A Payroll Tax Reform Proposal

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@Hentor the Barbarian

Do you have a cite that demonstrates the assumptions about the economic and population growth related to the projected shortfalls? Here is some information from FAIR that claims that these estimates are based on exceptionally poor expectations about how things are going to go (i.e. worse than during the Great Depression. Do you believe that is going to happen? See also jshore’s contributions to the discussion.

I have read jshore’s contribution. I wish he would stop maliging Mr. Greenspan for things he is not doing. But that’s my own pet peeve. Could you post a link to that analysis? I cannot get to the “numbers” they are analysing.

In the meantime, here is a link to Bipartisan Commission on Entitlement and Tax Reform Interim Report to the President August, 1994 among the 7 findings it says this:

"*Finding Number 1:

TO ENSURE THAT TODAY’S DEBT AND SPENDING COMMITMENTS DO NOT UNFAIRLY BURDEN AMERICA’S CHILDREN, THE GOVERNMENT MUST ACT NOW. A BIPARTISAN COALITION OF CONGRESS, LED BY THE PRESIDENT, MUST RESOLVE THE LONG-TERM IMBALANCE BETWEEN THE GOVERNMENT’S ENTITLEMENT PROMISES AND THE FUNDS IT WILL HAVE AVAILABLE TO PAY FOR THEM.

Although the short-term fiscal outlook has improved, the long-term situation requires immediate attention. For the next 5 years, the Federal deficit is projected to average 2.5% of the economy, its lowest level since the 1970s. After 1998, however, Federal spending is projected to grow faster than revenues which will cause Federal deficits to rise rapidly.

In 2012, unless appropriate policy changes are made in the interim, projected outlays for entitlements and interest on the national debt will consume all tax revenues collected by the Federal Government.

In 2030, unless appropriate policy changes are made in the interim, projected spending for Medicare, Medicaid, Social Security, and Federal employee retirement programs alone will consume all tax revenues collected by the Federal Government. If all other Federal programs (except interest on the national debt) grow no faster than the economy, total Federal outlays would exceed 37% of the economy. Today, outlays are 22% of the economy and revenues are 19%.*"

I am aware that this is a 1994 report and that many of the changes requested were actually made. I cannot find the final report online. Any help would be appreciated.

This is a link to the National Commission on Retirement Policy. It is a large pdf but contains many good graphs and charts. Beware of some of them. They are the sort of rhetoric you have warned about an I have acknowledged. Chart 5 is a prime example. It mentions the payroll taxes collected and the benifits payed as a percentage of that, but it does not mention the large IOUs held in trust for Social Security. Chart 4 is more informative, but it may include the sorts of economic assumptions you were talking about. But on the first page the primary forces at work and which are of concern are listed. Baby Bommer retirement, People living longer, Low birth rates, Low rates of personal savings.

Now, it may be possible to assume that some new sort of productivity will come along and 2 future workers will be able to produce the same wealth as 10 workers of old. In such a scenario it may be acceptable for those 2 workers to pay much higher payroll taxes in order to finance the growing number of retirees retirement. But doesn’t it seem like an odd assumption to you?

So Bush did apply the surpluses elsewhere, but saying so is partisan rhetoric? I did state that both parties have done this, but you responded only to one element. Why is that?

Not to get into a hijack about partisanship (I will readily admit to mine), but this is the paragraph of yours I was responding to:

“First, the democrats must take blame for believing republican scare tactics regarding the future of social security circa 1982. At that time, they markedly increased the tax rate for Social Security and the system started generating large surpluses. These surpluses have been used by both parties to offset deficits in other areas. Presently, Bush has raided the surplus to offset losses that are at least indirectly associated with his tax cuts that largely went to the wealthy.”

Now, if you can honestly say that you were putting equal blame on both parties then fine, I’ll drop it. But it seems like a thinly veiled Bush bash to me.

