The Social Security 2100 Act, which was introduced in Congress at the end of January by Rep. John Larson (D-CT), claims to bring a sea of change to the discussion of Social Security’s future.
On the surface, the proposal, which has 200 sponsors, has it all. Legislators promise that these changes will stabilize the system, increase benefits and poverty protection, and provide tax relief. Better yet, the changes will “cost the average worker less a cup of Starbucks per week,” Larson claimed. And the media swooned.
1. It Treats the Symptoms Instead of the Disease
The total sum of the checks was supposed to be a wash. Unfortunately, it is not for those who live beyond a normal lifetime.
It is argued that Social Security should be more generous. While the assertion is debatable, the cause of low benefits is not. In the 1960s, Congress expanded Social Security to enable seniors to receive checks before full retirement. Those approaching retirement responded in droves. The rules allowed these seniors to trade lower benefits in exchange for more checks. The total sum of the checks was supposed to be a wash. Unfortunately, it is not for those who live beyond a normal lifetime.
Today, the average benefit check is around $1,450, or $17,400 annually. The majority of seniors today took their first benefit check prior to full retirement. As a result, someone getting an average check today might be due more than $23,000. That is a $5,600 drop in annual benefits. This legislation offers to increase that benefit by $348.
It deals with neither early retirement nor the associated discount, which is rising to 30 percent. The sponsors do not even mention it.
2. It Relieves Tax Headaches for Current Seniors by Preserving Them for Future Retirees
The taxation of Social Security is a mess, providing a somewhat tragic and somewhat comical insight into the unintended consequences of mixing politics and power. In 1983, lawmakers added a tax intended to reclaim benefits from affluent seniors who had collected more from the program than they had paid. Those rules have morphed over 35 years into a tax that specifically targets middle-class seniors with marginal tax rates typically reserved for those in the top 1 percent of income, and soon enough it will hit those in poverty.
Instead of addressing any of these issues, this legislation simply seeks to insulate current voters from the consequences.
The existing tax has three problems. First, the threshold trigger is fixed, meaning that inflation will drive more and more people into the tax zone. Second, the rate of return on the program has fallen substantially since Congress decided that 85 percent of a benefit check represents earnings above contribution. Third, the tax phases in very rapidly. In conjunction, seniors are paying taxes on 85 percent of their benefits by the time they have $75,000 in annual income.
Instead of addressing any of these issues, this legislation simply seeks to insulate current voters from the consequences. The thresholds remain fixed. The portion of benefits subject to taxation continues to be completely inconsistent with cost and benefits. And the rate at which the tax applies to benefits remains unaltered.
3. The Legislation Tilts Social Security More Towards Entitlement Than Insurance
"Social Security is not an entitlement—it’s the insurance Americans have paid for to fund retirement, disability, and survivor benefits through a lifetime of work," Rep. Larson has said.
This is an argument that will never end. Some argue that Social Security is a tax that pays for an entitlement. Others claim it is an insurance premium that will pay benefits based on a lifetime of work. While I resist the urge to take sides, this legislation unquestionably tilts the mechanics of the system further towards “entitlement” by introducing a new, higher price for benefits for those with higher wages.
I do not take sides, but I have to say that in order to argue that FICA is an insurance premium, one has to believe that the benefit might offset the cost. To illustrate, if the worker is spending a quarter to buy a dime of discounted cash flow in retirement, 15 cents of the quarter is just a tax. The rest is nothing more than a bet on longevity.
At this point, the benefit formula is tiered so that low-wage workers get the best deal and benefits become more expensive as wages increase. This legislation introduces a new tier pricing that borders on extortion.
4. This Legislation Puts the Independence of the Program at Risk
“Tax” revenue represents a general fund subsidy that puts the character of the program at risk. At some point, higher and higher prices for benefits translate into subsidies that beg questions about the use of the revenue. For example, should the government subsidize a program that is not universal? Specifically, the rules exclude those Americans with the kind of spotty work records that need the most help in old age. Moreover, the system provides greater benefits to children of the affluent than children of the poor. It gives housewives 50 percent of what their spouses get. It will prove very difficult over decades to push general revenue into a program that takes better care of the rich than it does the poor.
FDR would have referred to Larson as one of "the damn politicians" who wanted to scrap his program. That is a longer discussion.