Is there a way to keep the Social Security system solvent for many decades to come without raising the Social Security tax, without raising any other taxes, without reducing benefits, and without diverting traditional resources from other government programs? A way that also allows an immediate and hefty tax cut for 80 percent of America’s taxpayers? Yes, there is a way.
What makes this exceptionally desirable result possible is the huge new revenue stream that will soon be flowing into federal coffers from privately controlled pension plans—IRAs, 401(k)s, Keoughs, etc. To help these plans grow faster and bigger, Congress mandated that their returns not be taxed until people reach retirement age. The plans are thus tax-deferred, not tax-exempt, with taxes collected only after older people leave the workforce.
This mandate has created a very interesting—and from the perspective of the great Social Security funding debate now going in Washington—very fortuitous demographic confluence. Because at exactly the time that so many baby boomers are reaching the age when they qualify for Social Security a few years down the road, this new stream of long deferred tax revenue will start flowing into government coffers in abundance. Or to put this another way, just when current Social Security tax revenues and interest from the Social Security Trust begin falling short of sums needs to meet current Social Security benefit levels, an ideal new revenue supplement arrives on the scene.
The answer to funding future Social Security shortfalls is thus obvious: All we need do is allocate deferred taxes on the three trillion dollars worth of individually-controlled pension plans to the Social Security system rather than to general revenues.
Critics might argue that this is just a backhand way of tapping into the government’s general revenues pool. To which a flip reply might be that since Congress tapped into the Social Security revenue pool for a quarter-century in order to hide the true size of government deficits, turning the tables for the next quarter-century would be simple justice.
But why be flip? The fact is that the Social Security tax itself is a diversion from general revenues. Virtually all other industrialized nations pay Social Security-like benefits from their own general revenues. Diverting another revenue stream to this purpose in this country is simply building on an established practice.
There’s another key point to consider here. Relatively little of the hundreds of billions of dollars in taxes that will ultimately flow to Washington from individually-controlled pension plans has so far been collected. The inundation only begins when baby boomers retire en masse in a decade or so. This is thus new revenue. No major program currently depends on it. This revenue can therefore be allocated to Peter without robbing Paul. And given its source, allocating it to supplement Social Security taxes and interest from the Social Security Trust to maintain the overall Social Security system in years to come is just plain common sense.
Consider the major advantages of such an approach:
- It guarantees the long-term solvency of the Social Security system without raising taxes of any kind and without reducing benefits.
- It doesn’t require tapping traditional general revenue sources (like income taxes) that now fund non-Social Security programs like education, defense and welfare.
- Since virtually everyone paying deferred taxes on privately controlled pension plans will also be collecting Social Security, these people would be partially funding their own retirements—a situation in which the generally well-to-do elderly, those with private pension plans, help support themselves with their own taxes.
- This same group of taxpayers would also be helping guarantee that poorer Social Security recipients without IRAs or 401(k)s don’t lose their benefits—a kind of wealth transfer from the well-to-do elderly to the poor elderly that’s not an extra burden for the former.
- Perhaps the most appealing feature of this innovative approach is that it would permit the biggest tax cut in U.S. history—a steep and immediate reduction in the Social Security tax. Social Security is the most broadly based and most regressive federal tax. Some 80 percent of Americans currently pay more in Social Security taxes than income taxes. Much of this onerous levy is used to create a surplus that goes into a Trust that’s supposed to help keep the system solvent when Social Security taxes start falling short of Social Security payouts a decade or so hence. When you opt to make up future Social Security shortfalls with deferred private pension tax revenues, however, you don’t need to generate an annual surplus. You can thus immediately switch to a pay-as-you-go Social Security system with the sure knowledge that adequate funding for the system will be available in the future. And the no-longer necessary surpluses can then go toward tax relief—hundreds of billions of dollars worth of tax relief over the next decade.
We have a dedicated federal tax on gasoline that helps maintain the nation’s highways because it makes sense for gas taxes to pay for road upkeep. Why not a dedicated federal tax on individual pension plan income to keep Social Security solvent—one that lets the elderly help provide for their own future financial well-being with their own tax payments?
