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Archive for the ‘Social Security’ Category

My views on the value-added tax are very simple and straightforward.

If we completely eliminated all income-based taxes, I would be willing to accept a VAT (or even a national sales tax) as a revenue source for government.

But unless that happens, I’m unalterably opposed because it’s far too risky to give politicians two major sources of tax revenue. Just look at what happened in Europe (and Japan). Before the VAT, the burden of government spending wasn’t that much higher in Europe than it was in the United States. Once VATs were adopted, however, that enabled a vast expansion of the welfare state.

This is why I’m worried about the Rand Paul and Ted Cruz tax plans. On paper, both plans are very good, dramatically lowering income tax rates, significantly curtailing double taxation, and also abolishing the corporate income tax. But I don’t like that they both propose a VAT to help make up the difference. It’s not that I think they have bad intentions, but I worry about what happens in the future when a bad President takes office and has the ability to increase both the income tax and the value-added tax. When the dust settles, we’re France or Greece!

By contrast, if we do some type of tax reform that doesn’t include a VAT, the worst thing that could happen when that bad president takes office is that we degenerate back to the awful tax code we have today. Which would be unfortunate, but not nearly as bad as today’s income tax with a VAT on top.

Bad since I’ve already addressed this issue, let’s focus on a part of the Paul and Cruz tax plans that has received very little attention.

Both of them propose to get rid of the payroll tax, which is the part of your paycheck that goes to “FICA” and is used to help fund Social Security and Medicare.

Alan Viard of the American Enterprise Institute has a column in U.S. News & World Report that explores the implications of this repeal.

Would you like to see the FICA item on your pay stub go away and be able to keep the 7.65 percent that the payroll tax takes out of your paycheck? If so, Republican presidential candidates Rand Paul and Ted Cruz have a deal for you – each of them has proposed getting rid of the tax. The senators’ plans would also eliminate the other 7.65 percent that the government collects from your employer, which you ultimately pay in the form of lower wages.

That sounds good, right? After all, who wouldn’t like to keep 15.3 percent of their income that is now being siphoned off for entitlement programs.

But here’s the catch. As Alan explains, other revenue sources would be needed to finance those programs, particularly Social Security.

The payroll tax finances two large benefit programs – 6.2 percent goes to Social Security and 1.45 percent goes to Medicare Part A. If the payroll tax went away, we would have to find another way to pay for those benefits. Paul and Cruz would turn to a value added tax, known as a VAT. …using it to pay for Social Security would have repercussions for the program that the candidates haven’t thought through. …once the payroll tax was gone, Social Security would no longer be a self-financed program with its own funding source. Instead, it would draw on the same general revenues as other government programs.

Viard thinks there are two problems with using VAT revenue to finance Social Security.

First, it means that there’s no longer a limit on how much money can be spent on the program.

…having a separate funding source for Social Security has been good budgetary policy. It’s kept the program out of annual budget fights while controlling its long-run growth – Social Security spending is limited to what current and past payroll taxes can support.

Second, replacing the payroll tax with a VAT eliminated the existing rationale for how benefits are determined.

And that will open a potential can of worms.

…what would happen to the benefit formula if the payroll tax disappeared and Social Security was financed by general revenue from the VAT? Paul and Cruz haven’t said. …One option would be to switch to a completely different formula, maybe a flat monthly benefit for all retirees. …that would be a big step, cutting benefits for high-wage workers and posing tricky transition issues.

I imagine there are probably ways to address these issues, though they might wind up generating varying degrees of controversy.

But I’m more concerned with an issue that isn’t addressed in Viard’s article.

I worry that eliminating the payroll tax would make it far harder to modernize Social Security by creating a system of personal retirement accounts.

With the current system, it would be relatively easy to give workers an option to shift their payroll taxes into a retirement account.

If the payroll tax is replaced by a VAT, by contrast, that option no longer exists and I fear reform would be more difficult.

By the way, this is also the reason why I was less than enthused about a tax reform plan proposed by the Heritage Foundation that would have merged the payroll tax into the income tax.

Yes, I realize that genuine Social Security reform may be a long shot, but I don’t want to make that uphill climb even more difficult.

The bottom line is that I don’t want changes to payroll taxes as part of tax reform, particularly when it would only be happening to offset the adverse distributional impact of the VAT, which is a tax that shouldn’t be adopted in the first place!

