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About the article
Published Online: 2013-08-07
“Social Security” can describe a general category of income insurance common in many countries. In this case, it is capitalized to indicate reference to the U.S. variant known officially as the Old-Age, Survivors, and Disability Insurance (OASDI) program established in 1935 (U.S. Government Accountability Office, 2005, p. 3). Hereafter, I will use the terms Social Security and OASDI interchangeably.
OASDI benefit costs exceed tax revenues, and the deficit is growing (U.S. Social Security Administration, 2011a). Federal payroll taxes of 6.2% and 1.45% of wages fund OASDI and Medicare’s Hospital Insurance program, respectively. These taxes are paid by employers and employees in equal shares (total 15.3%). Recent experience with a 2% payroll tax holiday may lead to consideration of a permanent shift to general revenue funding. In 2011–2012, employees’ share of the OASDI tax was reduced to 4.2% (U.S. Social Security Administration, 2012). The relief measure was enacted to assist recovery from the recession that began in 2008.
For decades, Social Security has been promoted as a savings program “to spare Social Security’s 54 million recipients the discomfort of understanding they’re on welfare.” But it taxes one group to pay benefits to another group as dictated by Congress, and it is a pay-as-you-go system (Samuelson, 2011). Some have gone further, criticizing Social Security not just for hiding welfare as savings but for operating like a Ponzi scheme by creating the illusion of return on investments (Tanner, 2011).
Welfare is defined here as transfer payments – benefit payments in excess of taxes paid and interest earned. The basic income guarantee is not a new concept; its features and a summary of the policy issues are provided by Van Parijs (2006). For a brief history of proposals to apply it in the U.S., see Caputo (2012). Allan Sheahen (2012) answers 146 questions (in favor of BIG) on whether America could and should adopt the policy.
Hereafter, BI will indicate the BI amount, payment, or benefit. SSBI will continue to refer to the program as a whole, including funding structure.
If SSBI is adopted, reform of the tax code will not likely be limited to replacing the payroll tax by income taxes as proposed. To keep the discussion focused and manageable, analysis is comparative static, that is, taxes and programs not explicitly replaced or modified are assumed to continue. BI replaces the standard deduction but does not affect other allowable deductions. Coordination with the IRS could minimize cash exchange using FIT withholding.
Tax schedule information is for 2011 (U.S. Department of the Treasury, 2011).
Exceptions apply to qualified individuals with long-term disabilities and to survivors of qualified individuals.
SSI is a federal means-tested program funded by general revenue of the U.S. Treasury. It is designed to provide a monthly payment to aged, blind, or disabled people with limited income and resources. Adults, as well as children, can receive payments based on disability or blindness. In FY 2011, the maximum monthly benefit was $674; payments were made to 8.1 million individuals totaling $49.041 billion (U.S. Social Security Administration, 2011a).
EITC is a refundable credit against federal income tax on earnings for those with relatively low incomes. If the credit reduces tax liability to zero, the government pays the amount left over as an income supplement. In 2012, qualifying income ceilings ranged from $13,980 for single filers with no children to $50,270 for married filers with three or more children. Credits ranged from $2 to $5,891 (U.S. Department of the Treasury, 2012).
The UC program is a federal–state partnership based upon federal law, but administered by state employees under state law. In states meeting the specified requirements, employers pay an effective federal tax rate of 0.6% on wages up to $7,000, or a maximum $42 per covered employee, per year. All states finance UC primarily through taxes on employers based on wages of covered workers. As a result of the many variables in states’ taxable wage bases and rates, benefit formulas, and economic conditions, actual tax rates vary greatly among the states and among individual employers within a state. For 2012, the preliminary estimated U.S. average tax rate was 0.95% of total wages; the high was 1.93% in Idaho applied to wages up to $34,100 and the low was 0.29% in the Virgin Islands applied to wages up to $23,700 (U.S. Department of Labor, 2013).
Currently, about 94% of all workers are covered. Half of the estimated 11 million non-covered workers are state and local government employees; only three quarters of them are covered (U.S. Senate, 2010, p. 12).
“[Presidential] candidates’ assertions that the system needs to change outnumber concrete ideas about reforming the system. This is understandable, as every potential solution seems to carry with it a heavy economic or political price tag” (Kurtzleben, 2011).
Approximately $174 billion of the $675 billion in benefits paid in 2009 went to households with incomes at or above $50,000 (U.S. Department of the Treasury, 2011 – Table 1, column DE; U.S. Social Security Administration, 2011a – Table 4.A3).
