Hello, Safety Net
A Moral Economy #11. Part III: How do we get from here to there?
This continues a three part series of excerpts from Social Security Basic Income: A Safety Net for All Americans, which I published in March 2020. Part I: What would it look like? concluded with #2 and Part II: What do we have? concluded with #8. This essay includes text from Chapter 5 Slaying the Payroll Tax Dragon. Refer to #1 in the series for a brief introduction of my purpose and perspective on this subject.
Atonement and no adult left behind
What replaces Social Security? Obviously, we must satisfy existing obligations. However, grandfathering “earned” benefits will not adequately support those in need. Many low-income workers who are 10–20 years from retirement have already paid a lot into Social Security, have no other savings or retirement plan, will spend any increase in take-home pay, and may find themselves in poverty when they are too old to work and the benefit earned decades earlier isn’t enough to pay rent. We need to replace it with something.
A robust safety net would achieve two important goals; it would help those who have been harmed or disadvantaged by past policies and offer some protection to those who experience misfortune or find themselves disadvantaged by future policy choices. For this purpose, I believe we need a federal Basic Income Guarantee (BIG)[1] that covers everyone below the poverty line, regardless of age or employment status.
As technological change accelerates, its effects are felt keenly by those at the bottom of the income distribution — people who have already endured decades of neglect at best and exploitation at worst. Waiting for the tsunami of unemployment could lead to strong political resistance to job losses that stops progress in its tracks. Since we will not have time to accurately predict impacts and develop effective policy responses, we must design a broad-based policy that is flexible enough to protect anyone who might lose out, thereby paving the way for businesses to experiment with labor saving technologies. The gains must exceed the losses to society because the public safety net will have to be funded by tax increases.
Such foresight would be a game-changer for our country. For far too long, capitalists have managed to pocket huge profits while dispersing their costs and losses among the many US working stiffs. They will claim that a BIG creates a leisure class that will live at the expense of hard-working entrepreneurs. What it actually does is compensate people who were and are left behind in part by choices others have made. With a BIG, they will have the choice of what to do with what little is provided at public expense — payments that may not even come close to restitution for past damages. It’s literally the least we can do, because morality and politics lead to the same conclusion: We cannot allow development of technologies that eliminate the livelihood of millions of Americans.
If we were to settle on a BIG, how much are we willing to spend? How will it be distributed? Who will pay for it? These questions will stoke fear and anger that more people will starve; others will be afraid of skyrocketing taxes. It’s time we had the difficult conversation about goals and effectiveness of federal social welfare policy.
If we’re too stingy, poverty persists. On the other hand, excess generosity invites moral hazard and bankrupts the system. A reasonable place to start is $1250/month, for two reasons: It is roughly where experts have established the Federal Poverty Guidelines and it is also near the average benefit level for the Social Security program we are replacing. Whatever is decided regarding eligibility rules and benefits, it should be obligated and paid for on budget, i.e., one fiscal year at a time. This rule provides flexibility to make adjustments as needed to the fiscal and political environments. It will work if the benefit remains universal, i.e., everyone remains in the same boat and factions are not allowed to throw others overboard or sink the ship, so to speak. This will allow adjustments to benefit amounts, tax rates, and thresholds as needed according to performance of the US economy and income inequality trend data.
[1] In previous essays, I used Universal Basic Income (UBI) for consistency with cited references. Henceforth, I’ll use BIG because it more accurately describes my proposed negative income tax version of the basic income.
Social Security Basic Income (SSBI)
The first three columns in the table below, which compares features of my proposals to the status quo (SQ), is identical to the table in the preceding essay (Goodbye, Tangled Web). The last column illustrates additional changes to the system that would implement SSBI and build upon Free to Work (FTW), which pays for existing Social Security obligations and Medicare from new revenue sources by eliminating the payroll tax and most tax expenditures, and adding a progressive income surtax.[1] Detailed explanations of the SSBI components follow the table.
