The Problem with Conservative Plans to Save Social Security

The Problem with Conservative Plans to Save Social Security
by Laurence M. Vance, September 24, 2012

The largest expenditure of the federal government is Social Security. According to the most recent annual report of the Social Security Board of Trustees, in 2011 $725 billion in Social Security benefits were paid to 55 million Americans, plus other expenses of $11 billion. The three major entitlement programs -- Social Security, Medicare, and Medicaid -- account for almost half of all federal spending.

According to the Monthly Treasury Statement of Receipts and Outlays of the United States Government (MTS), by the end of August, with a month to go in its fiscal year, the federal government had already paid out record amounts in both Social Security and disability benefits during fiscal year 2012. And according to the Social Security Administration, the month of August saw a record 56,291,797 people receiving some kind of Social Security benefit. More than 10,000 people per day now become eligible to receive Social Security.

The Social Security program, which is supposed to be funded by "contributions" from employers and employees is going broke. Currently, employers pay a tax of 6.2 percent and employees pay a tax of 4.2 percent on each employee's wages up to a "contribution and benefit base" of $110,100. But the payroll taxes from the 158 million Americans who pay them are not enough to fund the system, hence Social Security's $174 billion deficit last year. The so-called Social Security Trust Fund is expected to be depleted in 2033, which is three years earlier than the Trustees projected last year.

But as anyone familiar with Social Security knows, the situation is actually much worse. The system has no real trust fund except in the mind of government accountants. Social Security taxes are not invested. And there is no retirement account in the name of each taxpayer. Every penny paid into the system is merely deposited in the government's general fund and immediately spent.

Aside from raising Social Security taxes, since that is not politically expedient, other proposals to "save" the system include raising the retirement age, means-testing benefits, cutting benefits, fully taxing benefits, ending early-retirement benefits, raising or eliminating the wage base, reducing cost-of-living increases, and any combination of those things.

Various plans have been offered by conservatives over the years to fix, reform, strengthen, or save Social Security. Former president George W. Bush has said that the biggest failure of his administration was not that he started two wars at a cost of more than $2 trillion, doubled the national debt, or ran the first trillion-dollar deficit, but that he was not able to privatize Social Security.

The Heritage Foundation, a conservative think tank, thinks it finally has the answer to the crisis facing Social Security. There is a whole chapter on the subject in its plan titled Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity. According to the introduction, the Heritage plan "redesigns Social Security and Medicare as sustainable programs that truly protect seniors and will be around for our children and grandchildren." Social Security and Medicare need to be redesigned from "defined-benefit" programs to "real insurance" programs that focus on "those who need them and are phased out by income for those who do not really need them."

Under the Heritage plan, there would be "a gradual transition to a flat benefit that pays retirees who qualify for a full Social Security check" (those with 35 or more years of work). The benefit "will be the equivalent of about $1,200 per month in 2010 dollars when the reform is complete," indexed for inflation. The flat benefit will be phased in slowly, as it will apply only to workers born after 1985. In the meantime, benefits will begin to be means-tested right now. Those making between $55,000 and $110,000 ($110,000 and $165,000 for married couples) will receive a reduced benefit amount. Those making more than the income ceiling "will receive no Social Security payments." Married couples can decide whether to be classified as individuals or a couple. The normal retirement age will be gradually raised to 68 over the next ten years for workers born in or after 1959. The early-retirement age also increases, rising to 65 over the next eighteen years for workers born in or after 1964. After that, "both early and normal retirement ages will be indexed to longevity." Those who work past their full-benefit age "receive a special annual tax deduction of $10,000, regardless of income level." Once benefit reforms are fully implemented, no Social Security benefits will be subject to income tax.

As a supplement to Social Security, the Heritage plan would also institute a new savings plan in which "6 percent of each worker's income is placed in a retirement savings plan that the worker owns and controls unless he or she explicitly declines to have such an account."

Saving the American Dream also calls for changing the way Social Security is funded. The Heritage Foundation envisions a flat-tax system that "folds today's federal payroll taxes financing Social Security and Medicare into the new system, establishing a single tax rate for all taxpayers." But even though payroll taxes would be eliminated, "the revenues they would have raised are credited appropriately to the Social Security and Medicare trust funds." The funding of Social Security is, of course, a separate issue from the function of Social Security. The two reforms are loosely connected in the Heritage proposal, but they could be made fully independent.

There is no question that the Heritage plan includes some notable features, such as means-testing benefits and establishing a realistic retirement age. Although it is true that, depending on one's income, up to 85 percent of Social Security benefits can now be subject to income tax, no amount of wealth or income excludes one from receiving benefits. Social Security's original retirement age was 65. For those born after 1960, it is now 67, with reduced early-retirement benefits payable at age 62. The best thing about the Heritage plan is its elimination of payroll taxes. That would forever put to bed the myth that Social Security is anything but an intergenerational, income-transfer, wealth-redistribution welfare program.

There is just one problem. And it is the same deficiency found in every other conservative plan to fix, reform, strengthen, or save Social Security. (I don't mean to pick on conservatives, but liberals generally never advocate making any changes to the Social Security system.) All such plans continue the existence of an illegitimate government retirement and disability plan funded and maintained by government force.

Because Social Security is an income-redistribution program, because it is an illegitimate purpose of government, because it is unsustainable, because it is unconstitutional, and because it is incompatible with a free society, the system must be abolished. To that end, it is Americans' attitude toward entitlements that must first be changed.

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