One goal of my new income tax (see Reform the Tax System) will be to avoid taxing people into poverty. As with the current Individual Income Tax, personal exemptions will guarantee that only that income that exceeds the poverty level will be taxed. In the current system, however, the Social Security tax (FICA) is paid on all wages up to $90,000, and it is a hefty 12.4% (6.2% paid by the employee, 6.2% paid by the employer). In my system, there will be no social security tax, so there will be no tax at all on incomes below the poverty level. Social security benefits will be paid out of the General Fund, which comes mostly from income tax revenues.
This shifts more of the cost of social security to the wealthy. In the current system, income from employment is the only income subject to the social security tax. Interest, dividends and capital gains don’t get taxed at all, and no tax is paid on employment income over $90,000. It is not my intent, however, to finance Social Security by soaking the rich, since I also intend to convert the Income Tax to a flat tax. The wealthy will pay the same percentage as everyone else. The social security tax will end, but it will be replaced by a 12.4% (approximately) increase in the Income Tax. (Shifting the burden to the wealthy would tend to push that 12.4% rate down, while protecting incomes below the poverty rate would push it up.)
So the financing of the system is solved – no more worries about exhausting the Social Security Trust Fund. But that 12.4% income tax surcharge likely will have to increase to pay for the Baby Boomers benefits unless benefits are somehow reduced. One way would be to shift gradually to a system in which all of the elderly and disabled get the same amount, an amount just above the poverty rate – just enough to get by. The system would only provide a safety net. Anything additional would have to come from the retiree’s own savings.
On the other hand, we might want to increase benefits to make up for the elimination of subsidized retirement savings plans. With the new income tax, there will be no deductions for pension contributions and earnings. These "tax expenditures" are expected to cost $142.2 billion in 2012 (source, page 49):