Rightsizing Social Security
Seizing this opportunity to correct the system’s inequities
Exactly 25 years ago (April 15, 1998), I announced my Libertarian Party (LP) campaign to represent Wyoming in the US House. Over the next six months, I issued 20 press releases outlining my positions on various issues. The very first was called Scrap Social Security Now. It got me an interview on the local TV news channel, but not many votes. In the end, I won 4 percent, which was the usual for us, keeping our party on the ballot for next time.
Since then, I left the LP (and Wyoming), earned a Ph.D. in Economics, and spent 20 years in civil service. Social Security debt has grown, but Congress has done nothing. I’ll have more to say about that — and my proposed way forward — later in this post. But first, I’d like to share that April 20, 1998 press release in its entirety.
Steve Richardson, Wyoming’s Libertarian candidate for U.S. House, says he is glad to see the old parties finally acknowledging failure of our country’s oldest and largest entitlement. But while they are still interested in “saving” the beast, he’d like to kill it once and for all. Of course, slaying a $9,000,000,000,000 (size of current unfunded liability) dragon would take decades. That’s why we must remove its life support immediately, he said.
“The only Americans who (might) believe we have a Social Security trust fund and a balanced budget also believe in Santa Claus. Everyone else knows by now that accounting practices you and I would go to jail for thrive in Congressland. My solution is to eliminate the payroll tax as of January 1, 1999 while booking all benefits earned to date where they belong — right alongside all other federal spending obligations. Then let’s begin to balance the budget by trimming government down to the essential services authorized by the U.S. Constitution.”
“If, as individuals, we get in trouble with debt our advisor’s very first recommendation will be to avoid incurring any more debt. So we should freeze benefits where they are now, for current and future retirees. Those not yet retired will be able to save the amount previously removed from their pay to make up for the lower expected benefit. Employers may begin or increase retirement benefits with dollars they were previously forced to contribute to the government scheme. Both of these transfers of investment decisions from politicians to individuals will stimulate the economy and help (along with cuts) eliminate the debt so that by a predetermined date (December 31, 2024, for instance) we can pay off any remaining beneficiaries with one final check.”
Steve says the Social Security Tax is much harder on low-income people than the Federal Income Tax because it is applied to the very first dollar earned. “Big Brother takes 13% of what you earn and gives you nothing more than a promise to do the same thing (or worse) to some other poor soul years or decades from now. If you just started that job, you may have been unemployed for a while and you need every nickel of that income in your pocket now. If you’re trying to build a business, you need every dime available or you may not make it. And even if you can afford the deduction, any investment you can think of is likely to be better than the one being forced upon you.” Steve adds, “Vote for freedom and common sense. Elect Steve Richardson to represent Wyoming in the U.S. House!”
Quaint, isn’t it?
Just last week, the Board of Trustees for the Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) Trust Funds (or, combined, OASDI, aka Social Security) issued their 2023 Annual Report. Unfunded obligations are now estimated to be $22.4 trillion. Dollar figures with that many zeros fail to register with many of us, so the Board has kindly explained what this means in terms we can all understand. I highlighted the salient points below.
To illustrate the magnitude of the 75-year actuarial deficit, consider that for
the combined OASI and DI Trust Funds to remain fully solvent throughout
the 75-year projection period ending in 2097: (1) revenue would have to
increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.44 percentage points to 15.84 percent beginning in January 2023; (2) scheduled benefits would have to be reduced by an amount
equivalent to an immediate and permanent reduction of 21.3 percent applied to all current and future beneficiaries effective in January 2023, or
25.4 percent if the reductions were applied only to those who become initially eligible for benefits in 2023 or later; or (3) some combination of these
approaches would have to be adopted.
The magnitude of this problem should be alarming, but no one can claim it is a surprise. Neither is the fact that most of us would choose none of the above, which is why Congress has been so reluctant to act. I (still) think this is irresponsible, but the root cause of inaction is a failure of insight and imagination. The point of sharing my old press release is that relatively ignorant outsiders can often see what experts and elected officials cannot see or refuse to consider. And what is truly worrisome is not growing insolvency of the trust funds, but outright dysfunction of our democratic system that prohibits innovation and real solutions.
