Reform Federal Spending Along with Social Security

No.: 
83

Many taxpaying Americans are understandably concerned about a congressional leader’s trial balloon proposal to hike the normal Social Security retirement age to 70. (The proposal would apply to workers at least 20 years from retirement.) Millions of Americans over age 55 cannot find suitable full-time work. A higher retirement age may mean more years of trying to get by on marginal employment. Furthermore, working Americans stand to get a smaller return on paid-in FICA taxes if the normal and early retirement ages are raised faster than currently scheduled. That said, Americans are living longer and putting a serious strain on the Social Security system. A failure to make Social Security financially sound could not only break the program but contribute to the economic downfall of the country.

Most Americans do not want substantially higher taxes; hence, a fix for what ails the Social Security system must incorporate an increase in the age threshold for retirement benefits or significant reductions in benefits. Arguably, any attempt to raise retirement age thresholds should be part of an integrated plan for sustainable fiscal policy and a reduction in the size of government. The House minority leader, John Boehner, is to be commended for admitting the country is broke. Better yet, he should admit that defense outlays and other expenditures disproportionately beneficial to Republican constituencies are bloated and should be cut long before Social Security benefits. Likewise, Democrats should make similar confessions regarding many of the income transfer programs they have devised, including some programs within Social Security.

A Comprehensive Restructuring Is Needed

The nation needs a five year pathway to a balanced budget. Government must shift its spending emphasis from social and military subsidies to technology enhanced infrastructure investments. Along with a balanced budget we need a cap on the size of government expenditures relative to non-governmental GDP. Better yet, we need a new accounting measure that subtracts out of GDP all governmental expenditures and wasteful spending in the private sector. A maximum federal budget should then be benchmarked to this figure. (If government spending is not excluded, politicians will expand government spending to increase the fiscal benchmark.)

If prudently adjusted GDP in 2010 works out to be around $8.5 trillion (not $14.2 trillion), the federal government would be limited to spending 20% or 25% of that amount, social security and healthcare distributions included. Let the private sector devise solutions for the other services the public wishes to pursue, since government social programs tend to become sinkholes of bureaucratic largesse in the U.S. In essence, this perspective targets a 40% reduction (over a five-year period) in the footprint of the federal government, with an offsetting enlargement of the private sector. After all, what has federal government growth produced other than politics that no longer work, moral hazard, dependent constituencies and a risk to national economic autonomy.

Practical Problems In Raising The Age

Raising the retirement age of workers is not without its complications. At the minimum, there is the challenge of finding enough companies that want to employ senior citizens, especially in the manual trades. While some people in their 60s outperform younger people in certain responsibilities, there are many areas where retirement aged persons underperform. Should government have the power to force businesses to retain employees whose performance is declining due to age?

A better plan is to reroute some (not all) people at age 65 to jobs that fit intellectual fitness, motivation, wherewithal and health. Full-time work for most people age 65 should be 30 hours a week, with pay reduced accordingly. Furthermore, people who have worked for most of their lives deserve extra time off. This could be advantageously accomplished with the provision of two vacation blocks, each one month long — time-off in addition to earned vacation. The two months off work could be paid by government at social security rates, thus easing people toward retirement. Part-year workers could be excluded from the time-off plan.

Appropriate pay reductions for those age 65 and older could be positive in keeping senior citizens productively engaged while not burdening business with payroll largesse. That said, most senior citizens can do a lot more than bag groceries, punch tickets or do entry level work. America needs to find ‘middle way jobs’ to keep spry seniors as well as ‘old geezers and geezer-ettes’ engaged without clogging up productive processes, responsiveness and innovation.

While people are living longer than in the 1930s when the Social Security retirement age was set at 65, many Americans arrive at retirement age in relatively poor physical condition. For example, American women over age 45 are much heavier today than they were in the 1950s. (Men are heavier, too, but the change has been more consequential for women.) The overweight condition of many Americans is leading to chronic health problems and disabilities. If government creates new retirement rules that provide early retirement benefits for “those who feel unable to continue working,” then government effectively penalizes those who have shown the merit of self-discipline in keeping themselves fit.

