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Brett Arends’s ROI: This plan to ‘save’ and expand Social Security is missing some obvious solutions

Senators Bernie Sanders and Elizabeth Warren have introduced a plan to rescue Social Security from insolvency by increasing its spending by $13 trillion and its taxes by $34 trillion.

The “Social Security Expansion Act” would include $2,400 in extra payouts per beneficiary and raise benefits for those at the bottom of the economic scale, starting next year.

Read more about Social Security on MarketWatch

It would also levy new 12.4% taxes on earned and investment income on those making more than around $250,000 a year, as well as 16.2% in new taxes on net investment income for certain private business owners, namely active S-corporation holders and active limited partners.

An analysis conducted by the Social Security Administration’s actuaries said that the extra benefits that would be paid over the next 75 years had a present value in today’s money of $12.9 trillion, while the extra taxes had a present value of $34.2 trillion. These would begin with $123 billion in extra spending and $386 billion in extra taxes next year. Social Security chief actuary Stephen Goss confirmed that with the new taxes the plan would restore Social Security to a sound financial footing over 75 years.

Social Security is currently on a path to reach financial crisis by 2035, when the trust fund is expected to run out of money. Without Congressional action, benefits would have to be cut across the board by about 20%.

The new bill was at the center of a public hearing Thursday of the powerful Senate Budget Committee, of which Sen. Sanders is chairman.

Republican senator Mitt Romney took the chance to mock the proposals as “a messaging bill,” “a campaign bill” and “a fundraising bill” that has “no chance whatsoever” of becoming law. He is pushing his own proposal, the so-called Trust Act, which would involve bipartisan committees meeting in private to find solutions to the funding crises for Social Security and Medicare.

Sen. Romney denied that his bill was designed to cut Social Security benefits.

Among the problems for Social Security beneficiaries is that many politicians in Washington try to distinguish between outright “cuts” to Social Security benefits and maneuvers such as raising the retirement age, taxing benefits for higher earners or means-testing them. Yet all of those things are, technically, cuts in net benefits.

Taxes on benefits were introduced by the Greenspan commission in the 1980s and have become a stealth tax, hitting about half of Social Security beneficiaries. The thresholds were not indexed for inflation. Social Security benefits are among the few things that are actually double taxed, because workers pay into the system with after-tax dollars, and then get taxed on benefits when they retire.

Thursday’s hearings, and the proposals being considered to rescue the Social Security system from insolvency, are conspicuous for what they don’t say.

No mention, for example, was made of investing Social Security’s fund partly in stocks — like any normal retirement fund. This is what all U.S. state and local retirement systems do, all college endowments, and foreign sovereign-wealth funds from Norway to Singapore. It is also what every reputable financial adviser recommends to anyone saving for the long term, and for good reason. So far this millennium Social Security has earned an average return of 4.5% a year on its money. The S&P 500
SPX,
-2.82%

during the same period: 9%.

No mention, either, was made of a very simple, quick idea that would fix Social Security, as well as help the U.S. economy: Immediately raising the limits on legal, high-skilled immigration. Right now the system is expecting gross legal immigration of just 600,000 a year, which is lower than it was for nearly all of last decade (as well as half the number of “other-than-lawful” immigration). 

The system is suffering from falling U.S. birthrates as well as rising longevity, with the result that by 2035 there are expected to be 2.3 U.S. workers for every Social Security beneficiary, down from 3.3. No one is talking about bringing in more high-skilled workers, even though they could start filling the gap from day one with no cuts or extra taxes for anyone.

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