Kotlikoff's Social Security Plan
By Arnold Kling
Lawrence Kotlikoff has a long description in today’s Boston Globe.
One way to make up for the loss in revenue from privatization as well as cover the existing revenue shortfall is dramatically but gradually to cut Social Security benefits. Such cuts are part of each of the commission’s plans [referring to the Social Security reform commission of the first Bush term]. The commission’s report uses artful language to hide this fact. But the proposed cuts are huge. The second plan, for example, indexes the initial receipt of retirement benefits to prices, rather than wages, as is currently the case. Over time, this means that Social Security benefits would replace an ever smaller share of workers’ pre-tax wages. In the long run, Social Security would protect those in abject poverty, but that’s it.
The three key elements of the Kotlikoff plan are:
Step 1 shuts down, at the margin, the retirement (Old Age Insurance, or OAI) portion of Social Security. Current retirees continue to receive their full retirement benefits, and current workers receive all the retirement benefits now owed to them, but that’s it. There is no further accrual of Old Age benefits.
* Step 2 eliminates the employee FICA taxes (7.65 percentage points of the total 15.3 percentage point employer plus employee tax), directing these contributions to individual Personal Security accounts. The employer FICA contribution continues to finance Social Security disability, survivor, and Medicare benefits.
* Step 3 uses a roughly 10 percent federal retail sales tax to replace employee FICA taxes and pay off all accrued Old Age benefits. Over time, the sales tax rate falls as more and more of the accrued benefits are paid off.
One immediate concern I have is that the 10 percent retail sales tax would turn out to be permanent, rather than temporary. These political economy issues are difficult to manage.
For Discussion. One of Kotlikoff’s concerns with ordinary privatization plans is that they transfer the cost of paying for today’s retirees to workers in the distant future. Is the sales tax a useful mechanism for putting some of the cost onto current and near-term retirees?