To stir up excitement before the midterms, President Trump last week said he plans to cut middle-class taxes again in the coming year. The trouble is that Republicans have been so successful in cutting taxes in recent years that 44% of Americans no longer pay any federal income tax at all, and many more pay very little. After last year’s tax reform, a family of four earning $80,000 a year could pay as little as $2,300 in income tax: an effective 3% rate. A further 10% cut wouldn’t amount to much.
On the other hand, low- and middle-income workers do send the government a large share of their earnings in the form of payroll taxes. That same family of four pays $12,240 at the 15.3% combined rate for Social Security and Medicare. If you want to cut taxes for middle-class and low-income workers, that’s where you have to do it.
But instead of an impotent income-tax cut or, say, a payroll-tax cut of 4% of income, why not redirect that same 4% into personal retirement accounts for every worker? Call them “Trump Retirement Accounts.” With no decline in disposable income, American workers would suddenly be investing for retirement at market rates in accounts they own and control, instead of relying on Congress to keep Social Security solvent.
If the parents in that same family of four diverted 4% of their income into a diversified mutual fund over their entire working career, and their income never increased, they would amass well over half a million dollars by retirement age. And their account savings would grow much larger if their income did increase at a typical rate over four decades of work.
The painful truth is that low- to middle-income earners find it difficult or impossible to save adequately for a rainy day, much less for retirement. Part of the reason is that the federal government takes 15.3% of their earnings to fund a retirement system everyone knows it isn’t really funding.
America’s entitlements are on a path to collapse, and few politicians—including Mr. Trump—have an appetite to do anything about it. When the crisis comes, no tax increase will be big enough to solve the problem. Knowing the U.S. government is eventually going to fudge its commitment to retirees, policy makers should at least give workers a fair chance to amass the savings they will need to support themselves.
The back-door solution to the entitlement crisis is to make workers wealthy. Will you worry about Social Security’s solvency or a Medicare collapse if you have more than enough money in a real retirement account to buy a generous annuity and cover your health insurance?
Throughout his career Donald Trump sold the sizzle of wealth, but now as president he can deliver the steak. Trump Retirement Accounts could secure his place in history as the president who made Americans rich.
Mr. Giovanetti is president of the Institute for Policy Innovation.