Bob Pozen, the chairman emeritus of MFS Investments in Boston, has a long-term plan to cut the enormous U.S. debt, and it involves Social Security, “the only big number that we know how to solve.”
Speaking in Boston on Monday evening at the 4th annual Retirement Income Symposium, Pozen first said that it’s “pathetic on how little we’ve agreed on to deal with our debt.” Charging that “We’ve only agreed on $1 trillion; we should be aiming for $5 trillion,” he then laid out a proposal to “to keep our GDP to debt ratio as it is over the next 10 years.”
He first dismissed the notion that raising taxes is the answer. To get our debt down to 3% of GDP, he said “we’d have to raise the top tax rate to 76.8% and 72.4% for second-tier taxpayers.” While cutting the federal subsidies for ethanol production would, in his estimation, be a good thing, neither doing so, or even eliminating or modifying the mortgage interest rate deduction, for instance, would have a big enough impact.
Not only is the way to “solve” Social Security known, he said, there is also a “bigger chance that we can do so.” He put the unfunded liability of Social Security in the $5 trillion range, but said that changing the initial calculation for benefits from wage indexing to price indexing in a progressive way “would save us $5 trillion.” He pointed out that doing so would not cut benefits for anyone, “we’re just slowing the rise in benefits.”
This approach is doable, he said, and would have another benefit: “The markets need a long-term solution—this is a 75-year plan. This is my very strong suggestion to the super-committee,” referring to the joint congressional committee that is working on a debt reduction plan with a Thanksgiving deadline.
When an attendee at the symposium asked if the super-committee had sought counsel from Pozen, who has consulted to several presidents, he said no, and expressed concern that the majority of those in Congress who had delivered suggestions to the committee we’re simply pleading “Don’t cut this program, or don’t cut that one.”
As for additional solutions to the retirement income puzzle, Pozen said he was a big fan of auto-enrollment in workplace retirement plans, but took it a step further. Lamenting the fact that 78 million employed Americans have no retirement plan at work, he called for an “auto-IRA” for those workers. Employers would not be required to make any contributions to the plans, and their administrative costs could be offset by a tax credit.
Financial services companies, he said, would “do all the work” of managing those retirement plans, and workers who did not what to be part of the plan would be required to opt out, which would sharply increase the percentage of workers who would participate.