No Good Answers on Public Pensions

I've spent a fair amount of time over the last few weeks debating what we're going to do about Social Security when the time comes, that time being . . . um, almost now.  There are roughly three main plans, all of them unsatisfying:

Eliminate the ceiling on payroll taxes.  Someone I was talking to recently informed me that this was "all we have to do".  All?  That's a 12.5% marginal tax increase on a whole lot of income.   This is on top of the now-planned reversion to the Clinton tax rates of 39.5% for that income, and the various tax hikes on the rich that have been bandied about to pay for other things.  Tack on state and local taxes in high-wage states, and you're looking at many people having marginal tax rates in the 60-65% range.

That's too high.  To me, it's too high morally--no one should work more hours for the government than for themselves.  It's also too high practically.  I've long said that the Laffer Curve doesn't apply at US rates--but that's because we don't have people paying taxes at a greater than 60% rate.  You'll get Laffer effects from people deciding to work less, but also because with a 65% tax rate, it really pays to shelter your income, transform it into capital gains, or move.  You simply cannot hike tax rates by almost 20 percentage points in a few years with no war to stir the patriotic spirit, and expect it to go well.

The other problem is that you then shatter the illusion that this is insurance, rather than a legally enforced Ponzi scheme.  Which is why I understand the AARP has historically opposed moves like this.

Means test the benefits  I am in favor of this myself--I think.  The problem is that means testing old-age benefits is effectively an enormous tax on saving.  Say that saving enough to provide $100,000 a year in income results in a 100% loss of benefits.  With a maximum benefit of something under $30K a year, that's a 30% tax on my hundred thousand, on top of the income taxes I'll already pay.  Losing Medicare is a potentially even steeper tax.  Call it 50%, total, plus maybe 20% income tax.  Why bother?

You can set the caps higher, so that the marginal tax rate is rather smaller, but then you don't save any money.  The very wealthy are numerically few; kicking 20,000 wealthy couples off the rolls is not going to save the system. 

Raise the Retirement Age  I'm also in favor of this.  However, I notice that it is a proposal espoused and endorsed by sedentary people who have interesting jobs as policy wonks.  Moving people off the social security rolls and onto the disability system is not a huge help. 

Moreover, this proposal will not do much good unless you also raise the early retirement age; seven out of ten retirees collect their benefits before age 65 (or now 66).  Keeping people in the workforce means more years of taxes to prop up the system.  Otherwise it's just a benefit cut by another name--and if you cut them far enough, you end up with the elderly on other forms of public assistance to make up the shortfall.