James Leroy Wilson's blog

Tuesday, March 20, 2007

Make Them Voluntary

The Concord Coalition has an analysis of the Senate Budget Committee's projections up through fiscal year 2012. I see on one of the charts that by 2012, federal spending and revenues will both fall under 20% of the projected Gross Domestic Product and the national debt will be "only" 65% of GDP, down from about 66.6% in 2008. One encouraging sign is the re-institution of "pay-as-you-go" by which tax cuts must be offset by spending cuts. But the Concord Coalition's complaint is the same as always: it doesn't address the looming catastrophes of skyrocketing Social Security and Medicare costs.

It's a valid complaint, but what can be done? There is, was, and can't be any "lockbox" to prevent today's Social Security surpluses to pay for today's non-Social Security bills. Essentially, the Social Security payroll tax is government revenue, and Social Security expenditures are simply government expenditures, no different from other expenditures. Hence, the FICA taxes ostensibly used to fund Social Security and Medicare, are in operation just a "flat tax" that go to pay this year's government expenditures. When FICA revenues exceed Social Security/Medicare expenditures, the illusion is that there is a surplus in the Social Security "fund." We must get over that fiction. FICA is nothing but tax revenue, just like income taxes, excise taxes, tariffs, etc. They will help pay for this year's government operations (including Social Secuirity and Medicare payments), and that's all they do.

The "threat" posed by the looming explosion Social Security and Medicare expenditures when Baby Boomers retire, is essentially that FICA, which now pays these bills and more, will in future years not raise enough money to pay for them. Meaning, "they will have to be paid for from the general revenues." The horror!

But actually, it's all just revenue, and it's all just expenditure. So I say end the illusion by scrapping FICA taxes entirely. Shift that burden onto the general income tax code. Count Social Security and Medicare as just expenses that have to be paid for, just like everything else. This way, we can look at the problem not as a FICA "shortfall" but simply that Social Security and Medicare will in the future swallow up too large a chunk of the federal budget and overall GDP.

The best way to "save" these programs without bankrupting the country is to make them voluntary. Individuals who want to get out of these programs would be able to sign up for a "buy-out" would receive some pre-determined, tax-free lump-sum payment, or payment over installments of a certain number of years. They would be paid this money now instead of when they retire, and the amount would essentially be all the FICA taxes that had been paid on their behalf (what they and their employer paid to FICA). They would then forfeit any claim to Social Security or Medicare payments when they retire. FICA taxes themselves would be abolished, and anyone who wants to continue to be enrolled in Social Security and/or Medicare and collect benefits when they turn 65, will pay a certain additional percentage of their income tax. Those who don't want to be enrolled won't pay the additional percentage.

Meanwhile, employers won't know or care who will have enrolled and who hasn't, because they will have stopped serving as FICA tax-collectors and payers. And those who don't want to be enrolled, won't even have to get a Social Security number. Our nation could once again be free.

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