Return to Welfare; History, Results and Reform
Social Security and Welfare
One last brief comparison needs to be made - between Welfare and Social Security. It has been argued that this entitlement is different and that this New Deal program is vital to the livelihoods of our senior citizens. We cannot break promises to seniors who count on these payments and planned for them, but we need to look at changes for younger workers. We always hear how a growing number of elderly will rely on a shrinking number of younger workers. Despite rising life expectancies and longer working workers, the retirement age has stagnated at 62. The same disincentives to work that welfare recipients experienced are also applied to our Seniors, as a result of the convoluted setup of the Social Security system. Alan Reynolds, of the (libertarian) Cato Institute wrote a insightful and humorous article on this (239):
I have discovered a foolproof strategy for beating the income tax, the Social Security tax and the Medicare tax: Lower your income.
When I looked back at my own earnings, I saw I had already started cutting my labor income by 26 percent in 1998-99 by greatly reducing extra writing and speaking. The resulting savings in taxes was much greater than 26 percent, of course, because marginal tax rates rise with income. Uncle Sam took the biggest hit, as planned.
My wife got this message even earlier, responding to the 1991 tax increase by retiring a dozen years earlier than is usual. All her income would otherwise have been taxed at my steep rate. By not working, she also stopped paying the increased Social Security tax, and later began collecting Social Security benefits at 62. Because I continue working, however, 85 percent of her modest benefits are taxed at my marginal tax rate. Another incentive to work less.
By 2003, I had managed to reduce my labor income another 36 percent by asking my employer to pay me less in return for less time in the office. Altogether, I have cleverly reduced my taxable labor income by 67 percent from 1997 to 2003. My Medicare tax likewise fell by the same amount, and the Social Security tax fell nearly as much.
Past efforts to tax my wife and me more ruthlessly in 1991-93 had the opposite effect. Yet Sen. John Kerry now imagines he can make us fork over a much larger share of investment income by reverting to taxing dividends at ordinary income tax rates. Ironically, that would cut my taxes, not raise them.
For brave souls who keep working past 65, federal work penalties grow even more severe. Such heroic Americans must keep paying into Social Security and Medicare even though those payments add nothing to their benefits. This is the government's "nothing for something" plan for working seniors. Even a middling salary will also result in 85 percent of their Social Security benefit being taxed, while those who avoid work commonly get tax-free benefits.
To make matters worse, money taken out of individual retirement account (IRA) or 401(k) plans normally will be taxed at a higher rate if seniors keep working, because income from work puts them in a higher tax bracket.
The sensible solution is to stop working at 62-65, or work as little as possible -- like running a 12-cylinder engine on four cylinders. Yet this is a dangerous message to send our rapidly aging population. Future growth of tax revenues, and of the economy, will depend heavily on whether older Americans choose leisure over work.
Between 2000 and 2020, the population between ages 25 and 54 is seen increasing only 3 percent while the population older than 55 rises 63 percent. If older people shun work, there will be virtually no labor-force growth aside from immigration. America's medium-term challenge is not a job shortage but a prospective shortage of willing and able workers.
If only a fraction of future seniors respond as I have to tax penalties on work, money flowing into the Treasury, Social Security and Medicare from an aging work force will slow even more than expected. (239)
(Notice that this angle on Social Security has not been covered in this debate over allowing personal accounts. Neither has the fact that the trillions of Social Security money stagnating in government bonds would provide rocket fuel for the economy if invested in the stock market where it would make between 3-4% a year as opposed to 0-1% in the government bonds)