"While Social Security is not the cause of our deficit, it faces real long-term challenges in a country that is growing older. As I said in the State of the Union, both parties should work together now to strengthen Social Security for future generations. But we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans' guaranteed retirement income to the whims of the stock market." President Barack Obama, Wednesday, April 13, 2011.
Nice Speech
Dear Mr. President, wonderful speech. I hope your deficit reduction outline is a goal, and not just a starting position to be bargained away. In particular, you addressed the issue of Social Security reform, a subject that is an obsession of the right, who intend to reform it out of existence by letting Wall Street wring the money out of it.
We both know that Social Security has never contributed a single penny to the national debt, yet you have accepted the right's insistence that we put Social Security on the table even though it cannot be used to reduce the deficit.
So Be It
If we must put Social Security on the table, let's put it on a different table than the one used by the people who want to destroy it.
As things stand right now, Social Security is soundly financed for the next 27 years - it is in fact America's most soundly financed large government program ever. It's current surplus is over $2.6 trillion, and that will grow to $4.3 trillion before it begins to decline during the boomer's retirement years. In 27 years it will return to pay as you go - just as it operated for its first half century. At that point - 27 years from now - it will need to either increase revenues, or reduce benefits by about 20%. So we really need to get on top of that ... in about two decades.
But what the hell, Social Security is on the table now, not in two decades. What should we do?
Our 3 point plan:
Broaden the Social Security Tax base
Strengthen benefits
Permanently Lower Payroll Tax Rates
The GOP laid a trap for you last December when they agreed to a temporary reduction in payroll taxes to replace your Making Work Pay tax credit. When the payroll reduction ends - it will be called a secret increase in Social Security taxes. However ... we can make it permanent without crippling Social Security's revenue stream. Here's how:
Broaden the Social Security Tax base
Ask any progressive what to do when the boomers have used up the Social Security trust fund and they will say to simply raise the cap. That would solve all of Social Security's problems without any rate changes or benefit cuts. Right now Social Security's FICA tax is only levied on regular wage income up to about $106 thousand dollars. Every additional dollar of income goes untaxed by Social Security. Social Security could run forever without cuts in benefit levels simply by increasing that cap. Or eliminating it altogether. But let's do more than that. Let's broaden FICA to include all income, including income that is now exempt form FICA taxes - like royalties, dividends and capital gains. Treat all income equally. In effect that would turn FICA into the holy grail of conservatives - a flat tax.
Strengthen benefits
Right now Social Security saves money by deliberately not quite keeping up with rising costs. It uses a Cost Of Living Adjustment that doesn't keep up with actual inflation, thereby reducing costs by gradually paying retirees less and less in real buying power. We need to make benefits keep up with actual costs so that retirees don't face a gradual erosion of their standard of living.
The retirement age has been increased from 65 to 67 for those born after 1960, and now reformers (deformers?) want to raise it again to 69 or 70 on the theory that people live so much longer now. But that is a sham. Workers are paying into Social Security for just as long, or longer, and actual life expectancy once you reach retirement age has not increased much, only a couple of years. Almost all of the increase in life expectancy is due to far fewer people dying at a young age, not by those who reach old age living significantly longer. And while it may be fine for a banker or a executive to keep working to 70, a manual laborer needs to retire much younger. We need to reduce the retirement age back to 65, and in some cases allow full retirement benefits at even younger ages for those whose careers took an especially heavy toll on their bodies.
These measures would benefit the economy by putting spending money in the hands of consumers, and by opening up job positions for the unemployed when seniors are able to be gainfully retired rather than lingering on in jobs that could be filled by younger workers. It may sound minor, but those add up to a very powerful boost to wages and economic activity - and thus to greater general tax revenues.
Permanently Lower Payroll Tax Rates
Here's the beauty part. Broadening the FICA tax base increases revenue so much that it could pay for those modest increases in benefits, plus eliminate any shortfall that would have happened after 27 years, and still allow us to make that temporary cut in payroll tax permanent - and more. In fact we should be able to cut the payroll tax rate by more than half - for both taxpayers and employers. Or we could eliminate the employer portion entirely - do you think that might attract the interest of the business lobby?
Call Their Bluff
Call their bluff Mr. President - by putting Social Security on a more solid footing for the future without cutting benefits, raising retirement ages, or increasing tax rates. Instead turn FICA into a reduced rate broad based flat tax that reduces or eliminates the payroll tax that employers pay.