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The transition from the current program (Old SS) to a reformed Social Security (New SS) would occur on the first of January following enactment of the necessary legislation. At that time, payroll taxes for Social Security would stop; and the tax on adjusted gross income (AGI) would begin. (Taxpayers who filed early returns in the prior year would have to file amended returns to be taxed on their AGI.)
Of course, the first priority must be to fulfill the commitments made to those already receiving Social Security retirement benefits and to those who have qualified for such benefits. Thus, Old SS must be kept in place for many years (possibly 50 or more years). Those already receiving benefits under Old SS would continue to receive such benefits, including cost-of-living increases.
When someone who has qualified to receive benefits under Old SS — someone who has 40 quarters of covered wages or salary — but has not yet started to receive benefits retires, that person would receive a combination of benefits from Old SS and New SS. The benefits from Old SS would reflect the benefits earned prior to the transition date, including cost-of-living adjustments according to Old SS rules. The benefits from New SS would reflect the incrementally accumulated benefits starting with the transition date.
Anyone 18 or over who has filed a federal income tax return in the past and who does not yet have 40 quarters of coverage under Old SS would have all potential benefits under Old SS cancelled. Instead, that person would be retroactively credited with accumulated benefits under New SS based on those past tax returns. No retroactive tax on past AGI would be required. Instead, the present value of retroactive accumulations would have to be transferred from the accounts of Old SS to New SS.
While New SS would be fully funded from the AGI tax and its investment in government bonds, the pay-as-you-go nature of Old SS would leave future benefits unfunded. This should be an obligation upon all of us. The government should issue bonds in the amount of the estimated unfunded present value of future Old SS benefits and deliver them to the Social Security Administration (SSA). These must be bonds eligible for SSA investments in accord with the general reform of the program. They should be serial bonds, with staggered maturities reflecting the expected gradual winding down of Old SS. If a shortfall remains, it should be paid from the general federal budget. If a surplus remains when the last Old SS beneficiary dies, it should be transferred to New SS to mitigate inflation (and thus temporarily eliminate the corporate surtax for that purpose).
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