So I know what you are about to say, what does Bourbon have to do with Social Security. Well nothing in regards to the distilled spirit itself. But a possible excised tax could save the day. Our Founding Fathers have used an excised tax on Spirits three times in American history to pay for wars. Washington did it to pay for Revolutionary war debts. The Great Whiskey Rebellion eventually forced a repeal. But then Thomas Jefferson and Abraham Lincoln both used a Spirits Tax to pay for their respective wars; War of 1812 and the Civil War. Today the Federal Government does not have tax on spirits, they leave that up to the state governments.
Fast forward to today. Social Security has been called the Third Rail of politics. A subject that politicians do not want to tackle for fear of being ousted from their jobs. So what are the three biggest problems with Social Security and possible solutions.
- The number of people receiving benefits is growing faster than the number of people contributing. One possible solution is to raise full retirement age to 70 since people are living longer, which would delay payments, keeping more money in the trust.
- About two thirds of seniors rely on social security for half of their income. For one third it is over 90% of their income. The system was designed as a fail-safe for the elderly, not the primary means of funding their retirement. Society has changed and most employers do not offer pensions. Passing rules to make it easier for workers to create their own personal pensions, could go a long way to take way the burden that seniors need Social Security just to live.
- Regressive Payroll Tax. While Social Security benefits can be progressive for workers that earned below average income, Social Security payroll tax is actually regressive meaning that the higher your current income is, you could fall into a lower rate. A possible solution is to turn the payroll tax into a flat tax, making the percentage the same at any income level. Lower income workers would still get a more progressive ratio of their lifetime benefits, and more dollars would come into the system from those that have the incomes to afford it.
The Social Security Administration says that we will deplete the reserves in the trust by 2033. With the large number of voting Baby Boomers starting to take Social Security, the politicians do not want to talk about cutting benefits. And the even large demographic of Millennials are not going to be happy with a large increase in their FICA withholdings to pay for the Boomers payments.
So what else could we do to raise the required money to keep such a political hot potato like Social Security from running out. Maybe we should take a page from the Founding Fathers. Maybe the SmartMoneyMove is to tax that Whiskey. Then all the politicians have to fear is the Whiskey Rebellion II.
Written by: Van Pappas CFP®
Vice President and Private CFO™, oXYGen Financial, Inc.
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