Social Security and the U.S. Tax Code: Ripe for Reform

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FEBRUARY 2007 - The balance of power in the U.S. Congress shifted dramatically on January 3, 2007; it’s been more than a decade since the leadership in both the House and the Senate changed hands in the same election cycle. Back then, in 1994, the Republicans took over Congress with their “Contract with America.” Now it’s the Democrats’ turn to lead, and the new majority has already affected the domestic policy agenda in Washington, renewing the focus on both universal healthcare and an increase in the federal minimum wage.

Important issues, no doubt. But in its haste to bring new ideas to the table, the 110th Congress should not forget issues that may have fallen out of the national spotlight but are still very much in need of reform. Two in particular stand out: Social Security and tax code reform. Both are touched by the work we do at the Society, and both must be brought back to the forefront.

Social Security reform was once a hot topic in Washington, and although the national focus on the issue has clearly waned, the problem has not gone away. On the contrary, a crisis is looming, and unless we do something about it soon, future generations will pay the price.

According to the best estimates of the Congressional Budget Office’s Social Security trustees in 2005, the Social Security trust fund balance will peak in the year 2017. Subsequently, assuming no policy changes, this trust fund will steadily decline, until fully depleted in 2041. Once the Social Security trust fund’s assets have been depleted, other tax revenues would be needed to keep benefits at currently scheduled levels; Social Security taxes will then be able to fund only about three-quarters of its benefit obligations.

There is no clear path back to Social Security solvency, but one thing is certain: Our national leaders must act soon to save an American institution that has for decades spared hard-working Americans from the plight of living out their golden years in poverty. In 2000, President Bush proposed individual private accounts as a way to potentially increase a beneficiary’s return on investment and eliminate the shortfall. Democrats, for their part, have balked at the idea of privatizing Social Security, maintaining that there are better ways to solve the problem, like raising the payroll tax rates, increasing the age at which individuals are eligible for benefits, raising or removing the cap on the payroll tax, or reducing the benefits retirees receive. The different reforms the parties have suggested reflect an ideological divide over the nature of Social Security—Is it an entitlement program, or a retirement program? —and led to a stalemate in the last Congress. In the meantime, however, the day of reckoning continues to grow closer.

Tax Reform

Another area ripe for reform is our muddled federal tax code. As any American who has ever filled out a tax return can tell you, our tax system is hopelessly broken—“a beast whose complexity, confusion and outright unfairness have corrupted our economy and society,” according to Steve Forbes. Examples that illustrate the complexity and confusion abound.

Perhaps the most decried example is the alternative minimum tax (AMT), a parallel tax system originally intended to address the abuses of a few upper-income taxpayers that, because it was not indexed for inflation, has evolved to place an ever-increasing burden on the middle class. The AMT relies upon the good faith of taxpayers to calculate their income tax twice and pay the higher tax, based on two difficult calculations using two sets of rules. Sounder tax-policy initiatives would save complex tax calculations for tax benefits that are efficient, fair, and easily monitored.

Legislators and policymakers must act now to fix a federal tax code that has become overly complex, opaque, and replete with special-interest exceptions. A fully transparent code would allow taxpayers to feel confident that when they pay taxes they are paying into a fair and equitable system, administered in a simple, understandable, and effective way. Our current system does not inspire such confidence.

Solving these problems won’t be easy, but there is hope. Charles Rangel, the incoming Democratic chairman of the House’s powerful tax-writing Ways and Means Committee, has frequently said he intends to reach out to Republicans and work across party lines whenever possible. Let’s hope this spirit pervades Washington in the new Congress. We can and should expect more than narrow recommendations and temporary fixes. Congress would be doing New Yorkers—and all Americans—a disservice by not pushing for real, significant, permanent reforms to Social Security and our flawed tax system. Anything less would be like putting a Band-Aid on a broken leg.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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