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<< Poll: 62% Want Govt Health Insurance | Main | Bushie Promises 200,000 Jobs/Month >> October 20, 2003Social Security Easy to Fix: Remove the CapNo Crisis: The first thing to understand about Social Security is that there is no crisis, no need to do much of anything at all. On one hand, the economic assumptions used to promote a "crisis" in social security are just too pessimistic. Read this EPI brief. Beyond the regular numbers, the general idea of crisis was always based on the idea of the population getting old and there not being enough workers to continue paying into the system. Increasing immigration is solving that problem as well. A Fair Solution: But if any "solution" is needed, the simplest is the fairest. Currently, while a minimum wage worker pays 6.2% of his income into the social security trust fund -- $12.4% if you include the matching employers portion -- a CEO paid a $1 million dollars pays only 1% of his salary into the system. And Bill Gates pays nothing into the system from his billions in stock income. This all stems from the fact that wage income above a certain level -- $87,000 per year in 2003 -- is completely untaxed by social security. Eliminating this so-called "cap" would raise plenty of income to help out the system. Only 83% of all wages paid are subject to social security taxes, so this would increase annual social security revenues 20%, or roughly $100 billion per year, plenty This is hardly a radical idea-- the "cap" used to apply to the payroll taxes funding Medicare, but the 1993 tax bill removed the cap and now every dollar of wage income is taxed to help fund the Medicare system. There's no reason not to do the same for social security. A "New" Tax on the Wealthy?: Now, conservatives will scream that this is an additional tax on the wealthy, but in reality it would be applying the same tax already paid by poorer working families to everyone the same way. Every dollar earned, whether by a minimum wage worker or by a CEO, would be taxed the same 12.4% (6.2% of employee income, an additional 6.2% from the employer). With the social security "cap" in place, federal taxes on wages are not really very progressive, especially when you look at marginal tax rates-- ie. the tax on each additional dollar earned. Lifing the cap will just restore a marginal amount of progressivity to the tax system. An Irrational Tax Code: Look at the following tables and accompanying chart for single taxpayers, which combines the standard deduction, Medicare tax, the regular income tax, and the social security tax (employee portion) to calculate the total marginal taxes paid at different income levels. Note that the social security portion is adjusted for the odd phase-in and phase-out of the Earned Income Tax Credit for the working poor. (For poor working families with kids, the EITC phaseouts play larger havoc with marginal rates reaching well over 40%, far higher than marginal tax rates paid by millionaires.) What should be obvious is that millionaries are paying almost the same marginal tax rate on wage income as professionals making $75,000 per year and only a bit more than most working and middle class families. (If you add in the employer portion of social security, the wages of working families are taxed more heavily than CEO salaries.) What we have is a truly bizarre system where all wages between $87,700 and $151,300 gets taxed at a LOWER marginal tax rate than wages paid to those making $40,000 per year. This is just a strange way to run a tax code. Imagine getting rid of the cap-- doesn't the following seem like a more rational tax code? (Ignoring the EITC oddness, which Max Sawicky is working on). Ahhh....much better. And social security is saved! A Conservative Complaint: I can hear them now, complaining that these charts are misleading, since they look at marginal tax rates rather than the actual percentage of income paid in taxes-- which would make taxes on wages look more progressive. And they're right. Calculating the overall taxes paid is a bit complicated (as everyone knows from tax time), but the following table gives a stripped down accounting, pretending that none of these taxpayers take any deductions other than the standard one. To reiterate, this is not the marginal tax rate, but the overall percentage of all income paid in taxes at each income level: So that millionaire is paying a higher percentage of his or her salary in taxes than the janitor. Well, that's kind of comforting. Lower Taxes on Investment Income: Except...that table applies only to WAGE income (and ignores all the fancy deductions used to avoid paying taxes), and richer folks tend to earn a large percentage of their income from capital gains and dividends. Such investment is income