In “Tax Considerations in a Universal Pension System (UPS),” authors Adam Carasso and Jonathan Barry Forman say a universal pension system may be warranted due to the inadequacy of the current U.S. public and private pension systems, and the escalating costs of health care. The paper indicates individual accounts established with 3% payroll contributions could help guarantee every worker has an adequate retirement income.
Specifically, the system proposed by the authors results in a replacement of 14.4% of final wages for all men retiring at age 65, 13.3% of final wages for women (longer life expectancies mean lower monthly annuities), 14.4% for one-earner couples, and 13.8% for two-earner couples, according to a summary of the paper.
The authors admit that while the payroll deductions would have positive tax consequences for most workers, at distribution most of the tax advantages of their system would be realized by the upper-middle class and above. Additionally, the authors concede that any universal pension system will be costly to the Treasury.
The authors suggest a pension system that would cover all workers – full-time and part-time – and require them to contribute at a level that can help provide them with adequate incomes when they retire. The simplest design for such a system, the paper says, would be to piggyback individual retirement savings accounts onto the existing Social Security system. Other designs would target subsidies to low-income workers to help defray the costs of such a new system on their incomes.
This paper develops such a universal pension system and estimates its revenue and distributional consequences. The authors say the accounts could be held by the government; invested in a broadly diversified portfolio of stocks, bonds, and government notes; and annuitized on retirement.
Provided that action is taken to restore solvency to the Social Security system, the authors claim the universal system they describe would raise the total replacement rate for average wage men to 49% – or 39.8% if Social Security is not modified.
The paper can be accessed here .