Social Security Problems

Social Security and Medicare are two of the looming issues that will dominate and determine the economic future of our country. As they exist right now, they are welfare programs that will suck up more and more of this country’s economic output every year until they are curbed or our country goes bankrupt. The most difficult part is that there are industrial (pharmaceutical) and demographic (AARP) forces that are going to push for them to be expanded and not moderated.

Since those groups are both well organized and well funded, a political solution that is good for the long term health of the economy is going to be difficult, happen slowly and not be sufficient unless there is a crisis which forces expedient change. There are only two alternatives: a) find a multi-billionaire who believes in the cause and/or b) start spreading the word about responsible changes and see if there is enough support for a grassroots campaign.

Anybody who looks into the budget and projections for Social Security will agree it needs to be massively overhauled. This huge program gives to every retiree – whether they need it or not. As the retirees grow – in numbers and percentage of the population – the impact of this program is going to grow significantly.

The problem is that this generosity has to come from somewhere. In this case, it is from the paychecks of millions of Americans. With so many of other people’s wallets to draw from, politicians have had no problem making promises of future benefits. To meet those promises, more and more money is going to need to be borrowed and taxed from generations down the line.

This is going to bankrupt individuals if taxes are raised to meet the promises. It is going to bankrupt the government if they are not. This means the system as it exists today is severely broken and needs to be fixed.

While the system is severely broken right now, it is not the concept that is flawed, but rather the implementation. Here are some suggestions for how to go about fixing it.

• Do Not Change Benefits for Current Retirees
  
• Include Social Security in the Federal Budget
• Tax ALL Earned Income Equally For Social Security
  
• Not Everybody Should Be Eligible
• Provide Equal Benefits For All
• Really Balance the Federal Budget Every Year
  

Do Not Change Benefits For Current Retirees

It is critical that the changes to be made to Social Security do not impact current retirees. It would be unfair and disastrous to weaken or remove a major portion of somebody’s income for retirement. It would be especially cruel for the government to renege on that promise at a point when many people would find it difficult or impossible to replace that lost income.

Included in this are those who are very close to retirement too. At least the 55+ year olds who would hve very little time to make changes to their financial plans for retirement if changes to Social Security are enacted swiftly.

For those of us who are further out from retirement, the amount of change that is reasonable will grow the more time we each have to deal with the issue. A phased approach is appropriate where the full changes should impact those who are currently in the 40-45 year old range. 20 years is a good amount of time for individuals to adapt to the new program.

Include Social Security in the Federal Budget

The accounting trickery that is used to keep Social Security and Medicare ‘off the books’ of the annual budget needs to stop. Social Security is not independent. The program will not be shut down just because the ‘Trust Fund’ becomes empty. Plus, the collected funds are ‘borrowed’ for use in the current budget anyways.

It is time to stop pretending. Include it. Incorporate the Social Security tax into the income tax. Do the same with the Medicare tax. By consolidating, it becomes clearer how everything is really being paid for and how much we, as a nation, are overspending.

Only then, when the budget and projections are accurate will we really see how bad the issues are. Only then, will we be able to make the hard decisions for sustainability. Only then will meaningful changes be possible.

Tax ALL Earned Income Equally For Social Security

As it is currently implemented, the Social Security tax is among the most regressive taxes in this country? It gets paid on an individual’s first earned dollars, but not on their last. The poor pay a higher percentage of their total compensation to Social Security than do anybody else.

The quickest and easiest way to restore some of the equality to this tax would be make it apply equally to all earned income. This would generate additional income to meet the Social Security obligations without increasing the burden on those least able to afford it.

Not Everybody Should Be Eligible

The final step in ‘fixing’ Social Security is to limit who can collect. This ties in with allowing people to opt out of the retirement portion, but it also covers limiting benefits for people who otherwise would seek them.

Rather than handing it out to everybody who has paid in, benefits should go to those who are not able to provide for themselves. Those who lack assets and who are not earning a living income otherwise. Individuals like Warren Buffet and Bill Gates and Steve Jobs should not receive Social Security. My suggestion? Pick a point that is at 125% to 150% of the poverty level. Set Social Security at that level and phase out benefits at a 1/3 or 1/4 rate (Receive $3 or $4 in income, Social Security drops by $1. ). That way we have defined the minimum somebody will receive.

The actual amount of benefits can be adjusted based on the number of years in the workforce and the age benefits are first taken at, just like now.

