Time to revisit Social Security reform?

The next chair of the House Budget Committee, Rep. Paul Ryan (R-Wisc.), has proposed partially privatizing Social Security. Why not go farther, and institute a reverse income tax?

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    In this Feb. 2, 2010 file photo, the House Budget Committee's ranking Republican Rep. Paul Ryan, R-Wis. speaks during a hearing on Capitol Hill in Washington. Rep. Ryan will likely be the next Chair of the Budget Committee, which will put him in a position to move forward with his proposed 'roadmap' towards partial privatization of Social Security. But does that go far enough?
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This may be a good time to revisit Milton Friedman’s proposal for reforming all entitlement programs and social security, in one fell swoop. His idea goes back several decades but is no less powerful in its simplicity. A serious discussion on reform may now start with the Roadmap put forth by Wisconsin Congressman Paul Ryan, the next chairman of the House Budget Committee.

Mr. Ryan proposes to partially privatize social security. That’s reasonable enough. But there should be some thought given to an alternative, namely the negative income tax. This would provide a safety net for everybody—comprehensive and totally egalitarian. At a time when many Americans are suffering persistent economic hardship, the need for such a safety net is glaring.

The negative income tax is a replacement for myriad programs, from public housing to food stamps to social security. Anybody whose income falls below their tax deductions would automatically receive a check. This would insure that everybody gets a minimum income.

One of the great virtues of the negative income tax is that it requires no special bureaucracy to administer it. But this virtue is a political liability, because the bureaucracies that oversee the many existing programs and various other interests that benefit resist any proposal to replace those programs. After describing how the negative income tax would work, Friedman wrote: “This is a fine dream, but unfortunately it has no chance whatsoever of being enacted at present.”

Three Presidents – Nixon, Ford and Carter – had considered or recommended elements of a negative income tax, but as an addition to existing programs rather than a substitute for them. Friedman opposed those specific applications because the negative income tax would do more harm than good as another rag in a ragbag.

But he observed that “what is not politically feasible today may become politically feasible tomorrow”. The gradual transition he envisioned would start by repealing the payroll tax— which is a drag on job creation. There should be no change for existing Social Security beneficiaries (and those over 55, a provision in Mr. Ryan’s Roadmap).

For more information on the negative income tax, see Free To Choose, pp. 120-127.

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