Defenders of Social Security often make a point of stating that the retirement system is a form of “social insurance” because people become eligible for benefits by paying into the system. Welfare programs, by contrast, give money to people simply as a form of income redistribution. Proponents of the status quo are right. Sort of.
Social Security is an “earned benefit.” The payroll taxes of workers are somewhat analogous to a premium payment and retirement benefits are somewhat analogous to a monthly annuity payment.
But “somewhat analogous” isn’t the same as real insurance. Money isn’t invested and set aside to pay benefits. Instead, Social Security is a pay-as-you-go program, which means the payroll taxes of current workers are paying for the benefits paid to current retirees.
If a private insurance company did the same thing, its owners would be arrested for operating a Ponzi Scheme. But the government can get away with this kind of system because it can coerce younger workers to participate. Or, to be more accurate, the government can get away with this approach so long as there are a sufficient number of new workers who can be forced into the program.
The problem, of course, is that the combination of longer lifespans and fewer births means that Social Security is promising far more than it can deliver. And we’re talking real money, even by Washington standards. According to the Social Security Trustees, the cash-flow deficit over the next 75 years isapproaching $40 trillion. And that’s after adjusting for inflation!
So how can this mess be solved? At the risk of over-simplifying, there are four options.
1. Do Nothing. Some politicians want to stick their heads in the sand and pretend there isn’t a problem. They argue that the “Trust Fund” can finance promised benefits until the early 2030s. But the so-called Trust Fund has nothing but IOUs, which means that benefits can only be paid by additional government borrowing. As you can imagine, that doesn’t bother most politicians since they don’t think past the next election cycle. But this red-ink approach isn’t a solution because the IOUs will run out in less than 20 years. So what happens at that point? Retirees would have their benefits automatically reduced.
2. Personal Retirement Accounts. The reform solution would allow younger workers to shift their payroll taxes into personal retirement accounts. This “funded” approach is working very well in nations such asAustralia, Chile, and the Netherlands. Since there would be less payroll tax revenue going to government, there would be a “transition cost” of financing promised benefits to current retirees and older workers. But this approach would be less expensive than trying to deal with the unfunded liabilities of the current system.
3. Limit Benefits. For those that recognize the problem but don’t want genuine reform, that leaves only two other possible choices. One of those choices is to reduce benefits by modest amounts today to preempt large automatic benefit reductions when there no longer are any IOUs in the Trust Fund. Raising the retirement age would be one way of reducing outlays since people would have to spend more time working and less time collecting benefits in retirement. Another option is means-testing, which means taking away benefits from people whose income from other sources is considered too high.
4. Increase Taxes. The other option for non-reformers is to generate more tax revenue. An increase in the payroll tax rate is a commonly cited option. Politicians have already done that many times, with the payroll tax having climbed from 3 percent when the program started to 12.4 percent today. Another option would be to bust the “wage base cap” and impose the payroll tax on more income. Under current law, because the program is supposed to be analogous to private insurance, there’s a limit on how much income is taxed and a limit on how much benefits are paid. Imposing the tax on all income would break that link and turn the program into an income-redistribution scheme, but it would generate more money.
Now take a guess which of the four options is getting the most interest from Hillary Clinton?
As reported by the Washington Post, Hillary Clinton is signaling that she wants to change Social Security so it is less of a social insurance program and more akin to welfare.
At a town hall here Tuesday, she said she’d be open to a Social Security tax increase proposed by Sen. Bernie Sanders (I-Vt.), her radical rival in the primary. During the 2008 campaign, Clinton had flatly rejected such an increase. Her comments this week could suggest that she has warmed to the idea, or that she is responding to a broader shift to the left among Democrats. …Clinton…described an approach similar to Sanders’s — raising taxes only on the wealthiest earners to avoid an increase for people who consider themselves upper middle class. “We do have to look at the cap, and we have to figure out whether we raise it or whether we raise it a little and then jump over and raise it more higher up,” Clinton said. …Sanders’s proposal — increasing payroll taxes, but only for the wealthiest earners — resembles the one President Obama laid out as a candidate in 2008. …At the time, Clinton opposed the idea. “I’m certainly against one of Senator Obama’s ideas, which is to lift the cap on the payroll tax,” she said in a Democratic primary debate then.
So Hillary’s original position was the do-nothing approach, but now she feels pressured to go with the class-warfare tax-hike approach.
As a side note, I think it’s noteworthy that the article acknowledges that the current “wage base cap” exists because there’s also a cap on benefits.
…the wealthy don’t pay taxes on their earnings above a certain amount each year, it’s important to keep in mind that they also don’t receive benefits on those earnings later on.
But I suspect this kind of detail doesn’t matter to Bernie Sanders, Hillary Clinton, and the rest of the class-warfare crowd. They simply want to maintain (or even expand!) the social welfare state in America. Vive la France!
For more information, here’s a video I narrated for the Center for Freedom and Prosperity.
[brid video=”13470″ player=”1929″ title=”Senator Obama’s Social Security Tax Plan”]
And here’s another video on why personal retirement accounts are the ideal option.
[brid video=”8193″ player=”1929″ title=”Saving Social Security With Personal Retirement Accounts”]