By one simple act, Congress could strike a blow for fairness, sound principle and higher revenues. Congress could repeal or reduce the punishment now imposed upon old folks for the intolerable sin of working.
The system has been in operation since Social Security began, but it is ridiculous all the same. It violates a fundamental principle of the American ethic - the principle that honest work is a benefit to society.Here is how the system works. Suppose you are between 62 and 64 years of age and that you have begun to receive retirement benefits under the Social Security system. Suppose, further, that an opportunity comes along to return to work you find interesting and productive. Prepare to be walloped. Your Social Security benefits will be reduced by 50 cents for every dollar earned above $6,840. That is a higher marginal tax rate than a millionaire pays.
If you are between 65 and 69 and commit the folly of actually working, the penalty is 33 cents for every dollar of benefits once earnings pass $9,360.
This is crazy. In theory, Social Security is a form of "insurance" backed by a "trust fund." If the theory is to be believed, Social Security benefits should be paid as a matter of contractual right. Benefits may be subject to income tax, but they ought not to be subject to penalty for personal behavior.
The unfairness is manifest. The National Center for Policy Analysis in Dallas recently released an updated position paper by two senior analysts. By their calculations, the retired oldster who returns to productive work faces marginal tax rates that take away much of the pleasure or purpose of working.
Specifically: Those workers in the very lowest income brackets may be hit by a marginal tax rate of 41 percent. At a bit higher level, the marginal rate is 59 percent. Those in the middle-income 28 percent tax bracket suffer a marginal rate of 75.6 percent. At the highest income levels the rate is a confiscatory 90 percent. There is no way this can be justified.
So much for fairness; so much for principle. The authors contend that if the earnings limit were significantly increased, the treasury would come out ahead.
At present, about 750,000 retired workers between 65 and 69 report some outside earnings. They are penalized to the tune of $4.8 billion a year by withholding part of their Social Security benefits.
No one knows how many retirees would rejoin the labor force if the earnings penalty were abolished or reduced. The Social Security Administration has estimated that only 170,000 older Americans, at most, would go back on a payroll. The two authors put the figure at 700,000.
In any event, the return of many thousands of experienced workers would swell the gross national product. These retirees would pay income tax on their earnings; they and their employers would pay Social Security taxes.
The net effect of all factors in combination would be to increase the government's revenue by as much as $4.9 billion, more than offsetting the additional Social Security benefits that would be paid.
The prospect makes sense all around. Colorado's Sen. Bill Armstrong is pushing for an additional $3,000 a year for the next three years for retirees between 65 and 69. He regards the present system as "a harsh tax, imposing an inequitable and anachronistic burden on the workplace."
In theory, says Armstrong, we want our old people to be active. It is ironic to continue a policy so destructive of that goal.
Common observation indicates that most people on Social Security are not interested in returning to work. They enjoy retirement. Why go back to the grind?
But many other retirees, bored by inactivity, would welcome a chance to earn a few hundred dollars a week - provided they were not punished for their industry. No matter how one looks at it, the present penalty system is just plain wrong.