DROP THE VOLUNTARY BIT AND YOU'VE GOT A PLAN:

Private Accounts Can Save Social Security: With just a 3% payroll deduction, a 67-year-old retiree who earned $50,000 a year could double his current Social Security benefit. (MARTIN FELDSTEIN, 5/01/11, WSJ)

Here's how such a system might work. 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. 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. That assumes a real rate of return of 5.5%, less than the historic average return on a balanced portfolio of stock and bond mutual funds. Someone who was extremely risk averse could instead choose to put all of his personal retirement account into Treasury Inflation Protected Securities, accumulating enough with a 5% savings rate for an annual payout of about $13,000. Different combinations of savings rates and investment strategies would produce different expected benefits in retirement.

The automatic extra payroll deduction could start with a less disruptive 1% or 2% and grow as high as 5%. 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. And the good news is that experience shows that individuals who are automatically enrolled in such savings plans do not withdraw their funds but leave them to grow.

And, of course, it's foolish to wait until someone is in the workforce to start their retirement savings. The money should be added to their O'Neill account.

Posted by oj at May 2, 2011 5:55 AM
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