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Turning Social Security Over to the States
I’ve been pondering an item I saw in the Wall Street Journal the other day about states creating “automatic IRAs” for residents who don’t have a retirement plan at work. So far only three states – California, Illinois, and Oregon – have approved such programs, and none have actually gone into operation as of yet. The general idea is that workers without any other retirement plan would have an automatic payroll deduction into an IRA, but they could opt out if they want.
In general, I like to see the states moving into areas that are thought (incorrectly) to be federal concerns. The federal social security system has no legitimate constitutional basis – it was upheld in the midst of the New Deal by an FDR-friendly majority of the court. Justice Cardozo’s opinion was based mainly on the idea that Social Security was good policy given the “crisis” of the Depression. The policy argument looks a little thin now, with the Social Security Trust Fund facing depletion. That’s not to mention the inherent unfairness of paying into a hypothetical retirement account that your heirs cannot inherit.
Granted, a number of factors make one suspicious of the current state initiatives. First – the fact that California and Illinois are among the early adopters suggest that the legislatures are looking to plunder retirement savings in the manner of the US Congress. Secondly, the Obama Administration itself supports the state initiatives, which is normally a good enough reason for opposition.
But the fact that state retirement programs are blessed by Democrats could be an opening for a conservative policy proposal to shift retirement savings from Uncle Sam to the states. Policy wonks should be able to devise a system in which workers in states with a state-based retirement plan get a full or partial exemption from Social Security taxes, or perhaps a tax credit against Social Security taxes. For younger workers in those states, Social Security could be phased out entirely in favor of the state-based system.
In order to qualify, the state-based system would have to offer privately-managed, fully-portable retirement accounts. That shouldn’t be difficult – isn’t that what state 529 (college savings plans) already do? In New York, for example, the 529 plan offers only funds managed by Vanguard, and the money in those funds is – as far as I know – completely off-limits to the pols in Albany. Basically, state-based retirement accounts should be like 529 plans, except that workers are automatically enrolled and would have to affirmatively opt out if they don’t want to participate.
Granted, some state systems would be poorly designed, but the beauty of federalism is that the competition for businesses and taxpayers would create powerful incentives to get it right. Besides, almost anything would be an improvement over Social Security. I also appreciate the serious intellectual question of whether the government should have any role whatsoever in retirement planning. However, given the political reality, I don’t think we’ll ever get government entirely out of the game, so why not a competitive 50-state market for automatic retirement accounts?
Published in Economics, General, Law
Henry saw that things such as care for the needy and building roads would be all that was left to the states should the Constitution be ratified. They haven’t even that these days.
Great article. What stops folks from setting up payroll deduction plans into an IRA now? I am not sure what value the state programs add other than to take advantage of less informed citizens who surrender investment management of the accounts to the state which promptly ‘invests’ the funds in state debt instruments.
Defined benefit retirement needs to come to an end, everywhere. Whether it’s a federal law or a state law doesn’t seem to me to matter economically although constitutionally it probably does. But to privatize Social Security we need to move current payment obligations and those of people nearing retirement to general revenue. This requires major tax changes, indeed we should just toss the tax code and combine the payroll tax, corporate profits tax and income tax into one simple system. We all have our favorite alternatives, but we have to agree to toss the existing code. Reform from inside the existing code is impossible and we should recognize that as fact.
Repeat after me:
Interest rate floor on federal savings bonds of 6.8%.
Indeed. Or even just writing their own checks to such plans. I’ve seen no legitimate role for government at any level in our retirement plans. Including limits on the amounts that can be socked away in a retirement plan. Or a health savings plan.
And, not too unrelated, a low flat tax would leave more money in our hands to sock away. Or blow on frivolity. Or spend on necessities and nice to haves. Or spread among all of that. All without government “encouragement” to do more of this and less of that.
Eric Hines
I expect to have lived and worked in at least four states before retiring and my number might be below average. State- by- state systems sound like a nightmare. All of your reason for suspicion sound valid also.