Instead, let’s do the right kind of tax reform and leave the payroll tax unscathed so we’ll have the ability to do the right kind of Social Security reform.

P.S. Some of you may be wondering why Senators Paul and Cruz included payroll tax repeal in their plans when that leads to some tricky issues. The answer is simple. As I briefly noted above, it’s a distribution issue. The VAT unquestionably would impose a burden on low-income households. That would not be nice (and it also would be politically toxic), so they needed some offsetting tax cut. And since low-income households generally don’t pay any income tax because of deductions, exemptions, and credits, repealing the payroll tax was the only way to address this concern about fairness for the less fortunate.

P.P.S. Since we have a “pay-as-you-go” Social Security system, with benefits for current retirees being financed by current workers, some people inevitably ask how those benefits will be financed if younger workers get to shift their payroll taxes into personal retirement accounts. That’s what’s known as the “transition” issue, and it’s a multi-trillion-dollar challenge. But the good news (relatively speaking) is that coming up with trillions of dollars over several decades as part of a switch to personal accounts will be less of a challenge than coming up with $40 trillion (in today’s dollars) to bail out a Social Security system that is actuarially bankrupt.

P.P.P.S. It goes without saying (but I’ll say it anyhow) that class-warfare taxation is Obama’s (and Hillary’s) ostensible solution to Social Security’s shortfall.

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Because of the budgetary implications, I think it’s more important to deal with Medicaid and Medicare than it is to address Social Security.

If left on autopilot, Social Security will eventually consume an additional 2 percent of the private economy.

That’s not good news, but Medicaid (which now includes a big chunk of Obamacare) and Medicare are much bigger threats.

Hopefully, though, we don’t need to engage in fiscal triage and we can reform all the big entitlement programs.

So let’s look at why Social Security needs to be modernized.

First and foremost, the programs is about $40 trillion in the red. And that’s after adjusting for inflation!

Moreover, the longer we wait, the more difficult reform will be. I don’t always agree with the policy prescriptions of the Committee for a Responsible Budget, but they are very sober-minded in their analysis. And this chart from one of their recent publications shows that waiting until 2026 or 2034 will require more radical changes.

So it should be obvious we need reform, but now the question is what kind of reform.

Some people think the key goal is making the program solvent, but that’s the wrong focus. Sort of like making balance the goal of budgetary policy.

Instead, the goal should be creating a freer society and smaller footprint for government. And that’s why I think personal retirement accounts are the right goal.

And to understand the implications, consider these excerpts from a column in today’s Wall Street Journal. Professor Jeremy Siegel of the University of Pennsylvania explains how the Social Security system has made his retirement less comfortable.

Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits. Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640. This sounds like a good deal… But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund. …the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. …are affluent seniors making out like bandits? Not at all. The bandit is the federal government, which provides benefits that are millions of dollars short of what anyone whose earnings are at or above the tax cap easily could have accumulated on his own.

In effect, Professor Siegel has been forced to pay for a steak and he’s getting a hamburger. Which is a good description of how all entitlement programs operate.

And it’s not just high-income people who get a bad deal. Social Security is particularly bad for young people. And many minorities also are disadvantaged because of their shorter life lifespans.

Moreover, everyone will pay more for their steak and get even less hamburger if politicians deal with the program’s giant shortfall by imposing the wrong type of reform.

But it’s not just that Social Security is bad for individuals. It’s also a burden on the overall economy.

Andrew Biggs of the American Enterprise Institute looks at how private savings is impacted by government-run retirement schemes

fixing Social Security by raising taxes – or, going further, expanding Social Security as many progressives favor – won’t increase retirement income so much as shift it from households to government. …A new report from Canada’s Fraser Institute looks at how Canadian households’ personal saving habits responded to increases in the tax rates used to finance the Canada Pension Plan (CPP). …The Fraser study, authored by Charles Lammam, François Vaillancourt, Ian Herzog and Pouya Ebrahimi,  found that for each dollar of additional CPP contributions, Canadian households reduced their personal saving by around 90 cents. As a result, total saving – and thus total future retirement income – would increase by a lot less than you’d think. Households would receive more income from the CPP but less from their own saving.

