Well, fine, maybe it wouldn’t work. But can’t I just want a pay-as-you-go system instead of what we’ve got now?
Yes, but those dollars are in a higher income tax bracket too. You have to take that into account. In addition, a lower percentage of your income can be sheltered from taxes in an IRA. If you’re putting the maximum into a 401k, you cap our right around the same point that SSI goes away. It’s not that simple.
The maximum tax is capped in a manner corresponding to the cap on the maximum benefit. Breaking the linkage would weaken the (already threadbare, but politically indispensible) appearance that Social Security is an “insurance” program rather than a welfare program.
You can want whatever you’d like, we’re asking why you want it.
There’s a reason it’s not pay as you go. That reason is roughly that as the baby-boomers retire, there will be a lot fewer workers per every retiree then there is now. If it were pay-as-you-go, then those babyboomers would have payed a relatively small amount while they were working (to support their parents generation), and then as they retire, the smaller number of new workers (our generation) would have to pay a lot more to support the influx of new retirees.
So rather then have a smaller group of people (including you and me, since we appear to be the same age) pay a larger amount of money, it was decided during the Regan administration to increase the amount the Baby-Boomers would pay, collect that extra-money into a fund and buy T-bills with it. The idea was that the General fund would then pay-off those T-bills as they matured and SS would have an extra chunk of money to make up the difference between what our generation is paying and what the Gov’t needs to pay all the Boomer’s their benefits.
Not a perfect solution, but I think it’s pretty straightforward, and for all the doom and gloom about SS I’m willing to bet that future US administrations will simply jiggle the numbers on things like benefits and payment caps so that things will play out more or less as I described, if for no other reason then I doubt there will exist the political will to make any fundemental changes to SS.
Why is it “threadbare”?
I always assumed (and I have no proof or link) that the cap was a device implemented many years ago, in SS infancy, to avoid the accusation that all the worker’s money was being taxed away. If they could look upon the day when they reached that cap and threw off the SS yoke, then you could say they were less oppressed.
In other words, just a tax gimmick.
And for a while, the SS admin could get by with less income, so the cap wasn’t a big factor. Conversely, to raise more money, you could raise the cap without raising the percentage and the increase didn’t look so large to the average Joe Worker.
Because it’s common knowledge among people who pay attention that the first generation to collect Social Security got a lot more than they paid in, and the deal has gotten progressively worse (to the point where, for anyone currently under 30, it compares unfavorably with the First Bank of Serta Posturepedic).
Depends on when you plan on collecting. If you become disabled tomorrow, I see no reason you shouldn’t expect to receive full benefits.
And, unless they intend on doing away with the program entirely, whenever you retire presumably there will always be folks younger than you who continue to work and pay into the system, allowing payment of benefits of some amount.
But heck, you can say whatever you wish. 
FYI, if you are interested you can see a whole bunch of figures here. Current prediction for depletion of the trust funds is 2040. (Note, this number changes year by year depending on the current economic environment. Last year’s prediction was 2041.) At that point, current taxes are predicted to be sufficient to pay 74% of benefits. So even if absolutely nothing is done to reform SS, you should expect approximately 75 cents on the dollar.
Does that account for inflation? So, a 24 year old pays 1 into SS now and you're saying he'll get back .75 in today’s dollars or future dollars?
Assuming 3% inflation, in 41 years when asterion is 65 and retiring that he’ll need 2.56 to buy .75 worth of stuff.
To answer the OP: The only “factual” answer to your question is that it doesn’t because thats the way it was designed. The reason it was designed that way is debatable, of course.
By saying we should get rid of the cap on payroll taxes, I assume that people mean we should also not give those people paying more tax any more benefits. So, you’re basically taxing the rich to temporarily extend the ponzi scheme.
It’s a bad idea. The fact that people above a certain amount aren’t being taxed yet is a very good thing. It’s a safety valve that we might need to get ourselves out of this mess some day. It could pay the transition costs over to a privatized system for instance.
Also, as others have pointed out, by taking away the cap you’d be unmasking the system for what it is: welfare for old people.
His expected benefits are adjusted for inflation through the annual COLA, so yes, 75% of his adjusted benefits would be as well.
Huh? You said:
Suggesting that there was a thredbare difference between SS and a welfare program. I don’t see how your response supports this. Also I wouldn’t mind a cite for this:
Sorry, but I’m not going to look for a cite. But I understand it to be an undisputed fact that when SS was enacted in the 30s, certain classes of people immediately began receiving benefits, despite the fact that they had never contributed a cent to the program.
What do you think happened? They started withholding SS, and only began paying out benefits after the folks who paid in retired?
Well, I should have looked for a cite, because I was wrong.
Some funny stuff there.
The first recipient of SS bens retired the day after it was enacted.
He paid in a nickel, and received a lump sum payment of 17 cents!
I think you might be missing something. That guy was the first to receive one of the lump sum payments that they system used to pay people back who contributed but didn’t get any monthly payments because the system wasn’t up and running yet.
The actual first person to get SS bennies, if you read a bit further down on the page was Ida May Fuller.
Your original thesis is correct.
The first people into the system got paid out way more than they paid in. We’ve been paying for that mistake ever since.
How are we paying for “that mistake” today?
The federal government takes a flat rate tax out of our paychecks called the “payroll tax”. This tax is 7.65% of your income and another 7.65 of hidden tax is paid by your employer. That’s how.
Since the system was set up to be a ponzi scheme this money isn’t free to be saved for you for retirement. Instead it’s needed to pay out benefits for existing retirees, since those first people got a free ride we’ve been paying for it ever since.
Going back to our twenty four year old payee as an example. If he gets $.75 of his dollar back, after inflation that’s $2.56 of real dollars in his pocket at retirement for every dollar he put into the system. If instead that money were invested in the stock market he would get $133.70 real dollars back for every dollar put in. (I’m assuming the historical average of 12% return.)
Using a system that only gives you $2.56 back for every dollar invested when there is another one available that gives you $133.70 instead? That’s a costly mistake.
And if you’re self employed, you pay the whole 15.3%. That’s on top of normal Federal income tax and, for most of us, State income tax.
Those returns might even be higher if there was more money to invest, or spend for that matter.
Would you call the whole insurance industry one big Ponzi scheme? Because, for the most part, they work along a similar principle as Social Security.
If he lives to collect his retirement. If he gets hit by a truck tomorrow and he starts collecting up to $2100 a month in disability benefits for the rest of his life, his payments into the system will look like a fantastic investment. You simply can’t make the mistake of asserting that Social Security is no more than an old age retirement savings program, because it simply isn’t.
Nobody anywhere argues that people should depend on Social Security as their sole source of income for retirement; but when it comes to people criticizing Social Security, the first point trotted out is that private investments tend to give better returns. Nobody is arguing with that. The point that us pro-Social Security types tend to make is that even people who put all their eggs in the Enron or Pets.com basket – or get hit by a truck and permanently disabled before they can invest enough to live out the rest of their lives – can still count on some Social Security benefit because it is an income insurance program, not an investment.
It’s a mistake if the program hadn’t been set up to pay defined benefits even to those who didn’t put that much money in. You might disagree with the principle, you might think Roosevelt was a socialist, but it wasn’t a mistake.
I do hope you don’t plan to fund your retirement with 100% of your investments in the market. That’s not a very clever strategy. You seem to be ignoring the risk factor. Think of how much better shape some pensions might be in today if they hadn’t drained the fund when the market was high, only to get behind after the bubble. Yeah, the return on Social Security is relatively low, but the safety is high, making it easier for us to increase return on other investments having a safety net.