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April 19, 2017

Reform Social Security, or Make It Welfare

What if the payroll tax was eliminated in favor of funding Social Security from the general fund?

In a recent article published in The Fiscal Times, columnist Ed Morrissey discusses speculation that, despite promises to make no changes to entitlements, President Donald Trump may have found a backdoor way to make changes to Social Security and still keep his word.

It’s important to note that there is no official proposal being debated at this point, and the House Republican tax reform blueprint contains no serious payroll tax provisions, nor does Congress have any provisions for the FICA tax under discussion. This is just one idea being floated, and not a complete one at that. In fact, the key quote from Morrissey’s article is this:

> The tax-reform package is still in the negotiation phase, so it’s not clear how serious the idea of repealing the payroll tax is at the moment. Paul Ryan noted after the initial failure to pass the AHCA bill that only the House had a full proposal ready:

> “The House has a (tax reform) plan but the Senate doesn’t quite have one yet. They’re working on one. The White House hasn’t nailed it down,” Ryan told an audience in Washington. “So even the three entities aren’t on the same page yet on tax reform,” he added.

Clearly, we’re a ways off from a final bill.

However, the article presents an interesting debate on tax and entitlement reform. Referencing an AP article, Morrissey notes, “The tax-reform package that will follow the repeal of ObamaCare (or maybe eclipse it) might contain a repeal of the payroll tax as a means of economic stimulus. That would end the contribution-based funding system for Social Security and some of the funding for Medicare as well.”

This speculated proposal would repeal the payroll tax to create economic stimulus, returning the 12.4% currently taken in taxes to the employers and employees from whom they are now confiscated. It would also slash the corporate income tax. In turn, this would move funding for Social Security from the current payroll “contributions” model, to one funded from the general budget, essentially turning it into another welfare program.

What are the implications of changing the tax system in such a way as to do away with the FICA withholding, moving Social Security from an “earned entitlement” to a straight welfare program?

Quoting an unnamed lobbyist claiming ties to the Trump administration, the article notes the plan would “transform [House Ways and Means Committee Chairman Kevin] Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place.”

While a 12.4% increase in income that for employees would certainly be an economic boon, such a path is potentially fraught with danger absent fundamental changes to tax and entitlement policy.

Turning Social Security from an earned entitlement to straight welfare would all but guarantee the program would become even more of a vote-buying scheme than it already is. Thresholds for qualifying for benefits would be lowered in order to expand the pool of beneficiaries, which would gain votes for the politicians but drive the national debt even higher. Any politician brave enough to call it what it is would immediately be vilified as uncaring toward the poor and needy. Limits on payouts to beneficiaries would be raised time and again, further driving up the debt.

This is yet another proposal that eats away at the foundations of financial success; namely, hard work, personal responsibility, and saving for the future. It perpetuates the damaging cycle of dependence upon government not only for a safety net, but for basic subsistence.

Despite Trump’s previous promises to refrain from making changes to entitlement programs, this is one promise he needs to break. Entitlements (Social Security, Medicare, Medicaid) are the primary drivers of the national debt, and the national debt is so astronomical that it is a matter of a few short years before entitlement spending and interest payments on the debt will eclipse all other federal spending, strangling funding for constitutional functions of government like national defense.

Since Social Security was established under FDR, the ratio of workers contributing into Social Security has plummeted from 159-to-1 in 1940, to less than 3:1 today. That ratio continues to drop as Baby Boomers retire (and drain from the program’s resources) at a rate of 10,000/day, a staggering number of which have little or no retirement savings.

For those aged 50 and under, payroll taxes fund the benefits for today’s retirees, but the younger generations are not having as many children, and therefore it’s a mathematical impossibility that future workers will be able to fund the Social Security benefits of those who will retire in 15-20 years and beyond, without slashing benefits or drastically raising taxes, which will in turn lead to an economic death spiral.

Additionally, most are unaware that, unlike private retirement accounts such as 401(k)s or IRAs, they have no right to Social Security benefits, regardless of the number of years worked or the amount contributed. In Flemming v. Nestor (1960), the U.S. Supreme Court ruled that contributing to Social Security grants no contractual right to benefits from the program, and that Congress can change, reduce or eliminate benefits altogether.

As for this proposal above, again, it’s nothing more than speculation and conjecture at this point, though we should keep a close eye on it. However, when it comes to tax and entitlement reform, Republicans should go YUGE, and make changes that reward personal responsibility and thrift, and return power to the people.

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