These results are similar to what’s been found in other nations.

I found a similar result across OECD countries: when a country’s government provided an additional dollar of retirement benefits, retirees provided for themselves about 93 cents less in income from savings and work in retirement. …a 2003 analysis by Suzanne Rohwedder and Orazio Attanasio which found that, for the United Kingdom’s earnings-related pension system, individuals reduced personal saving by 65 to 75 cents for each dollar of benefits they expected to receive from the government.

Here’s a very powerful chart on the relationship between private savings and government retirements benefits from another one of Andrew’s articles.

Wow, that’s a powerful relationship. And Biggs isn’t the only expert to produce these results.

All of which underscores why I think we should have a system similar to what they have in Australia or Chile (or even the Faroe Islands).

Here’s my video making the case for personal retirement accounts.

P.S. Two economists at the Federal Reserve produced a study examining why Social Security was first created. It might seem obvious that it was a case of politicians trying to buy votes by creating dependency, but they actually go through the calculations in order to explain how it made sense (from the perspective of people alive at the time) to create a program that now undermines the well-being of the nation.

A well-established result in the literature is that Social Security tends to reduce steady state welfare in a standard life cycle model. However, less is known about the historical effects of the program on agents who were alive when the program was adopted. …we estimate that the original program benefited households alive at the time of the program’s adoption with a likelihood of over 80 percent, and increased these agents’ welfare by the equivalent of 5.9% of their expected future lifetime consumption. …Overall, the opposite welfare effects experienced by agents in the steady state versus agents who experienced the program’s adoption might offer one explanation for why a program that potentially reduces welfare in the steady state was originally adopted.

Gee, what a shocker. Ponzi schemes benefit people who get in at the beginning of the scam.

P.P.S. Speaking of Ponzi schemes, here’s the case for reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

P.P.P.S. I’m not sure whether Hillary’s plan or Obama’s plan for Social Security would be worse.

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We should fondly remember the great, late Margaret Thatcher for several reasons, most notably because she saved the United Kingdom from economic collapse.

I’m especially a fan of her famous observation that socialism fails because, sooner or later, you run out of other people’s money.

Though apparently the real quote (as opposed to the versions that circulate on the Internet) is “they always run out of other people’s money.”

And that’s exactly what’s happening in Brazil. It’s even gotten to the point that the New York Times has noticed. Here are some excerpts from a very sobering story about the pension mess in that nation.

It starts with an anecdote about a bureaucrat who retired with a full pension when she was only 44 years old.

When Rosângela Araújo turned 44, she decided that she had worked long enough. So Ms. Araújo, a public school supervisor, did what millions of others in their 40s and 50s have done in this country: She retired, with a full pension. “I had to take advantage of the benefit that was available to me,” said Ms. Araújo, now 65.

But the problem is that Ms. Araújo is the rule rather than the exception.

Indeed, her pension is relatively small compared to the way some government workers bilk the system.

An exploding pension crisis here in Brazil, Latin America’s biggest country, is wreaking havoc on its public finances, intensifying a political struggle over the economy that already has the president fighting for survival. Brazilians retire at an average age of 54, and some public servants, military officials and politicians manage to collect multiple pensions totaling well over $100,000 year. Then, once they die, loopholes enable their spouses or daughters to go on collecting the pensions for the rest of their lives, too. …“Think Greece, but on a crazier, more colossal scale,” said Paulo Tafner, an economist and a leading authority on Brazil’s pension system. …The nation’s economy has soured badly.

Worse than Greece?!? Is that really true?

Depends on what’s being measured. Greece has a bigger and more bloated public sector (and it’s getting worse), but Brazil ranks below Greece for overall economic freedom. So I wouldn’t be surprised if Brazil’s pension system is even worse than the one in Greece.

For instance, I don’t think young Greek women have an incentive to marry old codgers just to get a lifelong pension. That’s apparently so prevalent in Greece that they call it the “Viagra effect.”

In any event, it’s adding up, setting the stage for a fiscal crisis. Particularly when you consider demographic changes.

