A new idea to secure Americans in retirement; put social security taxes to work

Tom Giovanetti, president of the Institute for Policy Innovation, has an interesting idea: provide low and middle-income Americans with security and even prosperity in retirement while delivering, in effect, a tax cut right now. It would not cost taxpayers an additional dime. It is not just private sector employees that would benefit; most public employees pay social security taxes, so this could address some the shortfalls in public pensions.

What is this great idea?

Giovanetti pointed out in the Wall Street Journal that Republicans tax cuts have left Congress with little left to cut (Why Not ‘Trump Retirement Accounts’? If you want to cut middle-class taxes, go where the money is: Social Security):

To stir up excitement before the midterms, President Trump last week said he plans to cut middle-class taxes again in the coming year. The trouble is that Republicans have been so successful in cutting taxes in recent years that 44% of Americans no longer pay any federal income tax at all, and many more pay very little. After last year’s tax reform, a family of four earning $80,000 a year could pay as little as $2,300 in income tax: an effective 3% rate. A further 10% cut wouldn’t amount to much.

On the other hand, low- and middle-income workers do send the government a large share of their earnings in the form of payroll taxes. That same family of four pays $12,240 at the 15.3% combined rate for Social Security and Medicare. If you want to cut taxes for middle-class and low-income workers, that’s where you have to do it.

Here is how it would work:

But instead of an impotent income-tax cut or, say, a payroll-tax cut of 4% of income, why not redirect that same 4% into personal retirement accounts for every worker? Call them “Trump Retirement Accounts.” With no decline in disposable income, American workers would suddenly be investing for retirement at market rates in accounts they own and control, instead of relying on Congress to keep Social Security solvent.

Giovanetti recognizes that saving for retirement is very hard for most people and addresses the problem of social security being a terrible deal for most Americans—the negative return for many taxpayers makes payroll taxes just another wealth transfer that leaves billions of dollars in the hands of the government instead of working productively in the market.

If the parents in that same family of four diverted 4% of their income into a diversified mutual fund over their entire working career, and their income never increased, they would amass well over half a million dollars by retirement age. And their account savings would grow much larger if their income did increase at a typical rate over four decades of work.

The painful truth is that low- to middle-income earners find it difficult or impossible to save adequately for a rainy day, much less for retirement. Part of the reason is that the federal government takes 15.3% of their earnings to fund a retirement system everyone knows it isn’t really funding.

So true—and then there is the huge problem of underfunded public pensions, and large private pensions like Central States Pension. If we do not do something really bold and smart so that Americans can take care of themselves in retirement, we are going to hit a financial wall.

Here is the reality check and warning:

America’s entitlements are on a path to collapse, and few politicians—including Mr. Trump—have an appetite to do anything about it. When the crisis comes, no tax increase will be big enough to solve the problem. Knowing the U.S. government is eventually going to fudge its commitment to retirees, policy makers should at least give workers a fair chance to amass the savings they will need to support themselves.

The back-door solution to the entitlement crisis is to make workers wealthy. Will you worry about Social Security’s solvency or a Medicare collapse if you have more than enough money in a real retirement account to buy a generous annuity and cover your health insurance?

Throughout his career Donald Trump sold the sizzle of wealth, but now as president he can deliver the steak. Trump Retirement Accounts could secure his place in history as the president who made Americans rich.

Agreed; part of the President’s appeal to low and middle-income Americans is that he is not embarrassed by his riches, he acknowledges that it is fun to be rich and brashly, and sometimes crassly, encourages Americans to seek wealth. That has always been part of the American Dream, though we all define “wealth” in different ways.

Jimmy Carter’s turn-down-that-thermostat cardigan sweater routine, and misery index, did not inspire or lead Americans to wealth or greatness.

By all means, let’s find a way to put social security taxes to work for taxpayers, and ask the President to sell it to taxpayers but to sell it to Congress maybe he should resist branding that sizzling steak “Trump Retirement Accounts.”