SSBI is a negative income tax coupled with two surtaxes. The first one is a flat surtax on incomes above the guaranteed amount (SSBI) — 25 percent on wages and 30 percent on unearned income — designed to maintain incentives to work while recovering the benefit at incomes about five times the poverty level basic income. The SSBI surtax determines net payments by subtracting FIT liability from the basic income amount; they are estimated at $1.435 trillion annually. The FI surtax under SSBI is the same as the FTW version, except rates are higher — 10, 20, and 30 percent (vs. 5, 10, and 15 percent). This surtax raises an estimated $1.698 trillion that more than covers the payments. This is offset, though, by eliminating about $122 billion in FIT that was being collected from people who would instead receive SSBI payments. The net impact on federal revenue under SSBI, then, is $1.576 trillion annually.[2] It will replace direct transfers such as Supplemental Security Income (SSI), Earned Income Tax Credit (EITC), Temporary Assistance to Needy Families (TANF), and Supplemental Nutrition Assistance Program (SNAP) payments that amounted to an estimated $301 billion in 2021.[3]
SSBI would incorporate the child allowance by adding it to the BIG amount. In other words, a single individual with one child would get $20,000 and a married couple with two children would get $40,000. The negative income tax would claw back the child allowance at the same rate as the basic amount via the SSBI surtax (25 percent of earned income and 30 percent of unearned income). This means a married couple with two children would receive no net SSBI benefit if their (earned) income exceeds $160,000. A couple with no children would reach the break-even point at $120,000.
However, we need to consider that over time the amounts paid to retirees with higher incomes will disappear. The initial cost we just calculated (SS plus SSBI benefits) will slowly decrease as we transition to a steady state (SSBI benefits only) in which Social Security payments to taxpayers who would not qualify for SSBI payments disappear. This (legacy benefit) amount, which includes virtually everyone with gross incomes above $50,000, is $405 billion. It is worth noting that initial Social Security payments vastly exceed SSBI payments even though many more people (over 100 million) will receive payments under SSBI.[4] This is because many individuals and families with higher incomes receive Social Security payments two and even three times the SSBI amount.
[1]OASDI is Old-Age, Survivors, and Disability Insurance (aka Social Security). HI is Hospital Insurance (Medicare Part A). SSI is Supplemental Security Income. EITC is Earned Income Tax Credit. TANF is Temporary Assistance to Needy Families. SNAP is Supplemental Nutrition Assistance Program.
[2] This estimate applies IRS data in Table 1.2 for 2020 on the number of filers of each type and income level to estimates of SSBI payments to individuals and married couples (with two children). The breakdown is $726 billion for 76 million single filers and $708 billion for 26 million married filers.
[3] Source is the FY 2023 President’s Budget Historical Table 8.5, Outlays for Mandatory and Related Programs.
[4] Legacy SS benefits (paid to all filers with incomes exceeding $50K) are estimated using IRS Table 1.4 for 2020. The number of individuals and families who will receive SSBI payments is estimated in the preceding paragraph; SS program beneficiaries total 65 million. Many people will receive both types of payments.
In summary
SSBI is universal and unconditional; it avoids social engineering requirements that add to the cost of administration and serve primarily to exclude people. It would replace all existing federal income support programs and it would not be adjusted for locality, marital status, or any other statistical criteria. Other institutions (e.g., state and local governments or charities) may adapt their programs to eliminate redundancies or to fill gaps in cash assistance or social services according to the needs, preferences, and means of their constituents. In addition, SSBI has six goals: (1) honest accounting, (2) encourage work and entrepreneurship, (3) encourage savings, (4) simplify welfare policy, (5) minimize transition and implementation cost, and (6) promote equity.