The SS trust fund is already depleted because it never existed in the first place. I would not consider any thing that California, Illinois and Oregon does fiscally as something to copy. Personally,the least politicians touch my money the better of I will be. John Penfold has the only fix for SS but one that is perhaps impossible.
Agree. Our government is working at so many cross-purposes that it looks like a grifter dealing three-card monte on the street corner. I wonder if utter simplicity isn’t the answer:
1) a Steve Forbes’ flat tax with a Milton Friedman negative component. The maximum SS benefit is somewhere near poverty, which would also be a reasonable top-end for a negative income tax.
2) Make savings tax free. If we’re worried about the rentier problem, issue all of us an IRA (for all of our savings and investment securities) and tax it on withdrawal (a consumption tax for savings). This would also serve to replace IRAs, 401(k)s, 529s, HSAs and any of the random numbers and digits in the code and the various double taxations on investment income.
As Milton Friedman said, we all know we need to save up for an annuity for when we get old. Why make it complicated?
On the OP. Not clear how dictating a sensible (non-felonious) plan to the states would be done legally. Seems like you gotta let ’em do what they’re gonna do.
I think that if we want to keep the current popular systems, that the GOP POTUS should propose an amendment to make SS, Medicaid and Medicare fall within the power of Congress.
PC Cheese,
Impossible? I don’t know why. If we protect existing beneficiaries and those over 50 by moving the payments to general revenue why should they oppose it? Younger people should be glad to own their own retirement. The rest are negotiated actuarial fixes, i.e. 40 to 50 and 50 top 65 which we can buy off. The hard part is the tax reform. The establishment types, Bush, Rubio et al want to reform the existing code, others, correctly, want to toss it and start over fitting in on a few pages. A flat tax high enough, or a Fair tax big enough to pay for this transition would not be feasible, but a VAT like New Zealand’s, linked to the flat tax rate, uniform, no good excepted is magical. So difficult yes, because Congress never get’s anything right, but impossible with strong White House leadership? I don’t think so. Reform will be a giant log role and doesn’t allow innovation, but a new President can sell an idea, an idea that disintegrates if Congress begins it’s corrupt fiddling. Can you not see Carly doing this and beating back the parasites? As to the special interests that make any reform impossible, they’re all professional lobbyists and care most about relative loss to their competitors. They can live with all Oxen gored by a simple idea.
We did that long ago when the “trust fund” was raided and given IOU’s in return.
Precisely.
Illinois instituted a “Tier II” system for new state employees which cuts benefits but doesn’t decrease contributions. New people are subsidizing the old system and getting less for their efforts. Before they set it up they didn’t calculate whether the new benefits would be so low as to require the State to contribute to Social Security on their behalf. Another ticking time bomb waiting to go off in 20 years.
I can’t agree with you on the VAT. It’s an insidious tax that’s almost impossible to monitor. Every VAT proposal I’ve seen makes it a supplement to, not a substitute for other more transparent tax systems. Without that, I can’t support it.
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The issue with all the SS reforms is the concept of protecting those over 50.
A good start is a look everyone in the eye right now and say we are raising the eligibility age 1 year. Everyone will suck it up.
Then move the eligibility age up a year every 2 or three until it is mid or late 70’s.
Eliminating the cap on taxable earnings and lowering the overall rate may also be on the table.
Social Security was never intended, designed or funded to make payments for what has become the last 1/4 of our lifetimes. If we look at the original implementation and adjust it for contemporary life expectancy eligibility age would be north of 85.
Exactly. I suspect it would end up implemented in such a way as to create a new serfdom. The Dems. have long hated the idea of productive people being able to leave less hospitable states for more hospitable ones.
Exactly. The idea was to insure people against outliving their savings. Instead it became an excuse for not having savings, neither as individuals and especially as a nation. The major damage it has done to the nation was to shrink national savings. This is why our deficits immediately spill into external debt. Not smart.
This is a copout. If you can’t reform from within the existing code, you can’t reform outside it, either. You’ve got the same “we” to work with either way.
No to VAT. Period.
Tell me why? What is the problem with the New Zealand VAT?