Life on the Lamm Plan : A Look at the Newest Presidential Hopeful’s Recipe for Reform

Richard D. Lamm--a presidential hopeful who announced Tuesday that he’ll seek the Reform Party’s nomination--supports a controversial plan to fix the nation’s ailing Social Security system.

Although Lamm is a dark-horse candidate unlikely to win the nation’s top job, the Social Security reform at the heart of his candidacy is likely to generate attention and national debate.

Lamm’s “National Thrift Plan,” which would have a dramatic effect on every American, retired or working, already has generated support from several national economists and organizations. Like Lamm, though, the plan is a longshot. Nevertheless, the issues and the universal sacrifices it imagines must be addressed in the national retirement debate, experts say.

Here’s a question-and-answer look at the plan:

Q. What is the National Thrift Plan?

A. It’s a comprehensive program that would slowly replace the Social Security retirement program as we know it. In the end, the plan would promise every American a retirement income amounting to at least 120% of the federal poverty level, starting at age 70.

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Q. Why is the plan so controversial?

A. It would require sacrifices from everyone.

In addition to paying existing Social Security taxes, workers would be forced to put 5% of their income into a “personal thrift account.” The account would be the property of the worker, but workers would be prevented from tapping its assets until retirement.

Prospective retirees would find the Social Security retirement age moved back five years to age 70. (While the Social Security retirement age is gradually rising, the National Thrift Plan would phase in the changes far more quickly, affecting a vast group of middle-aged workers.)

Meanwhile, current retirees would get lower cost-of-living benefit adjustments and would have to pay more tax on the retirement benefits they do receive.

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Q. Why is change needed? The current system appears to work just fine.

A. Social Security is a pay-as-you-go system in which today’s workers pay the retirement stipends of today’s retirees. That works nicely because there are far more workers now than retirees. However, increasing longevity and the looming retirement of the massive baby boom generation promise ominous consequences in the near future.

Social Security Administration estimates show that by 2012, the retirement system will begin to collect less than it pays out. Surpluses that have been generated during the baby boom generation’s working years will be depleted by 2029, rendering the system bankrupt, according to the government.

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Q. What happens then?

A. At that point, employment tax rates would have to rise or benefits paid to retirees would have to be cut. There is no agreement on precisely how high tax rates would have to go--or how low benefits would fall--because the numbers are based on projections that include a host of hard-to-anticipate variables. However, all sides agree that one--or both-- steps would be necessary.

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Q. What are the best-guess estimates of the impact in 2029?

A. Optimists say that minor tinkering--including a tax hike amounting to 2 or 3 percentage points above today’s rates--could protect benefits. Pessimists counter that employment tax rates would have to nearly double if retirees didn’t want to face benefit cuts of between 25% and 35%.

In either event, protecting the current system would create a vast intergenerational transfer of wealth from the young to the old, Lamm says.

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Q. How would the National Thrift Plan affect current retirees?

A. It would impose a one-year freeze on cost-of-living adjustments. In subsequent years, cost-of-living increases would be computed by subtracting one-half of one percentage point from the consumer price index. (Notably, Congress is already looking at changing the cost-of-living calculation to this formula, mainly because of a widespread belief that the consumer price index overstates the real rate of inflation.)

Retirees would also be expected to pay tax on 85% of their Social Security benefits, regardless of their income. Currently, only retirees earning more than $34,000 if single and $44,000 if married, filing jointly, pay tax on that large a portion of their government retirement checks.

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Q. What about retiree benefits?

A. Benefits would not be cut. In fact, some would be boosted. Retirees with income below 120% of the poverty level would get additional money to raise them to that threshold.

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Q. What about current workers?

A. They would continue to pay into the old system and into the personal thrift accounts. When they retired, their retirement benefits would be paid out of the personal thrift accounts first. When that account was depleted, the system would continue to pay until the worker died--just as Social Security does now. However, those who died before depleting their thrift accounts would be able to leave the unspent portion to their heirs.

LAMM OPPONENT: Perot remains in race. A1