Honest accounting (Goal 1) is achieved by gradual elimination of unfunded liabilities for future benefit payments. My proposal honors existing obligations to pay earned benefits and makes no additional promises. It also eliminates the payroll tax and Trust Fund mechanism by paying benefits from general fund revenues enhanced by the aforementioned surtaxes. The official US Federal Poverty Guidelines form the basis of the guarantee because they provide a fair estimate of need that anchors the program to its primary purpose of reducing poverty. The guidelines also help maintain a sustainable balance between SSBI payments and taxes, because they are adjusted each year to reflect macroeconomic conditions.
Work and savings incentives (Goals 2 and 3) are also improved under SSBI. The surtax transitioning from low to middle income provides a path to escape the poverty trap via work, because SSBI payments are only reduced by ¼ of the amount earned. The benefit is universal, so poor individuals and families no longer have to enter the maze of social services programs to find out which cash benefits they can get and what happens if they earn additional income. SSBI payments are determined one year at a time, shifting the responsibility for saving to workers. Those with low incomes are no longer forced to contribute their first 7.65 percent of earnings to fund others’ benefits; they can put that same amount — perhaps supplemented by a portion of their SSBI payment — into savings they own and control. Entrepreneurs can save earnings that are not going toward Social Security or Medicare to start a small business and improve its chances of success. In addition, they have a safety net to protect them from the worst possible effects of misfortune or failure. They may be able to hire help for slightly less and/or encourage them to stay by investing funds they previously submitted in payroll taxes in an employee retirement plan.
SSBI is just one step toward simplification of federal welfare policies (Goal 4). The simple formula of relatively generous cash payments with no eligibility requirements (except citizenship and age 18) removes the bureaucratic gate and puts decisions on ends and means in the hands of the recipient. SSBI will affect all other social programs; each will adapt to serve beneficiaries with more cash in hand and to address political pressure to demonstrate the need for intervention under very different circumstances. Some programs will be able to better serve those with the greatest needs. State and local governments may find it easier to tailor their programs to supplement the SSBI than to build collages of benefits to satisfy requirements of numerous, smaller federal programs. Of course, some programs may no longer be needed at all.
SSBI is unavoidably complex and controversial, because it would significantly impact every American. However, I believe the actual transition can be less trouble than the deliberation process. My efforts to keep it simple (Goal 5) include a) using existing tax schedules and simple formulas to integrate SSBI payments and surtaxes, b) careful attention to achieve positive net impact on most individuals’ cash flow, and c) designating familiar and reliable administrators (SSA and IRS) to process funding, claims, and payments.
Funding SSBI from income taxes instead of payroll taxes addresses equity issues — not just between rich and poor but also between old and young (Goal 6). Under the Federal Insurance Contributions Act (FICA), workers and employers pay for all benefits. In general, this means the young support the old. However, many older people — especially the poor — continue to work and pay taxes that fund benefit payments to people with larger, mostly unearned income. SSBI flips this around. Shifting from payroll tax to FIT funding spreads the burden to include those with unearned income, who tend to be older and enjoy higher incomes. Young workers who do not even earn enough to pay income taxes will no longer support retirees with higher incomes in exchange for a vanishing promise of future benefits. Poor young and middle-aged individuals will receive financial assistance. Those who earn higher incomes will pay no more than their elders with similar incomes.
The Social Security Administration (SSA) will administer the program using information shared by the Internal Revenue Service (IRS), because SSA’s expertise is determining benefits and issuing payment to millions of beneficiaries. SSA will have to devise a system of estimating SSBI payments using recent tax returns and making (monthly) checks or automatic deposits on time. Not everyone will receive SSBI payments, because the guarantee is offset by a SSBI surtax on incomes above the guaranteed amount that exhausts the SSBI at a gross income of about five times the SSBI amount. Social Security benefits are also subject to income tax. Finally, there is a progressive federal income surtax that applies to most incomes exceeding $50,000. Coordination with the IRS could minimize cash exchange using FIT withholding.
The next essay in this series will continue Part III: How do we get from here to there? It will include text from Chapter 5 Slaying the Payroll Tax Dragon.
