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We all know the issues and demagoguing false facts from the right about Social Security. The answer nearly every progressive gives to questions of eroding benefits, and what to do about the trust fund in 20 years is "Raise the Cap".  Simple and succinct, but flies right over the head of most people who don't even realize that wage income over $106.8 thousand is exempt from Social Security taxes.

Let's reframe raising the cap as ending Social Security Tax Exemptions for the Wealthy.

This reframe also notes that the FICA tax exempts non-wage income -  the majority of income received by the very wealthy - capital gains, interest, dividends, carried interest, etc. 58% of personal income is sheltered from Social Security taxes by the Social Security Tax Exemption for the Wealthy.

This week Congress is fighting over paying for extending the Payroll Tax holiday - the ONLY tax cut that Republicans have ever thought needed to be paid for. The simple solution? Eliminating the Social Security Tax Exemption for the Wealthy would make all personal income subject to the FICA tax, which would allow us to cut FICA tax rates in half for everyone, permanently, and should still provide enough additional revenue to allow us to continue current benefit levels for as far as we can forecast without the need to erode benefits with chained CPI or raising retirement ages.

Total US personal income in 2010: $12,357 Billion
Total Social Security revenues from FICA taxes: $642 billion

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Comment Preferences

  •  Can't have it both ways (3+ / 0-)
    Recommended by:
    eatbeans, VClib, Economides

    the reason that SS enjoys widespread support is because it is widely viewed as a "you get what you paid for" system.  FDR specifically -- and wisely -- designed it that way so that it could not be viewed as "welfare" and thus would not be easy to kill.  It is "wage insurance" where what you get paid in retirement is tied to the amount of wages you insure.  People who insure $50,000 in wages (pay taxes on that) get the same retirement payout regardless of what other assets they have.  The "cap" is the higest amount of wages you can insure.  If you insure $106,000, and you make $106,000, you get the same retirement payout as someone else who insures $106,000 and makes say $200,00.  It is that link (as FDR recognized) that makes the system universally popular -- ask any Senior, who will tell you he is entitled to SS retirement benefits because "I only want what I paid for."  It is that link that keeps this perception alive with the public.  It is that link which keeps the program from being labeled "welfare."

    If you lift the cap completely, you have one of two choices. (1)  Since, by the nature of the system retirement payouts are tied to the wages you insure, you will be paying huge retirement benefits to people who insure $500,000 or more of wages; or (2) you can fundamentally change the nature of the system that FDR designed and that has enjoyed widespread support by breaking the link between the amount of wages you insure and the amount of retirement benefits you get.  

    Since the retirement benefits are somewhat progressive in the system as it exists now (people at the lower end get a higher % of what they insure back in retirement benefits), the best solution, I think, is to raise the cap somewhat and keep the link in place, increasing payouts somewhat on the higher end.  

    •  We have to... (2+ / 0-)
      Recommended by:
      Blue Mark, Fireshadow

      ...."fundamentally change the nature of the system that FDR designed".

      We have to do this because our economy has changed. FDR never envisioned a world where 40% of all income would be paid to 1% of the population.

      •  A fundamental change in SocSec (0+ / 0-)

        puts the entire system at risk because it will lose its bi-partisan support. Higher marginal rates on income driving funds into the general account is a much better answer than risking SocSec.

        "let's talk about that"

        by VClib on Sun Dec 11, 2011 at 05:43:38 PM PST

        [ Parent ]

        •  If bi-partisan support... (0+ / 0-)

          ...is a problem, there is a way to solve that.

          Defeat the other party. Make them lose elections, remove them from power, sweep them from Congress. Then rub salt into the burned-out soil of K Street so that nothing can grow there again.

          I'm just kidding about the salt. All that salt is bad for the environment.

          We win by telling the people truth:

          1) Social Security is not an insurance program. It's a wealth-transfer program. Retirees get more out than they put in.

          2) Wealth in this country is unfairly distributed. The 1% did not grow 40% of the food, do 40% of the spreadsheets, make 40% of the sales calls, nor fix 40% of the potholes. They don't deserve 40% of the money.

          3) We're going to fix the unfair distribution of wealth by taxing rich people more. They will pay Social Security tax on all their income, but they will get the same benefits. If they whine, they can move to Somolia, a land with no Social Security tax.

