Can a State Just Opt Out of Federal Social Security?

Commentary

The federal old-age programs, Social Security and Medicare, are facing financial challenges. Recent reports from trustees indicate that the Social Security trust fund is projected to run out of funds in 10 years, while the Medicare hospital insurance trust fund is expected to deplete in 11 years. As federal debt continues to increase relative to GDP, and interest on this debt rises, there is growing concern that Congress may not take the necessary steps to address these issues. Currently, the federal government is spending over $10,000 per person annually on interest payments alone (Figure 1).

It is likely that Congress will opt for tax increases rather than reducing benefits for retirees, a powerful voting bloc. However, an alternative approach could involve utilizing state governments to address the federal fiscal challenges.

State governments could negotiate with the federal government for exemptions from failing federal programs and the associated taxes. This would allow states to determine their approach to these programs for their residents. Transitioning from federal to state-run programs could lead to more effective policies and encourage innovation and experimentation.

State legislatures are often more agile and fiscally responsible compared to Congress, primarily due to restrictions on running deficits and limited access to central bank support. State and local debt levels are significantly lower than federal debt (Figure 2).

States with large government structures may choose to maintain Social Security and Medicare as expansive pay-go systems. However, they would be motivated and empowered to reform these programs to ensure fiscal sustainability.

Smaller government states might implement free-market reforms, potentially reducing the pay-go elements of these programs while introducing mandatory savings schemes like defined-contribution retirement plans. They could also explore innovative solutions such as health status insurance to stabilize premiums for private health coverage as individuals age. Some states may opt to means-test these programs for future retirees to prevent taxpayer-funded support for middle-income and wealthy individuals. In the long run, states could even consider phasing out these programs by issuing bonds to repay contributions, transforming an open-ended liability into a fixed, present obligation.

There is also the possibility of states contributing to the solvency of the Social Security and Medicare systems if they choose to opt-out. Older states with a higher proportion of future beneficiaries could help stabilize the systems by opting out, while younger states making significant contributions might be required to pay the present value of their future contributions net of benefits to maintain their exemptions.

While it may seem unconventional to have certain states participate in federal programs while others do not, such an arrangement is constitutionally sound if done without favoritism. This model is akin to Canada’s approach, where provinces can opt-out of the Canada Pension Plan, as seen with Quebec’s separate pension plan.

Countries worldwide have successfully implemented varying levels of regional autonomy within federations based on regional preferences. This concept, known as “asymmetric autonomy,” is evident in countries like Canada, Italy, Spain, and the United Kingdom.

If a state like New Hampshire wished to withdraw from Social Security and Medicare, the process could involve congressional legislation exempting state residents from these programs and directing federal agencies to share relevant data with the state. A transition period could be established to facilitate the state’s independent administration of revenue collection and benefit distribution.

Workers moving between opt-out states and others could retain their contribution and benefit records, allowing for a seamless transition. States could coordinate to ensure consistent benefits for residents moving across state lines while respecting each state’s benefit rules.

A worker who spends 25 years in an opt-out state and 15 years contributing to Social Security could receive prorated benefits from both systems.

Once one state does it, other states will likely want to follow suit. So Congress could set up a procedure for states to qualify to run their own programs, rather than issuing state by state exemptions.

There’s no reason why this process should be limited to just Social Security and Medicare. States already have the ability to set up their own occupational safety and health systems, for example. The law just needs to be amended to exempt these states from federal regulation. In Canada, the provinces are responsible for securities regulation, whereas in the United States, both states and the federal government regulate securities, causing inefficient duplication. States should be allowed to withdraw from the purview of the Securities and Exchange Commission.

Skeptics might claim that giving states too much autonomy will let them impose costs on the rest of the country. First of all, negotiated exemptions could be carefully designed to prevent these costs. But second, these skeptics need to tell us why, if these costs are so debilitating to commerce, international commerce has flourished without a world government to run transfer programs, labor regulation, financial regulation, and so on.

Letting states opt out of federal programs might seem radical. But current programs often have rules allowing partial opt-outs. Not every state has the same Medicaid eligibility rules, for example. When Vermont authorized a single-payer healthcare program, the state would have sought a waiver of PPACA (Obamacare) rules. (The state abandoned the plan when the taxes required to fund single-payer turned out to be too high.)

George Mason University law professor FH Buckley is the most notable advocate of far-reaching state opt-outs from federal programs. In his book “American Secession,” he frames the idea as a compromise alternative to outright secession from a fiscally irresponsible government.

The federal government is becoming increasingly unmanageable, costly, and even dangerous to our prosperity. State governments could press Congress now for the right to take over programs that the federal government has failed to manage properly. Congress won’t give up power unless it becomes politically costly for them to keep it.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times. Please rewrite this sentence.

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