…economists warn that the pension crisis will grow more acute…, ranking it among Brazil’s most vexing structural binds. Officials had expected a major shortfall in 2030, but they now say that could happen as soon as next year. …Brazil’s plummeting fertility rate — which recently dropped to 1.77 children per woman, below the rate needed for the population to replace itself — which will eventually put even more pressure on a pension system already under intense strain. …Brazil already spends more than 10 percent of its gross domestic product on public pensions, similar to what southern European countries with much older populations have recently spent…an even bigger shock is expected here, given that the population of people 60 or older is expected to reach about 14 percent of the overall population in just two decades, up from about 7 percent now.

You also won’t be surprised to learn that government bureaucrats have rigged the system so that they get the best deal.

…the system also perpetuates inequality by providing special benefits to hundreds of thousands of government employees and their families. …Brazil is estimated to spend about 3 percent of its gross domestic product on survivors’ pensions, about three times the level in many rich industrialized countries. Politicians have been especially skilled at securing big pensions at the state level. In the Amazonian state of Pará, former governors and first ladies were recently receiving lifelong pensions as high as $7,000 a month, even if they served only a few years in office. …“Public pensions in Brazil have long been a slow-motion disaster,” said Raul Velloso, a specialist on public finances.

Gee, I hope bureaucrats in New Jersey, California, and Illinois don’t read this article. They might get some additional ideas of how to pillage taxpayers.

By the way, the lesson from all this is that the only stable pension system – and the one that is impervious to demographic change – is personal retirement accounts.

P.S. As bad as things are in Brazil, the former socialist president of that nation has more wisdom than Obama.

P.P.S. Then again, the Brazilians have a very strange approach to “rights.”

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Chile is one of the world’s economic success stories.

Reforms in the 1980s and 1990s liberalized the nation’s economy and resulted in rapid increases in economic growth and big reductions in poverty.

Unfortunately, the current government is pushing policy in the wrong direction.

This drift toward statism has been unfortunate, featuring higher tax burdens, more spending, and increased intervention.

But I’ve always assumed that Chile’s private pension system would be safe from attack. After all, as noted in a new column for Investor’s Business Daily by Monica Showalter, it’s been a huge success.

Chile’s 35-year old private pension program…is working spectacularly well. …savings, ownership, control, responsibility and wealth building…are the pillars of the Chilean Model — and have as their ultimate reward a comfortable retirement, which Chileans now do.

But Monica warns that an ongoing education campaign is necessary to make sure that workers realize the benefits of the system.

And that’s been lacking.

…successive socialist governments in Chile have pretty well limited their recognition of the Chilean Model to criticism of it, many of them still unhappy that it’s not a state model that’s providing such high returns. …All the issues that had been called problems were largely the result of widespread public ignorance of economics…the people who should know better aren’t educating the public.

Given that Chile has enjoyed such strong growth in recent decades, you would think ordinary people would be happy, even if they’re not aware of the relationship between pro-market reforms and rising living standards.

And since Chile has grown far faster than other nations in Latin America, you would think that the political elite actually would understand that there is a strong relationship between economic freedom and national prosperity.

But that’s not the case, and the current left-leaning government is an obvious example. It even created a commission to review Chile’s pension system, and that decision was perceived as an effort – at least in part – to undermine support for the private system.

Fortunately, it’s very difficult to look closely at the Chilean system and conclude that personal retirement accounts have been unsuccessful.

Professor Olivia Mitchell of the Wharton School at the University of Pennsylvania served on the Commission and wrote a column based on that experience for Forbes.

She starts by acknowledging Chile’s personal retirement accounts are a gold standard for reform and then asks why there’s a desire to change something that works.

Chile’s retirement system has been hailed as “best in class” by pension experts near and far. The country’s fabled individual and privately-managed accounts include around 10 million affiliates, hold $160 billion in investments, and pay retirement benefits to over a million retirees. So why did President Michelle Bachelet establish a Pension Reform Commission that just delivered to her 58 specific reforms and three comprehensive proposals to overhaul remodel Chile’s retirement system?

A benign explanation for the Commission is that it’s a helpful way of helping people learn about the system.

Ms. Mitchell (no relation, by the way) points out that workers in Chile suffer from genuine and widespread ignorance.

…only a handful (19% of men, 11% of women) know how much they contribute to the accounts: 10% of pay. This underscores my own research showing that most Chileans had no idea how much they paid in commissions, how their money was invested, or how their benefits would be determined at retirement. Only one-fifth of the participants had the faintest idea about how much money they held in their accounts (even within plus or minus 20%!).

