Social Security faces insolvency. Expenses in payments to beneficiaries exceed revenue and this gap is expected to widen. Proposed solutions have taken two approaches. One approach will suggest some version of benefit denial ,delay ,or reduction of benefits. The second approach imposes more taxes to cover the increasing obligations. Neither approach is palatable public policy because it creates anxiety among beneficiaries and resentment among taxpayers. I propose a better solution that utilizes a tax cut to reestablish solvency for Social Security with additional benefits of economic stimulus. This proposal recognizes the healthier longevity enjoyed by modern seniors and the potential and desire to remain productive. Best of all , this proposal relieves anxiety and resentment and may genuinely please citizens. The fundamental problem of social security solvency is of course that the current and foreseeable revenue falls short of obligations. The tax cut that I propose is one designed to create an incentive for beneficiaries to forego Social Security benefits and thus reduce obligations.
This is what I propose.
All beneficiaries of Social Security at or above retirement age who voluntarily forego social security benefits for one year will be exempt from all federal income tax and social security tax on earned income in that same year.
Participation would be voluntary and an individual choice. The tax exemption creates a reward of retaining income that would otherwise be paid in taxes. It would appeal to those beneficiaries who do or could earn income that would result in a tax liability that would be larger than the expected Social Security benefits for that year. The reward may motivate participants or aspiring participants to even greater earnings. Beneficiaries who have underfunded retirement plans, and wish to work a few more years, would appreciate this plan. Others may wish to continue ,or return, to work to fund college for a grandchild , a wedding , purchase of a new boat , or travel. The proposal allows for individuals to choose to participate in one year and return to traditional social security benefits the next year and perhaps work tax exempt again in the future for any year that they elect to forego Social Security benefits. The decision could be retroactive and be made at the time of tax filing.
The reduction in Social Security obligations would be proportional to the number of beneficiaries who would choose to forego their benefits. The 2011 shortfall would be met if only 2 % of beneficiaries participated in this plan. If a greater percentage participated , a surplus could be realized. Some have suggested that a surplus could reestablish the trust fund. This would be a mistake. We have learned that a trust fund is a very untrustworthy place for any funds to be reserved from this government. Any surplus should be applied to a reduction of Social Security taxes. This tax reduction would produce economic stimulus and generate greater tax revenue to Social Security.
The Treasury would benefit from this plan. There would be no lost revenue because taxes retained by people who would have otherwise not been working is not a loss. The potential for loss to the treasury occurs from individuals who would have been working regardless of this proposal. The Treasury would stand to lose the difference between the individual's tax obligation and the savings in Social Security payment not made. As we considered above , the tax funds retained by the individual would likely be spent and would circulate in economic activity that would create multiple occasions for taxes to be paid and would likely result in an increase of revenue to the Treasury.
Employers will appreciate as lower cost the exemption from the employer paid portion of the Social Security tax Further incentive for employers to retain senior workers can be made by allowing medicare premium support or vouchers to assist the employer in meeting healthcare premium expenses. These incentives would make hiring or retaining older employees more attractive. Economic stimulus would be achieved in two ways by this plan. First , seniors who remain in or return to the work force add to productivity and commerce. Second , as suggested above , taxes in the hands of individual seniors will likely be spent in ways that create jobs and commerce and will likely strengthen the economy and add revenue to the Treasury.
The Barrilleaux Plan has the merits of being simple and easy to understand. It uses constructive economic incentives and rewards. It can be implemented with no risk. Best of all it can relieve anxiety of feared cuts for current beneficiaries and resolve resentments of taxpayers who can now see a more promising future for their investment. The probability of success can be estimated as very high. This estimate is not based on any intricate formulas or computer models or complex economic analysis. The estimate of success can be simply based on human nature, and the natural behavior of markets to answer incentive with productivity. This approach can restore solvency to Social Security and versions of this approach may also solve funding challenges for state retirement plans and a version could also relieve the crisis of public funding of pensions in European countries such as Greece.
I humbly submit this plan for inspection and criticism