If the desire is to limit the beneficiaries even more, there is another step that could be taken. Allow individuals to voluntarily remove themselves from Social Security. Let them have a reduction is Social Security taxes in exchange for not being eligible for retirement benefits. Thus, if I claim exemption for one year, I pay less taxes, but for Social Security calculations, it is just like I was unemployed for the entire year.

Now, before you say it – yes, some people would be in trouble from that. They would claim exemption, not save the money, and be destitute at retirement. This is America however, and along with the Freedom that we enjoy comes the responsibility to accept the consequences of our own actions. If I am able bodied, choose to opt out of Social Security, and don’t save – why should I be rewarded?

Provide Equal Benefits For All

For everybody who qualifies for Social Security, the benefits should be the same. Not based on how much has been paid into the system. The changes to the system that I am proposing is to turn it into a safety net and nothing more than a safety net. As such, the idea is to ensure that anybody receiving benefits is able to live at a certain level of lifestyle. That level is consistent, no matter who you are.

If we accept that somebody who has been a contributing member of society for 45 years deserves not to fall between the cracks, does it really matter what they did or how much they made? Does a former janitor deserve less of a safety net than a former stock broker? If they did not save or could not save, should one receive more benefits than the other? If so, which one and why?

Lives well lived are equal in my book. Lets reward them the same.

Really Balance The Federal Budget

Yes, this ties in to Social Security – especially if it is incorporated into the budget like it should be. This ties in because Social Security expenditures are driven higher and higher because of inflation. Inflation is tied in to the federal debt and deficit numbers. Thus, if we balance the budget, Social Security will grow at a slower rate as inflation will also be held down.

Think of it this way: The economy has a certain amount of goods and services for sale. All of these are for sale regardless of how many or how few dollars there are out there. If there are a lot of dollars, people will be willing to pay more for those goods and services. They are willing to pay less if there are fewer dollars out there.

Every time the government spends a dollar it does not have, it creates a dollar. The mechanism of creation can vary, but in effect the federal deficit is a measure of extra dollars created from nothing to buy goods and services.

If the budget is balanced, even if the debt stays the same, we will have a positive effect. The economy will keep growing with more goods and services available. More goods and services, against the same amount of ‘extra’ dollars means each dollar is worth more.

Now, the federal government is not the only place that can ‘create’ dollars. Consumer borrowing plays a large role too. The federal government is the largest single entity and has enough power that its debt does influence the inflation rate.

Conclusion

Social Security needs to be modified for long term sustainability. However, the system should not be scrapped in its entirety. With a significant overhaul, it can become a positive program that does what it should and not more. With those changes, it will no longer threaten to damage or destroy our economy or personal lives.

Lets make difficult choices, but with an eye to our long term future. Do not pander to organized political interests. Instead, lets do what is best for ourselves and our country in the long run. Lets reduce the cost of Social Security and make it a safety net instead of a benefit for all. Lets give back our futures to each other and not to a Nanny Nation who knows how to plan for our retirement better than we can do on our own.

Other information that I have heard recently also supports my thinking about changes that should be made to the federal income tax. Real estate gurus and even Rich Dad author Robert Kiyosaki helped drive home the point that taxes are inefficient and are not progressive like they are claimed to be. The rich have the ability to control how they make their money which allows them to keep more of it by despite a higher marginal tax rate.

Even those gurus and guides that we look up to will acknowledge that taxes are complex and take a lot of time and money to figure out properly and to plan for how best to reduce their tax liability. The government knows this as well, requiring that estimates of how long it takes to prepare an average return be included in the tax preparation materials.

All this, and a lot more, has driven me to the conclusion that the tax code needs to be made as simple as possible. All of the different deductions, credits, and differing tax rates on different types of income make filing taxes a more complex and difficult task than it should. It also has relatively little impact on most people’s actions – they do not change their behavior to minimize their tax burden. So, all of the tax provisions aiming to promote certain behaviors are significantly less effective than their authors would like to believe.

Social Engineering

Then there is the question of if the government should be in the role of being social engineers – changing incentives and penalties to get desired behavior out of the populace that would not naturally occur. It is not just the tax code that is manipulated to do that either. Welfare, insurance and financial regulations and more extend beyond basic programs and the rules behind each of those are written in such a way as to reward certain actions – actions that are not always in the best interest of society or individuals.

Lets look at just a few examples from the tax code. First is the home mortgage interest deduction. This deduction is in place to encourage people to own a home by artificially making it less expensive to pay for it. Essentially, it subsidizes home owners who maintain a mortgage on their home. Thus, indirectly the federal government helps encourage urban sprawl which has its own list of benefits and downfalls.

