Newt Gingrich has proposed the most cutting-edge solution to our fiscal crisis.
In New Hampshire on November 21, Newt Gingrich, who has just been endorsed by the Manchester Union Leader, unveiled sweeping entitlement reform proposals, discussed in a comprehensive, extensive campaign position paper now available at Newt.org. Those proposals reflect closely my own work over many years, discussed in detail in my recent book, America’s Ticking Bankruptcy Bomb.
These reforms taken together would reduce federal spending over an extended period of years by half from what it would be otherwise, solving America’s entitlement and fiscal crisis. Yet, these reforms are politically feasible, indeed even popularly appealing, because seniors and the poor would actually gain from them. In fact, they are all based on already enacted reforms, in the U.S. or elsewhere, that have been proven to work in the real world. Remember that even libertarian godfather Friedrich Hayek supported the concept of safety nets for the truly needy, as did Reagan.
The key is that the reforms are all based on modernizing our old fashioned, tax and redistribution entitlement programs to rely on 21st century modern capital, labor, and insurance markets instead. Through such fundamental structural reforms, changing the way the programs work and operate, we can achieve all of the social goals of these entitlement programs far more effectively, serving seniors and the poor far better, at just a fraction of the current cost of those programs. Consequently, we can actually achieve vastly greater reductions in spending than we could ever hope to achieve simply by trying to cut benefits.
These reforms all work more effectively to achieve their goals because they operate through market incentives, productive savings and investment, and competition, rather than simple tax and redistribution. They also all work to contribute to economic growth and prosperity today, rather than detracting from it.
Personal Account Prosperity to Replace the Payroll Tax
Gingrich proposes reforms that would empower workers with the freedom to choose to save and invest what they and their employers would otherwise pay into Social Security in personal savings, investment, and insurance accounts. My own studies with various colleagues over the years show that at standard, long-term, market investment returns, for an average income, two-earner couple over a career, the accounts would accumulate to close to a million dollars or more, depending on how big the account option is. Even lower income workers could regularly accumulate half a million over their careers.
Those accumulated funds would pay all workers of all income levels much higher benefits than Social Security even promises let alone what it could pay. That includes one earner couples with stay at home moms caring for the children. Retirees would each be free to choose to leave any portion of these funds to their children at death.
In retirement, benefits payable from the personal accounts would substitute for a portion of Social Security benefits based on the degree to which workers exercised the account option over their careers. This is where the spending savings come in. The personal accounts don’t just reduce the growth of government spending. They shift vast swaths of such spending from the public sector altogether, to the private sector.
Gingrich proposes to start the accounts focused on younger workers first. But over time the accounts would be expanded to take over financing for all of the benefits financed by the payroll tax today. That would ultimately amount to the greatest reduction in government spending in world history.
Moreover, eventually replacing the payroll tax entirely with personal savings and investment directly owned by each worker and his family would provide the greatest reduction in taxes in world history.
In 1981, the South American nation of Chile, then with a Social Security system just like ours, with the same problems, adopted such a personal account option, with astounding success. Virtually all workers chose the accounts within 18 months, and for 30 years now they have paid half the taxes of the old system, in return for at least twice the benefits, while their economy boomed with all the increased savings and investment. Those reforms included a safety net guarantee of former Social Security benefits, which has never suffered a loss or cost due to failure of a personal account to beat the old system. That is also included in the Gingrich plan.
In America itself, such a system was tried in 1981 as well, for local government workers in Galveston, Texas, who still enjoyed an option under the law then to choose an alternative to the current system. Just as in Chile, for 30 years now they have paid much less into their personal account savings and investment system than required by Social Security, but receive much more in benefits. The similar Thrift Savings Plan retirement system for federal employees has similarly worked spectacularly well now for nearly 30 years.
Model legislation providing for such accounts was introduced in 2004 and 2005 by Rep. Paul Ryan (R-WI), now Chairman of the House Budget Committee. I worked closely with Ryan in developing that legislation. A similar proposal is now included in the Ryan Roadmap. On September 12 of this year, Rep. Thaddeus McCotter (R-MI) introduced another model bill on which I worked closely as well.
Both bills were officially scored by the Chief Actuary of Social Security as eliminating all future Social Security deficits through the operation of the personal accounts alone, without benefit cuts or tax increases. Indeed, as discussed above, future retirees with personal accounts would enjoy higher not lower benefits. In the process, with full personal accounts the unfunded liabilities of Social Security, currently officially estimated at $15.1 trillion, would ultimately be eliminated entirely, as the personal accounts involve shifting to a fully funded retirement financing system. That would be the greatest reduction in effective government debt in world history. The Chief Actuary’s scores for both bills are still available at the official Social Security Administration website.
Under both bills, as well as under the Gingrich plan, workers would be completely free to choose to stay in Social Security as is without exercising the personal account option at all. There would be no benefit cuts or tax increases for these workers either. That is possible because as the Chief Actuary explicitly recognized in scoring the bills, the personal accounts would so obviously be a better deal for workers and their families than the current program that he concluded that 100 percent of workers would ultimately choose the accounts. Of course, under the Gingrich plan, as under both bills, there would be no changes in Social Security of any sort for anyone currently in retirement, or anywhere near retirement.
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