But if those people paid close attention, they’d learn that the private system – particularly when combined with the government’s safety net – does a very good job of protecting the less fortunate.

Chile’s retirement system actually does a rather remarkable job of protecting against old age financial destitution. …Adding the means-tested to the self-financed pension generates replacement rates of about 64%, levels even above what retirees in the US get from social security.

Nonetheless, some of the Commissioners want to weaken the current system and give government a bigger role.

Prof. Mitchell is not impressed by their thinking.

…reforms offered by others on the panel have a major flaw: these would – slowly or rapidly – eat into the money so painstakingly built up in the private accounts over time. My view, along with the majority of the Commissioners, was that wrecking Chile’s funded pension system is not the answer. Instead, this would destroy decades of national saving and economic growth, not to mention the well-being of future generations. This is an especially critical concern in view of Chile’s rapid aging: this nation is set to become the oldest country in South America within 15 years. …Chile needs a resilient retirement system that encourages continued work, incentivizes saving, and offers credible pension promises that can actually be paid when the time comes. It would be unfortunate to see Chile dismantle the system that has done so well for so many, over the past 35 years.

The good news, as you can see from the column, is that most Commissioners don’t want radical changes to Chile’s private pension system.

This is a positive outcome. Assuming, of course, that the current left-wing government follows their recommendations.

What we don’t know, though, is whether other governments learn any lessons from all this analysis.

America’s Social Security system has gigantic unfunded liabilities, for instance, and many other nations also have big fiscal shortfalls in their tax-and-transfer systems operated by their governments.

The right answer is a transition to personal retirement accounts. That’s what will happen if policy makers from elsewhere in the world learn from Chile’s success.

P.S. This comparison of Chile and Cuba tells you all you need to know about markets vs statism.

P.P.S. Here’s a comparison of real savings in Australia’s system of private accounts compared to the growing debts of America’s pay-as-you-go government-run system.

P.P.P.S. If you want to see a strong case for personal retirement accounts, click here for an explanation from the man most responsible for Chile’s remarkable reforms.

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I repeatedly try to convince people that the welfare state is bad for both taxpayers and poor people.

Sometimes I’ll add some more detailed economic analysis and explain that redistribution programs undermine growth by reducing labor supply (with Obamacare being the latest example).

And I’ve even explained that the welfare state has a negative impact on savings and wealth accumulation (these dramatic charts show Social Security debt in America compared to ever-growing nest eggs in Australia’s private pension system).

But if new research from the European Central Bank (ECB) is any indication, I should be giving more emphasis to this final point.

Culling from the abstract, here’s the key finding from the working paper by Pirmin Fessler and Martin Schürz.

…multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries.

Here are details from the study.

We regress net wealth on income…and add welfare state country level variables. …The main result of these hierarchical linear models is that pension and social security expenditure measured as shares of GDP show significant and negative correlation with household net wealth levels. …We regard this as evidence that welfare state expenditures indeed act as substitutes for private wealth accumulation and explain partly observed differences in household net wealth among euro area countries. A larger and more active welfare state leads to less need for private households to accumulate private wealth.

Here’s a pair of graphs from the study, showing the negative relationship between government-provided pensions and private wealth.

Now here’s the part that should make honest leftists more open to entitlement reform.

The data show that the welfare state increases inequality!

The effect of a 1 percentage point increase in state pension expenditure as a share of GDP on net wealth is a decrease about 20% less wealth for households around the 10th net wealth percentile. The size of the negative impact is smaller for wealthier households, but remains at above 10% of net wealth. Social security expenditure shows a similar but somewhat weaker effect, ranging at around 10% at the 10th net wealth percentile and coming close to zero for the wealthiest. …we see a decrease in net wealth of 47% for the low wealth household, of 16% for the middle wealth household, and 8% for the high wealth household. These numbers are roughly in line with our results… Additional welfare state spending is negatively associated with all wealth levels but decreasing in size relative to wealth across the full net wealth distribution. …this mechanism would lead to increased observed inequality of private net wealth given an increase of welfare state activity.

Those are some damning results.

And the numbers might be even worse in the United States since many minorities already are screwed by Social Security because they have shorter lifespans.

