The 7.65% Solution is a policy proposal from the American Institute for Full Employment, advocating personal retirement accounts and tax changes to address the long-term solvency of U.S. Social Security.

Argument for the proposal

Unlike reform plans, the 7.65% Solution invests the employee’s Social Security tax (6.2%) and Medicare tax (1.45%), permanently eliminating the entire FICA tax and replacing it with a compulsory savings. The 7.65% solution creates a real Social Security Trust Fund that first borrows, then pays off the debt, then invests in American corporate bonds. As the solution begins to take hold in the economy, the resulting growth in receipts is infused in the real Social Security Trust fund, reducing the need for borrowing. When the investment income of the trust fund is large enough to cover expected outlays from Social Security the employer portion of the FICA tax is eliminated causing additional benefit to the economy. As the real trust fund grows its investment income is used to eventually pay down the national debt by 2029.

As the traditional system progresses toward the 7.65% solution, the unfunded liabilities of both Social Security and Medicare are completely eliminated. The 7.65% solution creates a nest egg for each worker much greater than our current Social Security system can deliver. This is accomplished through a system of saving and investment that compounds the income, dividends and interest earned on those investments over many working years before being utilized for retirement and health purposes.

Argument Against the proposal

Unlike other reform plans that require 15-20%, the 7.65% Solution assumes 12% return on stocks and 9% on 50/50 stock/bonds, which they later, sometimes adjust to 7% real (FreedomWorks 2004) . With such optimistic projections, anything is possible. Likewise, the welfare and disability costs of workers who have not built up a nest egg appear to be optimistically minimized.

Proponents and promotion

Members of FreedomWorks have distributed brochures about the 7.65% Solution at local speaking events (FreedomWorks 2006a) and have contributed to a promotional video (FreedomWorks 2006b).

References

See also

  • Social_Security_%28United_States%29
  • Social Security debate (United States)