Hello all - this is a lot better with the pictures which I couldn't figure out how to put in...if you are interested you can check it out at http://havoconthehill.com/...
Social Security is a lot like Tim Tebow – people just won’t stop talking about either one of them. Everywhere I go I hear conversations resembling the following:
"We must maintain a safety net for our seniors!"
"I hate how everyone in our country expects a handout!"
"The test of a society is how they treat the old and the sick!"
"Why do I need to pay for your grandpa? He’s old and he smells and he doesn’t even work anymore and he’s not even interesting to have a conversation with!"
You might be thinking, “Who the hell are you hanging out with?” which is irrelevant and I’d appreciate if you stayed out of my personal affairs. The bigger question is: Why is there so much disagreement?
Part of me feels like it’s because a lot of people are assholes. Another part of me feels like the complexity surrounding the numbers behind Social Security leads to unnecessary disagreement. Maybe if we can all agree on the math surrounding the program we can agree on what to do about it.
We can start by breaking things down with a fairly simple scientific method endorsed by Tracy Morgan: ”What goes in”, “What comes out”, and “So what’s up with all this?”
Does it drive anyone else crazy that Jim Halpert still works at Dunder Mifflin? How are we supposed to root for a guy who after 8 years of working at a dead end job, at a dead end company, in a dead end industry, and for an idiot boss can’t get himself to boot up Microsoft Word, pump out a resume, and get a new job? If Jim Halpert was a real person I would try to convince Pam to leave that loser encourage him to seek new employement. Anyway, good morning, but I digress -
Social Security is funded by the payroll tax (separate from the income tax) and breaks down as follows:
YOU pay 6.2%* of your first $106,800 in income, and zero thereafter.
YOUR EMPLOYER pays 6.2% of the first $106,800 they pay you, and zero thereafter.
*Obama and Congress have temporarily cut YOUR contribution to 4.2%, while maintaining the employer’s contribution at 6.2%. The cut is scheduled to expire at the end of February but they will probably extend it in a bill that will also include an earmark to put Newt Gingrich on the moon, by himself.
You’re probably thinking three things right now:
1. Wow that’s a lot!
2. I really want Indian food tonight but do you think I’ll have gas all day tomorrow?
3. What’s up with the “And zero after $106,800″ part?”
Let me address each thought:
1. It is a lot! If you count the 6.2% from your employer, you are paying 12.4% in payroll taxes on your first $106,800. This is an enormous source of revenue for the federal government. In 2008 revenue from the payroll tax was THREE TIMES LARGER than revenue from corporate income taxes. WTF Google?
2. Yes but it’s worth it.
3. If you make more than $106,800, every dollar you make past that point pays ZERO in payroll taxes. I know you thought you had it good when you made $110,000 last year – but did you know you paid the same amount in payroll taxes that Brad Pitt did?
First of all, you look great.
You can’t be mad at Brad Pitt for his paltry payroll tax bill. It’s not his fault he’s so beautiful his rate is so low.
You’re right to be upset though. What does Brad Pitt do that’s so important? ”Moneyball” wasn’t even that good – why didn’t Jonah Hill make more jokes?
If it wasn’t for your job at the storage facility, people wouldn’t be able to store all their useless crap that they really should throw away. You are doing real work in the real economy, just like Mitt Romney. Why is the payroll tax capped at $106,800?
The short answer is: It’s fucked up. The long answer is a rationale that makes no sense when you look at how the payroll tax revenue is treated, so let’s take a look at that first. Actually, before any of that, let’s look at this baby next to this dog because I really want this article go viral:
So now we know what goes into Social Security. The next question is:
Social Security benefits are so complicated an objective observer might come to the conclusion that the government is just fucking with you. A tea party observer might come to the conclusion that the government is just fucking you. Your dog might come the conclusion that he just ate the envelope with all your benefit information and now he’s going to poop all over the floor.
You can start to collect full Social Security benefits when you are 67 (or a little earlier if you were born before 1960). You can elect to collect early at 62 but your benefit will be smaller. You can also collect early if you become disabled. The average recipient in 2011 received $1,177 a month in benefits, or $14,124 a year. Benefits are a factor of how much you paid into Social Security, if you are still collecting income, and when you chose to begin collecting.
So how does all this shake out? We all understand that Social Security is a “pay as you go” system – the younger people’s contributions pay for the older people’s benefits, like this:
But are there enough payroll taxes coming in to pay for what’s going out in benefits? Really we need to know:
Below is a graph of Social Security inflows minus outflows going back to to 1957. The data is from here
For the 68% of the adult population that cannot read simple charts – this means that we’ve taken in way more in payroll tax revenue than we’ve paid out in benefits, over $2 trillion worth.
This is by design. In 1983, concerned over the long term solvency of the program, President Reagan appointed Allen Greenspan to lead a commision to reform Social Security. Unfortunately, this was before everyone realized Allen Greenspan was an idiot.
The logic behind reform was simple:
1. Social Security is a pay as you go system.
2. When the Baby Boomers retire, there will be more people collecting benefits than paying into the system.
3. If we don’t pay their benefits they will be pissed and we can’t handle another decade of drugs and protests and bell bottoms from these people.
4. Let’s raise the payroll tax substantially so we collect way more now than we pay out. We’ll put the extra in a “trust fund”. We’ll also nudge up the retirement age.
When the Boomers retire, we’ll draw down on the trust fund to supplement any deficit we have in inflows vs. outflows.
Sounds good right? We’ll just take more money than we need for now and we’ll keep it in a trust fund. Maybe we can even invest it! Can we buy stocks? Let’s buy Apple!
Unfortunately things turned out more like this:
The Government borrowed the money in the trust, used it to supplement other spending, and “filled” it back up with IOUs (“Special issue US Government Bonds” more info here).
Some people claim that this is fine because every dollar we’ve borrowed from social security is a dollar we didn’t have to borrow from foreign creditors. The underlying assumption here is that government spending exists inside of a vacuum, and the amount of easy money laying around has no effect on it whatsoever. This is, well, silly.
Imagine you have a ten-year-old son who you plan on someday sending to college. You’ve saved up $20,000 and you put it in a shoebox on his dresser. He immediately “borrows” all $20,000 and spends it at the mall. I mean he just goes absolutely fucking nuts in the mall.
Eight years later when he is about to start college, would you say to yourself, “Well, every dollar he borrowed out of the shoebox is one that he would have borrowed from the rest of the money we have anyway, so really it’s all relative.”
Of course not! You would never have given him $20,000 to blow at the mall! You never should have put the shoe box in his room!
The same is true for the Social Security Trust Fund. It was an easy way for the government to spend over $2 trillion without having to borrow it in the public markets or raise income taxes. The increase in government spending we’ve seen since 1983 is in part a RESULT of the Social Security system.
If you are following this at all,
If anyone else is following this at all, here is what we need to do:
1. Recognize that this whole thing was probably a bad idea.
2. Admit that the payroll tax is effectively just a highly regressive form of income tax.
3. Get rid of the distinction and roll it into the income tax (which effectively gets rid of the $106,800 cap).
4. Acknowledge that Social Security is not a self funded retirement system, but a form of welfare for the old and sick (which is a good thing and something we should do! I love you Grandma!)
5. Stop paying out benefits to those who don’t need it.
6. Take a look at how the numbers stack out after these changes (they will look a lot better) and then tinker with benefit adjustments if needed.
7. Read “The Hunger Games” before the movie comes out because the book is always so much better with the possible exception of “The Girl with the Dragon Tattoo”. I didn’t realize how hot Lisbeth was when I was reading it.
Boom. We did it guys.
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