With millions of baby-boomers verging on retirement, the pension system is a hot issue in the US presidential campaign. All the leading candidates have expressed their ideas about reforming Social Security, which is a federal programme funded by income tax.
The US pension industry is watching the election and trying to prepare for the new administration and Congress. The majority of the industry's political contributions are going to Democrat candidates - 57% or $1.92m (€1.3m) against $1.46m to Republicans, according to data elaborated by the Center for Responsive Politics as of 6 December 2007 - notwithstanding Republicans' support from private accounts.
If there is one thing the leading Democrat candidates agree on, it is to reject President Bush's plan to let workers to divert some of their Social Security payroll taxes into individual investment accounts. In 2005, that plan failed to get any bi-partisan support: even Republicans were against the plan because it would require borrowing to finance it.
All the leading Republican candidates - Rudy Giuliani, John McCain, Mitt Romney and Fred Thompson - approve some sort of individual investment accounts, in addition to the public system. They all promise they would not raise taxes to address Social Security's long-term solvency issues, instead prefering to reduce growth in benefits, mainly by indexing them to inflation rather than wages.
Thompson is the candidate with the more detailed plan. To help make up for the reduced benefits, he offers voluntary add-on personal retirement accounts. Unless workers opt out, 2% of the wages that are subject to Social Security tax (up to $97,500 this year) would be deposited into private accounts, with the government matching contributions from the first $1,000 of wages each month; for contributions from wages above that amount, the government would match half of every dollar contributed. For those who chose to participate in the accounts, however, their guaranteed benefits would be further reduced - by about 30% over the course of a career - or they would have to work an additional five years beyond the current retirement age (now 67) to receive full benefits.
According to Thompson, workers would accumulate significant retirement savings, offsetting a reduction in benefits.
A more radical idea comes from Iowa Republican primary winner, Mike Huckabee. He would eliminate current Social Security taxes and income taxes, to be replaced by a consumption tax.
In the Democrat camp, the front runners Hillary Clinton, Barack Obama and John Edwards all believe that the financial position of Social Security is a problem rather than a ‘crisis'. They all are inclined to fix it by raising payroll taxes on wealthier US citizens.
Clinton has declined to give a more precise recipe instead talking about "fiscal responsibility", a return to balanced budgets and surpluses so the country has the resources to fix Social Security. She has stated that she would convene a bi-partisan commission to examine ways to ensure long-term solvency and that "anything could be considered".
Obama has advanced a more comprehensive plan: he would consider increasing the payroll tax, imposing the tax on all incomes over $200,000 to improve the system's financial situation, while leaving incomes between $97,500 and $200,000 exempt from Social Security payroll taxes.
However, he would propose government-based retirement accounts for people earning less than $70,000 a year: employers would be required to enrol workers in a direct deposit retirement account that invests a small percentage of each pay check; workers would have a choice of opting out or adding to the account and this would be fully portable. He would also reform the bankruptcy law, adding new protections for emloyees' pensions when companies go bust.
Edwards' ideas are similar to Obama's: he would encourage businesses to automatically enrol workers in a 401(k)-type portable retirement account, with automatic pay check deductions and employer contributions; worker contributions would be matched dollar for dollar on the first $500 by a new ‘Get Ahead tax credit'. Edwards would also create opportunities for workers to convert their savings into government-sponsored annuities, offering fixed monthly payments for the rest of their lives.
His website states: "The new annuity fund will charge minimal fees and be operated by the existing federal retirement savings plan or the Social Security administration at no cost to the government."