The financial gap between the projected inflows and outflows of Social Security is enormous, and the solutions to close that the hole are few.
Instead of talking about how to close the gaps, we are talking about how to spend even more. The money -- and the more money that flows from expanding Social Security -- has to come from somewhere because the program is not authorized to borrow money to pay its bills.
If you listen to the spend-even-more crowd, the rich should pay more. They blame the high wage worker, and the regressive structure of the program which insulates these workers from carrying their fair share.
This week, Thomas L. Hungerford, Associate Commissioner, for Retirement Policy at the Social Security Administration ("SSA"), published a commentary on broadening the Social Security tax base, and the media is covering it. You may agree with their conclusions, but at least understand the fallacies in their argument.
The reasoning is based on the fact that Social Security taxes apply only to the first $118,500 of wages. Everyone pays 12.4 percent in tax on wages. Those workers lucky enough to make more than that amount, keep their wages above that sum free of the Social Security burden. Naturally as you earn wages above the cap, the cost as a percentage of your income falls.
This analysis of course considers cost without factoring in potential benefits that the worker would receive as a retiree. The breakdown is no more telling than half a baseball score. Cardinals 6 tells you nothing about the game or even what sport is being played.
Social Security as a whole, is and intentionally so, quite progressive. The cost for Social Security on the last $1,000 of earnings is $124 ($103 for Old-Age benefits). The potential benefits for that cost are $25.71 for lowest-wage workers,$9.14 for medium range workers, and $4.28 for high-wage workers[1]. How that is regressive is beyond me.
Hungerford, and many others, blame wage inequality for the decline in the ratio of taxable wages to all wages paid. Hungerford notes, "The primary reason for the downward trend since 1983 is the rise in wage inequality over the past 30 years - an increasing share of earnings is above the taxable maximum."
Social Security's portion of the overall wage base is slipping, falling from 90 percent in 1983 to an average of 83 percent in 2013. (see SSA source data)Most of this fall, however, occurred in the late 1980s immediately following the 1986 Tax Reform Act. For all of its purported evils, income inequality in 2016 cannot explain the wage allocations of the 1980s.
By 1988, the Social Security drew revenue from only 86 percent of covered wages. Today program averages around 84 percent. Some of this fall stems from people choosing benefits that aren't taxed over pay increases. Specifically, the SSA has found that the rising cost of health insurance tends to replace a greater percentage of wages below the taxable maximum with benefits that fall outside of the program's revenue reach.
Taxing the rich is a popular alternative because the change would affect a minority of voters. The contributions to the system create little in the way of long-term obligations. The nonsense about the rich not paying their fair share is simply the economic tonic that makes the alternative palatable with voters.
The government is likely going to consider increasing the wages subject to Social Security. It has nothing to do with the burden or lack thereof carried by the rich. It is because we want to throw money at the problem, preferably money belonging to someone else.
[1] Average indexed monthly earnings on the last $1,000 of earnings = (1000/35 because the formula averages 35 years) / 12 (to get to monthly earnings). The benefits formula applies three separate percentages to portions of the AIME. The first portion is weighted at 90%. The next portion is 32%. For the high wage earner, the weight on the last $1,000 of earnings is 15%. So it is 2.38*.15 = 0.357 extra per month.
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