I am not sure how it is equivalent to a welfare system, since only exceptional circumstances allow one to benefit without having contributed in the first place.

Because

1)those who benifited from one’s contributions have already benifited;
2)participation in the program is manditory;
3)the program is taking wealth from those who earn it and giving it to those who do not.

FTR, I don’t think I said that SS is “equivalent” to welfare. If I did allow me to retract that and say the SS is essentially a welfare system. Better?

Otherwise, those who get out have put in. Or am I wrong in that? In that sense, means testing seems unfair, since you are saying that you may not get out what you put in. However, given what Kimstu said, some type of prorated means testing may be equivalent to removing the cap in all but timing.

I don’t think you are wrong. People who get out also put in. But they do not get out what they put in. We are using new participants to pay earlier ones.

PART 1: If conservatives want to fund this program for elderly retirees who have paid into the system from something other than the funds they paid in, I would say that were fine if I trusted them to not turn around and try to use that to kill it later on (i.e. “this is just welfare and it is unfair for us to pay for it”).

But let’s be honest with each other. I am willing to admit that some conservatives are using scare tactics to convince people that Social Security is about to collapse. But you have to admit that the situation you describe above (funding from sources other than each individual’s contribution) is already occuring. Given the current Worker to Retiree ratio, Worker Productivity numbers, Life expencancy statistics, and tax to benifits ratios, we are collecting more money through payroll taxes than we need to fund current benifits. The extra SSS is being invested in special government bonds. This trust fund will keep the system solvent for some time to come. However, it will not do so indefinately. And, it will not do so without other budgetary changes being made.

PART 2: At the same time, if we could allow for some people to opt out and make sure that they receive a prorated reduction in benefits later on, that would be fine, as long as we don’t give in to the large proportion of those retirees who opted to invest their money and lost it. “Suck it up and be cold, you market trusting old coot!” I am too cynical to trust part 1 of this plan and too compassionate to be fully behind part 2.

I do not understand why this is necessary at all. No one has suggested that the portion to be invested can be invested in any and all stocks. There are fiduciary rules which could be made to apply to such funds. The primary difference between funds so invested and those not would be that the original contributor could retain ownership of said funds. Additionally any interest earned would be from sources other than future taxes. The point in both cases would be to remove more and more people from needing a welfare like social security system. If it is done in small steps, I don’t really see any reason for the rhetoric against it.

I do understand the financial objections. But the constant cry that Bush wants to destroy Social Security seems overblown to say the least.

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@jshore

Let’s try that sentence with the link again:

For example, as a result of a commission that Greenspan headed in 1983, social security taxes were raised in order to build up the trust fund to prepare for the retirement of the baby boomers:

I’m not sure this is the link you wanted to post. The link you posted to is titled “*DEFAULTING ON THE SOCIAL SECURITY TRUST FUND BONDS: WINNERS AND LOSERS *”. It says little about Greenspan’s involvement with the commission in 83. It does make the bizarre claim that “President Bush’s Social Security commission is suggesting in its interim report, that the federal government will default on the bonds held by the Social Security trust fund.”. The interim report this link is refering to is here. (PDF Warning) In it the word default only occurs once and not in any context which could imply defaulting on such a debt. In fact,

*The President’s Executive Order establishing the Commission requires the interim report to set forth “criteria by which the Commission will evaluate reform proposals.” First and foremost, our criteria must be consistent with the President’s principles for strengthening Social Security, as outlined in the Executive Order.

The President’s Principles For StrengtheningSocial Security:
(1) Modernization must not change Social Security benefits for retirees or near-retirees.
(2) The entire Social Security surplus must be dedicated to Social Security only.
(3) Social Security payroll taxes must not be increased.
(4) Government must not invest Social Security funds in the stock market.
(5) Modernization must preserve Social Security’s disability and survivors components.
(6) Modernization must include individually controlled, voluntary personal retirement accounts, which will augment the Social Security safety net.*"

So, we have several principles advocated here by many of you. Especially 1 and 2. Meanwhile we have a demonstration that social security is not to be replaced by private investment funds (6).

