It is quite disturbing that someone who is supposed to be exceptionally sophisticated and financially astute as Charles Schwab would try to head Social Security in such an irresponsible direction. His recent commentary in the Wall Street Journal, “Give Social Security Recipients a Break,” proposes to limit payroll taxes for those over 65, and to stop taxing Social Security benefits. But both of these ideas are not only illogical and bad policy, but they would worsen the already dire state of Social Security today.
The problem with Schwab’s analysis is that he has the Social Security problem completely backwards. He treats 65 as the age at which bodily breakdown sets in, and people need massive assistance. But 75 (or 80) is the new 65. It is irresponsible – and ludicrously unsound -for people in this country to think that 65 is the age at which one can retire and live comfortably. Retiring at 65 made sense when people could expect to live to 70 – not when they will be living to 90.
(The reality is that the only ones who can actually retire in a financially secure way at 65 – or younger -are those who have worked in the public sector union space, and who receive a pension that is radically and irrationally out of step with the rest of the country. And those pensions only exist because the rest of society commits huge dollars to those pensions, severely hampering the rest of us from providing for our own retirement.)
Therefore giving additional benefits to retirees is the opposite of what we should do. Those who reach 65 need to be encouraged – almost forced – to continue to work. It is not realistic – in fact, it is not possible – for an average person to accumulate sufficient retirement benefits during a working life of, say, from 22-65, to be able to receive retirement pay from 65 to 90 or more.
Schwab’s point of not taxing social security benefits is just bad policy. But it does touch on the fact that taxation of social security benefits under the present Internal Revenue Code is abusive, violating the most fundamental principle of tax fairness. Social Security is the only type of investment that someone makes where they are actually taxed on the return of their own capital. Here’s how: The rule of taxability for Social Security is that, depending on one’s income, up to 85% of the Social Security benefit is taxable as income. This ignores the fact that most of the benefit is simply a return of the money paid into the system – it is not really income at all. Individuals aren’t being taxed on the difference between what they paid in and what they receive back (which would be profit). They are taxed on their virtually their entire benefit. But because Social Security is insolvent and that tax is needed to fund other people’s benefits, nothing is going to change.
Thus, Schwab would do well to address the real problem in this country: that the retirement age is way too young and unrealistic. This country’s legislators and progressives are irresponsible for fomenting this idea that 65 is the end of working, thereby creating a devastating moral hazard. The public sector has wreaked havoc on our system by relentlessly siphoning taxpayer money to fund overly generous benefits to a select group of beneficiaries. Perceptions about working need to be wholly re-thought.
If tax reform is at the heart of Mr. Schwab’s elevator pitch, he should start with advocating for making a systemic change. The reality is that with advances in medicine and life expectancy, the moving target for retirement should really be 75-80; Social Security desperately needs to make the necessary adjustments to reflect that reality as well.