is not taxed at all for social security and now pays a much lower income tax rate, a maximum of 15% under Bush's new tax law. So let's imagine three people, one making $50,000 in wages, another making $80,000 in wages, and another living off their investments, making $150,000 per year in capital gains. Here's what their marginal tax rates, total taxes paid, and overal taxes paid as a percentage of income look like: Essentially, in absolute taxes paid, the person with the $80,000 wage is paying the same amount of taxes as the rich investor, while both wage-earners are paying a much higher percentage of their annual income in federal taxes. Which hardly seems right. Adding Investment Income to the SS System: So since we're talking about expanding the base for social security, why shouldn't non-wage income be taxed to help fund the system? And to help out Medicare by assessing that portion of the wage tax as well on investment income. There is roughly $147 billion in dividend income claimed annually by taxpayers. Back in 2000, there were about $650 billion in capital gains. Even assuming that in the post-dotcom bust, the total of both of those added together is only around $500 billion per year in investment income, just taxing that amount at the employee social security and medicare rate (7.65%) would yield an additional $38.5 billion per year, or $77 billion if the equivalent of the employee and employer taxes was assessed (15.3%), as it is on self-employed wage earners, the best analogy to those living off their investments. So between lifting the cap for higher wages and assessing the tax on investment income, we could add something on the order of $170 billion each year into the social security and Medicare systems. Seems a far more compelling alterative to the privatization schemes being promoted by conservatives. An Alternative View: Here's a Heritage Foundation critique of removing the cap. Posted by Nathan at October 20, 2003 01:30 AM Related posts:
Trackback PingsTrackBack URL for this entry: CommentsYou've got it all wrong. The cost of FICA taxes is twice what you have listed because the employer is charged a tax equal to the FICA tax for the "privilege" of employing American workers. Overseas and off-the-books labor isn't taxed, of course. So the real burden on working Americans is exactly twice what you have listed. Not 7.65% (SS+M) but 15.3%. And the portion which phases out is not just 6.2% but 12.4% Please redo the charts so that everyone sees the truth.
And state taxes are even more regressive. But that's a story for another day. Today, let's repeal the earnings limit and apply FICA to all income. Posted by: Newt at October 18, 2003 11:56 PM Eliminating the cap on social security taxes would allow a modest cut of the social security tax. For example, a cut to 5.8% would still increase collected social security taxes by over 12%. A $80 tax cut per year for a $20,000 wageearner doesn't seem like much, but if it were permanent it would certainly add up. It will be difficult to get Republicans to support this, because it doesn't help the top 1% in the least--and the effects of tax policy on the top 1% seems to be the Republican metric for tax policy. Posted by: Tim Francis-Wright at October 20, 2003 10:05 AM Is there any reasonably plausible analysis of the total tax burden by income? By total, I mean to include everything from the gas tax to import tariffs to corporate income tax. None of these is pegged to an individual's income or wealth, which would generally make me assume that they have a regressive effect (though perhaps the corporate income tax turns out not to be regressive because its burdens fall on individuals in proportion to their ownership of stock). But I imagine that any attempt to measure how all of the federal government's revenue-raising correlates with individuals' income could be subject to various assumptions and would be inevitably controversial. My hunch--and it is only that--is that Nathan's point about our less-than-progressive system would be borne out. And my hunch would be stronger if we included state and local taxes, which, depending on the state, can be largely or wholly derived from regressive sources such as sales taxes and lotteries. Posted by: J. J. at October 20, 2003 12:49 PM Social Security should be made an optional program, or abolished outright. It is just another ridiculous tax that takes income from the pocket of the working individual. For the rich, it's no concern. For someone making under 50k a year, this is real money that could be used to pay bills. I know. Try living in Manhattan on 35k a year and you'll see what i mean. Every dollar counts. It is not the government's role to play retirement advisor for the citizenry. It is no better than outright thievery for money to be taken