7.65% Solution (Social Security)

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.

How IT Works

Unlike other 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.

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 that is 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.

The problem created by the 7.65% Solution is that a portion of the current FICA tax is paid out to people who never paid a FICA tax or paid less FICA tax than they are being paid. This is the reason that the FICA system is in trouble in the first place: funds are spent on things other than the retirement of those people who paid in. To enact the 7.65% Solution, there would also have to be a tax increase somewhere else to pay for these existing programs.

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)