Social Security: It's so damn SIMPLE after all!

I finally figured out what I want to do with Social Security.

After a few days absence from the blogosphere, I was browsing through Matt Yglesia's musings when I came across this response by Matt to an earlier post by Josh Marshall regarding section 4 of the 14th Amendment. Intrigued by what the 14th amendment could possibly have to do with Social Security, I followed the links and found this post from Josh, which I reproduce in its entirety:

President Bush lays the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds, from today at the Commerce Department ...

Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. We're on the ultimate pay-as-you-go system -- what goes in comes out. And so, starting in 2018, what's going in -- what's coming out is greater than what's going in. It says we've got a problem. And we'd better start dealing with it now. The longer we wait, the harder it is to fix the problem.

It's what they're after. Just watch.

Apparently, the subsequent discussion regarding the 14th Amendment was over whether a default wouldn't be unconstitutional.

Though I haven't given it much thought, I suspect that the Constitutional issue is pretty much a red herring. But a light did go on in my head as I read Bush's quote. The bonds in the Trust Fund are not really promises to pay money to the Social Security Administration. They are promises to pay benefits to beneficiaries. If we don't pay the benefits, there will never be any need to redeem the bonds. And, if we do pay the benefits, the necessary money is going to (can only) come from current tax receipts and/or borrowing (FICA taxes for now but beginning in 2018, a combination of FICA taxes plus other federal revenue or borrowing). So, what is the point of going through the charade of "redeeming" the bonds. That is simply a pass through anyway. Why not eliminate the middleman and recognize that current benefits are and always will be paid out of current revenues (taxes or debt).

It turns out that a commenter on Matt's post had the same idea, and took it one step farther (further? -- can anyone explain the difference between those two words?):

Abolish the payroll tax, and fold Social Security payments into the general obligations of the US government.

And, why stop there? Let's get rid of the Medicare tax and fold those obligations into the general obligations of the federal government as well. Eliminating these taxes and yet paying benefits will require that other taxes (most fairly, I think, income taxes) be increased. But, for the vast, vast majority of American taxpayers this is a distinction without a difference: for most, the only difference between income, FICA and Medicare taxes is that the amounts appear in different boxes on W-2s, K-1s and/or 1040s.

I assume that this is not a new idea to anyone but me. But, just in case, but here's the basic concept.

First, get rid of the idea that some retirees/disabled are entitled to get more from the federal government than others. This belief is a consequence of the misconception that Social Security is some sort of savings plan under which those who pay more in are entitled to get more out. That is not what Social Security is or ever has been. Social Security and Medicare are both pure transfer payments from the young and able to the old and disabled. The myth that benefits are a recoupment of money previously invested is a canard complicates both public understanding and rational discussion.

Second, once we have clarified what Social Security and Medicare actually are, decide (via the political process) what level of health and retirement benefits it is appropriate for the government to pay to retirees and the disabled. Then pay that same level of benefits to everyone, regardless of earnings history, assets or anything else. For instance, maybe we decide that it is appropriate for the government to guarantee to the elderly and disabled an income equal to 125% or 150% of the poverty level plus medical insurance that will provide benefits comparable to those provided by Medicare today. We then provide that level of benefits to everyone, tax free. Too low for people with higher pre-retirement/disability incomes you say? I agree that there may be a need for some sort of a phase-in to avoid possible disruptions for people already retired or close to it. But my general feeling on this issue is that the function of government is to provide a safety net, not to maintain your pre-retirement/disability standard of living. If you want to have more than what the government will provide, think -- voila! -- "private accounts," i.e. IRAs and 401ks.

Third, eliminate the FICA and Medicare taxes for individuals, and require employers to pay their share of these taxes directly to the employee. This would result in something like a 15% increase in pre-tax income for anyone earning less than $90,000 per year and $11,000/year plus about 3% of earnings above $90,000 for people making more than that. Low income workers would pay 15% or less of this back to the government in income taxes. Higher income workers would pay up ot 40%. A start on pregressivity already.

Finally, increase income tax rates by enough to (a) pay for the benefits we have decided to provide and (b) ensure that those making less than $90,000 get a net tax reduction, with the absolute dollar amount of the reduction getting progessively larger as income declines.

There are a lot of things I like about this approach. But the four most important are its simplicity, its progressivity, its transparency, and most of all, its honesty.