I make this proposal both as a necessary reform and as a populist political position to counter the conservatives effort to take money out of the social security system and give it to large corporations.
We need to reform the social security tax for wage earners. It is presently unfair to the middle class. We must do three things: 1) return the system to pay as you go; 2) remove the cap that favors the wealthy and thus reduce the taxes for everyone; 3) have an honest discussion about the real likelihood of the Social System collapsing.
First, the democrats must take blame for believing republican scare tactics regarding the future of social security circa 1982. At that time, they markedly increased the tax rate for Social Security and the system started generating large surpluses. These surpluses have been used by both parties to offset deficits in other areas. Presently, Bush has raided the surplus to offset losses that are at least indirectly associated with his tax cuts that largely went to the wealthy.
The idea is that at some point the government will pay back the Social Security with interest, but that presumes the government will suddenly have surpluses somewhere else to pay it back. Since we rejected and mocked the “lockbox” idea, we need to lower the taxes so that the system returns to a “pay as you go” basis, so that the money generated by the middle class no longer flows upwards for tax cuts for the wealthy.
Secondly, Social Security taxes are paid on wages up to $87,000. So, if you make $50,000 a year, you are paying 12.4% on 100% of that amount. However, if you make $174,000, you are paying 12.4% on only 50% of your wages. We need to remove the cap, so that Social Security taxes are paid on all wages equally. This way, to achieve the same dollar amount, we can reduce the tax rate.
Finally, we need to challenge this assertion that the Social Security system is in danger of going bankrupt. It has been generating surpluses for a long time and would be sitting pretty if these surpluses had not gone missing. Some analyses suggest that it will only go bankrupt if the economy starts dramatically underperforming, at rates lower than were achieved even in the Great Depression. And frankly, if the economy is doing that poorly, there’s no way that the Social Security surpluses are going to be repaid, interest or not.
I am not by any stretch an economist, but I am interested in defending the middle class from inequities. You can bet by damn that any tax reform that occurs will not be favorable to the middle class, and I am sure that this proposal can benefit from criticism.
HtB: *Presently, Bush has raided the surplus to offset losses that are at least indirectly associated with his tax cuts that largely went to the wealthy. *
It’s been suggested that this is a part of the “starve the beast” strategy: i.e., deplete the government’s resources so that it has difficulty meeting its obligations, and then use that difficulty to argue in favor of privatizing the system. Whether or not this is the actual strategy, it’s certainly true that racking up more debt now will make it easier to argue for privatization in the future.
Since we rejected and mocked the “lockbox” idea, we need to lower the taxes so that the system returns to a “pay as you go” basis, so that the money generated by the middle class no longer flows upwards for tax cuts for the wealthy.
I agree that it’s just placing temptation in politicians’ paths to generate large revenue surpluses which aren’t needed for another few decades. However, if there’s no additional margin in SS revenues, then what happens if at some point the number of recipients unexpectedly goes up (say, an unexpected number of people getting SS disability or survivors’ insurance) or revenue unexpectedly goes down (say, an economic downturn brings pay cuts and decreased payroll taxes)?
*Secondly, Social Security taxes are paid on wages up to $87,000. So, if you make $50,000 a year, you are paying 12.4% on 100% of that amount. However, if you make $174,000, you are paying 12.4% on only 50% of your wages. We need to remove the cap, so that Social Security taxes are paid on all wages equally. This way, to achieve the same dollar amount, we can reduce the tax rate. *
Nitpick: Technically, the employee pays only 6.2% of salary in payroll tax and the employer pays the rest, but you could argue that the employee is in effect paying it all because the employer takes the tax into account when setting salary levels.
Non-nitpick: I’m not sure abolishing the cap entirely is the way to go, simply because it would make the benefits-to-contributions ratio so small for the highest-income earners. At present, as I pointed out in an earlier thread, the “progressivity rate” for lifetime contributions and benefits in SS is pretty close to 1, meaning that the b-to-c ratio isn’t much higher for poor contributors than for wealthy ones. If the cap were abolished, SS would become much more redistributive from rich wage-earners to poor ones, and would come under fire from the anti-welfare folks.
