Many people think taxing social security is unfair. I don't agree and the reason is simple: social security isn't a retirement plan, it's a safety net for the impoverished and eldery.

This is the part where you say "huh?".

Ok, maybe that isn't so simple. Let me explain how things work right now.

Social security income is in principle the same for everybody. But, if that's your only income, then you're probably not paying taxes anyway. If, on the other hand you have a reasonably good retirement income, then social security isn't necessary anyway and you should pay it all back in taxes. If your income is somewhere in between, then you pay some of it back.

So you might ask why the government doesn't just give social security to those who need it. The reason everybody gets social security is that way the government doesn't have to decide whether you need it. How much you get to keep is based on how much you made that year. That way it all works out right in the end.

In fact, I'm opposed to even tracking social security "accounts" the way they do today. Every so often, I get a letter from the Social Security Administration stating how much I've paid in. Although they never come right out and say, they make it look like a retirement account report: "Here's how much you paid. Here's how much you can expect to be paid and when." That gives people the false impression that a) they are entitled to the income, b) the government has the money saved or invested somewhere, c) they can count on the income. Nothing could be further from the truth.

The system is clearly and definitively a pay-as-you-go system. To claim it is anything else is to turn it into a pyramid scheme. Think about that. If I collect money from someone and promise to give them back more money later by collecting it from someone else, then I've committed a crime. Unless I'm the Social Security Administration.

So people need to get a reality check. Social security is a revenue-based program, with a fund to help buffer the difference between the fluctuations in revenue and payments. It's not a government sponsored retirement plan, and it's certainly not an entitlement that all Americans should expect to receive tax-free. If you are impoverished, you don't pay taxes anyway and it's tax free, but if your income is high enough, your social security check is taxed because you don't need it all.

That sounds fair to me, but there's a hitch with this system, which isn't fixed by not taxing social security.

Let me suggest a change to the system based on a much more arcane problem created by taxing social security income. Consider what happens to a dollar received from an employee or employer by the Social Security Administration. That dollar is paid out to a beneficiary in the form of a social security check. If that beneficiary is low income, then they spent it on food, lodging, etc. That's the point. If, on the other hand, the beneficiary has a sufficiently high income, then they will pay that dollar back to the government in the form of an income tax. The government then puts that dollar into the general fund to spend as it sees fit. You can see what happened here: by taxing social security, the government has effectively taken some social security revenue and diverted it to the general fund. That is what drives fiscal conservatives nuts. They think that the best way to reign in social programs is to cut off the funding to them, and this is one way the government feeds the general fund.

So is this really a problem? Well, in principle I think it is. If anything, it's irresponsible and misleading bookkeeping. A portion of the social security funds are being used for general funds. Obviously the fix is to not give social security checks to people who don't need it. Yeah, right! After years of wrongly telling people they are entitled to it, there'll be hell to pay if they take it away. Alternatively, they can not tax that income at all. That's not really acceptable because it's giving an unnecessary free ride to those who can very well afford to pay taxes.

So here's my suggestion: the Internal Revenue Services should track how much money was collected in taxes from people who received social security and refund that money directly back into the Social Security Administration's fund. The rationale for this is as follows. Income tax is a reasonable tax because that income is obtained from value-added economic activity like work, capital gains, corporate profits, etc. that can only occur because of the legal and physical infrastructure paid for by the government using these taxes. Social security income on the other hand, is not income from a value-added activity, and so the government really has no claim to taxing something which itself provided. By returning that revenue to the Social Security Administration, it is simply putting the money back where it rightly belongs.

In principle this should make fiscal conservatives happy because it does reduce the revenues into the general fund, which is a mantra of theirs. It should also make socially conscientious liberals happy because it returns funding to social security that was unnecessarily paid out to people who didn't really need. It should make everybody happy, because it keeps the government out the double-edge sword business of deciding who deserves social security assistance and who doesn't.

Now let's see if our legislators in Washington DC can understand something simple like that and make it happen without messing it up.