December 11, 2004

Opting out (updated)  

Tyler Cowen speculates that Bush's Social Security plan might consist of a "transfer tax" that younger workers could pay for the privilege of not paying any more FICA, or at least putting that money in a private account instead. I don't think this is very likely (I have to cynically presume they'll just add the costs of privatization to the national debt), but even if they wanted to do this, is it even possible? How many Americans would pay a tax up front to opt out of the most popular program in American history? Even if private accounts have a bigger payoff (which I'm not ready to concede), explaining that to people will be a pretty daunting task, since most Americans don't have a finance background.

Even assuming some people would want to do this, it doesn't seem like most Americans have the kind of cash they'd need on hand to pay for this kind of option. Could you put it on your credit card? There's no way such a tax could be small and still offset the decrease in payroll tax revenue. But unless it were small (and perhaps even negative), how would it entice people to give up all the funds they've paid into Social Security already? It's hard to see how this could be a workable idea.

MORE: Paul at Right Side of the Rainbow makes some guesses about how many people would opt out of Social Security. For example:

There are 2.3 million millionaires in the United States, and many of them work. I'm thinking they'd opt out, yes? And they'd be joined by many of the hundreds of thousands of doctors, dentists, pharmacists, lawyers, architects and other well-paid professionals who either understand finance or have accountants who understand it.
But millionaires would tend to be older and closer to retirement age, so there's a good chance sticking with Social Security would be worthwhile for them. Wouldn't young people be more likely to opt out, people who haven't paid in anything yet and therefore don't have a benefit already waiting for them?
With an opt out tax of, say, $5,000 -- plus the prorated loss of equity in Social Security (the younger you are, the greater the loss) -- the Government would generate billions in revenue and savings with only a couple million buyers. And when you're facing transition costs of trillions for a partially privatized system -- and trillions more for doing nothing -- every little bit helps.
I assume he means minus the prorated loss of equity in Social Security, since leaving the program means leaving behind the money one's already paid in as payroll taxes (why would you a bigger tax for leavig more money behind?). And of course, it's actually the older people who are leaving more behind, since they've been paying into the program for a longer time and would therefore have to opt out of a bigger benefit.

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