Thursday, January 20, 2005

Social Security, negative income taxes, and forced savings accounts

If we were to rethink social security from scratch, what would we get?

First of all, what are the objectives of social security? I think that the primary objective is to provide a minimal income for seniors. Social security is not a retirement savings plan. It is not an investment program. It is simply a way to ensure that no senior is without some minimal income.

In that way it resembles Medicare, a program that attempts to ensure that seniors have basic medical care. As the official Medicare web site says,
Medicare is a Health Insurance Program for:
  • People 65 years of age and older.
  • Some people with disabilities under age 65.
  • People with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant).
Similarly social security is intended to provide a basic income for seniors.

How can we do that? The easiest way is with a negative income tax . It would apply solely to seniors. It would provide supplemental income to seniors who do not have enough money for their basic needs. It would phase out slowly so that it would not be a complete disincentive to work. But unlike today's system, it would phase out. Seniors with large incomes would not receive any additional cash. (Perhaps it could morph from a tax credit to a tax deduction as one's income increased. That way, everyone would get some benefit.)

If we wanted to retain the feature of the current social security system that benefits are related to prior income, the negative income tax could be structured so that the amount that one is eligible to receive is based on the amount of income taxes one has paid over one's lifetime.

Because the program would be means tested, it would be significantly cheaper than the current social security program. I would therefore eliminate the current payroll tax (on both employees and employers) and fund the plan with less regressive and less job-destroying sources of revenue. This would encourage job creation and would result in a lower and more intelligent net tax burden on the economy.

Forced savings
One could make a negative income tax plan such as this even less costly by implementing a Bush-style forced savings plan.

If Bush really wants the government to force people to save for retirement, he could push for a law that required people to save some percentage of their income in special government accounts. He could also force employers to contribute matching amounts. The result would not be good for the economy. But it would result in some savings, and it would reduce the payout required by a senior-oriented negative income tax.

This would not be a very libertarian approach. Putting the government into the business of forcing people to save — and forcing their employers to contribute to those savings — doesn't seem like the sort of thing conservatives normally support.

But then Bush is not a normal conservative. Quite the opposite. Instead of a force for stability and conservatism, Bush thinks of himself as a history actor, someone who changes reality by his actions. Since contrary to his words Bush seems to like using the power of the state to push people around (see, for example, President Calls for Constitutional Amendment Protecting Marriage), he might continue to argue for a forced savings plan.

Getting from here to there
Additional advantages of this approach are: it is easy to implement; it would relieve the government of a massive debt; and it would be a stimulus to the economy.
  • It is easy to implement because we already have an income tax system in place.
  • It would relieve the government of a massive debt in that the so-called social security trust fund now consists of government bonds owed to the trust fund by the federal government. That debt would simply be declared void.
  • Finally, moving from the current system to the new system would be a stimulus to the economy. Payroll taxes would be eliminated — for both employers and employees. Other taxes would have to be raised, but these would be less in total than the payroll taxes, and they could be more intelligently focused.
All-in-all this would be a win-win-win plan.

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