Social Security Cap in U.S.

Great Debates
1

I’m not entirely sure what forum is most appropriate for this, but I can imagine a good deal of debate ensuing, so I’ve picked GD. As always, mods feel free…

I’m not convinced the “problems” with Social Security are as pronounced as some politicians would like me to believe. However, if the long-term survival of Social Security is an issue, why not remove the $90,000 cap?

The current structure seems awfully regressive to me. While I like getting that little extra in my check after I hit the cap, I imagine folks making less than $90K are probably a bit peeved that 100% of their income gets taxed while those making more get, in effect, a tax break. (I guess it depends on your point of view, here.)

Al Franken suggested on Air America that perhaps Social Security taxes should kick back in after a certain level (I think he suggested $200K). Why not remove the cap entirely, decrease the percentages employees and employers contribute, and shift some of the burden further up the chain?

Given that taxes in this country have historically been based on one’s ability to pay, what would be the philosophical opposition to a move like this? I understand that it would shift more of the burden to the middle class, rich and super-rich, but is that such a bad thing?

2

It would not be a bad thing, and I would be in favor of some combination of raising or removing the cap on taxable earnings, means testing benefits, and raising the age to receive full benefits.

The logical counterargument to lifting the cap on taxes is that your benefits are based on what you pay into the system. Raising the limit would cause the wealthy to put in more without a corresponding increase in their benefit. It’s true that Sammy Sosa pays very little more in SS taxes than I do, but it’s also true that my SS benefits will be nearly as big as his.

3

If you raise or remove the $90,000 cap you also need to close tax loopholes on entities such as S-Corps. Basically if you own your own business you can pay yourself a salary (subject to payroll taxes) and additionally take money from the company as profit (which is not subject to payroll taxes but you do pay income taxes on). Raise the $90,000 cap and you will likely see a lot of people claiming a salary of $50,000 and take several million as corporate profits to avoid the tax.

4

I understand the argument, but would counterargue that other taxes levied in the U.S. don’t operate under this assumption that one gets out what one puts in. Do higher-income people necessarily take more advantage of federal, state and local services than their lower-income counterparts? Why can’t Social Security share the same philosophic DNA as federal income tax?

What about implementing some sort of component of a self-employment tax? I don’t know too much about S-Corporations, but in an LLC, don’t partners pay self-employment tax on things like guaranteed payments for services rendered?

5

Getting rid of the cap on SS isn’t a terrible idea. It goes a step more towards what SS has become: Welfare for old people.

The original idea of SS is that you take out what you paid in. It’s part retirement plan, part investment, and part insurance. But, the reason for Social Securities success and popularity is that it isn’t welfare. Everyone gets it because everyone paid into it.

What would be a bad idea is dropping the cap on SS without privatizing the system for younger workers. By dropping that cap you would flood money from the richest americans into the system. This could be done now, and it would assure that SS doesn’t go bankrupt quite as fast. To do this in a vacume would be a waste, though, of such a valuable resource. If we let younger workers invest in private accounts rather than old fashioned SS, we could make up for the money the system will lose by dropping the cap.

This is only one way that we could implement privatization of SS on a massive scale for young workers. It’s not perfect, because it’s not fair. All the rich people get penalized and have to pay a tax into a system which they will not recover. But, they will bail the system out long enough to get the younger workers out. Also, it’s been proven that simply soaking the rich to solve our problems is politically possible. If this was done, SS could become like welfare is now: Available to all who need it, but not used by most, because they are providing for themselves.

6

I think it is far from a foregone conclusion that privatization of SS is a “good” thing and should be done. On the face of it it sounds attractive but when you start thinking through the implications of it all many potential problems start to crop up. In my view the only group privatization of SS would be clearly good for would be Wall Street.

7

Wrong wrong wrong. That was never the idea. It was always conceived of as what it is, except for the extent of recent borrowing from what was supposed to be a trust fund. Payments began just a couple of years after the fund began to be filled, and the first recipients got a helluva lot more than they put in - some hadn’t put in a cent. If your concept were true, payments would be cut off after one’s lifetime contributions had been reached - but you know they aren’t.

Why are this notion, and the corresponding notion that what you put in is “your money”, so commonplace? Is it simply the incessant repetition from the righty partisan yammerers?

SS was conceived of as a guaranteed minimum income to prevent destitution among those who could no longer earn. But it has always been a current-workers-support-former-workers system, with some cushion from the trust fund to help. Always.
If Bush’s current trial balloon, that benefits (and therefore contributions) to the guaranteed system won’t be cut, what’s the point? If you want to invest more money for your retirement, there are many ways to do so. Tax-free IRA’s have been around for a long time, for instance. Why, then, would Bush want to governmentalize a very successful private program?
THespos, nothing further to add except “You’re right. every word”.
“It’s money from the government. I didn’t earn it, I don’t need it, but if they miss a payment I’ll raise hell!” - Grandpa Simpson

8

That would necessarily be accompanied by one of the following:

  1. Removal of the corresponsding cap on benefit payouts (i.e. it wouldn’t make the system any more solvent).

  2. Removal of the pretense that Social Security is anything other than a welfare program (which would doom it politically in the long run).