We are all in this for the long haul, whether we like it or not. We need a real safety net in this country, not just welfare for old people.
Today, my motivation and ultimate objectives focus on solving a very serious income inequality problem, not downsizing government — and I have actually done the math. However, the approach of my Free to Work (FTW) policy proposal is remarkably similar to my earlier intuition.
The only way out is to eliminate the payroll tax, because it creates new obligations tied to the old system.
I’ve described this and many other problems with the payroll tax in this essay, which is part of a series on Social Security Basic Income (SSBI), my basic income guarantee proposal. As mentioned in another essay that describes FTW as the first phase of transitioning to SSBI, the tax is responsible for the entitlement (expectation) because payments are determined by contributions; we even refer to them as “earned” benefits.
It’s no secret that the trust fund is merely an accounting term; there are no funds being set aside to pay benefits. We also know that each retirees’ benefits are paid by several current workers’ payroll taxes. The problem is that future taxpayers become obligated to pay benefits to each of those workers, and the trend of fewer workers supporting each beneficiary (referred to as the dependency ratio in the Trustees’ report) shows no sign of turning around any time soon.
I titled this post “rightsizing” Social Security because it presents my radical proposal not as a threat but an opportunity. First of all, relief from the payroll tax would boost take home pay for every worker. While setting those funds aside for retirement savings is advisable for most, it is completely optional, and in that sense enhances freedom for all. It also reduces future obligations for all taxpayers.
That said, there is no question about paying benefits earned to date, and taking the payroll tax off the table presents opportunities to satisfy those obligations in a more fiscally responsible manner. For starters, FTW proposes eliminating hundreds of tax breaks to corporations and individuals known as tax expenditures (TE), which total about $1.5 trillion per year.
Only three are worth keeping, in my view. The biggest TE item is employer paid health insurance. As I explain in my aforementioned essay on FTW,
Employers treat premiums like wages, which are fully deductible as a business expense, yet these premiums are not taxable to the insured individuals. Because this policy disproportionately benefits higher income individuals, I propose to eliminate the expenditure, thereby making employer-paid premiums taxable. Due to the high standard deduction, lower income individuals may not see any increase in federal income tax liability; if they do, it will be offset by payroll tax savings. The rationale for retaining the deduction for premiums paid by individuals is that health care is essential — and it is high on the list of household expenses, especially for the poor.
The second item we should retain is the individual deduction for retirement savings, especially as part of a package phasing out Social Security. And finally, I would replace the child care tax credit currently $2000) because it is insufficient for low income households and unnecessary for those with high incomes. Here is another excerpt from the FTW essay describing my scheme:
Instead, I propose a child allowance of $5000 per child, which is close to the estimated marginal cost of each additional family member in the Federal Poverty Guidelines. It would operate as a negative income tax, meaning the benefit is reduced by income. The full amount is available up to the poverty threshold; thereafter, it is recovered by a surtax of 10 percent on income above that amount until the full allowance is recovered. For example, a married couple with two children and income of $20,000 per year would receive the full $10,000 child allowance because the threshold for their household (family of four) is $30,000. The same family with an income of $40,000 would receive $9000 ($10,000-(0.1 X ($40K-$30K)); at $80,000, the benefit is $5000; at $130,000 and above, it is zero.
Even with this generous expansion of child care assistance, the proposed TE reduction would raise almost $1 trillion in federal tax revenue. The thing is, Social Security and Medicare cost about $2 trillion annually. We can close this gap with a progressive surtax on individual incomes. The FTW surtax would start at 5 percent and rise to 10 percent and 15 percent of additional income well above the poverty level ($50,000, $100,000, and $200,000, respectively, for single filers and twice these amounts for married couples).
That may seem like a lot, but because we will have eliminated the payroll tax, the net effect is positive (more disposable income) for all but those with high incomes. For details on how individuals and families are affected, see this essay, which includes spreadsheets, charts, and hypothetical examples.
Sorry, but clearing the deck is all I could cover in this post; I never got to the question of what replaces Social Security. If you’re interested, it’s covered in this essay and a couple that follow in the series.
By the way, I’ll get my first Social Security check next month. Thanks to those of you still contributing to the “trust fund” that helps pay me. I promise to enjoy it while it lasts.
