- The Washington Times - Sunday, February 6, 2005

President Bush has two big and bold ideas — one on Social Security reform and one on tax reform — both with great potential for propelling economic growth but both in need of a boost. Perhaps taking the best ideas from both proposals and combining them could break the political traffic jam and score Mr. Bush and the U.S. economy a substantial victory.

The idea is to create “Two Plus Two” retirement accounts, which would marry a couple of popular and worthy ideas: personal accounts for Social Security and individual retirement account (IRA) expansions. Under this “2+2” plan, all workers would get the opportunity to invest 2 percentage points of their payroll tax payments into a private investment account so long as they match that 2 percent with an IRA contribution of 2 percent of their paychecks each pay period. Thereby, 4 percent of each participating worker’s paycheck would be saved and invested in a personal retirement account.

Under this plan, the worker would be permitted to personally invest 2 percentage points of the 15 percent payroll tax, but only if it were matched by additional private savings. The program thus works like a government match, in much the same way many 401(k) plans typically match worker contributions with employer set-asides.

The plan is a potentially workable grand compromise between left and right on pension reform. Conservatives want all the money for private accounts to come from Social Security payroll taxes. Liberals want all the money to come from “add-on” private savings, and in some cases, tax-preferred private savings. Under this plan, half comes from each.

With most House Democrats declaring Mr. Bush’s Social Security plans dead on arrival and Sen. Harry Reid of Nevada proclaiming he has at least 40 of the 45 Democratic senators as definite “no” votes on Social Security reform, clearly a new package of ideas is needed to jumpstart the debate.

A big stumbling blocks Republicans face on private accounts has been the so-called “transition costs.” I happen to believe the “transition cost” issue is a red herring, because private investment accounts save taxpayer dollars over the long term as future retirees begin drawing more of their retirement income from the private accounts and less from traditional Social Security outlays.

But deficit hawks in both parties fret over the short-term borrowing costs. The two plus two program reduces by half these borrowing costs by requiring that half the funds come from private savings rather than government revenues.

Some critics might say it will be difficult for low-income workers to match the 2 percent requirement. Most families even with low incomes have the capacity to save 2 cents on the dollar by proper priorities and planning. It is a sad reflection on our instant gratification culture that families with incomes and lifestyles that 50 years ago were thought middle class are now told they can not possibly save at all.

But even if Congress decides it really is too large a financial imposition for families with low incomes, such families could be allowed to put a larger share of their payroll tax dollars into the accounts as a replacement for the private IRA contribution.

With 4 percent accounts, workers would be able to tap into what Albert Einstein once called the most powerful force in the universe: compound interest. A family with an income of just $30,000 a year would be able to put aside $1,200 each year, and with normal rates of market return, this money would accumulate to more than $400,000 after 45 years of working.

Here was a recent news story of a janitor in Florida who built a nest egg of more than $4 million by joining the ownership class and saving diligently during his lifetime. He accumulated this wealth even though his annual salary was at best middle class. The “2+2” plan would help broaden America’s savings culture.

IRAs have proven over the last 25 years to be highly popular savings vehicles. But in 1986 the eligibility for IRAs was scaled back, and so the number of participants plummeted.

Ultimately, all private savings should be given IRA tax-deferred treatment, as economist Larry Kudlow has suggested in his idea of “Super Saver” accounts. But allowing all workers to take advantage of an additional IRA worth 2 percent of each paycheck would expand dramatically flows into such accounts.

This would also dramatically expand the investor class from 55 percent to perhaps 80 to 90 percent of U.S. households. As Mr. Bush said in his State of the Union address, money in private accounts “could never be taken away from workers.”

History proves the key to wealth acquisition in America is to save early in life and to save often. If all young workers parked 4 percent of every paycheck in an IRA-type account, this next generation of workers would begin understanding in a very personal way what Einstein meant about compound interest being “the most powerful force in the universe.”

Stephen Moore is president of the Free Enterprise Fund.


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