When it comes to Social Security, it's all rocks and hard places.

Over the next 75 years the unfunded liabilities of our most important social program are estimated at $3.7 trillion. That figure assumes that the $1.5 trillion in U.S. Treasury obligations in the Social Security Retirement Trust fund can be redeemed for cash when promised benefits exceed payroll tax collections. This means our government would need $5.3 trillion in cash, on hand today, plus all expected payroll tax collections to fulfill the promises that have been renewed by Republicans and Democrats, alike, for decades.

If the Trust fund IOUs can be redeemed, our annual Social Security letter tells us, benefits are safe until 2042. After that, they must be reduced by 27 percent. If the Trust fund IOUs can't be redeemed, which no politician will discuss, the benefit cuts would have to start earlier--- perhaps as early as 2013.

This is a real problem. The year 2013 is only 8 years away.

The Democrats want to deal with it in the traditional manner of politicians: denial. They intend to tinker their way through the largest demographic change in American history. It simply won't work.

And now we know what the Republicans want to do, at least if they follow the leadership of President George W. Bush. They'll reassure voting seniors and consign millions of our children and grandchildren to the poverty seniors fear by putting the entire burden on our children and grandchildren, cutting their future benefits.

George Bush wants to tax those too young to pay attention, those too young to vote, and those yet to be born.

This is not what I want. I am a father with three children and five grandchildren. I'll bet you feel that way too, if you are a parent or grandparent. The desire to make a better world for our children is a force of nurture, a gift from god. Yet the leader of the Republican party, a man I voted for twice, wants to put this entire $5.3 trillion burden on our children's backs. It will assure that our children will look enviously at what their parents have, knowing they will never have it because they, not us, are too heavily taxed.

I believe there is a better way to deal with this problem. So does the economist I coauthored "The Coming Generational Storm" (MIT Press, 2004) with, Laurence J. Kotlikoff. Here is what we suggest in that book. Our plan isn't without pain.   But it spreads the burden fairly. It protects seniors. It opens a whole new world for our children. It liberates them from the most regressive and fastest growing tax ever created, the payroll tax. Our plan has three steps.

Step One: Recognize the unfunded liabilities as real obligations. While the technicians worry about floating more Treasury debt for transitions and related machinations, the promises of Social Security are as real as U.S.

Treasury bonds. A bond, after all, is only a formalized promise, as in "his word is his bond." Until both parties 'fess-up' to this reality, there will only be what we have gotten from previous Democratic administrations and the current Republican administration--- obfuscation and deceit. Since Social Security was created we have had as many years of Republican presidents as Democratic presidents. This is a shared problem that has been created by more than half a century of political obfuscation.

Step Two: Institute a national sales tax on all consumption. This tax would be dedicated to paying the Social Security benefits promised and accrued to today's workers and retirees. Because consumption accounts for 70 percent of GDP, a sales tax is the broadest possible base, so the tax would be much smaller than the payroll tax. Seniors would pay the tax. So would workers. But it would be in proportion to their means.

There would even be a "kicker"--- when the affluent and rich spend some of their wealth, they would pay the tax. Still better, this tax would be self-liquidating because the number of people collecting Social Security benefits would inevitably decline.

Step Three: Kill the payroll tax. Replace it with a compulsory program of real private accounts so that every worker would build substantial assets. We call this the Personal Security System. This can be done without enriching the mutual fund industry, as some fear. In our book we cite two examples: the Exxon-Mobil 401(k) plan and FERS, the Federal Employee Retirement Savings plan. Both plans have low cost index based options that make Vanguard funds look expensive. It would also increase our savings rate, something we must do.

We are not alone in this idea. In a recent article Edward C. Prescott, winner of the 2004 Nobel Prize in economics, suggests that Social Security be "reconstructed," not reformed, with 100 percent private accounts. He also cites FERS as a model for a privatized plan.

As workers approached retirement they would have the option of converting all or part of their accumulated assets into inflation-protected life annuities, as workers in Chile do. With large-scale competitive purchases, annuitants would get a better deal than private purchase annuitants get.

Removing the payroll tax would take a major burden off employers and employees. It would cut the marginal tax on labor. It would make us more competitive in global markets. It would encourage employers to hire. It would be a New Deal for the 21st Century.

On the web:

The Iceberg of Promises, Tuesday, October 3, 2004

Generational Storm Reader

NCPA paper on Private Pension Annuities in Chile

Information on political responsibility:

Party control of Senate

Party Control of House

U.S. Presidents