P.S. Since we’re on the topic of inequality, regular readers know that I think the issue as a complete red herring. Simply stated, the goal should be faster growth and it doesn’t matter if some people get richer faster than others get richer (assuming, of course, that the rich are earning their money and not getting subsidies, bailouts, and other forms of unearned wealth).

That being said, if somebody had asked me whether there had been a significant increase in inequality over the past couple of decades, I would have guessed – based on all the feverish rhetoric from our statist friends – that the answer is yes. So I was very surprised to see this chart from Mark Perry at the American Enterprise Institute.

In other words, the politicians who are talking about a supposed crisis of growing inequality are spouting nonsense. And I’m ashamed I didn’t know their rhetoric is a bunch of you-know-what.

That being said, if their concern about inequality is legitimate and not just for purposes of demagoguery, I expect them to read the ECB working paper discussed above and add their voice in support of a smaller welfare state and in favor of Social Security reform.

P.P.S. If the New York Times can support private retirement savings (albeit by accident), then other leftists should be able to do the same thing.

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Defenders of Social Security often make a point of stating that the retirement system is a form of “social insurance” because people become eligible for benefits by paying into the system.

Welfare programs, by contrast, give money to people simply as a form of income redistribution.

Proponents of the status quo are right. Sort of.

Social Security is an “earned benefit.” The payroll taxes of workers are somewhat analogous to a premium payment and retirement benefits are somewhat analogous to a monthly annuity payment.

But “somewhat analogous” isn’t the same as real insurance. Money isn’t invested and set aside to pay benefits. Instead, Social Security is a pay-as-you-go program, which means the payroll taxes of current workers are paying for the benefits paid to current retirees.

If a private insurance company did the same thing, its owners would be arrested for operating a Ponzi Scheme.

But the government can get away with this kind of system because it can coerce younger workers to participate.

Or, to be more accurate, the government can get away with this approach so long as there are a sufficient number of new workers who can be forced into the program.

The problem, of course, is that the combination of longer lifespans and fewer births means that Social Security is promising far more than it can deliver.

And we’re talking real money, even by Washington standards. According to the Social Security Trustees, the cash-flow deficit over the next 75 years is approaching $40 trillion. And that’s after adjusting for inflation!

So how can this mess be solved?

At the risk of over-simplifying, there are four options.

1. Do Nothing. Some politicians want to stick their heads in the sand and pretend there isn’t a problem. They argue that the “Trust Fund” can finance promised benefits until the early 2030s. But the so-called Trust Fund has nothing but IOUs, which means that benefits can only be paid by additional government borrowing. As you can imagine, that doesn’t bother most politicians since they don’t think past the next election cycle. But this red-ink approach isn’t a solution because the IOUs will run out in less than 20 years. So what happens at that point? Retirees would have their benefits automatically reduced.

2. Personal Retirement Accounts. The reform solution would allow younger workers to shift their payroll taxes into personal retirement accounts. This “funded” approach is working very well in nations such as Australia, Chile, and the Netherlands. Since there would be less payroll tax revenue going to government, there would be a “transition cost” of financing promised benefits to current retirees and older workers. But this approach would be less expensive than trying to deal with the unfunded liabilities of the current system.

3. Limit Benefits. For those that recognize the problem but don’t want genuine reform, that leaves only two other possible choices. One of those choices is to reduce benefits by modest amounts today to preempt large automatic benefit reductions when there no longer are any IOUs in the Trust Fund. Raising the retirement age would be one way of reducing outlays since people would have to spend more time working and less time collecting benefits in retirement. Another option is means-testing, which means taking away benefits from people whose income from other sources is considered too high.

4. Increase Taxes. The other option for non-reformers is to generate more tax revenue. An increase in the payroll tax rate is a commonly cited option. Politicians have already done that many times, with the payroll tax having climbed from 3 percent when the program started to 12.4 percent today. Another option would be to bust the “wage base cap” and impose the payroll tax on more income. Under current law, because the program is supposed to be analogous to private insurance, there’s a limit on how much income is taxed and a limit on how much benefits are paid. Imposing the tax on all income would break that link and turn the program into an income-redistribution scheme, but it would generate more money.

Now take a guess which of the four options is getting the most interest from Hillary Clinton?

