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Dear phil_will1,

"There is only one proposal that I am aware of which takes the Social Security system off its dependency to payroll taxes."

I guess in your perspective, that's a good thing.

From my perspective, it isn't.

At least, by maintaing Social Security through payroll taxes, it's possible to actually point out the coming "insolvency" of Social Security, because it sorta looks, in some ways, like a pension system. A chunk of money gets taken out of my check, and out of the employer, and supports the pension system. I know it's not a real pension, but it looks like it, and that's largely how folks understand it.

However, one of the effects of the NRST that is negative in my mind is that Social Security and Medicare will then come out of the general consumption tax, rather than out of the specific payroll taxes.

I view that as a big negative, in that to me, it seems to better hide the coming trainwreck.

"Privatization actually makes the insolvency problem worse in the near term."

That's true, especially, if we chose to privatize, the faster we went. That's why I say, we're going to have a trainwreck, no matter what.

The question is how bad it will be.

No privatization means that either the system will have to be ultimately abandoned in the decades ahead, to the great detriment of lots of old people, or it will have to be maintained through truly confiscatory tax rates (In terms of an income tax, how about a 30% payroll tax [15% per side] just to cover Social Security?).

I don't know which will be more unsustainable - letting old folks starve to death, or taking away an additional 15% off the top of folks wages (or adding an additional 15%, exclusive, to the NRST - with state sales taxes, we'll have an overall sales tax on some items of 50% or more).

Faster privatization means more pain in the relatively short-term, but it also means getting to a better place faster. Slower privatization means that we spread the pain over a longer stretch, and it takes longer to get to the final destination.

Frankly, I prefer faster to slower, in part because although it will be ugly in the short-term, it will require high political will for a shorter time.

One benefit, though, of privatization now (whether fast or slow) is that the President and Congress will be forced to deal with the fact that they're both currently spending the existing Social Security surplus on stuff that is not going to provide a real return to future recipients.

I saw one proposal where all the government would do is take the existing surplus, on an annual basis, divide it proportionately by all payroll taxpayers, and dump it into private accounts. This isn't exactly a real move to privatization, and its material positive impact would be pretty limited.

But it would point out the absurdity of the idea of "transition costs" to a completely-privatized Social Security system, by exposing graphically that Congress is just pissing away the existing annual surpluses in additional federal spending.

I certainly agree that privatization will hurt in the short-term. But the end result provides some very positive things. Here are a few off the top of my head:

- Instead of the 6% - 7% of GDP that is collected and turned over to the federal government from payroll taxes, that 6% - 7% would be directly saved and owned by the individual worker. Thus, this part of GDP goes from being re-distributed by the government to being invested by workers in productive assets, be they bonds, equities, etc.

- Privatizing Social Security would reduce the federal government's take of GDP to the low teens, as a percentage of GDP. At that level, a broad-based consumption tax starts to become much more practical, as some of the problems that folks like me cite start to recede as the needed tax rate declines from 30% down to less than 20%, and perhaps even lower.

- In the long-term, workers who began their careers under this system would have much higher retirement incomes than they would have even if it would have been possible to maintain the solvency of the old system.

- Out of necessity, more workers would become knowledgeable about financial assets, and would be more knowledgeable how government policies affect them and their assets.

- Just as we've seen a growing "investor class," and the positive political effects thereof, we would magnify that effect by turning all workers into investors.

I guess to me, this is a far more important issue. Perhaps that's because the so-called "trust fund" is scheduled for insolvency a few years after I'm scheduled to retire, and the system will have entirely failed by the time my kids are old enough to retire.

I know that it isn't as sexy an issue, and the only reasonable paths to fixing it of which I'm aware will cause pain. So, it's a tough one, politically.

But that doesn't mean it should be the highest economic/tax policy priority for us.

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