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10 ways to fix Social Security

Social Security
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Let's set the record straight about Social Security. It's not "going broke" in 50 or 75 years … it's broke today.

The system's unfunded liability is $32 trillion, according to the "infinite horizon" projection in the Social Security and Medicare Boards of Trustees' annual report. This is the present value difference between a) all the system's projected benefit payments and b) all the system's projected tax receipts plus the existing trust fund. This unfunded liability measure is called Social Security's fiscal gap. It's formed over the system's entire projected future.

Social Security's $32 trillion in red ink is 32 percent of the present value of the system's projected taxes. This means Social Security is 32 percent underfunded. In comparison, Detroit's pensions were only 20 percent underfunded before they helped drive the city into bankruptcy. Being 32 percent underfunded means that perpetuating the system in its current form requires an immediate and permanent 32-percent hike in the system's 12.4 percent combined employer-employee payroll tax rate. This means we all need to pay 4 cents in extra taxes for every dollar we earn up to the covered earnings ceiling, now $118,500. The longer we wait to raise taxes, assuming we don't intend to cut benefits, the larger the requisite tax hike will be. And that is something our children will bear.

What's more, Social Security, a system that has hundreds of thousands of rules, is a user nightmare. In my experience, the staff is so poorly trained that half of their "advice" is either completely wrong, partially wrong, or correct but entirely misleading.

I'm running for president as a registered write-in candidate. (That means that, unlike a write-in for "Mickey Mouse," votes for me will be counted.)

My opponents haven't said much about Social Security. I'm not sure if it's because they don't know how to do fiscal accounting or they do know and they are concealing the truth about the nature of our country's long-term fiscal condition. Either way, our kids don't have the luxury anymore of amateur hour in the White House.

If I am elected president, here's what I will do to fix Social Security:

1. Grandfather in current Social Security beneficiaries (people who have already paid into the system). That is, pay them the Social Security benefits they've already earned over time. Finance these payments from Social Security Federal Insurance Contributions Act (FICA) tax proceeds, which will be expanded under my tax plan by eliminating the ceiling on taxable payroll.

2. Freeze the current Social Security system by filling zeros in workers' earnings records for years after the reform begins. This means just consider the earnings records of workers during the year before the reform.

3. Require all workers under 60 to contribute 10 percent of their wages to Personal Security Accounts (PSAs). This 10-percent compulsory personal saving contribution is in addition to the 12.4 percent FICA tax.

4. Allocate each worker's contribution 50-50 to his/her own PSA and to his/her spouse/legal partner's PSA.

5. Ensure that the government contributes to the PSAs of low-income workers, the unemployed and the disabled.

6. Ensure that all PSA balances are invested in a global market-weighted index fund of stocks, government bonds, corporate bonds and real estate trusts.

7. Ensure that, from ages 61 to 70, all PSA balances for each cohort (defined by year of birth) are gradually sold to purchase TIPS (Treasury Inflation Protected Securities).

8. Ensure that all investing, sales, purchase of TIPs and provision of benefits is done by a single government computer at zero cost. Wall Street would play no role and collect no fees.

9. Implement a government guarantee that, when PSA balances are sold and converted to TIPS, they are at least of equal value to what was contributed adjusted for inflation. (i.e., the government guarantees PSA participants against real losses.)

10. Ensure that PSA participants who die prior to age 70 bequeath unconverted balances to their heirs.

I believe that this is what we would choose to do if we could start Social Security from scratch today. But we can't start Social Security from scratch. We can simply freeze the existing system, pay off all benefits owed under the existing system as they come due and run the PSA system in parallel.

How will this reform help reduce the country's fiscal gap? First, payroll tax revenues will continue over time even though the old Social Security system is being phased out. Indeed, since I eliminate the payroll-tax ceiling as part of my tax reform, payroll tax revenues will be substantially higher. Second, no one will accrue additional benefits under the old system. These two features — higher taxes and lower future benefits — will more than wipe out the System's current $32 trillion in red ink.

Commentary by Laurence Kotlikoff, an economist at Boston University and co-author of "Get What's Yours – the Revised Secrets to Maxing Out Your Social Security Benefits," fully updated to reflect the new Social Security laws. He is also a registered write-in candidate for president in the 2016 election (www.kotlikoff2016.com). Follow him on Twitter @kotlikoff.