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The 6.2 Percent Solution

Contributed by mm | February 22, 2004 9:24 PM PST

"The 6.2 Percent Solution: A Plan for Reforming Social Security is a Social Security reform proposal by Michael Tanner from Cato Institute. The main fixes the paper proposes are:

- Individuals would be allowed to divert their half (6.2 percentage points) of the payroll tax to individually owned, privately invested accounts. Those who chose to do so would agree to forgo all future accrual of retirement benefits under the traditional Social Security system.

- The remaining 6.2 percentage points of payroll taxes would be used to pay transition costs and to fund disability and survivors' benefits.

- Workers who chose the individual account option would receive a "recognition bond" based on the accrued value of their lifetime-to-date benefits. Those bonds, redeemable at the worker's retirement, would be fully tradable in secondary markets.

-Those who wished to remain in the traditional Social Security system would be free to do so, accepting a level of benefits payable with the current level of revenue.

The proposal apparently wants to use the other half (6.2% contributed by employer) to fix the gap between future Social Security liabilities and revenue.

If this becomes true, I will elect to take the 6.2% to private accounts without any hesitation. The option is much better than hoping for a free-lunch Social Security fix down the road as my retirement is still 30 years away.

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