We haven’t ranted
about the problems in the Social Security system for a while, but an article
struck our eye a couple of weeks ago. As
soon as we got back from the ophthalmologist, then, we decided to do a blog on
the subject. After all, none of us is
getting any younger, and the government doesn’t have forever to fix the thing.
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| Feldstein: "Maybe I didn't think this thing through. . . ." |
The article? “How to Make the Tax System Fairer and Save
Social Security” by Martin Feldstein.
Feldstein was Chairman of the Council of Economic Advisers under
President Reagan, and is currently a Harvard Professor. The article appeared in the July 20, 2017
issue of the Wall Street Journal. Page A17 if you want to read it. We don’t advise it.
Why not? Because it’s the Same Old Thing. In brief, the federal government has a budget
deficit. Add to that the fact that
Social Security is in trouble. How does
Feldstein say to fix it?
Tax healthcare
benefits. That will add an extra $135
billion to tax collections, while fiddling with the age to start receiving full
benefits will add more.
We hate to do
this to a Harvard professor and an adviser to President Reagan, but —
Blah, blah, blah.
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| "Marty, I listened to you, but you should have listened to me!" |
There are so many
things wrong with Feldstein’s solution that it’s difficult to know where to
begin. That being the case, we’ll just
jump right in and hit some of the high points.
Tax healthcare
benefits, and what happens? Unions start
demanding more pay to make up the difference.
One of the reasons employers have been willing to assume the cost of
health benefits is that the employee gets a full dollar of benefit for every
dollar paid. If benefits were taxed,
employees in, say, a 33% tax bracket, would receive only 67¢ of benefit for
every dollar paid.
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| Raise labor costs and there are fewer jobs. |
And where is the
employee going to get the cash to pay the tax on the non-cash healthcare
benefits? From the employer, of course. For the employee in a 33% tax bracket to
receive $1 of benefits, the employer will have to pay the employee $1.50. Labor costs just went up by half. Start looking into automation or cheaper
labor elsewhere.
Oh, but Feldstein
says that this will be included in the payroll tax. The employer picks up half of that . . .
which means the employer pays one half of the tax directly, and the other half
indirectly. The cost of labor has still
increased, albeit less than the regular rate, but still giving employers an
incentive to get rid of workers.
Now, about those
increased taxes deposited in the Social Security Trust Fund. . . .
We’ve mentioned
this before, but it bears repeating: There is nothing in the Social Security
trust fund.
Read that again:
T
HE
REI
SNOT
HINGIN
THESOCI
ALSECURI
TYTRUSTFUND
Do you know what
that nothing is in the Social
Security trust fund? By “nothing,” of
course, we mean $00.00, not “nothing” as in “non-existence.” We’re not going to violate the first
principle of reason on this blog if we can help it.
Government
debt. Lots and lots of government debt.
And who runs the
trust fund?
The government.
And what does
that mean, exactly?
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| "Don't tell anyone. I'm just borrowing it." |
It means that the
government borrows every cent that comes in to the trust fund, and replaces it
with an IOU. In other words, the
government borrows money from itself and spends it.
When it comes
time to pay a dollar out of the trust fund, then, the government has to go find
another dollar to redeem one of its
IOUs. Every dollar put into the trust
fund is not a tax savings, but a future tax liability. Thus, for every single dollar paid out of the
Social Security trust fund, the government had to collect more than $2.00 in
taxes.
More than $2.00 for every $1.00? Are we sure
about that?
Absolutely. The Social Security system is not
cost-free. It has to pay people, and come
up with the cash for operating expenses.
It costs money to collect money and pay it out. How much, we don’t know, but we do know that
it’s going to be more than what is collected, borrowed, and repaid — remember,
this is the government lending to itself out of money that doesn’t belong to
the government in the first place, being allocated to pay Social Security
benefits, not make up for shortfalls in other revenues.
The weird part is
that the money doesn’t belong to the people who paid it in, either. There was a Supreme Court case about that
back in 1960, Flemming v. Nestor.
Who does it belong to? The only answer to that question is another
question: Who does what belong
to? There’s nothing in the trust fund to
belong to anybody! That’s what happens
when somebody borrows money from himself and spends it.
At least
Feldstein agrees there is a problem with Social Security. Unfortunately, his solution for fixing the
tax system and saving Social Security only perpetuates a very bad system, and —
worse — gives the illusion that something is being done.
Is there anything
that can be done? Tune in tomorrow.
#30#