Pick your poison.

9

There are two separate issues here – the reality and the political sell.

The reality, of course, is as you describe – Social Security is a welfare program.

The political sell, on the other hand, was always as an investment/insurance program that gives back because you paid in. This was (correctly) seen as a necessary illusion to make the concept acceptable to middle-class Americans.

10

It’s evolved to that in later generations, but it couldn’t have been the case when the program started. As I said, many of the early recipients hadn’t ever paid into it.

11

Doom it politically how? This particular form of welfare is paid to everyone over a certain age…not just poor people. Those people feel an entitlement to that money as they have been paying into it for the last 50 years. Those people are further backed up by one of the most powerful lobbying groups in the country (AARP). And of course those people can be counted on to go to the polls and vote in large numbers.

12

BTW, where did the idea come from that SS is a “Ponzi scheme”? Is that anything more than simple derogatory rhetoric from people who don’t know or care what a pyramid is?

13

One of the central issues here is the expectations surrounding Social Security and whether what folks pull out of it when they’re done working is roughly equivalent to what they put in. Do you think that maintaining this expectation is critical to Social Security’s survival?

Personally, I don’t think so. I’ve always wondered that expectation is so widespread with Social Security, but not with other taxes.

14

Here is a good history of the SS system.

It describes the current system this way:

*The “New” Alternative

With the coming to office of President Roosevelt in 1932, and the introduction of his economic security proposal based on social insurance rather than welfare assistance, the debate changed. It was no longer a choice between radical changes and old approaches that no longer worked. The “new” idea of social insurance, which was already widespread in Europe, would become an innovative alternative.

Social insurance, as conceived by President Roosevelt, would address the permanent problem of economic security for the elderly by creating a work-related, contributory system in which workers would provide for their own future economic security through taxes paid while employed. Thus it was an alternative both to reliance on welfare and to radical changes in our capitalist system. In the context of its time, it can be seen as a conservative, yet activist, response to the challenges of the Depression.*"
It also suggests that:

*The two major provisions relating to the elderly were Title I- Grants to States for Old-Age Assistance, which supported state welfare programs for the aged, and Title II-Federal Old-Age Benefits. It was Title II that was the new social insurance program we now think of as Social Security. In the original Act benefits were to be paid only to the primary worker when he/she retired at age 65. Benefits were to be based on payroll tax contributions that the worker made during his/her working life. Taxes would first be collected in 1937 and monthly benefits would begin in 1942. (Under amendments passed in 1939, payments were advanced to 1940.)

The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a joint fund. It was thus distinct from the welfare benefits provided under Title I of the Act and from the various state “old-age pensions.” As President Roosevelt conceived of the Act, Title I was to be a temporary “relief” program that would eventually disappear as more people were able to obtain retirement income through the contributory system. The new social insurance system was also a very moderate alternative to the radical calls to action that were so common in the America of the 1930s.*

Finally, it suggests this:

From 1937 until 1940, Social Security paid benefits in the form of a single, lump-sum payment. The purpose of these one-time payments was to provide some “payback” to those people who contributed to the program but would not participate long enough to be vested for monthly benefits. Under the 1935 law, monthly benefits were to begin in 1942, with the period 1937-1942 used both to build up the Trust Funds and to provide a minimum period for participation in order to qualify for monthly benefits.

There’s lot;s more stuff in there. It really is quite interesting. One thing to note regarding the removal of caps (as SteveMB did) is that the system currently works such that larger benifits are paid if you have contributed more. They are also adjusted, however, such that a larger proportion of your income is replaced if you are lower on the economic ladder. So, SS does both. It provides welfare to the indigent elderly, AND it provides a self financed retirmement insurance benifit to more productive members of society.

Anyway, I just wanted to introduce that article.

15

I don’t know if this is **critical **to SS’s survival, but the expectation that the money you take out is related to what you put in is not unique to SS. Unemployment insurance (ie, tax) works similarly, doesn’t it? But as long as it’s maintained as a separate tax, people will see it as different from income tax-- which all goes into the general fund.

16

You already answered your own question:

Social Security is a ponzi scheme. It’s great if you get in on the scheme early. You get back many times over what you paid in. However, those that get in to the scheme later on won’t even get back what they paid in.

