A Stitch in Haste

The Urban Institute analyzes income inequality in post-retirement America:

Without savings, low-wage workers will have to rely on other sources of retirement income, such as Social Security and pensions. Yet these sources of retirement income are based on earnings. The Social Security benefit formula replaces a greater share of earnings for low-wage workers than for higher-wage workers, but low-wage workers will still have lower benefits than their higher-wage counterparts.

Can you identify the missing word in that text? That’s right: taxes.

The reason higher-income workers receive higher Social Security benefits is because they pay higher Social Security taxes.

As I’ve blogged repeatedly: Social Security can either be viewed as a form of compulsory retirement savings or as intergenerational welfare. It cannot simultaneously be both. (It can be presented, by the government or its apologists, as one or the other depending on the context or the audience, but it cannot be both at the same time.)

If we (i.e., the majoritarian mob) decide that no one should have a low-income retirement, then fine: Let’s scrap the current Social Security scheme altogether and replace the current “lifetime earnings” benefit formula with a single, poverty-eliminating old-age pension — paid equally to all elderly regardless of their lifetime earnings. Simultaneously, we would abolish FICA taxes (which, recall, have no exemptions or deductions) and raise federal income tax rates by an appropriate amount to make the transition revenue-neutral.

The only thing standing in the way of such a reform plan is the unwillingness to admit that this would turn Social Security into intergenerational welfare. That was unacceptable in 1935, and it’s unacceptable now. Social Security, to remain politically viable, requires the continued insistence that people “earn” benefits via dedicated taxes. With the corollary truth that some people will pay more taxes and therefore earn more benefits.

You can’t have your retirement cake and eat it too: Either Social Security is a government-imposed, government-run retirement savings plan (in which some people will put in and get out more than others) — or it’s the dole, complete with the stigma that attaches to being on the dole. It cannot be both.

And my challenge to Social Security’s apologists remains on the table: Anyone who claims to champion the plight of the working poor must also champion the reform of a system that seizes one-eighth of the working poor’s paychecks — week in, week out — over their entire careers. Anything else is simply irrational.

Go back to the quote: “Without savings, low-wage workers will have to rely on other sources of retirement income, such as Social Security and pensions.” Absolutely correct. But the first and greatest impediment to saving is taxes — 12.4% of an entire paycheck is a lot of money that could have been saved, had it not been for Social Security.

Previously:
–Has Social Security Been a “Success”?
–Questions — Special “Obama Donut Hole” Edition
–Some Thoughts on American Poverty
–“Comment Left Elsewhere” of the Day (Means-Testing Medicare)
–Socialized Medicine: More on Means Testing

Filed under: Progressive Taxation, Social Security