Save Social Security!

According to the 2009 Social Security and Medicare Trustees Reports, the current unfunded liability of Medicare and Social Security, or the difference between benefits promised to current and future retirees and what will be collected in taxes and Medicare premiums is around $107 trillion. This is an astounding number, nearly 10 times our annual GDP. It’s obvious that as we move to the future, general revenue tax dollars will be needed to help meet these obligations, to the tune of nearly 50% of income tax revenue by 2030. Medicare premiums and Social Security taxes will have to be greatly increase to compensate for this massive debt burden.
Or we could phase out Social Security all together. Instead of having a transfer payment system, which has shown to not work nor provide for an adequate retirement income, we should set up a privatized savings plan for people entering the permanent work force.
Currently, employees are forced to contribute 6.2% of their income towards Social Security, and employers are forced to match that, up to a certain amount. This money isn’t saved for the future, it is transferred immediately to current Social Security recipients.
Here’s an idea. Let’s suppose a person enters the work force at age 22, and works for 45 years. Let’s also assume he/she starts with a salary of $35,000 per year. I have no idea what a starting salary is right out of college, and of course it varies by profession, but I think $35,000 is a good ballpark figure. Because we are going to get rid of the employer contribution to the FICA tax, this can automatically be added to the starting salary. If we assume that total payroll taxes are 15% (split between employee and employer) we can add 7.5% to the starting salary of the employee immediately, raising it to $37,625. My idea is to mandate (I hate government mandates, but bear with me here) a private savings of 15%, essentially equaling what was once payroll taxes. If this money were to be put into a private savings account earning only 2% per year (compounded daily, what the heck), and if we assume the employee receives an average annual raise of 3%, then at retirement, between contributions and accrued interest, the employee will have accumulated $768,741.61 in retirement savings! If we bump the interest rate up even a half a percent, to 2.5% this savings jumps to $855,185.74! That’s just savings, that’s not even any 401(k) contributions.
I also propose that this money be deducted pre-tax. Of course, soon I will propose an alternative to the current tax system, rendering “pre-tax” and “after-tax” a moot subject.
People wanting to continue with their current system of sending the government money and hoping that at some point when they are old they’ll get something back are more than welcome to do so. However, I believe fazing in this “privatization” of retirement savings would be more beneficial at providing a retirement income for those new kids just entering the workforce.