Thursday, January 06, 2005

Social Security: A Regressive Tax?

Liberals often claim that Social Security withholding is a regressive tax. On C-Span the other morning, Susan Milligan, a Congressional reporter for the Boston Globe, claimed that "Social Security is the most regressive tax we have." I submit that this is nonsense: SS cannot be a regressive tax, let alone the most regressive tax, since it is not a tax at all. Let’s consider what a tax is.

Suppose you pay property taxes to the county government. In exchange, you get roads, public schools, public libraries, and the like. Taxes are monies paid for goods and services rendered. Once correct taxes have been paid, tax monies are not returned to the payer. The same is true of any tax, including sales taxes, income taxes, and estate taxes. But SS payroll deductions, in the normal course of events, are returned to the payer. It follows that SS withholding is not a tax.

Not being a tax, SS withholding cannot be regressive. To call a tax regressive is to say that it targets those on the lower end of the income distribution. (One should be careful with the term ‘distribution’: as I am using it here it does not imply a distributor.) The idea is that it is somehow unfair that those on the lower end of the scale, those who make less that $89, 700 per annum, should be the only ones who pay this ‘tax’ -- with the high-end earners getting off ‘scot-free.’

But this is rubbish. Money that a worker pays into the SS system is money that he or she has a reasonable expectation of getting back later, when he or she retires. The money workers pay in is not a tax any more than money that one voluntarily contributes to a 401k or 403b plan is a tax. (Of course, the latter are individual accounts, unlike the SS system; but that difference is irrelevant to my point) Since it is not a tax, SS withholding cannot be regressive. Note also that it is precisely the low-end earners who need – assuming they do need – the SS system to keep them from dining on cat food in their dotage. It is for them – a fact reflected in the existence of the cap. Why should high-end earners pay into the system? They will do fine by themselves, thank you very much. Furthermore, if the high-end earners were to pay into the SS system, then they would be entitled to take money out later in proportion to how much they paid in. How would that solve anything?

The really fundamental problem with the SS system is that it is a complete conceptual muddle, quite apart from the moral and economic problems it poses. No one knows what exactly it is or what it is supposed to be. Destitution insurance? (Then why are the premiums so high?) A retirement plan? (Then why is the payout so miserable?) Intergenerational wealth redistribution? (Geezers have had an entire lifetime to accumulate wealth; why take money from relatively poor young people starting out in life?) Some other kind of socialist scheme? I could go on, and I do, here.