Funding Social Security through Estate Taxes

Link: Economist's View: Cato: Social Security Linked to Reduction in Fertility.

A new study by Michele Boldrin and colleagues examines the link between government-provided old-age pensions and the continual dramatic reduction in fertility throughout the developed world during the twentieth century.

Declining workers-to-retirees ratio is cited as a major reason why Social Security will be in trouble.  Technically it is true! In pay-as-you-go social security systems, if there are lesser number of workers to support each retiree then either benefits will have to cut or tax rates will have to be raised. But I don't understand why raising the taxes should be a problem to fund the "gap". Lesser number of workers for each retiree means that current retirees had lesser number of children. That means, their spending on kids, such as for education, food, clothing, etc., must have spread over lesser number of children. Not only that, but these lesser number of workers stand to inherit more wealth per-capita as compared with their previous generation. Thus, it is only fair that they pay for these benefits through higher taxes. If that is not politically acceptable  Govt. can always fund the "gap" through higher estate tax rates. As immigrant workers neither benefitted from higher spending when they were young, nor stand to receive inheritance from the current retirees, raising social security tax can discourage immigration of workers to US. If US reduces social security tax rates and increases death tax rates in a revenue-neutral fashion it will still come out ahead as lower social security tax rates will attract more immigrant workers.

None of this means that I support Govt. sponsored tax-funded social security schemes. All I want to point out that workers-to-retirees ratio does not stand in isolation and decline in that will not invalidate or trouble the Social Security on its own! Best argument against Social Security is lack of freedom and not some declining ratio or temporary deficit.

Comments

[Half Sigma]

This most makes a great point! Until now I had never thought about how the declining birthrate calls for higher estate taxes, but it makes perfect sense!

[Hemant Mandpe]

This is a good diversion to get the attention away from the problem.

To try to resolve a problem, a revenue neutral solution that does not raise taxes, helps to support the economic growth and avoids violent ups and downs.

So, We Should Try To Persuade Our Senators & Congressmen to Change Their Mind on Social Security Reform.

1. Last year, Social Security collected $ 151.1 Billion more* in taxes and interest than it paid out through payroll deduction.
2. The Social Security Trust Fund is now about $ 1.5 Trillion*. The fund itself is an accounting device in which this money is in paper only and is loaned back to the government to spend.
3. Assuming an average 3% interest rate [my estimate] for last year, this fund on paper provides an estimated $ 45 billion in interest, leaving an estimated surplus of $ 106.1 billion in excess taxes collected.
4. This surplus was spent as part of the general budget funds. Even the $ 45 B interest does not materialize as that too is spent as part of the general budget fund.
5. So if there were no such surplus, Congress would have been forced to raise that money either by raising taxes or borrowing that money now.
6. In effect any reduction in this contribution to general funds as expected, directly affects the budget now.

At this point please consider the factors that will affect the possibilities of reduction to this surplus tax generation. If you do, you will conclude that it is urgent to address this issue today.

Baby boomers will start collecting the benefits within next five years. This is a double whammy. A sharp reduction in employment [resulting in reduced tax collection] and a sharp increase in the benefits, which further accelerates the need to reform now, and not after they hit the retirement age. This will give everyone some time to prepare for what is in the future.

Any reduction to the collection of taxes today is a good reason “Why We Should Try To Persuade Our Senators & Congressmen to Change Their Mind” and act on Social Security Reform” NOW.

*Source: Wall Street Journal 02/01/2005

**For general information, the current system of payment was put in place in 1983 to avoid benefits from exceeding the SS revenues. This was based on the recommendations made by a panel headed by Alan Greenspan. Since then several minor adjustments have been made to the system It does not resemble what FDR had initiated in mid-thirties