Finally, we need to challenge this assertion that the Social Security system is in danger of going bankrupt.
True. SS certainly has funding issues that have to be addressed, but suggestions that it’s on the brink of collapse are mostly just scare tactics by privatization advocates (many of whom, it’s worth noting, would personally benefit greatly from having many additional billion$ in payroll taxes flowing into the private investment market).
What we really need to do is challenge the isea that you :earn" SS, and that they put YOUR money into YOUR account. SS is welfare for the elderly, funded by a special tax on wages. Once people understand that, the rest is easy.
But I do agree that there should be no “cap” on wages taxed. It fits into the above.
DrDeth: * SS is welfare for the elderly, funded by a special tax on wages.*
Except that:
disabled people and surviving spouses/minor children can also get SS benefits;
over their lifetimes, as I noted above, most SS recipients have about the same benefits-to-contributions ratio. Is it really “welfare” if everybody’s getting about the same amount out of it, compared to what they put into it?
OK, I started a hijack in the “social concervative” thread about this which I will transfer here. Allow me to question a fe of your assertions.
Social Security does indeed have a serious financing problem. Not right now, and not for a couple decades. But unless we alter the way we collect and pay social security we will be in a bad place when the ratio of workers to retirees falls much farther.
Suggesting that Bush “raided the surpluses” is simple partisan rhetoric. The habit of investing Social Security surplusses in special government bonds goes back decades. It is, in effect, the standard way to account for the money. Why don’t we blame the Democratic congress who started the practice and President Clinton who continued it. I’ll answer that. Because it would be unfair. Both parties (and to a greater extent the voters) deserve whatever blame exists for the practice of spending the suplusses and writing out a promisary note.
I agree that removing the wage cap is appropriate. However, I also think that we shoudl means test Social Security benifits which you did not mention. Social Security is basically a welfare system. We should be honest about that and treat it accordingly.
Kimstu, I didn’t bother going into the study you mentioned when you posted it before but I’d be willing to now if you’ll repost it. I’m not really sure it proves what you think it does.
the Social Security funding issues are in fact no as dire as some try to make them out to be. However, MediCare funding issues are almost unbelievably bad. Not only is that system already going into the black, it is almost impossible to project how much we will owe to it in the future. While there are uncertainties in population projections, they are nothing compared to the uncertainties in future medical needs projections. We have to get a handle on Social Security reform as a dry run for Medicare Medicaid reform.
Meanwhile, if we accept that Social Security is welfare for the elderly, why not reform the system so that more and more people retire without the need for such welfare? Why not allow some people to put some small portion of their SS taxes into private investment funds.
You’re completely right on the first part, a bit off on the second. SS is not welfare, and it is not a pension. It is an income insurance program. You pay your premiums through the payroll tax, and should you meet certain conditions (get old, go blind, etc) you draw benefits.
I don’t think anyone will ever be able to explain Social Security in a simple and accurate way so that most Americans will understand it. I am resigned to think that 75% of Americans will always think of it as a retirement plan.
In this case, “a couple decades” actually means approximately 4 decades…And, predictions that far into the future are hardly reliable.
To make it clear, there are two notable dates for social security:
(1) Somewhere around 2018, give our take, when the system will no longer be running a year-to-year surpluss but will instead go into deficit. However, this is not really a problem for social security itself since it will be owed a few trillion dollars in IOUs from the federal treasury. It is a problem for the rest of government that will no longer be able to count on social security revenues as a cash-cow to fund the rest of government (and will in fact have to start paying back the trust fund for all that it has borrowed). This is why the Bush tax cuts are so irresponsible.
(2) Somewhere around 2040 or so when the trust fund will be exhausted and the only source of payment of social security benefits will be the current revenues of workers paying in. The estimate is that these revenues will then only be able to pay about 2/3 of the full benefits. However, as I said, predictions this far out are based on a variety of assumptions about economic growth and so forth that make them questionable. This doesn’t mean that no reforms should be contemplated now. But, it is important not to over-react and also to concentrate more of our energy on the part of the budget where spending exceeds revenues, which is outside of social security. And, of course, now we are back talking about the irresponsible Bush tax cuts again.
