Sustainable Pensions and Savings
The current pension systems in much of the world were built to fail. They were created in a time of better age demographics, where a large, young labor force could easily support the small population of retirees.
In many countries, the times have changed, and now a shrinking, aging workforce must support a large population of retirees. This imbalance means that workers pay an increasingly large share of their income to support retirees and are putting more into a bankrupt system that they might not get to enjoy.The only solution that guarantees the security of pensions is to replace the system with individual pension and savings accounts, which we call, the Assisted Savings Program (ASP). But how do you ensure that lower and middle-income workers will have enough to retire on? How do you encourage saving? And how do you ensure that the majority of the population isn’t forced to contribute unrealistic or objectionable amounts to their accounts?
Citizens would have mandatory, low contribution rates (e.g., 5% of net income after NIS and ND cash transfers), but have the option of increasing their contribution up to a maximum amount (20-40% of median income) — and would be rewarded generously for doing so. With the mandatory contribution including NIS and ND payments, it would guarantee that even those with spotty or no employment would be saving for their futures.
ASP contributions might also be deductible from income tax for 20-40% of median income, a deduction that would automatically change based on consumption, current-account metrics, and the unemployment rate. This would amplify the countercyclical effects of monetary policy, while still maintaining a large buffer of private savings.
All capital gains taxes (which would be taxed progressively, based on a person’s income), must be redistributed to the ASP accounts. The funds raised would be distributed so that contributions are supplemented progressively, with contributions up to a certain percentage of the national median income receiving the largest supplements.
For example, in a country where the median income is 30,000, contributions of up to the first 9,000 per year would receive the largest share of the savings supplement (the funds of which would be mostly derived from the capital gains taxes). Capital gains tax rates would be based on both personal income tax rate and length of time invested. For short-term investments, this would mean a capital gains tax rate equivalent to the investor’s income tax rate. Investments of over 5 years in duration would be taxed at half the personal income tax rate (4% for low income brackets, and 12% for high income brackets). Tax rates on investments for any duration between 0-5 years would be prorated. Capital gains as a result of high frequency trades (trades conducted within 10 seconds of one another) would be taxed at a higher rate of 32% (the revenues of which would also be distributed back to peoples’ ASP accounts), so that all investors can enjoy the benefits of these trades, which they likely do not have the capability of performing themselves. Gains from passive income investment vehicles (such as passively managed ETFs and index funds) would face a 1-4% surtax (based on income), to ensure that invested funds are allocated efficiently, to deserving market performers. Using a progressive rate, along with the fact that these revenues are directed to ASP accounts, limits negative externalities for lower income earners with limited investment knowledge. Capital gains on property would not be taxed at all, as it would be earned income from improvements (as the ULT would tax the unearned income), and keeping in mind the aim to ensure the ease of transferring land to the best possible user. All of these capital gains tax revenues would be redistributed back to the market via individuals’ ASP accounts. The account top-ups received would not be taxed at all, except for the capital gains, which grow from them.People must be free to withdraw from these accounts early. The portion of saving contributions (plus the earned interest and redistributions) should be allowed to be withdrawn after 5 years of being deposited in the account, with a sizeable tax penalty.
Early withdrawals after more than 5 years should be possible to withdraw with a decreasing tax penalty. Tax revenues collected from these early withdrawals should also be directed back into the pool, to be distributed back to the other accounts.By distributing these capital gains / transaction taxes back into the financial markets or savings via ASP accounts, it would also ensure that no money is sucked out of the financial markets via taxation as it currently is, and would therefore be less distortionary. It would also redistribute short-term gains to invest in long-term investments. Finally, the program would also act to further supplement incomes and encourage long-term savings, rather than being strictly a pension program, and would serve to even out the incomes of people with less stable employment. In addition, there would be no demographic or financial risks that plague many developed nations with pay-as-you-go public pension programs.