disability tax base and rate to tax all compensation – that is, wages and benefits without maximum – except retirement contributions, lower the rate to 1.2%, and make it employer-paid. Items with an asterisk will be implemented when the supplemental income for families proposed in the Health Care, Disability, Long-Term Care, and Welfare reform is implemented.
Third, private retirement plan rules must be amended. Retirement plans must be made employee-centric instead of employer-centric and required to have proper diversification and management. Investments in retirement plans would be more restricted than currently allowed. Individual retirement account rules will be amended to consolidate and simplify existing retirement plans; will reduce the total tax-deductible contribution limit to $10,000 per year per person; will implement an opt-out rule; and will allow taxpayers to direct their tax refunds and other government payments into their retirement accounts. Assure full funding for corporate pensions. Review and revise work rules for older Americans.
Fourth, reform public pensions. To repeat, enroll all public employees in Social Security. Harmonize public sector retirement plans with private sector retirement plans. Federal government pension plans will be invested like state and local government pension plans instead of in US Treasuries. Protect pensions by increasing the public employee contribution rate by 10% of salary. Government employees will wonder, “How can we afford to contribute another chunk of our paycheck, all other things being equal?” But they are not equal. In any event, employees will be held harmless. Governments will make up the difference if the reduction in net pay exceeds the savings from lower federal income and payroll tax rates, the elimination of state and local income taxes, the elimination of employee-paid health insurance premiums and the SIF.
Income taxes will be lowered in order to compensate for the higher revenue going to Social Security. Tax labor compensation 7.0% less than non-labor income and lower income tax rates by 2% in the 25% and higher tax brackets. This will compensate for the payroll taxes levied on all labor compensation without limit.
In order to compensate for lower income tax revenue, overall spending will be reduced. Defense spending will be increased by $42.9 billion per year after a long period of reduced spending because of sequestration and new challenges facing America. Spending on homeland security, intelligence agencies, State Department, international assistance, veterans affairs, and energy will be increased by $4.2 billion per year. Other spending will be reduced by $40.7 billion per year. Parenthetically, the impact of implementing the proposals in all reforms excluding health care related directly to defense will decrease defense spending by $6.2 billion per year using 2008 as the base year; that is, before subsequent actual and proposed spending reductions.