The Individual Social Account as a Platform for Citizen Interaction with Government

Here I sketch details of the advanced earned income (AEI) program as a prospective reform. As already discussed, the program combines the features of an interest-free loan with Federal supplements intended to ameliorate poverty. It offers its benefits up front as an advance on future earned income, aiming to cultivate a sense of obligatory repayment as circumstances permit, encouraged by the government’s willingness to write off say half the AEI balance outstanding on a matching basis for participants with low qualifying annual incomes, here set at $12 K or less. Table 1 provides details of how this might work.

While the AEI program would be accessible to all working-age adults, that is, those who have yet to retire and obtain Social Security benefits, only those with low qualifying incomes would likely have a compelling incentive to participate, given repayment terms. Significantly, AEI would be taxable in the year advanced. Although a standard monthly AEI of $1 K is suggested, applicants might choose to receive less. The yearly sum of $12 K approximates both the official individual poverty line and annual earnings from half-time employment (1000 h) at a $12/h minimum wage. It further approximates the amount which can be earned tax-free after the standard deduction and personal exemption. The current tax rate of 15% would thus apply to total individual income between $12 K and $24 K. This should not be a significant disincentive to work.

Might individuals such as Jane be content to simply work quarter time supplemented by the AEI indefinitely? Here the program is structured to discourage this, as with a rising AEI balance to be repaid, the cash advance is progressively reduced. At the high end, the AEI is allocated equally to cash advance and repayment.

Finally, note two special features of the program. Jane receives only $800 cash from her standard AEI, while $100 goes to an account for future repayments and another $100 goes to a tax-deferred savings account. These features support both future repayments beyond the required ones, and the personal savings needed for eventual retirement. The encouragement of personal savings currently poses one of the most important social challenges in the U.S., as with the decline of pensions many now approach retirement with little to draw upon.

How expensive might the AEI program be? Drawing from data accessible on the Web, I make a rough calculation. The current U.S. working age population (ages 18–65) is about 224 m. About half (112 m) earn $30 K or less annually. Some 23%, (51.5 m) earn $12 K or less.^[1] This lower earning group thus qualifies for the AEI program and are its focus. Assume that all participate and average $6 K in earnings apart from AEI. In the absence of repayments, the total program cost would be about $572b ($618b adjusted for $46b collected on earnings taxed at 15%). Assume further that individual required monthly repayments average $200. Total annual program repayments would be $124b and the annual program cost would be reduced to $448b.

Much of the AEI program cost could be covered through the replacement of existing government programs. Assume that the program replaces the government’s food assistance program ($123b annual expenditures), the unemployment insurance program ($32b annual expenditures), and the earned income credit program ($70b annual expenditures) totaling $225b. The annual shortfall to be made up by increased taxes (assuming no net administrative or other savings) would be $223b, about half the total cost. This would amount to a 5.6% increase in a Federal budget of roughly $4 trillion, before 2021 expenditures to combat the current pandemic.^[2]

Would an AEI or other guaranteed annual income program be worth such a cost to the Federal budget? For those who believe that an efficient way to improve upon the current social safety net is much needed, maybe so. This would likely depend, of course, on how the considerable shortfall is paid for. Obviously, there is much to discuss, and there are alternative ways to provide basic income. Regardless, the potential of the ISA as a platform for reform is well illustrated by this program example. The notion that everyone should have a social account to responsibly maintain and draw upon when needed, without going through a cumbersome application and approval process, is an appealing one. An AEI program such as that described here, accessible through the ISA platform, might provide an important reform component.