BTW, that interim report also puts into words and charts the President’s arguments regarding the coming financial crisis.

[Kimstu]

pervert: Kimstu, I didn’t bother going into the study you mentioned when you posted it before but I’d be willing to now if you’ll repost it.

Sorry, can’t find the thread. Do you happen to remember the thread title?

pervert: Why not allow some people to put some small portion of their SS taxes into private investment funds.

As I said in the other thread, I don’t have a problem with making some funding changes to SS (as you pointed out, putting 2% of one’s current SS payroll contribution into private investment is not all that drastic), and I am in favor of stronger government incentives in favor of private investment. But SS in any transition period will need to be “double funded” to the extent of the transition; that is, we need to figure out some way for current workers to pay both the benefits to today’s retirees under the existing system, and the investments into their own supplementary private accounts.

pervert: But the constant cry that Bush wants to destroy Social Security seems overblown to say the least.

Well, it depends what kind of proposal you’re talking about. Modifying the current system to include somewhat more private investment is one thing: replacing it entirely with private retirement savings is something else.

pervert: *Fine. Then allow me to opt out. Allow me to own the policy just like all of my other insurance policies. Allow me to adjust it throughout my life to meet my personal needs. *

Ah, now the mask comes off. You started off talking reasonably enough about modest funding changes to the existing social insurance system, but now you say that what you’re really after is the opportunity to “opt out” of the system entirely and replace it with privately owned investment. In other words, destroy Social Security.

pervert: The fact of the matter is that Social Security is welfare for the aged and we need to start treating it as such.

Nope, because then it becomes tainted with the “welfare stigma” and people start thinking that it’s just another “unearned benefit” that those lazy poor people don’t deserve.

pervert: We should not be paying benifits to millionares.

If we could trust millionaires to be willing to go on contributing to Social Security for non-millionaires even though they’d get no direct benefits from it themselves, I’d most likely agree with you. Unfortunately, it happens all too often that people bitterly resent making contributions to the support of poorer people when they don’t get any such contributions themselves, even if they don’t need the money. We have to keep SS at some level a universal social-insurance scheme, or the anti-welfare resentniks will simply defund it.

[pervert]

I’ve already posted enough arguments, but in the interest of prividing the best information I can, this is the final report of The President’s Commission to Strengthen Social Security (PDF Warning). It contains a good description of the personal investment proposal on page 109. Here’s the gist of it.

“Workers would be given the opportunity to invest 2 percentage points of their taxable wages in a personal account. In exchange for this, traditional Social Security benefits would be offset by the amount of personal account contributions, compounded at a real interest rate of 3.5 percent. So long as the
yield on the personal accounts exceeded this 3.5 percent real rate, workers would anticipate receiving higher total retirement benefits by electing the personal account.”

It is not clear to me that my earlier assertion is correct. These privitized accounts may be in addition to the worker’s normal payroll taxes. There is certainly a proposal along those lines.

“Another variation on this general framework would be to supplement traditional Social Security benefits with voluntary personal accounts, established and financed by the mechanism described by the cochairs in their introduction to this report. Under this option, workers would be given the opportunity to invest an additional one percent of their pay in a personal account, and to receive a one percent match from general revenues. Such accounts may or may not interact directly with the Social Security system, depending on the design of the personal account. Structured purely as a supplementary “add-on” account, the accounts would produce additional income for participants, without affecting the underlying
finances of Social Security. It would also be possible to design such accounts to play a role in funding a portion of existing Social Security benefit promises, and thereby to use the accounts to help shore up the finances of traditional Social Security.”