17

OK. But lets back up from both positions. Debaser and ElvisLives. The portion of SS which went to those who had not contributed very much was quite small (There is a table in the article I linked to). Additionally that portion was seen from the begining as a temporary measure due to the Great Depression.

SS has some characteristics of a Ponzi or Pyramid scheme. It uses contributions from current participants to pay back the contributions of retired particiapants. The difference, of course, is that since the government is collecting the payments and disbersing benifits, it is free to adjust them such that the burden on current workers never grows out of control.

It also has some social engineering aspects. It replaces a higher percentage of low income retiree’s wages.

At the same time, however, it retains many aspects of a retirement or insurance program. Specifically, benifits are calculated based on the amount paid into the system. People who pay more into the system get more out of it.

Its simply not true to say that SS is either a ponzi scheme nor that it is plain welfare, or even an income guarantee.

18

Ahem. I asked if Debaser knew what a pyramid was, and apparently neither he nor you do. Ignorance-fighting time: A Ponzi scheme depends on an exponentially-increasing number of entrants, a number which exceeds the population of earth in fairly few steps, and is therefore by definition fraudulent. Quickie primer. SS depends only on having *income * equal outgo, since it’s simply a transfer program. The number of people paying in does not have to increase or even remain steady, the money they pay doesn’t have to either as long as disbursements can be made from a fund from earlier accumulations (as had been the plan for the boomer retirees). Clear now?

The point was that the term is used by the drown-government-in-the-bathtub contingent, represented by Debaser, to spread the ignorant notion that SS is somehow just a criminal fraud, one that somehow has lasted seven decades before imploding, and not an application of social responsibility. By “demonizing the enemy” one feels fewer pangs of conscience about destroying it.

Debaser, since you have no reply to anything else you’ve been told, can we take that as acknowledgment that you’ll go educate yourself first?

19

I love when people make this argument. I disagree with you, therefore I’m a big dummy head. :rolleyes:

pervert’s post is just about right. Social Security is not a typical pyramid or ponzi scheme exactly, but only because the government can tweak it just enough to keep it afloat. It certainly is very similar in nature to a textbook ponzi scheme.

Wikepedia defines a pyramid scheme as:

Let’s apply this to SS: It’s not a sustainable business model (or at least it wouldn’t be if not for constant government tweaking and cash injecting in order to keep it afloat). It does involve money exchanging primarily for enrolling other people into the scheme (passing of the money between generations). There is no product or service being delivered.

It meets the criteria for a pyramid scheme. However, there are two differences between SS and a typical pyramid scheme:

  1. The participants are forced. Normal pyramid schemes flame themselves out because after a certain point people stop willingly entering into the system. This leaves many of those already in the scheme with losses. Since everyone is forced to participate in SS, this hasn’t so much of a problem up until now. (Although currently over 50% of younger workers want private accounts, and this number will grow over time.)

  2. The government is tweaking the system to keep it afloat. By taking steps like taxing the rich, lowering payouts or raising the retirement age the government can keep the system afloat for longer. This is generally not in line with a typical pyramid scheme. Usually, whoever starts the scheme simply lets it run it’s course and doesn’t actively manage it as much as the government does.

However, in a general sense, my statement stands: Social Security is a ponzi scheme. It has the same characteristics of one for the most part. Certainly, the overall concept of round after round of participants paying for their predecessors is very much the same. It’s a bit more complicated, and there are some unique features, but essencially the statement is correct.

*Lower down on the page, Wilkepedia mentions this:

20

Since you want to fight ignorance, it seems inappropriate to misuse your own cite. It specifically says:

An investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones.

Notice the decided lack of any mention of exponential numbers of entrants. Specifically, that is a pyramid scheme. As noted later in your own cite. Also, note that the number of entrants has nothing to do with the reason that a Ponzi scheme is a fraud.

Although a Ponzi scheme is similar to a pyramid scheme in that both are based on new investors’ funds to pay the earlier backers, they differ in that the Ponzi mastermind signs up new investors, who are used to attract potential investors, rather than the hierarchical pyramid setup whereby all the investors do the recruiting. Eventually, there isn’t enough returns to go around and the schemes unravel.

Your cite does, however, point out 2 aspects of Ponzi schemes we have not yet considered. They typically attract large numbers of investors with promises of large profits. SS does not seem to do this. It simply forces people to participate. Also, Ponzi schemes at least pretend that said profits are coming from some investment vehicle. Ponzi himself promised to invest in international postage stamps (and actually bought a few dollars worth if my memory serves). Other schemes promise to dig gold mines, or buy real estate, for instance. Multi level marketing, on the other hand, promises to allow entrants to become retail tycoons by selling <stuff>. SS does none of these things. It is clearly and up front about the source of its funding.