As reported by the Washington Post, Hillary Clinton is signalling that she wants to change Social Security so it is less of a social insurance program and more akin to welfare.

At a town hall here Tuesday, she said she’d be open to a Social Security tax increase proposed by Sen. Bernie Sanders (I-Vt.), her radical rival in the primary. During the 2008 campaign, Clinton had flatly rejected such an increase. Her comments this week could suggest that she has warmed to the idea, or that she is responding to a broader shift to the left among Democrats. …Clinton…described an approach similar to Sanders’s — raising taxes only on the wealthiest earners to avoid an increase for people who consider themselves upper middle class. “We do have to look at the cap, and we have to figure out whether we raise it or whether we raise it a little and then jump over and raise it more higher up,” Clinton said. …Sanders’s proposal — increasing payroll taxes, but only for the wealthiest earners — resembles the one President Obama laid out as a candidate in 2008. …At the time, Clinton opposed the idea. “I’m certainly against one of Senator Obama’s ideas, which is to lift the cap on the payroll tax,” she said in a Democratic primary debate then.

So Hillary’s original position was the do-nothing approach, but now she feels pressured to go with the class-warfare tax-hike approach.

As a side note, I think it’s noteworthy that the article acknowledges that the current “wage base cap” exists because there’s also a cap on benefits.

…the wealthy don’t pay taxes on their earnings above a certain amount each year, it’s important to keep in mind that they also don’t receive benefits on those earnings later on.

But I suspect this kind of detail doesn’t matter to Bernie Sanders, Hillary Clinton, and the rest of the class-warfare crowd.

They simply want to maintain (or even expand!) the social welfare state in America. Vive la France!

For more information, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s a link to my video on why personal retirement accounts are the ideal option.

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The American Enterprise Institute has published a comprehensive budgetary plan entitled, “Tax and spending reform for fiscal stability and economic growth.”

Authored by Joseph Antos, Andrew G. Biggs, Alex Brill, and Alan D. Viard, all of whom I know and admire, this new document outlines a series of reforms designed to restrain the growth of government and mitigate many of the tax code’s more punitive features.

Compared to current law, the plan is a huge improvement.

But huge improvement isn’t the same as perfect, so here’s my two cents on what’s really good, what’s partially good, and what has me worried.

I’ll start with something that’s both good and bad.

According to the latest CBO estimates, federal tax revenues for 2015 will absorb 17.7 percent of GDP and spending will consume 20.4 percent of economic output. Now look at this table showing the impact of the AEI proposal. As you can see, the burden of taxes and spending will both be higher in the future than today.

That’s obviously bad. One would think a conservative organization would present a plan that shrinks the size of government!

But here’s the catch. Under current law, the burden of government is projected to climb far more rapidly, largely because of demographic changes and poorly designed entitlement programs. So if we do nothing and leave government on auto-pilot, America will be saddled with a European-sized welfare state.

From that perspective, the AEI plan actually is good since it is based on reforms that stop most – but not all – of the already-legislated expansions in the size of the public sector.

So here’s the bottom line. Compared to what I would like to see, the AEI plan is too timid. But compared to what I fear will happen, the AEI plan is reasonably bold.

Now let’s look at the specific reforms, staring with tax policy. Here’s some of what’s in the report.

The goal of our tax reform is to eliminate the income tax’s inherent bias against saving and investment and to reduce other tax distortions. To achieve this goal, the income tax system and the estate and gift taxes would be replaced by a progressive consumption tax, in the form of a Bradford X tax consisting of a…37 percent flat-rate firm-level tax on business cash flow and a graduated-rate household-level tax, with a top rate of 35 percent, on wages and fringe benefits.

At the risk of oversimplifying, the AEI folks decided that it was very important to solve the problem of double taxation and not so important to deal with the problem of a discriminatory and punitive rate structure. Which is sort of like embracing one big part of the flat tax while ignoring the other big part.

We’d have a less destructive tax code than we have now, but it wouldn’t be as good as it could be. Indeed, the plan is conceptually similar to the Rubio-Lee proposal, but with a lot more details.

Not that I’m happy with all those additional details.

To address environmental externalities in a more cost-effective and market-based manner, energy subsidies, tax credits, and regulations would be replaced by a modest carbon tax. The gasoline tax would be increased to cover highway-related costs.

