Here’s the basic problem. Everyone agrees that if the system is not adjusted, then at some point many years down the road (2042 or 2052, depending on whose estimates you use), the social security system will not have enough funds to pay the full level of promised benefits (it will still be able to pay 70-80% of promised benefits). Is this a "crisis"? Is the system going "flat bust, bankrupt"? No. But it is a situation that should be addressed. The traditional unappealing options: reduce benefits, raise the retirement age, raise the payroll tax, raise the wage ceiling, or borrow a ton of money. Because nobody likes proposing any of these things, the social security problem is politically difficult to solve.
But let’s look at the payroll tax for a minute. In 2005, wage earners will pay a flat social security tax rate of 6.2% on their first $90,000 of income, and nothing on any amount that they earn over $90,000. Employers match their employees’ contributions, so social security taxes businesses as well as individuals. Here are a couple of numerical examples of how this plays out:
- $40,000 income pays $2,480 in social security tax (6.2%)
- $90,000 income pays $5,580 in social security tax (6.2%)
- $100,000 income pays $5,580 in social security tax (5.6%)
- $200,000 income pays $5,580 in social security tax (2.8%)
- $3,000,000 income pays $5,580 in social security tax (0.2%)
Because you stop paying social security tax after $90,000, the more you make over $90,000, the smaller the percentage of your income that goes to social security.
One obvious way to increase revenues — to raise the tax rate — is in some ways the most unfair because it hits lower wage earners the hardest. Another option, raising the wage ceiling, say to $200,000, seems more reasonable — that would mean that somewhat wealthier wage-earners (those earning between $90,000 and $200,000) would continue to pay social security tax up to the new ceiling, so the maximum contribution would be $12,400 instead of the current $5,580. But that’s just a tax increase, and no one wants to take the heat for hiking taxes.
But what if we reduce the social security tax rate — say to 5.5% — while simultaneously raising the wage ceiling to $200,000? Then look at how our numerical examples play out:
- $40,000 income pays $2,200 in social security tax (5.5%)
- $90,000 income pays $4,950 in social security tax (5.5%)
- $100,000 income pays $5,500 in social security tax (5.5%)
- $200,000 income pays $11,000 in social security tax (5.5%)
- $3,000,000 income pays $11,000 in social security tax (0.4%)
Everyone earning $100,000 or less gets a tax cut! Everyone earning more than $100,000 will pay more, but the increase only becomes significant as you approach $200,000 — these are the people who frankly can afford to pay a bit more to ensure that old and disabled people don’t sink into poverty. If the numbers are done right (I just made up the 5.5% rate and the $200,000 ceiling), the increase on the higher-income people should more than make up for the tax cut for the lower-income people, thereby solving the financing problem while cutting taxes for the people who most need it.
This plan also gives a substantial tax cut to businesses that employ people earning less than $100,000. If a business has 200 employees earning $40,000 each, the business would save $56,000 a year. That’s not chump change, and I suspect you could get at least some of the business community to back something like this.
I’m surprised that no one (as far as I know) has suggested this before. Yes, to cut the tax rate but still get the same revenue boost you have to raise the ceiling more than you would if you leave the rate unchanged, but it seems to me that the political and economic benefit of cutting taxes on low wage earners and the businesses that employ them outweigh that drawback. This seems like a win-win where we help lower-income Americans, give politicians cover by letting them claim credit for a tax cut, solve a serious economic and political problem, and send everyone away happy. Tell me if I’m missing something.
Oh, and about those private personal accounts: we already have them. They’re called IRAs, and I have no problem with raising the limit on the amount that individuals can contribute to them. Just don’t sacrifice the social security system to do it — it’s not necessary. By cutting the tax rate as I’ve described, we can make it easier for lower-income Americans to save more — if they choose to do so, they can divert the money they’ll save in the tax cut into an IRA — without taking away a successful program that has kept generations of seniors out of poverty. That’s an ownership society.
