Monday, May 02, 2005

Social Security personal accounts that might fly

President Bush’s proposal to means test SS COLA’s has sweetened his SS proposal to moderates. One more step might put it over the top. And that is to put an income cap on the personal accounts equal to the mean personal income (about $35000). Contributions on income above this cap up to the SS cap (about $90,000) would go into the SS trust fund as before, reducing the borrowing necessary to make the transition. And make the personal accounts mandatory, with government bonds as an option. One problem the program will encounter if it is voluntary is that high income people will join and low income people will not, defeating the purpose of the program.

President Bush says he wants low income people to become part of the ownership society. Since they don’t make enough money to save in IRA’s or other instruments, and SS is a mandatory tax, this is a way for them to save and become part of the ownership society. Having a personal investment cap means that there is no disparity between high and low incomes as to how much of SS they can privatize, and will force people to save at least a portion of their income.

Another tweak that would get more people behind personal accounts would be to allow the investment to be in an owner occupied home. Allowing SS contributors to acquire and pay off their residence would reduce the need for retirement income. There are already laws that allow this investment to follow the owner to other homes if a move is necessary. Rent is a major portion of retiree’s expenses if they don’t own a home that is free and clear. The tax free accumulation of such gains in the value of a home, together with the deductibility of mortgage interest make home ownership one of the best investments a person can make.