Second are all of the per person credits and per child credits. Like the home mortgage interest deduction, these credits reward certain behavior. In this case, it is having a large family. So the federal government is in the business of encouraging procreation [while trying to discourage teenage pregnancy]. Yes, these credits and deductions do not fully offset the additional costs of raising a child. They do however offset those costs which helps to promote that act.

Third is the preferential treatment of capital gains. By choosing to tax capital gains at a lower rate, the official line is that it is to encourage people to invest in American companies, thus driving economic growth, creating more jobs and helping us live better than we would otherwise. What it actually does for a government that is deficit spending is tax our labor at a higher rate.

Spending

Now, before I get into my thoughts on what would be a reasonable tax plan, there is another side to this equation that matters more in some ways than taxes. It is government spending. Regardless of how fair or unfair, simple of complex a tax system is, the spending on the other side actually has more of an economic impact. Without restraint in spending, it does not matter how much is collected in taxes. Now, I will not expound on spending right now beyond saying that I think the federal government needs to do less while state governments need to do more and the American citizens ought to take on more responsibility for their own communities rather than handing it off to government at all levels.

Required Tax Complexity

Now, I do realize that no matter what I propose, there is a certain level of complexity that has to be involved. Things need to be defined and guidelines need to be set – especially on the corporate side – on how to determine certain values that are used to determine tax liability. It may be possible to get to where some people’s taxes could be filed via postcard, but that vision is more dream than reasonable.

Complexity would come from how to treat certain plans that are in place now like 401k, 529, IRA and similar that give favorable tax treatments for saving for the future. Municipal bonds and more would also be significantly impacted. This treatment would be part of an appropriately crafted rework of the current federal revenue program as enacted by the US Congress.

Reasonable Tax Plan

My proposal is that all income be taxed equally regardless of source. Income taxes should be progressive with the rich paying much more for each marginal dollar than somebody at the poverty line. Rather than have different classifications of taxpayer (single, married filing jointly, etc.), there should be a single tax chart for individuals and a single chart for corporations. Each person who makes money in a given year would file separately. There should be no deductions or credits for any particular activity.

Explanation

Income taxes are enacted so that the government can have the funds necessary to carry out its duty. Ideally, the government would only take the funds it needs and would not take so much that it leaves even low wage workers destitute. In my opinion, this requirement to collect revenue needs to be divorced from the process of spending completely. By simplifying the tax collection process, it becomes more of a revenue tool and less of a policy tool.

As an example, with no child-care tax credit, the government will have to make the decision if it wants to take its hard earned revenue and actually pay for child care. That means that we get to choose, through the representatives we elect, if we want the government to be more Socialist by subsidizing child care and more, or if we want to be more Capitalist and market driven.

For those who are concerned that eliminating credits and deductions will harm the poor more than the rich, consider the power of setting the marginal tax rates. By setting a rate of 0% on earnings up to a certain amount (say $15,000), the poorest workers will not be subjected to any taxes. Offsetting that, choosing a 35%, 40% or even 50% tax rate for all income above a certain level (say $500,000) we wind up with a progressive tax system that will not works to avoid pushing people to poverty while still collecting enough revenue for the government to function.

Lastly is the proposal to have every taxpayer file separately. This will eliminate the marriage tax penalty (which still exists) while collecting from each person according to the same standards. A high-earning wife will not force her husband to pay higher taxes on his income than he would on his own. A day-trader will pay on his earning the same as a business owner, construction worker, real estate investor or librarian. It would be easy to predict the impact of individual decisions on your annual tax liability because there are fewer, simpler rules to know and understand.

Follow up

I like this plan for a lot of reasons. First, it frees up a lot of time for people to use more productively with their families, friends, or developing their businesses and careers. As a part of that, all the economic activity spent on calculating taxes is freed up for use keeping America competitive in the world economy. Second, it does not require a college degree to figure out how much money somebody is paying for the government. Third, it will force the government to find new ways to hide their social engineering efforts. Finally, it treats everybody equally regardless of how they make their money.

Yes, adopting this plan would change a lot of things for people financially. The transition would have to be approached with a lot of care and caution otherwise chaos and harm could be done to a lot of people. Still, properly planned, this change could offer a lot of people benefits in how they handle their day to day financial lives and long term planning.

Please leave your comments about this idea. Once there are enough suggestions, criticisms and alternatives, I will summarize and respond with a follow-up post. I would love to see ideas that help lead to fleshing this out with the details necessary for it to become a useful tool in debates about federal taxes.