February 2005

The PACT America Report

Patriotic Americans Collective Trust (PACT)

The definition of the word pact is “a written agreement between two or more people or states.” The word trust may either be defined as “the belief in the honesty and reliability of others” or “assets held for a beneficiary.” Therefore, this program will create a written agreement between the citizens and our government. We citizens will make it known that we place our trust in America and in its future. In return, the government will agree to abide by sound fiscal policy. There is nothing average about the average American, and we exceptional individuals will restore a solid financial foundation to this nation so that Democracy shall never perish from the land.

Program Structure:

Many Americans took advantage of the recent low interest rates to refinance their homes. By converting a high interest rate to a lower fixed rate, the mortgage holder will save thousands of dollars in interest payments over the life of the mortgage. Therefore, this low interest rate environment has been a blessing for many American homeowners. However, one of the disadvantages of low interest rates is that savings accounts now earn very little interest. This has hurt many elderly Americans who rely on the interest payments from their savings to supplement their fixed retirement incomes. While American savers are currently being penalized, the holders of our national debt continue to enjoy high interest rates.

The theory behind this plan is to refinance our national debt at a lower rate. When a person refinances a home mortgage, the existing home loan must first be assumed by a new loan. This means that the new loan must first pay off the existing balance on the higher interest rate loan before it can begin to charge the new lower interest rate. Therefore, in order to refinance the national debt, we as Americans must first pay off the existing debt. However, it would be virtually impossible to pay off the entire balance at this time. This plan will begin to slowly refinance those parts of the national debt that are issued at the highest interest rates, and it will also refinance the Social Security trust fund. Therefore, this program will restore a strong foundation to Social Security while also providing supplemental retirement income.

This plan relies on a fixed rate of return of 4.5%. As of January 31, 2005, the average interest rate for all interest-bearing debt is 4.551%. Therefore, we will be bringing the highest rates of interest down to this acceptable average rate. Mathematically speaking, this is known as a reversion to mean. This program will accelerate the inevitable reversion to mean, and in the process, it will provide great benefit for America and the American people. The rate of 4.5% will be permanently guaranteed. While future circumstances may necessitate an increase in this rate of return, the interest rate for this program will never dip below this 4.5% threshold. In addition, Option 2 of this plan will provide a 4.5% annual return that is indexed to inflation.

There is no reason for Treasury bond holders and bond traders to oppose this plan, because this plan will not begin affect these individuals for quite some time. Even if everyone in the country started making maximum contributions to this plan, it would take at several years to fully finance the Social Security trust fund. While this is happening, Treasury Bonds with high yields that are eligible to be called will be retired and those assets will be financed by this plan. Therefore, the government will not be cutting any promised benefits to American bondholders. It will simply start the process of replacing higher yielding interest-bearing securities with the assets from of this program.

This plan may either supplement or replace the traditional employer pension plan. Employers may make a tax-deductible annual contribution of up to $1,000 for each employee’s account. Employers could use this incentive as an annual performance bonus. This would create a morale boost, because workers would know that they were helping to support the nation while securing their own retirements. It would also help eliminate the uncertainty surrounding company pensions and layoffs. A worker could change employers while still keeping the same pension plan. This is because the employer only makes contributions on an employee’s behalf; the employer does not administer this part of the pension. In the end, this plan would be a great source of relief for the average American worker.

Assumes annual contributions of $1,000 and a quarterly compounded interest rate of 4.5%.

The accrued interest will be transferable upon death for a spouse or dependent child. A spouse or dependent child may either cash out inheritable contributions or use them to receive an increased monthly benefit check. The assets in a person’s account will essentially be in the form of a long bond position. In theory, the government will no longer need to pay interest on these bonds when a person retires. Instead, the government will borrow these interest payments from the accrued interest in order to reduce the overall national debt interest expenditure.

A worker who makes $1,000 annual contributions over a period of 40 years will have accumulated $70,870.11 in accrued interest. The high water mark will be established at the total account value of $110,870.11. At an interest rate of 4.5%, an account worth $110,870.11 will provide monthly distribution checks of $415.76. These monthly distributions will be deducted from the accrued interest instead of coming from general revenue. Even though the account value is diminishing, the account holder will continue to receive interest checks based on the high water mark. It will take 14.2 years to exhaust the accrued interest assets, and the account holder would be 79.2 years old. At this point, the value of the monthly distribution checks will be deducted from the account holder’s contributions. This will provide an additional 8.0 years worth of interest payments, and the account holder would now be 87.2 years old.

Once all account assets have been exhausted, the account holder will continue to receive monthly distribution checks until death. If the account assets had not been used for the monthly payments, the account would have generated interest payments indefinitely. Therefore, the government is simply borrowing money from the account holder in order to make the interest payments. In exchange for allowing the government to borrow money interest free, the account holder does not have to pay taxes on the monthly disbursement checks.

The government would no longer need to make interest payments to an account when the account holder reached a retirement age. Therefore, the money that normally would have been dedicated for the purpose of making interest payments will now stay in general revenue. This surplus may be used for the purpose of paying back the national debt, or to compensate the government for lost tax revenue. The government will only need to make interest payments if an account holder lives past the age of 87.2. Essentially this creates a period of 22.2 years in which interest payments on the national debt are waived.

This program will ultimately provide great benefit to both the American people and the American government. The people will receive a tax-free pension plan, and the government will essentially be saving much of the money that it otherwise would have had to pay out in the form of interest payments on the national debt. It will also provide the American people with acceptable investment returns while providing the government with stable long term financing.

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