Lets play a game. The ultimate point of the game is to understand certain aspects of Social Security but to keep complications from creeping in too early (wait for later parts) we are going to start with simple game play on a board far, far away. In fact on distant yet oddly Earth-like Planet Elsinore.
Setting the map. Elsinore has two large land masses named in order of discovery by the dominant tribe as Old Elsinore and New Elsinore. Elsinoreans are much like Earthlings except that they are universally numerate and logical (which makes them not much like us at all). The land mass of New Elsinore is shaped like an hourglass which has led our logical (if unimaginative) Elsinoreans to dub them North New Elsinore and South New Elsinore. Two centuries ago certain inhabitants of North New Elsinore established a democratic republican polity under the name of the United States of Elsinore. (Which name cheesed off every other inhabitant until the warlike and heavily armed USErs explained to them ‘Shut UP’).
Any way the citizens of what they liked to call the Good Ol’ USE established a program a hundred years back designed to deliver a minimum income to retired citizens of USE which they called Total Security or TS. This program is financed by an individual income tax starting from the first dollar with no exceptions, exemptions, deductions or caps at a rate of 10%. The overseers of TS were quite naturally known as the TS-tees and among other things were mandated to report on the finances current and projected of TS on an annual basis. So that is the map.
Game One and Special Rule One.
All citizens of the USE agree that under no circumstances should the current schedule of TS benefits be cut either now or in the future.
Game One Scenario. The TS-Tees report that Total Security faces a shortfall starting in Year 20 that would require a 20% cut in benefits overnight. This shortfall amounts to 2 percentage points of current income. This could be backfilled by an immediate boost in dedicated income tax from 10 to 12%, itself a 20% increase in tax. Or it could be phased in over the 20 years in a way that reduced the sticker shock up front but by deferring portions of the fix to future years would mean a higher rate in the end, how much depending on the phasing schedule.
Should the citizens of the USE just take the increase on the ‘Sooner is better than later’ and ‘It will only cost more if we wait’ basis? Or would it be better to phase in the increase over the period?
Well the answer here is clear. We don’t have enough information to decide. Not logically and on a pure numeric basis as good Elsinoreans would always prefer. Because ‘sooner is better than later’ is under this rule simply a moral judgement, we just don’t know enough about the USE politics or economy to even make the call on grounds of equty or efficiency.
So lets add a new variable. In this same Report the TS-Tees show that the current tax gap projects to increase at 0.05% per year simply because of the demographics of Busters approaching retirement. As such the cost of doing nothing would mean a new gap that summed up the 2% gap over the period, the portion of that NOT collected in year one and so having to be allocated over year 2-19, AND the extra 0.05%. Does the calculation change?
Well a little. Under this scenario the ‘sooner is better than later’ folk’s argument starts to bite because whatever are the benefits of phasing they would reduce over time if the phasing was too slow because you would have some equivalent of a balloon payment on the backend. But still it seems to me there is no absolute argument for taking the whole 2% increase in the first year.
Comments on the game so far welcome. Or just pass on by until the game gets more complex and dare I say it closer to the actual game we are playing on Planet Earth. But for now we are talking about an income security program called Total Security in a country on Planet Elsinore named the USE based on a universal 10% across the board income tax facing a medium term shortfall amounting to 2 percentage points.