Larry Kotlikoff on March 11, 2016 in New York City
Nicholas Hunt—Getty Images
By Laurence J. Kotlikoff
May 24, 2016

In my line of work, the greatest sin isn’t plagiarism—it is inventing, distorting, or ignoring the truth. When this happens, academics like myself are ethically obliged to set the record straight and, where possible, repair the damage.

To many politicians, truth is a matter of convenience, not a vital requirement for securing our country’s future. They say whatever’s needed to get elected and do whatever’s needed to stay in office. But my purpose in running for president is to tell the truth about our country’s domestic and foreign problems—and to fix them.

The Fiscal Gap

Although you’ve heard no mention of this in the vapid and juvenile primary debates, our government is dead broke. We’re not broke 50, 30, or 10 years from now. We’re broke today. Indeed, we’re in the red to the tune of $199 trillion. This is the fiscal gap, which is effectively our government’s credit card bill. It equals the difference (in present value) between all projected future expenditures and all projected future taxes.

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Since U.S. GDP is about $18 trillion, our fiscal gap is close to 11 times total annual U.S. output. That’s a colossal sum. If $199 trillion doesn’t fall out of the sky, we’re going to have to raise taxes or cut spending—a lot. Indeed, closing the fiscal gap requires either a 53% immediate and permanent hike in all federal taxes or an immediate and permanent 33% cut in all federal expenditures.

If we wait 20 years to address the fiscal gap, it will grow substantially, just like any credit card bill we ignore. The requisite tax hikes and spending cuts starting then are 63% and 38%, respectively. So the longer we wait to adjust policy, the more our children will have to pay in taxes, or the less they will receive in benefits. Therefore, if we care about our offspring, waiting is not the answer.

Indeed, our fiscal gap is miles larger than the $19 trillion gross official debt the politicians love to discuss. It puts everything on the books—all future spending commitments, and the sum total of all projected receipts, no matter what they’re called.

In contrast to the fiscal gap, many politicians use deficit accounting, which lets them pick and choose what liabilities to record and which to ignore. Paying Social Security benefits to current and future beneficiaries is a case in point. These commitments are fundamentally no different from the promise to make coupon payments on Treasury bonds. Yet not a penny of the present value of future Social Security benefits is included in official reports of what the government owes.

 

Our nation’s insolvency has been decades in the making. Each administration, starting with President Eisenhower’s, has engaged in take-as-you-go policy. This entails taking money from the young, giving it to the old (a key voting bloc) in the form of benefits or tax breaks, and promising the young that their children will repay them when they retire. The money taken is called “taxes,” not “borrowing,” and the repayment is called “transfer payments,” not “principal plus interest.” This language choice ensures the future transfer payment obligations are kept off the books.

All Ponzi schemes run aground eventually, and our great postwar generational Ponzi scheme is heading straight for the shoals. We still have time to steer clear, but we aren’t going to do so with politics as usual. What’s needed is fundamental reform of our tax system, our welfare system, our healthcare system, and our Social Security system. These reforms have to complement one another, treat everyone fairly, and make our fiscal policy far more cost effective and user friendly. Let me offer just one example.

The Trouble With Social Security

Social Security is the financial backbone of most retirees. For 70%, it’s either their first or second most important income source. For 20%, it’s their sole income source. Unfortunately, Social Security, like the overall fiscal system, is in grave financial trouble. According to its actuaries, its fiscal gap is $26 trillion, making the system 31% underfinanced. By comparison, Detroit’s pensions were 20% underfinanced when the city declared bankruptcy.

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Social Security is in desperate need of reform, even apart from its insolvency. The system is a user’s nightmare thanks to hundreds of thousands of unbelievably complex rules. These rules, plus Social Security’s appalling inability to properly train its staff, and the public’s lack of knowledge about what they are owed, make collecting one’s Social Security benefits largely a matter of luck.

The Purple Plan

It’s time to fix Social Security from the ground up without sacrificing its key objectives. If we are going to ask younger generations to pay most, if not all, of the current system’s unfunded liability, let’s give them a modern Social Security system that is simple, transparent, fair, efficient, and fully funded.

My purple plan, designed to appeal to red Republicans and blue Democrats, deals with the retirement portion of Social Security. Here are its 11 provisions:

  1. Freeze the current Social Security system by filling zeros in workers’ earnings records for years after the reform begins. This eliminates further benefit accrual under the old system.
  2. Grandfather in current Social Security beneficiaries. Raise payroll tax revenues by eliminating the ceiling on taxable wages. Use these revenues to pay off, over time, all the Social Security benefits that today’s retirees and workers have already accrued.
  3. Require all workers under 60 to contribute 10% of their wages to Personal Security Accounts (PSAs). This 10% compulsory personal saving contribution is in addition to the 12.4% FICA tax.
  4. Allocate workers’ contributions 50-50 to their own PSA and to their spouse/legal partner’s PSA.
  5. Government contributes to the PSAs of low-income workers, the unemployed and the disabled.
  6. All PSA balances are invested in a global, market-weighted index fund of stocks, government bonds, corporate bonds and real estate trusts.
  7. From ages 61 to 70, all PSA balances in the global index are gradually sold, with the proceeds used to purchase TIPS (Treasury Inflation Protected Securities). This is done on a cohort-specific basis.
  8. All transactions are done by a single government computer. Wall Street plays no role and collects no fees.
  9. The government guarantees that PSA balances, when they are sold and converted to TIPS, equal at least what was contributed adjusted for inflation. I.e., the government guarantees PSA participants against real losses.
  10. PSA participants who die prior to age 70 bequeath unconverted balances to their heirs.
  11. Starting at age 62, each cohort-specific pool of TIPs is used to make payments to surviving PSA participants in proportion to their share of PSA assets used to purchase the pool of TIPS.

My plan’s system of Personal Security Accounts, progressive government contribution matching, contribution sharing among spouses/legal partners, uniform investment returns, a government guarantee that you get back at least what you contributed adjusted for inflation, and collective cohort-specific annuitization represent a modern Social Security system. It is, I believe, what we would establish were we able to start Social Security from scratch. We can’t do that. But we can freeze the current system, pay off all its benefit obligations as they come due and run the PSA system in parallel. This reform would not only make Social Security fair and efficient. It would also contribute dramatically toward eliminating the fiscal gap since the system’s accrued benefits are far smaller than its projected benefits.

Laurence Kotlikoff, who is entering the 2016 presidential race as a write-in candidate, is a William Fairfield Warren professor of economics at Boston University and co-author of The New York Times bestseller Get What’s Yours: The Secrets to Maxing Out Your Social Security.

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