There is another model proposal. It contains personal accounts like this:
“Workers who have not yet reached age 55 (as of January 1, 2002) would be given the opportunity, starting in 2004, to redirect 4 percentage points of their payroll taxes, up to an annual maximum of $1,000, to a personal account. The amount of the maximum annual contribution of $1,000 (as of 2002) would be indexed annually by wage growth. In exchange for the benefits generated by the personal account, traditional Social Security benefits would be offset by the amount of personal account contributions compounded at a real interest rate of 2 percent. So long as the career-average net yield on the personal account exceeds this 2 percent real rate, a worker would receive higher total retirement benefits by opting for the personal account. Even the most conservative portfolio available, consisting only of government bonds returning about 3 percent
annually, would likely exceed the offset rate and result in higher total benefits.”

[pervert]

@Kimstu

pervert: Kimstu, I didn’t bother going into the study you mentioned when you posted it before but I’d be willing to now if you’ll repost it.

Sorry, can’t find the thread. Do you happen to remember the thread title?

I’m not sure. I think it was in xistme’s thread about Free Market System: How Would it Work. You posted a link to a study showing a progressivity ratio of 1 (or something) for social security. I did look at it and was going to post a response. But it seemed a little out of place in that thread, and unfortunately I was called back to real life. I think I did that to a couple others of your posts in that thread.

pervert: Why not allow some people to put some small portion of their SS taxes into private investment funds.

As I said in the other thread, I don’t have a problem with making some funding changes to SS (as you pointed out, putting 2% of one’s current SS payroll contribution into private investment is not all that drastic), and I am in favor of stronger government incentives in favor of private investment. But SS in any transition period will need to be “double funded” to the extent of the transition; that is, we need to figure out some way for current workers to pay both the benefits to today’s retirees under the existing system, and the investments into their own supplementary private accounts.

Not to mention pay back the money we have borrowed from Social Security over the last few decades. That has to be paid by workers at the time as well.

pervert: But the constant cry that Bush wants to destroy Social Security seems overblown to say the least.

Well, it depends what kind of proposal you’re talking about. Modifying the current system to include somewhat more private investment is one thing: replacing it entirely with private retirement savings is something else.

But replacing it entirely has never to my knowledge benn proposed by President Bush. I am willing to be wrong on this. If you can point out somewhere he said such a thing please do so. I did post his instructions to his “Strengthening Social Security Commission” below. They certainly do not include any such options.

pervert: *Fine. Then allow me to opt out. Allow me to own the policy just like all of my other insurance policies. Allow me to adjust it throughout my life to meet my personal needs. *

Ah, now the mask comes off. You started off talking reasonably enough about modest funding changes to the existing social insurance system, but now you say that what you’re really after is the opportunity to “opt out” of the system entirely and replace it with privately owned investment. In other words, destroy Social Security.

No, not at all. Please allow me to withdraw some of my rhetoric. I was being a bit hyperbolic to illustrate the idea that Social Security is not like insurance because it is not voluntary. I have said quite a few times that I am not in favor of removing Socials Security or the more broadly defined social safety net.

pervert: The fact of the matter is that Social Security is welfare for the aged and we need to start treating it as such.

Nope, because then it becomes tainted with the “welfare stigma” and people start thinking that it’s just another “unearned benefit” that those lazy poor people don’t deserve.

But what exactly is wrong with this? It might get the sort of funding it really needs if this were the case. Notice that after may years of the denigration of welfare recipients, we have not abolished welfare.

pervert: We should not be paying benifits to millionares.

If we could trust millionaires to be willing to go on contributing to Social Security for non-millionaires even though they’d get no direct benefits from it themselves, I’d most likely agree with you. Unfortunately, it happens all too often that people bitterly resent making contributions to the support of poorer people when they don’t get any such contributions themselves, even if they don’t need the money. We have to keep SS at some level a universal social-insurance scheme, or the anti-welfare resentniks will simply defund it.

How will they do this without convincing vast numbers of these recipients to go along with it? I don’t think our democracy has died just yet.