While the solution you propose sounds fair, it doesn’t take into account how it would affect people in more expensive parts of the country.Where I live (Long Island, New York) house prices for modest single family homes have grown to $400,000 and up. There are people who earn well over $100,000 a year who are struggling to buy their first house, pay their mortgage or pay their rent. Hitting this group of people with an extra $4,000 to $5,000 in taxes will make it even harder for them to meet the financial needs of their family.People earning over $100,000 shouldn’t automatically be considered weathly without taking into account the average income and housing costs of their geographical region. In addition, it shouldn’t be assumed those earning over $100,000 a year “frankly can afford to pay a bit more”.
Believe me, living in the Boston area I am painfully familiar with the high cost of living in certain parts of the country. And under my proposal, no one earning $100,000, or even a bit more than that, will be paying “an extra $4,000 to $5,000 in taxes.” The larger tax hikes will affect folks approaching $200,000. I recognize that even that level of income can be eaten up quickly by high costs of living, but the fact is that someone will have to pay to solve social security’s solvency problem. The only question is who – old and/or sick people in the form of benefit cuts? Or people with incomes approaching $200,000? That strikes me as a fairly easy choice. Also, your idea raises a further question: should benefits be similarly indexed? Should people living in lower-cost regions of the country receive less in benefits? What do you think?
Lets look at somebody in the $150K range. Under your proposal they would pay $8,250. That’s almost a $3,000 increase over what they currently have to pay. In a high cost of living area the few hundred dollars a month that averages out to can make a big difference.The idea of indexing payments to the cost of living in a region is interesting. In theory, people who live in higher cost areas generally make higher salaries and would have put more into the system, so it makes sense they get more out when they retire. But that would only happen if they stayed in a high cost of living area. Should somebody who moves to a lower cost of living area after retirement have their benefits reduced after putting in all that money? What about other way around. Should somebody who resided in a low cost of living area and put little money into the system be able to increase their benefits by moving to a region with a higher cost of living?The Social Security issue is something that is not going to be easy to solve. The potential solutions I’ve read only makes the outlook more grim. Every proposal seems to benefit one demographic and hurt another. Being early in my career, I believe any benefits being payed by the government by the time I retire will be far too small to survive on unless changes to the system are made. What should those changes be? Maybe individual retirement accounts will work, maybe the won’t. Maybe we should impose a “Wealth Tax” on a person’s net worth? There are many options and which one will work best is an endless debate with no clear solution.
I’m doing a report in my econ class about SS, and this page is very very informative, I’m just saying that it’s a very good idea for SS.
I am not a greedy person, but I need to comment about the “obvious” of having the social security tax ceiling raised to, for example, $200,000. Other than the geographical scenario explained above, what about the intangible issues that would certainly arise? I make about $300,000 per year. When you factor in school repayment costs (racked up $200,000), child support, family dependency, geographic location (Southern California) etc., my $300,000 evaporates down to $100,000 pretty quickly. However, it sure looks like I would be paying an additional $5000 per year more than others making $100,000. Also, the reasoning mentioned above in reference to individuals making $200,000 annually, “frankly, they can afford it”, is very shallow. Becauase Bill Gates “can afford it”, he should pay more social security tax than his fellow American? I can assure you he already pays more taxes than pretty much anyone else, but why should he pay more than his return value would be? Well, I just erased about 3 paragraphs below this as I was getting more upset. So, I’ll just keep it simple….I pay a total of 47 percent of my income in taxes (I’m self employed). After the first $90k, the percentage drops, finally hitting about 42 percent for 2005. And yet, you think I can “frankly afford it” in regards to paying more yet????
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“OK, right”: You don’t sound like someone who should judge on who’s “shallow”. You 1) make six figures; 2) brag about it; 3) live in southern california (and from the looks of it orange county) 4) judge and berate those not as well off as you. God forbid you might not afford that new BMW and leather driving gloves (even though you already have more cars than you’ll ever need). God forbid fixing social security for the good of all might cramp your opulent and lavish lifestyle ever so slightly. I have no sympathy for you people. Hopefully the majority of the country (you know, that place north of Santa Barbara and east of Vegas where people don’t give a crap about your cell phones and SUVs) will support such a plan as was proposed in this entry. I say remove the ceiling altogether! Lower the rate to 5% or so (where only 5-10% will ahem “suffer”) and it passes in a landslide. So sorry the rich might not get richer as fast as they expect. Whatever!