Well, I agree that it is rhetoric. However, there is also dangerous rhetoric on the other side which is to blame social security when it is in fact a cash cow and to cut revenues coming in through the income tax when that is in fact the side of the budget that is in deficit. And, it is particularly distressing that Alan Greenspan has aligned himself first with the policy of reducing those revenues and then with the policy of starting to imply that it is social security that is the problem.
Well, I don’t really see why we should do a dry-run on the program that is solvent for a long time to come in order to prepare for the one that is going to have problems much sooner. Medicare funding, and health care costs in general, are indeed a growing problem and one that we should be focussing our energies on (along with the problem of general revenues) rather than inventing big problems that don’t really exist…or are, at best, much less pressing.
And, I agree with those who say that SS is not “welfare”. Rather, it is income security. That is, it is an insurance program you pay into in order to get a guaranteed income in retirement. Not a very hefty income but one that likely at least keeps a roof over your head and food on the table.
Not so, since those who never paid in a dime (survivors, disabled, etc) can get money back out of it. You do have to meet certain conditions, but “putting money in” is not nessesarily one of them.
If indeed, only those who paid in could get SS, then I’d agree. But since many who never even worked a day in their lives can get benefits, then it is 'welfare".
Rather than address the ignorant and prejudiced statements wherein you blame the evil Republicans for everything, let me delve into the meat of this.
The reason why an intelligent yet socially responsible person might object to this plan is because a person making a million dollars, paying $120,000 a year in Social Security taxes is getting ripped off. Social Security is supposed to be like an insurance policy. You are paying in for your benefit. If you are paying in 120,000 per annum for several years it is likely to be exceedingly poor insurance as you are getting no leverage on your money. You are paying for everybody else’s benefit.
So, if you want to do something like this you need to recognize that that is a rechararacterization of Social Security from insurance to a straight tax. For now, I make no comment as to whether or not this is a good idea, I just want to point out that you are contradicting the basic structure, design and purpose of the program to uncap it.
Social security differentiates itself from income type taxes under the principle that you are paying for the benefits you will receive, and carrying your own weight. Rather than do this, the simpler and less bureacratically complex thing to do is abolish social security taxes as seperate and simply pay the benefit out of an increased income tax.
Few would endorse such a stance, but that in effect is what you are suggesting. Because of this, I think it is both unfeasible and politically suicidal.
However, there is some merit in your suggestion. I think it’s important to retain the pay-for-your-own-benefit design of social security if we are to maintain it at all. Yet, at the same time, I feel that it is appropriate for those who are doing particularly well to carry a larger portion of the burden. This would allow those making less not to feel social security as such an onerous tax, while those making more for a benefit which is less important to them would not be treated unfairly.
Instead of simply capping it or uncapping it, why not a sliding scale? The first $30,000 might get taxed at 4% the next $70,000 at 8%, the next $100,000 at 5% and the next $100,00 at 3%, everything above that at 1%.
I doubt those numbers precisely work, but you get the idea. It shifts the burden appropriately without ripping off anybody. Secondly, to make such increased taxes more palatable you could allow people who are putting $ in at the upper tiers to be partially privatized. Remember, that if these people do well their increased future benefit will be taxable, as well.
How does that sound?
Actually that’s really not the problem. Allow me to be simplistic and I’ll describe it.
Social Security was designed at least in part with the idea that it could be a bit of a scam on the public. People weren’t living as long, and there weren’t as many retired people and the workforce was large. Since everybody was paying in for those relatively few people receiving it, there were lots of surpluses that could be skimmed. That’s how it was designed.
It was thought that it could last forever since our population is a growing one. There would always be a larger workforce than there was a generation before, so there would always be plenty of money.
The problem is that people are living longer and drawing longer on SS than was forseen. The other problem is that the Baby Boomers are all getting old, and represent a potentially horrific drain on the system. The workforce has not grown in the exponential fashion originally forseen.
The question becomes as the number of retirees as a percentage of the population increases, and the number of workers as a percentage of the population decreases, not only will we not be able to skim from the SS fund, but we will be unable to pay out current benefits.
