Fixing Social Security by Ending it

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By on August 29, 2019 in Retirement with 0 Comments
Stacks of silver coins surrounding a Social Security card, the top of which is just visible over the stacks of coins

Veronique de Rugy of the Mercatus Center at George Mason University offers a worrisome picture for the future of Social Security; first in data and subsequently in solution.

She is right on the data which comes from the latest Trustees Report.

  • The program is apt to be underfunded by $13.9 trillion over the coming 75 years. 
  • To make Social Security solvent over this period would require an immediate and permanent payroll tax increase (today) of 2.78% of overall wages — 
  • which translates into 25% higher taxes or benefit cuts of 17% (that includes existing beneficiaries

For those worried about the finances of the program, this material is almost boilerplate. Yes you should be worried.

From this base perspective, Ms. de Rugy concludes that the real problem with Social Security is that it helps too many people. She compares Social Security to a private charity designed to help everyone, and argues that Social Security should be changed to focus resources on people who are actually poor. She writes:

“Considering that much of the support for Social Security comes from people who incorrectly assume it’s mostly helping poor Americans — economists have shown that Social Security is a regressive system that mostly benefits higher-income Americans — we need reform that truly targets people who can’t help themselves. Such a reformed program would provide better and larger benefits to fewer recipients and, in turn, require less revenue and lower taxes.”

Again, she is right that the program would cost less and more poor people would be helped. On the downside, we are essentially redrafting the path for Social Security to appease the voting-block which understands least about how the program works and the goals it serves. In short, the solution would transform a program designed to lower the statistical likelihood of poverty-ridden old age into one that incentivizes it.

There would be nothing left but the name. Today, the program is highly progressive where taxes are collected in exchange for the promise of future benefits. At the margin, a low-wage worker spends $100 to get $25/yr in benefits. The mid-tier worker pays $100 to get about $9/yr. And the high-wage worker pay shells-out $100 to buy $4/yr in benefits. Where is the regressivity in that math?

When Social Security is a welfare program, there is no promise of future benefits. It is just a tax that provides a pot of money that politicians can spend on the elderly. While future benefits today do not have a guarantee, this new arrangement would all but guarantee that today’s worker would end up dependent upon an annual debate in Congress over how little they need. 

Without future benefits to balance out the impact of payroll taxes, yes Social Security would be an insanely regressive system. Under the current financing arrangement, workers would pay a tax on wages, while very wealthy retirees would pay nothing. That is a regressive system – insanely so. 

Once the payroll tax is gone, the protection for the elderly is a matter of how much politicians can take from younger Americans – and you are kidding yourself to think that the government could continue to collect a sum from voters equal to 12.4% of wages without a commitment to paying benefits to a lot of people.

FDR didn’t want any of this. He said that the system was designed around contributions so that workers would have legal, moral, and political right to benefits. The whole point was to insulate the system from the damn politicians. The president viewed Social Security as “my program” and didn’t want politicians like Senator Sanders and Senator McConnell to haggle over who does and who does not need benefits.

I am not telling you that she is wrong about the numbers. But let’s be honest about what we are doing. The idea here doesn’t really fix Social Security. We are ending one program, and creating another which preserves the name for nostalgic voters. 

If the goal is to help the poor, it would be faster, cheaper, and vastly more honest to end Social Security, and divert whatever resources are left to Supplemental Security Income which is a welfare program. The infrastructure for welfare already exists. There is no point in reinventing the wheel. In a matter of rule changes and key strokes, millions of poor people are helped.

But Social Security has been scrapped.

© 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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