A proposal by the New America Foundation to expand Social Security, while limited to pensions, is similar to SSBI in its focus on correcting poverty reduction shortcomings of the existing program and its reliance on general revenue funding (Lind, Hill, Hiltonsmith, and Freedman, 2013).
TANF replaced Aid to Families with Dependent Children (AFDC), which was said to encourage dependency because benefits were offset by employment income – discouraging work. A major feature of TANF is that benefits are revoked after 2 years from those deemed able to work. This obviously reduces welfare payments compared to a system without work-related requirements. However, the positive incentive to seek work is not so clear.
“[F]amilies become ineligible for TANF cash assistance at very low income levels in nearly all states” (Finch, 2011, p. 5).
Bryan (2005) offers a more complete discussion of the impact of TANF work requirements and the EITC on poverty in a BIG context.
Sheahen also assumed Social Security would be phased into the BIG program. His financing options went beyond those needed to pay for the estimated costs of the proposed BIG – providing a menu of sorts that included raising FIT rates, eliminating all but “single” FIT filing status, a FIT surcharge on incomes over $1 million, eliminating the payroll tax cap, taxing stock trades, taxing wealth, raising the capital gains tax rate, and raising the estate tax rate.
These six goals are based on recommendations of the Concord Coalition, which identified several objectives of Social Security reform designed to ensure long-term fiscal sustainability, raise national savings, and improve generational equity (Concord, 2005).
For details of this estimate, see section “Estimated Costs and Offsets” further.
This is much more than the $457 billion in Social Security benefits reported on 25 million returns (U.S. Department of the Treasury 2009 – Table 1, columns DD-DG). I assume the difference between total benefits paid by SSA, and reported to the IRS consists of lower income beneficiaries with no other source of income whose benefits will not be taxed even under SSBI.
This comes from adding the estimates in the preceding paragraph estimating BI payments and compares to the 54 million documented SS program beneficiaries cited previously. Many people will receive both types of payments.
See U.S. Department of the Treasury, 2009 – Table 1.2, columns AA, AN, BA, and CA. Above 3× BI, the BI partially offsets only “new” tax liability due to elimination of the standard deduction.
See U.S. Department of the Treasury (2009) – Table 1.2, columns V&W for married filers and columns AI&AJ, AV&AW, and BV&BW for single filers.
Impact on state and local programs that deliver non-cash benefits will not affect the direct cost of SSBI.
The Budget Control Act of 2011 included a poison pill in the form of automatic sequestration of Fiscal Year 2013 spending authority that became effective due to inability of Congress to agree on deficit reduction measures.
Those who do not feel obligated to aid the poor, prefer leaving it to voluntary institutions, or believe income support harms beneficiaries may be more interested in dismantling existing welfare programs than improving them. However, the proper role of government and the comparative effectiveness of charity and government assistance are outside the scope of this article.
Coercive redistribution is commonly associated with socialism and considered anti-capitalist. But there are other views about the relationship between government, markets, and freedom. For example, where others discussed markets as a means to freedom, Amartya Sen redefined freedom in terms of access to markets (Sen, 1999). And Louise Haagh (2012) argues that freedom for all requires stability in the form of Social Security funded by progressive taxation.
Milton Friedman said of Old Age and Survivor’s Insurance (aka Social Security), “I do not see any grounds – liberal or other – on which this particular redistribution can be defended. The subsidy to the beneficiaries is independent of their poverty or wealth; the man of means receives it as much as the indigent. The tax which pays the subsidy is a flat-rate tax on earnings up to a maximum. It constitutes a larger fraction of low incomes than of high. What conceivable justification is there for taxing the young to subsidize the old regardless of the economic status of the old; for imposing a higher rate of tax for this purpose on the low incomes than on the high; or, for that matter, for raising the revenues to pay the subsidy by a tax on payrolls?” A program aimed at poverty relief “should be designed to help people not as members of particular occupational groups or age groups or wage-rate groups or labor organizations or industries” (Friedman, 1962, pp. 184, 191).
FIT calculations use 2011 Tax Rate Schedules (U.S. Department of the Treasury, 2011, p. 98). The BI surtax is 25% of earned income and 30% of unearned income up to the BI amount ($11,000). The FI surtax for single filers is 5% on income between $50,000 and $125,000, 10% on amounts between $125,000 and $250,000, and 15% on amounts above $250,000. For married filers, threshold amounts are doubled to $100,000, $250,000, and $500,000.