Exactly when and where this line is crossed is the subject of some speculation. It depends largely on economic and demographic forecasts spanning decades, and these forecasts cannot be expected to be particularly accurate for much the same reason that you wouldn’t think much of a weather forecast for two years from now.
The situation though is a cause for concern, though how much and when is as always the issue.
But you are NOT 'paying for the benefits you will receive"- at best you are paying for your father benefits. At worst you are paying for benefits for someone that never paid in a nickel. Anyone paying in the current maximum will never get back anything but a tiny% of what they pay in (considering interest and such).
Semantically you are correct. You are not actually paying in the same dollars you get back.
When I say you are paying for your own benefit, I mean so in the context of a structured pooled investment like insurance… or social security.
You buy in by paying into it. Actuarially your payment covers your benefit down the road (Some people will live longer and get more than they put in, some will get less, but on average you receive back a benefit paid for by your contribution.)
It doesn’t matter where your actual dollars go, you have paid for your benefit. By buying into it, you are entitled to it.
In retrospect, I should have avoided the whole disability question. Sloppy me. If I was typing clearly, I would have said Social Security retirement benefits are an income insurance program, paid for by the SS taxes. Workers entitle their surviving spouses to benefits by virtue of the worker’s payments into the system.
SSI, however, is not funded by SS taxes. There’s no accrual of benefits, as there is in SS, because it is funded by general tax revenues, not payroll taxes. I suppose you could say that it’s like welfare for the poor and disabled.
I quit reading after this. Did you have your partisan blinders on when I suggested that the Democrats are to blame for increasing the tax in the early 80’s, and when I said that both parties have (ab)used the surpluses? If you had anything useful to say, I suppose it is too bad. Ignorance indeed.
Well, this is a bit oversimplified. SS has been modified along the way. For example, as a result of a commission that Greenspan headed in 1983, [:
(See also [url=http://www.ssa.gov/history/reports/briefhistory.html]here](]social security taxes were raised in order to build up the trust fund to prepare for the retirement of the baby boomers[/url) for a history of S.S.) That Greenspan headed this commission that raised the (regressive) social security taxes to build up the trust fund, that Greenspan then endorsed the Bush tax cuts that created the current fiscal crisis outside of social security, and that Greenspan now seems to be starting to talk about how social security needs to do dramatic things like cut benefits in order to deal with this fiscal crisis creates a rather bizarre story!
Nice post, as usual. It clearly explains the issues at hand. Clearly then it would come under fire by the anti-welfare folks. Seriously, when those people are ready for some plain talk on the overall tax burden it would make sense to maintain the historic tie in Social Security between input and benefits though allowing earler retirement would help lower-income people and especially blacks. Until then a flat wage tax would help offset disparities elsewhere. Offsetting the rest of the budget is nothing new. The habit of investing Social Security surplusses in special government bonds goes back decades, after all.
To put it another way, if we continue our present ways in around four decades Social Security will be in about the same situation that the rest of the budget was 2 decades ago when we raised the regressive wage tax but not enough to offset the increased spending and lowered progressive income tax. We have a taxation crisis looming in America to be sure but reality won’t smack us in the face on the Social Security side of the budget first. Not by a long shot.
I assume that these unexpected changes would have to be of a notable magnitude to exert any real influence on the issue of solvency, but for the sake of argument, let’s say that this is possible. I suppose we have to balance the risks of over-taxing ourselves (ourselves being the middle class) now in ways that are clearly being taken advantage of by both parties with the risks of having to make significant adjustments in the face of some dramatic circumstances that markedly increase the number of beneficiaries or markedly reduce the number of wage-earners. These significant changes could be increased taxes and/or cuts in benefits, but they would be easier to sell when contrasted with whatever crisis caused such changes. (I would prefer to allow a surplus, myself, but only in the presence of fiscal responsibility of a type that is not presently being shown by our government. It would also be more palatable to have a surplus that is generated by taxing all wages at a lower rate.)
You are right, and I used a shorthand for convenience. But this element of the equation does make me wonder if the 2% privatization plan will come evenly from this breakdown, or will be taken from either the employer or employee alone. The cynical part of me suspects that Bush would rather give the immediate break to the employer, suggesting that the employee gets the benefit of returns on their investment down the road.
