Cutting social security benefits is under consideration once again as the US Congress and the White House hurtle toward a full embrace of austerity. The rationale they offer is the professed bankruptcy of the social security system. Undoubtedly, reducing benefits from a program that keeps an estimated 40 percent of elderly Americans out of poverty is an unsettling prospect.
One plan to boost the sustainability of the system involves tweaking the payroll tax rules. According to a January 2013 report by the Center for Economic and Policy Research, the maximum amount subject to the 6.2 % social security payroll tax recently increased to $113,700, but income above that cap is not taxed by social security. Senator Mark Begich (D-AL) and Representative Ted Deutch (D-FL) have introduced legislation that would eliminate the cap on taxable earnings, with purpose to ensure the program's solvency for decades to come. This is a sensible path toward preservation of one of our nation's most effective antipoverty programs. In fact, given that 5 percent of American workers earn more than $113,700, the CEPR calculates that if such a cap were lifted, only 1 in 20 taxpayers would be affected.
Indeed, saving social security is highly desirable, but we can do much more.
We propose the adoption of a new program that would provide security for all Americans at the onset of adulthood. This "social security" would provide young adults with the opportunity to launch their working lives or obtain higher education. The program we have devised--the late Columbia University historian, Manning Marable labeled it a "baby bonds" scheme--is patterned after the Child Trust Fund plan that had a decade-long history in Britain.
Under this program, every newborn infant in the United States would receive a federal trust fund that they could access at 18 years of age. Each fund would be guaranteed to increase at a real rate of interest of at least 1 percent until the child reaches adulthood. The fund could be designated for the purposes of financing higher education or training, the purchase of a home, or to support self-employment.
The program would be universal, but the amount of the endowment would be graduated on the basis of the child's parents' wealth or net worth. So, if by chance Bill Gates or Oprah Winfrey had a new child, their child's endowment could be $50. For children born into families in the lowest quintile of the wealth distribution, the endowment could be as large as $50,000 to $60,000.
With approximately 4 million infants born each year, if the average endowment was $20,000, the annual cost of the program would be $80 billion. This only would constitute 2.2 percent of the 2012 total federal expenditures and about 11 percent of current social security expenditures. If removing the cap on taxable earnings to support social security is not sufficient to finance this new program, other highly regressive federal subsidies could be reduced, particularly the mortgage interest deduction.
We need to expand the conception and reach of social security rather than continuously put it on the national chopping block.