Is Social Security Welfare or Insurance?

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By on February 11, 2019 in Retirement with 0 Comments
Congressman John Larson (D-CT)

Congressman John Larson (D-CT)

Last week, Representative John Larson (D-CT), with 200 cosponsors, announced the introduction of legislation, Social Security 2100 Act (H.R. 860), designed not only to preserve Social Security’s finances through the rest of the century but expand benefits as well.

The Promises

They promised that the legislation would increase Social Security’s checks for those receiving benefits today, as well as reduce the taxes paid by current retirees. Moreover, it would add a new minimum benefit that will be set at 25% above the poverty line. Finally, it would change the COLA adjustment to be based on CPI-e rather than the current CPI-w. In total, the SSA projects that the composite changes would add about 2% to the average benefit check.

The proposal promises to more than offset the incremental expense by (1) eliminating the wage cap over a period of roughly 30 years (projected 2048), (2) increasing the payroll tax to 14.8 percent over a similar timeline, and (3) offering a much lower pay-out on bonus revenue collected by the program. In total, the legislation would make Social Security solvent for the next 75 years.

When you combine all of the promises, the legislation sounds great. For a very modest cost for most Americans, the program is secure in the present sense. In the words of Neville Chamberlain, we have solvency in our time.

Honesty in Advertising

We need to be honest with voters. All of the taxes are presented to voters as though they do not grow with time when in fact these taxes explode higher with each passing year.

  • According to the brief, this legislation “would mean paying an additional 50 cents per week every year to keep the system solvent” to the average worker. That is the first year, but the incremental cost accumulates annually until it reaches $12 a week.
  • Moreover, the promise excludes the impact on wages. Most economists agree that employers lower wages to pay for the employer’s share of payroll taxes. If so, the combined cost of this legislation would actually grow to nearly $25 per week for a typical worker rather than the $0.50 advertised.
  • Likewise, when the supporters argue that this legislation “would only affect the top 0.4% of wage earners”, they are talking about the first year. In reality, the legislation phases out the cap, so the new tax will reach about 6% of workers annually, and 18% of the public at some point in their career.
  • Finally, the overview of the legislation claims that it will generate income by having “millionaires and billionaires pay the same rate as everyone else.” The hard truth is that this proposal hits a wider audience of people every year until it affects the type of person making roughly $130,000 today. These aren’t billionaires.

The timeline for the tax increases begs the question: if these taxes are a good idea, why not introduce them faster, so that we do not rely on people who have no vote today? In its current state, the proposal is effectively an agreement that we make with ourselves that our grandchildren will pay the taxes that we will not.

What Does “Rate” Mean?

Understand, much of the discussion about Social Security is really an argument about the meaning of words. Rep. Larson has one definition for the word “rate”, and I use it in a very different sense. It is possible for a single word to have multiple meanings, and in this case it is pretty important to understand the context.

In Larson’s presentation, “rate” expresses what someone pays in terms of what someone has, where as I use it to convey what someone pays in terms of what they expect to collect. It is a big difference. The former is a measure of welfare. The latter is a measure of insurance. For me, rate shows that Social Security is a highly progressive form of insurance.

What Do You Get?

Currently, the benefit formula looks at historic earnings in 3 tiers. The first tier uses the highest weight to ensure that low-wage workers get a best deal.

Marginal Tier Amount

People who earn a lot pay a much higher “rate” for benefits
1st $100 buys $25 in annual retirement benefits
2nd $100 buys $9 in annual retirement benefits
3rd $100 buys $4 in annual retirement benefits

The terms of Larson’s proposal are substantially less generous to the high-wage worker. These people would over time collect a little less than $0.40 every year in benefits for a $100 payment. It is difficult to argue that these terms are consistent with “insurance”, which workers buy through a lifetime of contribution. It is just a tax.

If you believe that Social Security is welfare, this measure is a welcome step forward. If you see it as progressive insurance, this legislation is another example of the can-kicking Congress that that created the problem in the first place.

Word Limits

I have a self-imposed word limit that I have already broken, and plan a second article explaining how the legislation would affect current seniors, who get very little in this deal.

© 2019 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes, FedSmith.com, MarketWatch, TheHill.com, and regional media like The Denver Post.

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