Well, at times that is the battle I want to be joined. Your point is well taken in terms of the political palatability of the proposal, and I have no doubt that the wealthy would bring their forces to bear. I would like to believe that we would be demonstrating the weight of the middle class on our side of things, thus the appeal to populism.
Do you have a cite that demonstrates the assumptions about the economic and population growth related to the projected shortfalls? Here is some information from FAIR that claims that these estimates are based on exceptionally poor expectations about how things are going to go (i.e. worse than during the Great Depression. Do you believe that is going to happen? See also jshore’s contributions to the discussion.
So Bush did apply the surpluses elsewhere, but saying so is partisan rhetoric? I did state that both parties have done this, but you responded only to one element. Why is that?
I am not sure how it is equivalent to a welfare system, since only exceptional circumstances allow one to benefit without having contributed in the first place. Otherwise, those who get out have put in. Or am I wrong in that? In that sense, means testing seems unfair, since you are saying that you may not get out what you put in. However, given what Kimstu said, some type of prorated means testing may be equivalent to removing the cap in all but timing.
PART 1: If conservatives want to fund this program for elderly retirees who have paid into the system from something other than the funds they paid in, I would say that were fine if I trusted them to not turn around and try to use that to kill it later on (i.e. “this is just welfare and it is unfair for us to pay for it”). PART 2: At the same time, if we could allow for some people to opt out and make sure that they receive a prorated reduction in benefits later on, that would be fine, as long as we don’t give in to the large proportion of those retirees who opted to invest their money and lost it. “Suck it up and be cold, you market trusting old coot!” I am too cynical to trust part 1 of this plan and too compassionate to be fully behind part 2.
Let’s be clear about this. If Bush had not instituted his tax cuts, the money would have been spent elsewhere. Please do not imply that it would have simply been saved for Social Security’s future when you know full well that is not what we would have done with the money. Your further suggestion below that we shoudl raise income taxes because that is the side of the revenuew stream in deficit is the same sort of sillyness. Raising more money via income taxes will, in fact, make the problem worse. I can agree that we should not be borrowing money, and that even an increase in income taxes might be necessary to counteract the deficit. But to imply that we might want to make up for the Social Security deficit is sheer lunacy. You know as well as everyone else in the world that any such increase in income tax revenues would be spent. And most likely spent on new social spending requiring even harder decisions in the future.
Finally, those 40 year projections are not as pie in the sky as you like to claim. they are not based on bizarre notions about what the economy will or won’t do. They are based primarily on demographic trends and the number of workers paying into the Social Security system for each retiree. They are based on the simple facts that people are having less and less children while living longer and longer lives. And, unlsess I am very much mistaken, they are not based on any sort of functional projection. That is, the assumptions do not require that people live to 150 and begin habving partial children. All that is required is that current demographic trends continue. A rather reasonable assumption IMHO.
I do agree that we should not over react. I would consider scraping Social Security an over reaction. I would also consider renigin on the system’s promise to seniors or those about to become seniors an over reaction. It is precisely this sort of over reaction that I wish to avoid. Unfortunately, it requires action very soon in order to do so. Allowing some participants to pay some small portion of thier Social Security contribution into a private investment fund seems like a rather prudent reaction.
Because he understands the problem of out of control government spending. Let’s level with one another. If we were to finance all government programs besides Social Security with money other than payroll taxes, is there even a single person here who believes that we would not also spend the Social Security Surplus (SSS)? Even one? If not, then we have to begin to practice spending less now. The last thing we need to do is start treating the SSS as some sort of extra money that we never need to repay.
I’m talking about a dry run of the political process. I agree that if we had sound government we would not need to do things on such glacial time scales. But we don’t, and so we do.
And you are all wrong.
Fine. Then allow me to opt out. Allow me to own the policy just like all of my other insurance policies. Allow me to adjust it throughout my life to meet my personal needs.
The fact of the matter is that Social Security is welfare for the aged and we need to start treating it as such. We should not be paying benifits to millionares. We should not be paying benifits to adicts. We should not be pretending it is some sort of investment scheme when it is much closer to a ponzi scheme.
