Opinion:

Some moderate proposals for Social Security and achieving an "ownership society"

Some of the statements regarding the current uproar over the proposed changes to the Social Security system are out-and-out silly. For example, one politician said that we should “fix Social Security forever,” which is ridiculous. No system, public or private, can be constructed to last forever. The projections used by both sides are merely that, projections, and are only reasonable expectations of what is likely to happen, barring major events negative or positive, for the next 5 to 10 years at best. Any talk of a “permanent fix” is unrealistic at best, and disingenuous posturing in what I suspect is the typical case.

The projections, and indeed the current state, of Social Security show two fundamental problems, problems that the vast majority of us face every month when we have to pay our bills and balance our checkbooks. Eventually, outflow to Social Security payments will exceed inflows from taxes, and relatively immediately after that point, the “surplus” that the government and BOTH political parties have been gleefully using to make the deficit look smaller than it really is will come due to be repaid by that same spendthrift government.

The quickly renamed “personal accounts” (née “private accounts”) do nothing to address this fundamental problem. The vast majority of proposals floated for adding some kind of personal accounts to the Social Security system actually decrease the current inflow of money with no corresponding decrease in the current outflow of payments. Sadly not recognized as widely as merited, most of the personal account schemes have so many restrictions on the personal accounts that they do not create the “ownership society” that President Bush proclaims is his goal, but instead set up a massive new bureaucracy within the already huge Social Security Office to handle the new personal accounts.

In addition, the personal account proposals made to date put the government in the position of picking stocks. Even if the accounts are limited to index funds, this just moves the stock pickers out of the government to private parties, but still has government involvement distorting the markets. The indices are chosen by parties to reflect the performance of the stock market as a whole. Unfortunately, the large influx of cash into the markets from the personal accounts will then distort the markets because the cash will be going into the index stocks and NOT into the broader stock market. Especially given the excesses of the 90s that are now coming to full light, is it realistic to expect that the non-governmental entities that choose the stocks in the indices will not engage in some under-the-table dealing to get certain companies on the indices so they can get a share of the influx of cash?

Finally, we already have “personal accounts,” they are called IRAs. On top of that, many if not most workers are able to participate in 401(k) programs at their companies. Both of these retirement savings schemes allow direct control by people in their personal, private accounts. That is true ownership, not having a government intermediary telling you what you can and cannot invest in, which oddly enough is key in the plans being proposed to modify Social Security. A bit of a contradiction in there for nominal “conservatives,” isn’t it?

There are several straightforward steps that can achieve both an increase in the time that the Social Security System remains solvent without the creation of a new “personal account” system on top of it and increase personal investment to create the “ownership society” that the President says he would like to foster.

First, the Social Security System:

1) Remove the cap off the Social Security tax. I stop paying the tax in late September because by then I’ve earned more money than the cap. Social Security is one of the few taxes we have that is limited to only the first $90,000 of income. The question of why people who earn more do not have to pay has not been answered. Most people benefit from money that the government gave them, directly or indirectly, not just those on welfare or other direct forms of public assistance. Most people with college degrees got them at state universities. Where did the land grants that created those universities come from? The semiconductor industry benefits directly from research money the government gives to professors in the universities, because the technology used to create the computer you are using right now to read this arose from the scientific foundation established by those professors. It is fairly safe to say that those who make the most money in our economy are benefiting directly from how our government has chosen to spend money. Therefore, it is not unreasonable to ask those who have benefited the most to pay more, or even in the case of Social Security tax to pay the same percentage as everyone else. As currently structured, the highest earners pay less Social Security tax as a percentage of their income than everyone else. The high earners do not pay so much that they do not benefit from the fruits of success, and removal of the cap on Social Security taxes will not overburden them.

2) Change the indexing of the increases in Social Security payments from wage increases to the mean of wage increases and inflation. This prevents too small an increase if a simple inflation index is used, but it prevents the high rate of increase that wage indexing has resulted in. Yes, ultimately this will reduce the Social Security benefit, but far less than the proposals that are being put forward now, and this may result in a fairly reasonable increase that prevents absolute poverty but retains a ground floor for those who have chosen poorly in their retirement planning.

3) Consider means testing for benefits, with a sliding scale that reduces the benefits for the wealthy. Is that fair? No, but then neither is the current system, and it reduces the outflow to those who do not need it.

1) Change the tax deduction on IRAs for low-income earners. Instead of being able to deduct the IRA contribution from income, have the contribution count as a tax credit. This puts the money where the mouth is. If we want people to invest money instead of the government spending it, then count some level of investment in an IRA directly one-to-one against the taxes that people pay. Income limits with a sliding scale can be set up so that the benefit of the tax credit goes to those earning below the median income to encourage the group least likely to have cash to invest to actually invest at no net cost to themselves, that would be a huge incentive. To make it even more attractive at the risk of adding more bureaucracy, set up a way that the IRA contribution can be made by deduction from every paycheck, the same way taxes are paid and 401(k) plans are administered. Yes, this will reduce government tax receipts, but this can be compensated for by allowing expiration of the tax cuts that President Bush wants to make permanent. Those tax cuts disproportionately benefited the wealthy with no discernable effect on investment, whereas giving lower income citizens an opportunity for a tax credit by investing should have a direct, measurable effect on investment and quickly broaden the base of the “ownership society” the President says he wants to create.

2) Increase the ridiculously low limits for deposits into IRAs. Don’t increase the tax deduction currently allowed, but allow additional money to be deposited without the tax deduction. The low limits now do not encourage the amount of savings needed to have a good retirement nest egg.