31 December 2012

On Social Security

I've previously made my views on Social Security very clear.  So it will be no surprise that I am glad that the Administration has apparently withdrawn its offer of a few weeks ago to include a change in how the COLAs are calculated ("Chained CPI"), which amounts to nothing more or less than a long term stealth benefit cut to a program that should be increased, not cut. Were that terribly dumb idea actually put into effect, Social Security, which is the primary income for more than 70% of retirees, would gradually cease to do its most essential job, which is to keep the elderly out of poverty. I am totally intransigent on this point: if Democrats agree to this, they will have betrayed their constituency and forfeited any claim to being the party of Progressives.

Now, it also appears that the payroll tax holiday will not be extended. And here, I hope, my view is consistent. I also applaud that outcome. Along with Bernie Sanders, I and many other Progressives were deeply suspicious of the idea of using a payroll tax cut as a stimulus measure in the first place.

The key to Social Security is that it is and always has been self-funded. (This also true, but not entirely true, of Medicare, but let's keep the focus on Social Security). Taxes are paid into the Trust Fund, which uses the funds, including past surpluses, to pay benefits. The tax is regressive, in that it is levied essentially only on wages and salaries, and only up to a certain level. There is no maximum benefit, per se,  but there is, effectively, because you only receive benefits based on the amount of income that was taxed, and that's capped, currently at $110,000. Of course, the General Fund has always, in effect, borrowed the surplus, but this is not, as many people seem to think, commingling. It is actual debt, in the form of US Securities, whose full faith and credit is a critical factor in the financial health of America. So that the idea that Social Security is a house of cards because it only has a bunch of IOUs is a pernicious and frankly profoundly stupid canard: if politicians were to allow the debt to the Trust Fund to be defaulted upon, it would be indistinguishable from defaulting on our national debt to China or other creditors. And it would amount to theft from the American people themselves. All of which is why I repeat Ronald Reagan's comment whenever this subject comes up: Social Security has nothing to do with the deficit. 

Not only that, but the very idea that Social Security is even a problem right now is ridiculous. Under current projections, it is solvent to 2033 (used to be 2037, but there was that not-too well-advised payroll tax holiday... possible only because Social Security was, in fact, so fiscally healthy). Any insurance or pension system that could show it was solvent with current income and surplus to 2033 would be declared solid gold and would have no competition.

So right wingers and ill informed Democrats who crow about how Social Security is "unsustainable" and "going broke" just don't know what they're talking about. Or they're deliberately lying, which I suspect is often the case.

Since the long term health of Social Security is important, however, I am glad to see that payroll taxes, which are its funding source, are going to go back to their statutory intended level after the first of the year. We do need stimulus, no doubt about it, but this is bad policy. 1) Tax cuts are relatively ineffective as stimulus, as any rational economist will tell you; and 2) if a program's long term viability is a policy issue, cutting its funding makes no sense.

So then, you may ask, what should we "do about" Social Security. (So glad you asked).

The most obvious fault of Social Security is that it is a social insurance system funded by taxes, but that those taxes are not progressive. We need to make a decision as a society that we are going to provide a buffer against poverty for all our citizens, and continue the guaranteed income to all payees that makes the whole system popular. (After all, if it were just welfare, it would be SSI, which we already have, for the indigent elderly and disabled, thanks in part to that notorious liberal, Richard Nixon, but that's another issue). Having committed ourselves to Social Security as a benefit system more or less in its current form, we need to enhance the way in which its paid for. I actually think that Roosevelt's plan to fund it separately from general tax revenues was pure genius. Americans hate income tax but they by and large don't resent paying for Social Security (or Medicare). But there are some improvements that could be made. Here's my idea:

The portion that employers pay should remain essentially the same, except for two major changes. First, the cap on wages and salaries subject to tax should be lifted. Not raised. Removed. All compensation should be subject to the tax. (Benefits would remain capped, based on current levels, and the difference would fund the surplus necessary to keep the program solvent forever, which this scheme would accomplish). The other big change would be that no form of deferred income
should be exempt from either income tax or payroll taxes.should be exempt from either income tax or payroll taxes. (Stock options, in-kind perks, fancy schemes to treat income as dividends or carried interest, etc. -- all of which should be addressed in more comprehensive tax reform anyway). If it's compensation, it's taxed. Period.

Now, the portion of Social Security (and, incidentally, Medicare) taxes paid by the employee should be handled a bit differently. I would like to see the same lifting of the cap on income subject to tax, and the same application to all compensation. But for incomes up to $110,000, I would like to see tiered rates, so that those who are earning less than a defined "middle class threshold" income should pay at a lower marginal rate, while keeping benefits the same. This is a recognition that there is  a component to the program that comprises social welfare. Again, I'm proposing that the benefit system be capped, but that all compensation be taxed. For compensation above a certain level, perhaps $75,000, the payroll tax rate would go to maximum, and stay there above the present cap. The system would be adjusted so that current levels of income to the trust fund would be generated from the taxes on compensation below some level, say $150,000, and taxes on compensation above that level would pay for a trust fund surplus, to keep the program solvent forever. 

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