Social Security Fundamentals

WM: Social Security: Social Security Fundamentals: A Fact-Based Foundation, April 26, 2023

Social Insurance

The most basic foundation for understanding Social Security is the nature of social insurance itself. As I commented to the Subcommittee in December 2021:

The theory behind social insurance has two pillars. One: accidents of birth and family size must be evened out so that unearned gains and unreasonable burdens are not a feature of retirement, as they once were. 

The second is that, because a main feature of capitalism is the transfer of ownership of the products of labor, with a full return for that labor, social insurance returns what was surrendered during working years. 

This is especially the case for lower wage workers that make it possible for higher wage workers to avoid less profitable activities - like cleaning their own offices or serving business lunches. Social insurance restores what society took from them without just recompense. The value of every minute of their lives, on a personal basis, is equal to the value of those who are “more productive.”

Establishing The Trust Fund

In our first submission to Congress in May of 2010, we addressed Trust Fund reimbursement issues. They are particularly applicable given the proposed funding increases in the subject legislation (which, if passed, would continue to have workers subsidize lower income tax rates for the few). They remain especially true today.

When Social Security was saved in the early 1980s, payroll taxes were increased to build up a Trust Fund for the retirement of the Baby Boom generation. The building of this allowed the government to use these revenues to finance current operations, allowing the President and his allies in Congress to honor their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is entirely appropriate to rely on increased income tax revenue to redeem them. It would be entirely inappropriate to renege on these promises by further extending the retirement age, cutting promised Medicare benefits or by enacting an across the board increase to the OASI payroll tax as a way to subsidize current spending or tax cuts.  

The Conservative Nature of Trust Fund Estimates

In 1999, Dean Baker and Mark Weibrot published Social Security: The Phony Crisis in which they eviscerated the efforts by Michael Tanner and the Cato Institute in favor of personal accounts for Social Security. The myth that the program was out of balance is based on the necessity in law to estimate conservatively rather than putting forth the most likely scenario. The latter shows that there is no problem. Their bottom line is that, using the conservative assumptions found in the official forecast, personal accounts would not occur as advertised. Indeed, they would perform even worse than Social Security.

Tax Reforms 

We offer two reform proposals in our comprehensive tax reform plan that will provide for a more equal distribution of Social Security benefits for the future, although if these proposals would make some current beneficiaries better off, they should be applied to them retroactively.

The problems with the current system are that the poor do not get enough and the rich get too much, although in the end, due to bend points, the rich only get what they put in, which drives the demand for personal accounts. 

One oft-cited reform is means-testing. This will only make the call for personal accounts louder. The alternative to means testing is to lower the ceiling of the employee contribution. This seems counter-intuitive - but this is only the case if the employer and employee matches are equal. They need not be. Employer contributions need not be capped, nor should they be tied to income earned. Rather, they should be credited equally. Here are the details:

Individual payroll taxes. A floor of $20,000 would be instituted for paying these taxes, with a ceiling of $75,000. This lower ceiling reduces the amount of benefits received in retirement for higher income individuals. The logic of the $20,000 floor reflects full time work at a $10 per hour minimum wage offered by the Republican caucus in response to proposals for a $15 wage. The majority needs to take the deal. Doing so in relation to a floor on contributions makes adopting the minimum wage germane in the Senate for purposes of Reconciliation. The rate would be set at 6.25%.

Employer payroll taxes. Unless taxes are diverted to a personal retirement account holding voting and preferred stock in the employer, the employer levy would be replaced by a goods and receipts tax of 6.25%. Every worker who meets a minimum hour threshold would be credited for having paid into the system, regardless of wage level. All employees would be credited on an equal dollar basis, rather than as a match to their individual payroll tax. The tax rate would be adjusted to assure adequacy of benefits for all program beneficiaries.

