Let's face it: Neither Democrats nor Republicans have a viable plan for how they are going to reform Social Security so it can remain solvent for the next generation of retirees. What's more, while the parties haggle over initiatives that are bound to fail, Social Security is becoming ever more vulnerable. Because a permanent solution is not on the horizon, we would do well to consider an interim one.
Here's a thought. Instead of repealing the estate tax entirely, Congress and President Bush should dramatically expand the tax's exemption. By increasing the exemption from $2 million to $5 million per couple, more than 99 percent of estates would not pay a penny in taxes. At the same time, by keeping a portion of the tax in effect, the government would save more than $600 billion over 20 years, an amount sufficient to finance a plan for progressive savings accounts outside of Social Security.
How would the plan work? The idea would be to provide Americans a matching contribution for up to $1,000 a year in savings deducted from their paychecks. For middle-income families, it could be a one-to-one match; for low-income families, it could be a two-to-one match — or they could even receive seed money to start their savings. A family eligible for a two-to-one match could accumulate a nest egg of $250,000 in today's dollars simply by contributing $700 a year for 40 years, assuming a 5 percent rate of return.
The accounts could be set up by private entities or through the thrift savings plan now used by federal workers. And they could offer investors choice — but only among broad-based, diversified funds.
Why would an interim solution of progressive accounts succeed when so much else has failed?
First, universal progressive savings accounts make economic sense because they would increase national savings, putting the country in a more fiscally sound position to reach an eventual agreement on Social Security reform. Our current system of encouraging savings with tax deductibility is backward: it gives the biggest incentives to the most well off and the smallest incentives to those with low and moderate incomes.
For example, nearly 90 percent of part-time workers and small-business employees, and more than 60 percent of Hispanics, have no employer-based pensions. Many women who leave the work force to care for children feel they have fewer incentives to save once they've lost the benefits their company provided. A universal pension or savings plan would help tens of millions of people by essentially offering them a generous 401(k).
Second, such a plan makes political sense because it offers both sides of the privatization debate a victory that could justify an interim truce.
Democrats could claim credit for an individual savings strategy that did nothing to undermine Social Security's guaranteed, risk-free benefit structure — not to mention one that would promote responsibility by encouraging people to prepare for retirement.
Republicans, on the other hand, could claim that, while they temporarily put aside the battle on private Social Security accounts, they won by convincing the country to support a new experiment with individual accounts that emphasizes private savings and individual choice.
Both sides could avoid claims that they were increasing taxes, as this initiative would simply turn a tax cut for the wealthiest families into a refundable tax credit for tens of millions of families.
For an interim solution, that's not half bad.
Gene Sperling is a senior fellow at the Center for American Progress and was national economic adviser to President Bill Clinton from 1997 to 2001.
This story originally appeared in the New York Times on Nov. 18, 2002.