from the working masses, with the weak assurance that when we are 65 or so, the money will be returned. Meanwhile, the payout age gets pushed up and payouts will diminish as the number of retirees increases as well as their average lifespan. Heck, I don't even know if I'll be alive in 5 or 10 years, much less in 40. I'd rather have the money now to do with what I will. It all boils down to free will and individual responsibility. I plan on putting enough money away to ensure my own comfortable retirement. Why should my money go to pay for someone else's? Of course, society is so enamored of the SS principle that a rational discussion of the inherent flaws in the system is impossible. The entire notion of SS has been imbued with a holy aura, so that most folks are inherently opposed to any reforms, even before considering the facts. Posted by: Guy B. Jones at October 20, 2003 08:25 PM Guy- your social security taxes aren't to pay for your retirement. They cover the retirement of the elderly today. Just as taxes in the 1930s paid for the retirment of elderly then (who never paid into the system). It's not a investment program-- it's a system to guarantee income to today's elderly. Posted by: Nathan at October 20, 2003 08:38 PM nathan, my point exactly. To each their own. It seems the notion of individual responsibility and fiscal freedom is sacrificed in the SS scheme. The whole structure based on drawing money from current workers to pay for current benefits is what makes SS so screwed up from a fiscal standpoint. It defies common sense. If workers can put away money to pay for benefits that will go directly to their own retirement, that;s all well and good, but don't take my income from last week's paycheck to pay retirement benefits to someone who ostensibly has had 65 years in which to plan for their own retirement. That's called stealing in my book. Along those lines, I don't want and I don't expect some poor schmuck flipping burgers at Mickey D's to be funding my retirement, should I manage to reach that golden age in this increasingly dangerous world. Posted by: Guy B. Jones at October 20, 2003 09:49 PM GUy-- If you want to make the general libertarian point that all taxes and spending that lead to income redistribution are immoral, fine. But a lot of "hamburger flippers" have parents and uncles and aunts who are taken care of by social security spending, so they generally like the system-- as voting patterns and polls support. But you are ignoring the point of the post-- IF social security exists, the taxes to pay for it should come from ALL income, not just the wages earned by "hamburger flippers." Posted by: Nathan at October 20, 2003 10:11 PM In order to legally drive a car in this country we are required to carry liability insurance. Most of us are unwilling to leave an accident victim to die when medical treatment could save him or her but we prefer not to assume 100% of the cost of their treatment. Most of us are unwilling to leave retirees living out on the street in their old age but we prefer not to assume the cost of their food and shelter so we require that they (with the assistance of their employers) purchase retirement insurance. SSI (Social Security Insurance) is currently funded like a term life insurance policy. Rather than purchasing a death benefit, we are purchasing a retirement benefit. The private plans are similar to a whole life product. Given identical benefits and guarantees (life time income, a disability benefit, and a token death benefit) the term model is much less expensive - that is not even taking into account the efficiencies gained by having a large pool of participants and having the program centrally administered (rather than having many insurance companies, each with their own adverts, IT staffs, HR staffs, etc. serving a smaller pool of participants). With SSI as it's currently structured, the individual (with the assistance of his or her employer) is most definately assuming the responsibility of providing for his or her retirement. The large pool of participants makes the guaranteed benefit affordable. Like rural neighbors helping each other to bring in the harvest or raise a barn, we benefit from working together but still bear the majority of the repsonsibility as individuals for our own success. SSI is in fact, a distinctly American social contract - in other countries, similiar benefits are funded more from the nations wealth as whole. Privatising the program, will be the biggest giveaway of our nation's wealth that I've ever heard of. If it is priviatized, I'd suggest that you invest at least a portion of your funds in the insurance companies administering the plans. If we decide to go it alone, I'd suggest that you start to save early (your employer won't be helping) and plan to