If these options are adopted, the impetus to establish personal accounts largely goes away. Ironically, a more equal distribution on the side of accumulation would make personal accounts workable. Initially, the employer match would be replaced with a broad based VAT, as above. In time, as employee-ownership of the workplace evolves (and it must), funding with a goods and services tax would be replaced with funding with an employer-paid subtraction value added tax. Such a change would nearly be price neutral, although exporters would pay more while importers pay less.

Personal accounts for employee-owners could not be enacted now - as there are simply not enough such firms for this reform to make a difference. That this sector should be expanded is the difference between a widening income divide in the American economy and a more cooperative and democratic economic future. 

A different form of tax reform is necessary to do this - one that involves a tax cut. Currently, when creating employee stock ownership programs, the founder sells his stock to an ESOP Trust fund and gets a tax premium due to the fact that capital gains taxes are not levied on such a sale. Giving shareholders in public companies the same benefit - in other words - a tax cut, will provide the incentives needed to jump start the employee-owned economy.

A further tax reform will facilitate this transition: fully end the “Death Tax” and capital gains taxes (both long and short term) and replace them with an asset value added tax, which is described in the attachment.

Increasing Incomes

The current “school solution” to increase savings to supplement Social Security, as found in Social Security 2100, is obscene. Those who can save, already do. Most cannot do so and giving them tax incentives, even with automatic contributions, highlights the inadequacy of the wages in the vast majority of households.

There are two reasons for this. The first is that the minimum wage has not increased in decades and the tipped wage is not a wage at all, especially when low tipping is not offset by higher wages, as required by law but never enforced (or paid).  To restore the value of the minimum wage to the level it would have been had it been indexed to inflation would require an increase (and I mean an immediate increase) to $10 per hour. This was the counter-offer the Senate Minority made to counter a $15 wage increase until the Senate Parliamentarian ruled that such a reform was not germane in Reconciliation. The Majority Leaders should have taken the deal.

A $12 wage would restore the balance to 1965 levels, which is when the Kennedy-Johnson tax cuts took effect and compensation and productivity were decoupled. An $11 per hour wage with a decrease in full-time hours to 32 per week would have the same impact for workers.

A $15 wage - which is an old number - was meant to be a family wage - and would be $18 to have the desired effect. The other option, one proposed in the President’s Budget, is to increase the Child Tax Credit to pandemic recovery levels (including making it fully refundable), although I would start the phase out at the $85,000 income level, with no credit for households earning over $150,000. The amount of the credit should also be increased with time to $1,000 per month, per child and then indexed for inflation.

The second reason wages are inadequate is the way inflation adjustments are made - which is as an equal percentage increase to all employees or beneficiaries rather than an equal dollar increase. This was an innocent mistake until tax rates were cut on the CEO class. When the government stopped taxing away increased compensation for business owners and executives who cut labor costs, a minor math mistake turned into class warfare from above. It is time to fix this.

Adjusting the minimum wage does not affect the median dollar in the economy, which is earned at the ninetieth percentile of households. This has been the case for decades, and it is why anyone below that level has LOST VALUE to inflation. 

The federal government plays an outsized role in how salaries are determined through percentage based cost of living adjustments to government workers, beneficiaries, government contractors. The government can change this with the stroke of a pen.  

From here on in, adjust for cost of living on a per dollar an hour rather than on a percentage basis (or dollars per month or week for federal beneficiaries). Calculate the dollar amount based on inflation at the median income level. No one gets more dollars an hour raise, no one gets less dollars per hour in increases. Increase the minimum wage as above and consider decreasing high end salaries paid to government employees and contractors. Even without decreases, simply equalizing raises will soon reduce inequality. Why is this necessary?

Let me emphasize: prices chaise the median dollar. The median dollar of income is actually at the 90th percentile, rather than the 77th percentile (which is about where the median is). This strategy will reduce inflation in both the long and short terms as prices adjust to decreases in higher salaried income. 

Attachment: Asset Value Added Taxes Video

Attachment: Social Security and Ownership