February 27, 2003
While you were cuddled up under the plastic and duct tape, watching the Bachelorette and avoiding
Great White concerts (am I the only GenXer surprised to hear that band is still around?), the
Bush administration was slowly building broad-based support for...a revamp of the tax code.
Which is not necessarily a bad thing. While I'm not so sure about the proposed elimination of taxes on
dividends, the proposed Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and
Employer Retirement Savings Accounts (ERSAs) have a great deal of merit. LSAs would be a great
means of encouraging people to pay taxes now (there's no up-front tax deduction for contributions) and invest in the lagging stock market,
by allowing them to make tax- and penalty-free withdrawals at any time. RSAs would work in
generally the same way, with no up-front deductions but the allowance to make tax-free withdrawals
as early as 58 (or leave that tax-free money to one's kids if one so chooses). ERSAs would replace
401(k)s and the menagerie of similar plans, simplifying the tax code. Personally, I'm psyched
about the prospect of being able to make tax-free withdrawals from a brokerage account whenever I
need them, and even more psyched about the prospect of being able to retire tax-free just about
the time my mortgage is paid off.
The problem with the proposed plans is that they don't address the problem of social stability.
The primary purpose of savings and retirement plans shouldn't be to help people who already have
cash escape taxes; it should be to ensure that no one is left out in the cold when ill health or
old age roll around.
I'm not knocking the concept of personal responsibility: everyone can and should set aside money
for the proverbial rainy day, whether that day's tomorrow or fifty years from now. The problem is
that there will always be people who don't save, and those people are often the majority (for
example, only 1 in 10 of those eligible currently contribute to an IRA). If you want to consider the
concept of personal responsibility on a national scale, consider the consequences of many, many
people left destitute in the coming years by the reduction or complete elimination of their Social
Security benefits (which is bound to happen unless the system is changed).
Personal responsibility entails not only looking out for yourself, but also looking over your
shoulder for those who might want to take your hard-earned gains for themselves.
What we don't need is tinkering with this country's existing tax code. What we need is a
drastic overhaul of the system to ensure that the elderly and ill are provided for while maintaining
incentives for those still able to work. One way this could be accomplished is to create a true
"pay as you go" system, whereby earners are taxed a set percentage (say 10% for all earners,
whether or not they're self-employed) every fiscal year (from October 1st to September 30th).
Between October 1st and January 1st, the accumulations in the pot are calculated, and divided
by the number of those eligible for Social Security benefits to determine what those benefits are
starting January 1st. Yes, with the 10% rule, employers and the self-employed get a tax cut, but
all of those eligible for Social Security get the same benefits, including lower-income workers who
are less likely to be employers and self-employed.
Such a system would be self-sustaining. If benefits are low one year, more of those able to
work are likely to come out of retirement, or delay retirement if they're already in the work
force. These workers would increase the benefits pool for the following year, and thereby allow those less
willing or able to work to retire. Yes, there would be an amount of uncertainty in the benefits
from year to year, but this uncertainty would trump the certainty of an entitlement system that
(in its present form) is bound to impose crushing taxes on an economy just when it needs growth to
pay for the en masse retirement of the Baby Boomer generation.
The Pool Principle could be applied to health insurance as well, and even welfare. Change that
10% tax to 15%, and Medicare and Medicaid could be covered with a set amount taken off the top
each year for each person eligible for such benefits. Welfare benefits could be funded from the
pool with a certain percentage of the remainder after health benefits are covered.
With such a system, the federal government could get out of the entitlements business, and
would therefore be able to balance its budget. A government that can guarantee it won't weigh
the economy down with an undue tax burden and can also promote the general welfare would be more
valuable to an investor than any tax break could ever be. Telling others to take responsibility for their own financial well-being works just fine, until
they show up at your mansion gate with torches and pitchforks, or, more likely, show up in your
local voting booth with a vote for the extremist politician who promises them a roof over their
head and food on their table. It's unfair, but it also happens to be reality.