I’m very nervous about giving Washington a new source of revenue. And while I’m open (in theory) to the argument that a carbon tax would be a better (less worse) approach than what we have now, I’m not sure it’s wise to trust that politicians won’t pull a bait and switch and burden us with both a costly energy tax and new forms of regulatory intervention.

And I definitely don’t like the idea of a higher gas tax. The federal government should be out of the transportation business.

There are also other features that irk me, including the continuation of some loopholes and the expansion of redistribution through the tax code.

Child and dependent care expenses could be deducted… A 15 percent refundable credit for charitable contributions… A 15 percent refundable credit for mortgage interest… A refundable credit for health insurance…the EITC for childless workers would be doubled relative to current law.

Though I should also point out that the new tax system proposed by AEI would be territorial, which would be a big step in the right direction. And it’s also important to note that the X tax has full expensing, which solves the bias against investment in a depreciation-based system.

But now let’s look at the most worrisome feature of the plan. It explicitly says that Washington should get more money.

… we also cannot address the imbalance simply by cutting spending… The tax proposals presented in this plan raise necessary revenues… Over time, tax revenue would gradually rise as a share of GDP… The upward path of tax revenue is necessary to finance the upward path of federal spending.

This is very counterproductive. But I don’t want to regurgitate my ideological anti-tax arguments (click here if that’s what you want). Let’s look at this issue from a strictly practical perspective.

I’ve reluctantly admitted that there are potential tax-hike deals that I would accept, at least in theory.

But those deals will never happen. In the real world, once the potential for additional revenue exists, the appetite for genuine spending restraint quickly evaporates. Just look at the evidence from Europe about the long-run relationship between taxes and debt and you’ll see that more revenue simply enables more spending.

Speaking of which, now let’s shift to the outlay side of the fiscal ledger.

We’ll start with Social Security, where the AEI folks are proposing to turn Social Security from a substandard social insurance program, which is bad, to a flat benefit, which might even be worse since it involves a shift to a system that is even more focused on redistribution.

The minimum benefit would be implemented immediately, increasing benefits for about one third of retirees, while benefits for middle- and high-earning individuals would be scaled down to the wage-indexed poverty level between now and 2050.

Yes, the system they propose is more fiscally sustainable for government, but what about the fact that most workers are paying record amounts of payroll tax in exchange for a miserly monthly payment?

This is why the right answer is personal retirement accounts.

The failure to embrace personal accounts may be the most disappointing feature of the AEI plan. And I wouldn’t be surprised if the authors veered in this unfortunate direction because they put the cart of debt reduction ahead of the horse of good policy.

To elaborate, a big challenge for real Social Security reform is the “transition cost” of financing promised benefits to current retirees and older workers when younger workers are allowed to shift their payroll taxes to personal accounts. Dealing with this challenge presumably means more borrowing over the next few decades, but it would give us a much better system in the long run. But this approach generally isn’t an attractive option for folks who fixate on near-term government debt.

That being said, there are spending reforms in the proposal that are very appealing.

The AEI plan basically endorses the good Medicare and Medicaid reforms that have been part of recent GOP budgets. And since those two programs are the biggest drivers of our long-run spending crisis, this is very important.

With regards to discretionary spending, the program maintains sequester/Budget Control Act spending levels for domestic programs, which is far too much since we should be abolishing departments such as HUD, Agriculture, Transportation, Education, etc.

But since Congress presumably would spend even more, the AEI plan could be considered a step in the right direction.

Finally, the AEI plan calls for military spending to consume 3.8 percent of economic output in perpetuity. National defense is one of the few legitimate functions of the federal government, but that doesn’t mean the Pentagon should get a blank check, particularly since big chunks of that check get used for dubious purposes. But I’ll let the foreign policy and defense crowd fight that issue since it’s not my area of expertise.

P.S. The Heritage Foundation also has thrown in the towel on personal retirement accounts and embraced a basic universal flat benefit.

P.P.S. On a completely different topic, here’s a fascinating chart that’s being shared on Twitter.

As you can see, the United States is an exception that proves the rule. I don’t know that there are any policy implications, but I can’t help but wonder whether America’s greater belief in self-reliance is linked to the tendency of religious people to believe in individual ethics and moral behavior.

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