retire late. Posted by: dorsano at October 21, 2003 12:15 AM Guy- you claim that you badly need the money now. So if we remove SS you won't save anything for retirement. Sorry, one reason SS exists so the rest of us don't have to deal with that kind of stupidity. Dorsano- that was wonderful. I feel like getting it printed on a T-shirt. It no longer surprises me that "conservatives" don't seem to know anything about taxes or finance. SS is a quite logical financial tool and actually an important part of everybody's portfolio-- if it didn't exist, my financial advisor would have to "invent" it. All my non-SS retirement contributions go into small cap stocks. If I didn't have SS, I would have to buy bonds (at higher fees) with the SS money. Posted by: a different chris at October 21, 2003 07:51 AM Different Chirs- Important point, especially when the spurious "higher returns" of private investments come up. Presuming that people make some rational risk-return calculation (and the privatizers are sort of stuck with that one)they are choosing the optimal balance of risk and return on their whole portfolio, including social security. Eliminate Social Security and they'll want the same mix of risk and return so they'll invest in very safe, very low return government securities, and the total return of their portfolio won;t change. Of course it's much more realistic to doubt that most people engage in this sort of optimizing, but that's not exactly an argument for private accounts... Posted by: jw mason at October 21, 2003 12:55 PM I'm glad you put this topic out for discussion, Nathan. I've been pondering the most logical way to start attacking the deficit problem, and removing the cap on social security taxes seems to be the simplest way to get around the demonic intensity of the current tax cutters. Leave their tax cuts in place and implement a simple seven word law that everyone can understand. We can call it Nathan's Law: "SSA Taxation shall apply to all income." Dave Roberts Posted by: Dave Roberts at October 21, 2003 01:26 PM Or to coin an old conservative mantra-- a flat tax for social security. Posted by: Nathan Newman at October 21, 2003 01:33 PM That works. How could they possibly object to a flat tax that treated every taxpayer and every dollar the same way? Dave Posted by: dave roberts at October 21, 2003 02:04 PM to a different chris ... "Dorsano- that was wonderful." "I feel like getting it printed on a T-shirt." Correct the spelling and grammar first :) and add "profits" to the "adverts, IT staffs, etc." list. I'll work on a sound bite version - but don't hold your breath - I'm not Karl Rove. Posted by: dorsano at October 21, 2003 06:52 PM "It no longer surprises me that "conservatives" don't seem to know anything about taxes or finance. SS is a quite logical financial tool and actually an important part of everybody's portfolio" Conservatives do care and recognize it's value. The wing nuts that have hijacked the GOP are doing this on behalf of their libertarian supporters in order to hold on to an electoral majority. Most of the wing nuts are millionaires. The libertarian's are shooting themselves in the foot (with an RPG). And the insurance companies will be more than happy to convert and service the block of business. Posted by: dorsano at October 21, 2003 07:04 PM Let's tack the SS tax onto non-work income as well. 9Nathan hinted at this, but didn't have any numbers for how much further this would increase revenues/reduce the tax burden for the rest of us.) In my state (Massachusetts), we used to tax work income at 5ish%, and "unearned income" at 10%. They reduced the latter to the same as work income a few years back under the mantra that all income should be treated equally. Let's throw that line back at them! Posted by: Kevin Block-Schwenk at October 21, 2003 11:55 PM Let's tack the SS tax onto non-work income as well. 9Nathan hinted at this, but didn't have any numbers for how much further this would increase revenues/reduce the tax burden for the rest of us.) In my state (Massachusetts), we used to tax work income at 5ish%, and "unearned income" at 10%. They reduced the latter to the same as work income a few years back under the mantra that all income should be treated equally. Let's throw that line back at them! Posted by: Kevin Block-Schwenk at October 21, 2003 11:56 PM Lifting the cap on the payroll tax seems like it might catch on as an answer to the call that several of us have issued to consider wholesale reform of the tax system. But there is a significant pitfall to this proposal that advocates should at least be aware of: It would create a class of people for whom Social Security is a manifestly bad deal. And I think that when that happens, it will be much harder to save Social Security from its enemies. See more