“Reforming” Social Security

Abstract

Put aside that the government has for years collected a dedicated tax for social security and then spent some of that revenue on ordinary government expenses. And don’t mention that this “borrowed” money is supposed to be returned to the social security trust fund but never has been. With these predicates, one can say that social security currently is in financial difficulty. There are at least 3 proposed solutions. Each one disproportionately impacts a different group. One proposal is to means test social security benefits. Simply, notwithstanding that everyone pays into the system with the expectation that they will be entitled to receive benefits at a given age, means testing would effectively tell richer folks that they cannot obtain their promised money. In effect, the system would become a wealth transfer program. The winners are those who continue to receive benefits. The losers are those that have paid (and will continue to pay) but will receive no direct return on their investments. A second proposal is to increase the age eligibility for social security. This decreases the cost of social security because, obviously, the fewer years that each person collects these benefits, the less money the government needs to return to taxpayers. Everyone loses a bit in the sense that all receive less—in exchange for a stronger system, mind you. The problem is that the age cutoff disproportionately impacts those groups with lower life expectancies. African Americans, men, and the combination are the most impacted. That is, women live longer than men. So, more men than women will likely die before receiving any benefits at all—particularly as the age eligibility increases. The same is true for African Americans relative to whites. And the most dramatic difference is seen between African American men and white women. Thus, effectively, there will be some wealth transfer from the former to the latter, all else being equal. A third suggestion is to increase the amount of income that is taxed for social security. Remember that social security taxes are regressive. That is, everyone pays roughly 6% towards social security on up to approximately the first $100 000 of income. So, if you make less than that amount, then this tax is plenary. But the more anyone makes above this sum, the less effective the social security tax rate is, as it is no longer collected above the cutoff. Some argue that this: (1) is a function of the fact that social security is asserted to be a retirement plan, and (2) the payments “in” relate to the capped payments “out.” This would be largely—albeit not completely—true had the government not systematically raided the social security trust fund to build roads, pay bureaucrats, and, inter alia, send rockets into space. But the real way in which the social security system has been operated makes clear that it is not an individualized retirement program like, say, a 401(k) plan. Moreover, the notion that richer people pay more for the same services—such as roads and national defense—is neither new nor generally controversial. Under the proposal to increase or remove the cap, there are partial winners and losers. Those who earn above the cutoff will partially lose by paying more for the same benefits, and those earning below it will pay the same—and all will have a stronger system. Whichever solution is pursued, one reform not yet mentioned is both critical and just. Social security taxes should be, as Al Gore suggested a long time ago, placed in a truly secure fund. No longer should the government be able to “borrow” from the trust fund—no less with no reasonable likelihood that the money will ever be repaid. Government likes to spend money. If the money is not dedicated for retirement, then the government should: (1) admit that the social security tax is just another income tax, (2) the social security tax should be combined with the income tax that it has propped up, and (3) Americans should be told the true total amount of federal income taxes that they pay. I certainly am not suggesting this outcome, but I deplore the duplicitous means by which Americans are currently taxed under the pretext of a universal retirement plan. Author Affiliations: University of Arkansas at Little Rock, William H. Bowen School of Law. Correspondence: Robert Steinbuch, JD, MA, Professor of Law, University of Arkansas at Little Rock, William H. Bowen School of Law, 1201 McMath Ave, Little Rock, AR 72202 (resteinbuch@ualr.edu).