Tax cuts are the first order of business for Republicans. Saving Social Security has to come first, says the president. There is a way to do both that also will increase the American savings rate, making more capital available to continue our economic good times.
The best tax cut would be reducing Social Security payroll taxes. Because it is not payable on salaries in excess of $72,600, it falls most heavily on lower-paid workers. A reasonable goal is to reduce that tax by about one-third, to 8.4% of payroll. The reduction not only would help employees, but it also would save employers 2% of wages up to the wage base, helping make American industry more competitive.
It can be achieved by additional funding of the Social Security retirement system, which would result in a reasonable percentage of the benefits being paid out of investment earnings rather than out of payroll taxes. The expected budget surplus over the next generation or two could be used to build up the assets of the system.
Historically, Social Security financing has been pay-as-you-go. Current payroll taxes are used to pay benefits to retired workers and their families. However, as a result of changes made in 1977 and 1983, Social Security taxes began to be collected in amounts that were greater than benefit payments. This was done to build up a surplus to finance the benefits of the baby boomers. That surplus has been held until now in government bonds and has been used to finance federal government operations.
We can begin the process of funding by allocating a portion of the budget surplus to the Social Security system.
The assets so created should be under trusteeship. The U.S. president, with the advice and consent of the Senate, should select the board. There might be six trustees: two representing industry; two, labor; and two, the public. They should have six-year rotating terms so that, except at the beginning, no president could select too many of the members.
The board should be constructed with the same kind of independence the Federal Reserve Board has. The chairman of the Federal Reserve Board should serve as chairman of the Social Security Trust Fund board and should not have a vote except to break a deadlock.
The trustees should then invest in stocks and bonds using the "prudent man" rule, with restrictions on how much can be invested in any one company. Or, trustees could invest in mutual funds, to avoid an appearance of the government owning American industry directly.
State and local governments have been investing pension plan assets this way for many years. Increasingly they have been following the practices of corporate pension plans by investing about 60% in stocks and 40% in bonds. Most pension funds have been earning about 10% or 11% in recent years, far more than the amount payable on long-term government bonds.
The budget surplus is estimated to be $2.9 trillion over the next 10 years, and $1.9 trillion of that has been set aside for Social Security and no longer will pay for current expenditures. The investment earnings on the additional $1 trillion will pay for $85 billion to $100 billion in benefit payments. If the funding process is continued, the full 4% reduction in payroll tax likely can be made over the next generation.
Robert D. Paul is the retired chairman of the Segal Co., New York.
