Fitting the Fisc to Social Security

Oren Cass and Wells King have added their proposal, a parenting supplement they call the Fisc, to a list of ideas designed to reduce the fiscal burden on parents relative to non-parents.

One of the most hotly debated features of the Fisc is a “work requirement,” in that the annual allowance cannot exceed prior year earnings. I’ll let others quibble over the details on the formula. And I’m also sympathetic to the idea that parents need extra resources whether they’re working or not, particularly in the case of a single-mother.

However, by tying the payment to earnings, the Cass-King proposal may encourage marriage because they’d entice single workers to marry single parents. Let’s say an unmarried couple has a child and the mother intends to be a full-time homemaker while the father works. Un-married, they don’t get the Fisc; married, they do. In this case, the “work requirement” is a marriage incentive in disguise.

Now a quibble that I do care about: the income thresholds for phasing out the Fisc start at $100,000 for singles, $200,000 for married couples. I’d suggest lifting the threshold to $142,800 for singles, which is the amount of the taxable Social Security wage base in 2021, with a threshold of $285,600 for married couples. In addition, I think those thresholds should rise each year at the same pace as the taxable wage base, which is generally faster than inflation.

Why lift the thresholds to the maximum wage base potentially faced by each kind of household? Because one of the points of helping parents is to offset the disincentive for parenting built into the Social Security system. The Social Security system taxes earned income (wages and salaries), forcing workers to use a portion of earnings up to those thresholds to purchase government retirement obligations. Future Social Security benefits then relate to those tax payments, crowding-out the natural incentive to raise children to provide for old-age security.

Why not make the Fisc available to all parents, even those with very high incomes? Because workers who expect to consistently earn more than the taxable wage base face different incentives. For them, the Social Security tax is essentially a “lump-sum” payment to the government, which doesn’t affect them at the margin and shouldn’t generate the same distortions in their parenting behavior.

One other change I’d make is to specify that the only earnings that matter for purposes of deciding eligibility for the Fisc should be those taxed as part of the Social Security wage base. That means no capital gains, no dividends, no interest. All irrelevant! Keep the Fisc a benefit tied to labor earnings; parents who only clip coupons need not apply.

[Note: This comment is from a series of responses to the proposal for a Family Income Supplemental Credit.]