Random thoughts on Social Security, etc.

Now, this was partially inspired by this post.

Right now, Social Security (and Medicare, which is not being addressed) have the same problem: both will eventually pay out more money than they take in. (Actually, Medicare hit this point in 2004 - I guess the administration is limited to tackling one issue at a time. Pity it wasn't the one that's already in "crisis".)

Personally, I am not a huge fan of Bush's plan, though I think it is a good thing that at least politicians are talking about action. (It should be worth noting that, the previous administration called for action, though in a different direction). So, here are some of my thoughts on Social Security. They might not all work, but at least they're good for a Gedankenexperiment.

  • Institute means testing. Sure, it's not fair, but if you have a certain level of income independent of SS, then maybe you shouldn't be drawing from the pool. Even though Bill Gates contributes to the SS fund, he probably isn't going to need it when he retires.
  • Raise the bar on taxable income. Instead of the current cap of $90k, raise it to $200k or so.
  • Stop taxing the first $20k. SS is inherently a regressive tax. If you're a family of four with an annual income of $120k, that 6% on the first 90k might be mildly painful, but unless you're in an area with an abnormally high cost of living, then you're doing pretty darned well. If you're a family of four with an annual income of 28k, 6% is a lot more noticeable*. So, I suggest reducing or eliminating the employee payment on the first 20k, but continue to require the employer payment and use government funds to match it. This may not be terribly feasible, but I think that with means testing and a higher cap on taxable income, it could be made to work.
  • Allow for some privatization. Perhaps allow 2%, instead of the proposed 4% (though the employer funds would still go into the SS pool), and make it voluntary. I wouldn't limit the accounts to only certain funds - I'd allow people to invest in whichever stocks or bonds they wished.

I'm not really a liberal or a conservative on this topic. Something needs to be done, and it will be much easier to do it now (on in the next couple years) than to wait until 2018/2042/whenever. Medicare should have been looked into years ago, but now, any changes will have to be drastic, and possibly draconian, to bring the system back into long-term solvency.

Concerning the inheritance tax: I understand where both sides are coming from on this issue. The right dislikes the idea of someone having to pay taxes on revenue/property for which the previous owner already paid taxes. The left dislikes the idea that failure to tax inheritances can cause a concentration of wealth. I've looked through some articles, and while I haven't checked the references on this one, I can see the need for some possible reform. (The official IRS site wasn't much help - unless I want to open all the attendant forms and go through the math, I cannot quantify how much anyone pays**.) So, unless current tax law alerady does this, here is my compromise solution:

  • The first $500k in real estate may be passed on, tax-free, to spouses/children/family. This would allow homes, farms, small businesses, etc to be passed out without a significant tax burden. If a business is bequeathed to a parter, it is taxed under the normal rules.
  • The first $250k in monetary assets (cash, stocks, non-real estate property, etc) is passed on without taxes under the same proviso as above.
  • Any inheritance beyond the above would be taxed according to the recipients current tax bracket (thus, someone in the lowest tax bracket who recieved a windfall would pay the lowest bracket amount, regardless of the size of the windfall).
  • NB - If someone bequeaths a business valued at $1.5 million to a spouse and two children, then the first $500k is exempt, and (presuming an equal distribution of shares in said business), each beneficiary would be responsible for the taxes on $333k.

Thus, some property and money could be passed on without taxation, but truly large estates would still have a tax burden. Seems fair to me, though the numbers (as always) could be adjusted.

* I have lived at or below the poverty level at several points in my life. At each point, I cursed the amount that SS took from each paycheck, because it often would have meant the difference between being able to buy something other than generic mac-n-cheese and ramen. Unless you count every dime, $12.36 a week may not sound like much (6% of a 40-hour week, @ $5.15 per hour), but $49.44 a month is a utility bill, or groceries for a week (or more - I've eaten for close to a month on less), gas or bus passes to get to work, etc. That kind of tax hurts - and it hurts hard.

** Look for an additional post in the near future about the need to reform the US tax code. Anything so Byzantine should be removed from the government post haste. While I won't be calling for a flat tax, I'd love to close up a lot of loopholes and simplify the whole code.


Blogger Kyle said...

Just a few remarks...

1. I think raising the cap (and instituting a floor) is a good idea.

2. I don't see much benefit to investing retirement in the stock market; it's risk in a place where that's not wanted. I don't think that it's risk only to the individual either. Those people are implicitly risking the futures of the people they expect to care for them if their investments fail.

3. I think taxing inheritance at the rate of the recipient is a novel idea, but I'm concerned that dependents who don't pay taxes would become the most common recipients.

4. As I recall the inheritance tax only applied to people passing on over $1 million anyway. I'd be in favor of raising that number as high as $10 million.

5. I've always thought the "already paid taxes" argument was flawed. All my income is already taxed twice--when I earn it and when I spend it. I can see the unfairness of the rich paying a tax only for being rich, but I think that's typical of taxes in general (for example, we tax smokers).

Anyway, good post. Wish I had more time to talk about it further.

5:12 PM  

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