Proposed Policy Reform: Social Security Reform

I have a solution to the Social Security mess that will allow us to maintain this system, restore its solvency, and give tax breaks to 90% of taxpayers and 100% of all businesses. Under the current system, our payroll taxes (Social Security and Medicare) are highly regressive as the burden of paying these taxes falls heaviest on the lower classes. Right now, if you make less than $102,000, your entire income from wages is taxed at 7.65% for both programs, while your employer pays an additional 7.65% on your behalf. However, any money you make over this limit is completely free of this tax all together. (1)

Unfortunately, as you've probably heard or read, the Social Security and Medicare funds are rapidly running out. With Social Security being the "third rail" of politics, we don't allow our politicians to consider drastic or necessary changes that could potentially destroy Social Security in the worst case scenario, or reduce benefits in the best case scenario. Instead, we Americans stick our heads in the sand and hope that someway, somehow, this problem is fixed without having to make any changes or sacrifices whatsoever.

Well, I've been thinking about it for years, and I think my solution will benefit the greatest amount of individuals and businesses while only significantly impacting the fewest political stakeholders (aka the rich).

My solution is a simple two-part plan. Part one: raise the Social Security Wage Base from $102,000 to $250,000. Part two: introduce an exemption to all taxpaying wage earners making less than $250,000 that exempts the first $10,000 from these taxes all together, this exemption would apply to both the employee and their employer.

The greatest problem with these taxes is that they are highly regressive since the more money you make, the less tax you pay. If we raise the wage base up to the level where we can meet our current and future projected needs, we could eliminate the solvency issue all together. Unfortunately simply raising this wage base is not politically feasibly without giving businesses a break at the same time. This is where part two of the plan comes in.

In part two, we further reduce the regressive nature of these taxes by exempting the first $10,000 from these taxes. So long as this exemption applies to both the employer and the employee, both stand to save $765 a year on this tax. For employers, that means they save $765 per employee, quickly equally vast tax savings and tax preparation expenditures.

Already, I know that those who support the welfare state will cry "but that means these people will have less money in their accounts when it comes time to retire!" Well, if we assume that these people will always make less than $10,000, then sure, you're right. However, most people making less than that amount are high school students and part time workers who are likely going to college at the same time. In either case, we can be fairly sure that they stand to make more money later in life, thus catching up with their decreased contributions earlier in life.

In addition, these young people could also invest that money they save in taxes, if they are so inclined, in their own private IRAs. IRAs, even despite the current economic woes, are superior to Social Security accounts not only for the fact that they generally have better returns on investment than Social Security, but also because, for homosexuals and other second-class citizens in our Democracy, the proceeds can be willed to a partner. The proceeds can also be willed to charitable organizations, non-family members, step children, and common law spouses. These funds can also be withdrawn before the age of retirement for a great many purposes including education, buying a home, and paying medical expenses. (2)

By allowing the young to apply this money to an IRA, we allow them the choice (albeit a small choice) as to how they want to invest for their retirement. Yes, there is always a chance that they will blow this money frivolously, but we as Americans spend our money frivolously at any age. The only way to combat this behavior is better financial education (a subject I plan to explore in a latter piece).

Of course, the amounts I present should be indexed for inflation. After all, this tiny but significant oversight led to our current debacle. I would love to see any representative or senator adopt all or part of my proposal, or at the very least, I would like to hear what would not work in my proposal so that I can later tweak it.