Redistribution Of Wealth Still Doesn't Work

Communist psychology is now winning the day, not militarily but in pathological politics. We submit to a plank of communism when we ‘take from each according to his ability and give to each according to his need.’ Our blind service to unwarranted claims on personal security and equal protection are creating this unAmerican effect. If we continue down this road — Bush’s policies as well as Obama’s — the stars and stripes on our flag will begin bending into hammers and sickles. Remember, social equity did not work out in Russia as Bolshevik idealists hoped: A police state materialized rather than nirvana. Indeed, it took both widespread deprivation and a police state’s enforcement of work requirements to keep “social justice” alive.

How long can America continue taking from the wise, productive and meritorious to transfer to the foolish, greedy or incompetent — whether on Wall Street or bum street? We must compete against Asian countries that are producing new efficiencies left and right. There is, of course, a difference between making a lot of money by any means (e.g., predation) and making it constructively. But if we come to reward disability and inability above competency and self-discipline, we incentivize behaviors that will move us from head to tail.

Merit, productivity and tax contributions must be respected in reforming the system. The U.S. Congress must be careful or it will do to Social Security what it did to big banking; namely, reward moral hazard. American rights are not protected when policymakers take from people according to their ability and give to people according to their enterprising “needs.” While warranted compassion for worthy need is essential in a fair and just society, need can become as much a bottomless pit as subsidies for businesses that refuse to make themselves competitive.

Reforms Must Be Just!

While our Social Security reforms must be economically efficient, they must also be just. Justice may require a guarantee to all who pay into the Social Security system that if they die early, a minimum distribution will be paid to their beneficiaries — perhaps 50% of paid in monies after adjusting for all lifetime benefits. It may also be prudent to end all medical subsidies 15 years after the normal Social Security retirement age; thus, those who wish to live long through medically instrumented means can do so at least somewhat on their own dime. This is salient, since many hang onto life no matter what the cost to others.

People support the Social Security Administration not only from their paychecks but in income forfeited as employers match employees’ Social Security tax dollars. When the two categories of contributions are combined, the is tax burdensome. A government decision to make people wait several years longer for benefits is the equivalent of a large tax increase. While increasing the retirement age is preferable to raising taxes and expanding the government, a better approach is to reduce government spending overall so that people can be paid more and can save more.

The proposal of some to take Social Security retirement benefits away from those who have sizable pensions or other income is ill-considered. Should the well-heeled be robbed of the retirement benefits they paid for? Of course not. By the same token, the Social Security tax loophole for large income earners should be closed. Currently, individuals do not pay FICA tax on six-figure income (i.e., above $106,800). The elimination of this unwarranted exemption would reduce the amount by which the early and normal retirement age is raised in coming years.

Wall Street capital gains should be taxed at considerably higher rates, especially for persons with net Wall Street investment assets over one million dollars. As the law stands, capital gains is an Amazon-sized loophole that allows the speculative rich to grasp with little taxation the rewards of easy-money asset inflation. In a proper financial system these rewards would more likely come in the form of taxable dividends. But even in regard to dividends the system has been corrupted for the rich. In 2003 the Bush Administration lowered the dividend tax rate to 15%, essentially shifting the nation’s tax burden toward the middle class. Justly, dividend tax rates should again coincide with income tax rates beginning in 2011.

In sum, a prudent approach to raising the retirement age might help mend the Social Security system. That said, taxpayers must guard against Congress using a tax revenue enhancing increase in the retirement age as an excuse not to cut bloated programs elsewhere in the federal system. An increase in the retirement age is the equivalent of a new tax! The equivalency amount of the increase should be calculated, followed by offsetting reductions in federal spending elsewhere in the system.

Americans must insist that federal spending be limited in absolute terms to a non-phony GDP measure. Any approach that fails to include this type of spending restriction will soon prove inadequate, even with a balanced budget amendment. The last 40 years of federal fiscal policy proves this point. A raised Social Security retirement age must not become a means by which politicians gain renewed budget flexibility to curry political support in exchange for more government programs.