America cannot keep to its spendthrift ways - here's a way to increase saving.

Creating a universal and portable system of accounts would not be hard. Employers are already required to withhold and remit workers' income and payroll taxes. Workers could simply specify a monthly saving deduction, which employers would forward (along with other tax deductions) to an IRS clearinghouse. The Federal Thrift Savings Plan, which already manages 401(k)-style accounts for three million military and civilian federal personnel, could house small accounts. Individuals would always have the option of transferring their account balances to a private financial institution or a future employer's 401(k). The greater flexibility and portability of citizen-based savings accounts would benefit employers and employees alike.

The other part of the retirement-saving equation - Social Security - is more challenging to fix. Given the multitrillion-dollar shortfall the program is facing, the nation's retirement system is clearly in need of shoring up (it would take an immediate infusion of more than $4 trillion for the program to make good on all promised benefits over the next 75 years). Not only have the program's actual surpluses been tapped to pay for other government programs, but the mere presence of the Social Security surplus has affected budgetary decision-making by causing the federal budget to appear larger than it otherwise would. The solution is to wall off the savings that Social Security accrues by introducing a system of individually owned investment accounts that would augment - though not completely replace - the retirement benefits paid out by the current system.

There are two significant obstacles to creating individual accounts. The first is the large initial cost. Much of the money to pay benefits to future recipients will have to come from somewhere else. Simply borrowing the funds - an approach many politicians favor because it appears relatively painless - would undermine the purpose of using the accounts to build up national savings. (Personal saving would be increased but government saving would be decreased by the same amount.) It would also unfairly shift huge costs to future generations, which would be burdened with repaying the borrowed funds. The second obstacle is that personal accounts could threaten the important redistributive dimensions of the current system, whose progressive design helps those with lower incomes relatively more than those with higher incomes.

Both these obstacles can be surmounted. The start-up cost could be partially offset by setting up the private accounts with money the government now expects to lose to President Bush's ten-year tax cut. Repealing the tax cut would provide $400 billion to $1 trillion of seed funding for these accounts, enough to get them started while other necessary changes to the traditional Social Security system, such as slowing the growth of benefits and gradually increasing the retirement age, were phased in. By diverting funds into personal investment accounts for all Americans, the President could actually achieve both the effect of tax cuts (since he would still be returning money to citizens) and Social Security reform.

The redistributive aspects of the current system could be preserved by making the funding of these private accounts progressive: all American workers would get accounts but lower-income workers would get government-funded matches for their contributions. For instance, the government could contribute two dollars for every dollar saved by the lowest-income workers, one dollar for every dollar saved by workers who make slightly more, and so forth, with government subsidies phasing out at 50 cents for workers earning around the national median income. Workers would also be guaranteed a minimum benefit that would keep them out of poverty - a guarantee that Social Security does not offer at present. In short, these accounts - let's call them "progressive private accounts" - not only would help to shore up Social Security for the long term and provide workers with an additional source of retirement income, but also would maintain the program's fundamental commitment to a progressive design.

Shifting our economic priorities from consumption to saving will not be easy. But whether created separately or together, government-subsidized universal 401(k) accounts and progressive private accounts for Social Security would help individuals to prepare for retirement and would set our economy on a course for long-term prosperity. In any event, with the American consumer sinking further into debt and the retirement of the Baby Boomers fast approaching, we need to do something soon.