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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.

sitetest

I know it's not a real pension, but it looks like it, and that's largely how folks understand it.

Because people don't understand how SS really works is not argument against a NST. That is an argument for teaching basic economics.

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

Now, payroll taxes and income taxes are not, in reality, in seperate "accounts". It is all lumped together to pay both the cost of SS and the rest of government. Same thing happens under a NST except "folks" would know what they are really paying(much easier to understand)

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

I totally agree with this and your other arguments regarding privatization. Once everyone has control of their forced retirement funds, the SS portion of a NST would disappear. The faster the better..

The problem with your proposed solution is that it completely ignores the enormous near to mid-term 800 pound Social Security gorilla, which is demographic in nature. As the baby boomers retire over the next decade or so, the number of retirees drawing money from the system relative to the number of workers paying into the system is going to shift in such a way as to threaten the solvency of the whole system without either
(1) substantial benefit cuts, or
(2) enormous payroll tax increases
I have heard no privatization proposal which would enable older Americans to have enough set aside in private accounts by the time they reach retirement age to materially alleviate the government's obligations toward funding their retirement benefits. Those benefits will have to be paid from payroll taxes withheld from younger workers and supplemented by general revenue funds (or more national debt). As previously mentioned, to the extent that privatization diverts funds into private accounts which would otherwise be available to fund these benefits, it exacerbates the near term problem, although it also means that younger workers will have their own private accounts to draw down on for their retirement and won't be dependent on government revenues for their retirement security. I think everyone agrees that is where we would like to get to. The huge challenge, however, is how do we get there from here, given the magnitude of the financial hurdle. That is the gigantic issue which you completely ignored, which is typical of most who say that SS reform (meaning privatization) is extremely important.

To put that financial hurdle into perspective, Dr Lawrence Kotlicoff of Boston University has estimated that the 75 year shortfall in SS and Medicare is a little over 50 trillion $$$. That's TRILLION - with a T! If we were to nationalize the net worth of every household in America - if the federal government were to seize every privately held financial asset in the nation - that would only be a little over 40 trillion $$, meaning we could only cover about 80%.

Obviously, there are some tough decisions which have to be made. If we convert to the FairTax and double the size of the US economy over the next 15 years, then we double the base from which to draw these social safety net revenues. There is no way that happens with a payroll based system. Will that be enough to completely resolve the demographic time-bomb? Probably not, but it is certainly a major step in the right direction and is most assuredly more politically palatable than the alternatives.

FairTaxers get understandably frustrated by the naysayers who say "we don't like your approach to the problem". When we then respond with "ok, what is your approach?", and it becomes obvious that it the naysayers don't have one. Left to their own devices, they would ignore the big issue completely. During my business career, I saw an approach advocated on many occasions which essentially boiled down to "Let's ignore this problem and hope that it goes away". I have yet to see that approach produce even marginally acceptable results - not a single time.

I can't help but draw the parallel to the aftermath of Katrina. There is the usual partisan finger-pointing, of course. However, it is very hard to explain to the American public why, with warnings going back for more than a decade that a class 4 or 5 storm hitting New Orleans directly would produce catastrophic results, that we were as ill prepared and slow to respond as we were.

Perhaps it will take a major financial crisis contributed to in large measure by our tax system for Americans to get serious about our antiquated and horribly inefficient tax system. There are no perfect solutions and no painless short-cuts to getting on a more sustainable and sound longer term path.