on this point (and others) at http://markschmitt.typepad.com/decembrist/2003/10/removing_the_ca.html Posted by: Mark Schmitt at October 22, 2003 01:31 AM a different chris- IT's typical to resort to ad hominem attacks when you can't refute a point or discuss an issue in a civilized manner. And, if you bothered to actually read my post, you'd see that I said I was entirely capable and willing to take care of my own retirement. So, your post doesn't make any sense to me. Posted by: Guy B. JOnes at October 27, 2003 07:47 AM My understanding is that SS is an earned right. I believe that's the concept of the cap. That if you start taxing all earned income or even unearned income, then SS is nolonger an earned right. Now, we have portions of the program that aren't an earned right and all earned income is taxed on those programs. I think the SS system is a good program. We've just gone away from a lot of the original tenants of the program that made it good and that's going to come back to haunt us. Posted by: Chad Peterson at October 28, 2003 02:13 PM If Social Security was an earned right, then no retirees could have received it when the program started, since they never paid a dime into the system. Yes, there are lots of polite fictions about it as a saving program, but the reality is that benefits have gone up significantly over the years with little relation to what retirees paid into the system. Which is fine. Our society got richer and we could afford to pay more to upgrade the lifestyle of our retirees. Social security is exactly that-- a "social" contract between present workers and present retirees. Those who work make sure those who are retired don't live in poverty, and future workers will do the same. We aren't saving for our own retirement, so why pretend otherwise. And since present workers are paying for present retirees, I see no reason why CEOs shouldn't pay the same 12.6% of their salaries for the system as I do. Posted by: Nathan Newman at October 28, 2003 02:28 PM If we uncap FICA then, of course, we should uncap social security benefits (which are directly related to the amount of FICA one pays over one's working life). Someone who is projected to max now is projected to receive about one-fourth of the max wage in Social Security if they retire at the statutory full-benefit retirement age. So, if we tax the $500,000 earner all the way up, that person should be entitled to get about $12,000 a month in Social Security. Uncapping FICA without uncapping Social Security benefits simply makes Social Security into a welfare program. Nobody likes welfare, and, more importantly, politicians don't support welfare. That would hardly seem to be helpful to senior citizens... Posted by: Matthew Dundon at October 29, 2003 11:02 AM Benefits ARE NOT directly related to the amount one pays over one's working life. Low-wage workers receive higher retirement benefits compared to their lifetime wages than those making the average wage. Social security is a progressive transfer program and always has been, so there is no reason that rich earners need to receive a pension proportional to the taxes paid. It's not inherent in the program. It's odd; conservatives are dying to means test Medicare, despite the fact that Medicare taxes are paid on every dime of wages; so why not means test Social Security in the best way possible-- create a fair flat tax on all wages with a cap on total monthly benefits paid. Posted by: Nathan Newman at October 29, 2003 01:19 PM Quoting Guy B. Jones: IT's typical to resort to ad hominem attacks when you can't refute a point or discuss an issue in a civilized manner. And, if you bothered to actually read my post, you'd see that I said I was entirely capable and willing to take care of my own retirement. So, your post doesn't make any sense to me. I plan on putting enough money away to ensure my own comfortable retirement. Why should my money go to pay for someone else's? How nice to be able to plan for your retirement. Do you have any plans to be laid-off between now and retirement? My point is that retirement planning is all well and good, -and putting funds aside is only prudent-, but to act as if you can predict every eventuality is, frankly,ludicrous.
Posted by: dano347 at November 5, 2003 02:39 PM Nathan, You are absolutely correct that SS taxes go to pay for *today's* retirees. And it makes no A corollary to your theses is that there is no reason to run a SS surplus. Today's SS taxes Revising the tax code accordingly would result in a dramatic benefit to the typical Posted by: Kyle McCullough at November 9, 2003 06:33 PM Just because there's a pattern doesn't mean there's a purpose. Posted by: Cesare/Bartnicki Nikki at June 30, 2004 07:12 AM Post a comment
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