Thursday, May 5, 2011

Feldstein on How Individual Choice Can Save Social Security

Here is the system that Martin Feldstein suggests to complement the demographics-contrained Social Security pensions:

"An employer-based plan is less practical than one based on the individual (because) ... many individuals work in small firms, change jobs frequently, have multiple jobs, or are self-employed."

“Each individual would designate a broad-based mutual fund from a large list of funds approved by the government. The designation could be done on the individual’s annual tax return and could be changed once a year (my emphasis). Employers and the self-employed would send an additional few percent of wages to the Social Security Administration each month in addition to the current payroll tax. The Social Security Administration would then forward those dollars to the mutual fund chosen by the individual. The returns on those funds would be untaxed just as they are in an IRA or 401(k).

With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit. 

Since every individual would have the option of requesting a refund of that payroll deduction on the following year’s income-tax form, the extra saving is strictly voluntary. It is not a tax.”

My comment:

Since there is individual choice and since the system is strictly voluntary, it would not create a disincentive to work, contrary to the current payroll tax based Social Security contributions.  

Such a system should prove especially worthwhile in the high payroll tax – high disincentives to work European countries.

Read the paper here.

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