This week, the Associated Press reported that the Trump Administration is considering changing the way that Social Security is financed, by eliminating the payroll tax.
The system today is broken. The program has, for every dollar ever collected, created nearly $2 of promises that no one expects it to keep. Instead of looking at reforming the causes of the imbalances, we are looking for ways to pay for them. Team Trump team believes that the answer to these imbalances lies in shifting the pocket which pays for the program. If we have more money, then all will be well.
Ideas this bad do not come along often. In the words of P. J. O'Rourke, if you think Social Security is broken now, just wait until it is free. And it is probably best if voters understand why.
The structure by which we pay for Social Security dates back to the inception of the program. FDR did not want the system to be perceived as a welfare program. He said, “With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”
He demanded a program that was independent of politics, one designed around the principle that benefits and contribution were connected. As a result, Social Security is supposed to be a socialized pension, rather than a welfare program.
The pension provides old-age insurance on a progressive basis. Insurance provides a buffer against the cost of the unknown. For example, given that we don’t know how many auto wrecks we will have, we buy auto insurance. Likewise, since we don’t know how long we will live, we should buy old-age insurance.
Americans want no part of insurance that is run on a basis of welfare. Social Security provides answers to needs over a period of decades. Public assistance is an annual expense in which politicians argue over the importance of one need over another. To give people who really can’t work decades of commitments that are fulfilled in annual arguments is insane.
To illustrate the problem, the payroll tax holiday clearly illustrates why this approach is such a bad idea. At the time, the government decided to fund 2 percent of the payroll tax from the general fund “as a middle-class tax break.” In fact, it was a subsidy to those lucky enough to have a job, where the break got bigger as the job got better. This subsidy was offset dollar for dollar with debt for future generations.
In the case of Bernie Sanders, he saved $2,202 in payroll taxes for 2012 where as the millions of Americans who didn’t have a job received zero help. Is that a sensible economic policy? Is it thought-out that this money comes from our children, many of whom will be in poverty?
When Bernie Sanders pays for his benefits, this arrangement works. When it is our children who have no vote today, it is an invitation to a financial debacle. The cash flows of Social Security are an indefensible public expense. The system provides greater benefits to children of the affluent than children of the poor. It gives housewives 50 percent of what their husbands get. The rules even exclude those Americans with the kind of work records that create need in the first place.
Today critics of the program already believe that the system is welfare. The word “welfare” means a government program designed to help people in need. According to Andrew Biggs, the AEI scholar on retirement issues, the program excludes one fifth of the poorest seniors. Calling Social Security is the point where words cease to have meaning.
What happens when we actually run Social Security like welfare?
First, the people who are not eligible will demand access to benefits. Even the vaunted employees of Galveston County, Texas, will start to collect benefits. Wives will realize that 50 percent support is not equitable, so they will require more benefits. So you are dealing with millions of new beneficiaries collecting more benefits.
Second, benefits are on based on average wages. If average wages rise, so do benefits. If introductory economic theory is correct, the cost of payroll taxes tends to lower wages paid to employees. As that barrier to entry of the program is removed, wages will naturally rise, pulling up benefits owed by the system.
Raise your hand if you believe that the answer to the crisis emerging in Social Security is spending more on more people.
Brenton Smith writes on all aspects of Social Security reform, translating the numbers and jargon of the issue into terms that everyone can understand. His work has appeared in Forbes, MarketWatch, Fox Business, The Hill, and a number of regional newspapers. To read more of his reports — Click Here Now.
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