          •  0 for 3 (0+ / 0-)

            1. (A) Social Security a social insurance program that is modestly progressive. The retirement side is only very modestly progressive, despite the higher replacement rates for lower lifetime earners, primarily because lifespans are longer for those with higher earnings. The disability program is sharply progressive paying out more to lower lifetime earners.
            (B) all insurance programs involve re-distribution, primarily from those who need to claim insurance from those who do not. If my house catches on fire, all those lucky folks who pay the same premium as me but do not have their house burn down are transferring wealth to me. Health insurance is a transfer of wealth from the healthy to the sick. And on and on....
            (C) All retirees do not get more than they paid in. For top earners the benefits they receive relative to taxes paid is slightly negative. On a relative scale replacement rates are actually falling over time. On an absolute scale real benefits are increasing because, total average wages are growing (the relevant base is all wages, not just those subject to payroll tax).

            2. Deserve is a tricky word.  If in the course of 1 month a person digs 50 ditches and another person records an album that sells 5 million copies, who gets compensated more?  There are many valid reasons why one person product is worth more than another's. That said, there seems to be a tremendous amount of inflated compensation for no good apparent reason among corporate executives. We may not be able to do anything about most pre-tax inequality. Need seems a lot sounder basis for re-distribution than a foggy notion of who does and doesn't deserve what.

            3. If the Social Security system is only modestly progressive then how will taxing all income of the top earners make it much more equal? BY contrast if you tax wealthy people more an devote those tax receipts to education, health and housing for poor people you have made a large positive re-distribution.

            •  Progressive and Regressive (0+ / 0-)
              3. If the Social Security system is only modestly progressive then how will taxing all income of the top earners make it much more equal?
              Don't confuse tax progressivity with Return on Investment (ROI). Social insurance is not an investment, at least not a personal one.

              SS has 'modestly' progressive benefits - as rightly noted, but the SS portion of the FICA tax is not by any means progressive - at low income levels it is mildly regressive (the poor have very little income from interest, dividends or capital gains), and becomes highly regressive for incomes over $106.8k, and this is no trifling matter - for the majority of Americans FICA is the largest tax they pay.

              Taxing all income, wage and non-wage alike, at a substantially lower rate, would change FICA from a regressive tax to a smaller flat tax. That makes taxation just about as equal as possible - but I suspect that is not the "equality" in question. My question in turn is to ask - Is the benefit of social insurance calculated solely on personal ROI, or on individual and community benefit of having a population protected by social insurance?

              •  Social Security is not a tax system (0+ / 0-)

                First, you misunderstood my larger point which is that the point of raising the cap is to achieve long-term solvency of the Social Security system. A system whose net benefits are mildly progressive. It is not as if we are using the new taxes to massively increase benefits for those least off. We are just maintaining status quo. And if the real political alternative to raising taxes on higher earners is to cut benefits for higher earners then once again on net we have done very little make post transfer income for retirees more equal.

                Second, why does it make sense to talk about the progressivity or lack thereof of the revenue side of social security separate from the benefit side. It is all one system. We are not trying to equalize just the tax side, or just the benefit side. We are trying to make the system as a whole to serve it's objectives.

                So to understand if the system as a whole is progressive most people tend to look at benefits received net of taxes paid (in present value). This does not have ot be an individual calculation, you can do it from broad income groups.  Now, net benefits are higher for those with lower incomes than for those with higher incomes, so the system is slightly progressive.

                If you want to argue the system as a whole should be even more progressive, go ahead. It makes little sense to argue that we need to make just the tax side more progressive, and to do so by totally changing the nature of the system in the sense that it is tied to wage earning.

                •  Social Security is not a private pension (0+ / 0-)

                  Despite the concern trolling of the right, there is no question of the long term solvency of Social Security. For the nearly 50 years before the current trust fund was established in the 80s Social Security operated on a pay as you go basis. When the trust fund is expended in 20 years or so it can continue on the same basis. If no other adjustments are made - such as 'raising the cap', it will continue at reduced benefits levels - right now that looks like about 78% of current levels. Many of those on the right who claim to want to "save" SS start with cutting benefits now. And the Obama administration counters with a plan to gradually cut benefits, starting now. Bah. An unnecessary breach of trust with those who have been making contributions all these years.

                  I understand the ROI calculation that says the regressive FICA tax coupled with the benefit structure results in a slightly progressive system if you look primarily at benefits paid. I.E. lower benefit levels are subsidized. I just don't buy that as the correct way to look at it. Sure, if we were talking about pensions, but we are not, it is social insurance, not a pension. The question is - does Social Security provide a public benefit apart from the individual remuneration to participants? And does that justify the very wealthy contributing a more equal share despite receiving a smaller personal ROI. I say yes, and yes.

        •  Bipartisan support? (0+ / 0-)

          Seems to me that Social Security has already lost its bipartisan support. Hell, it's barely holding onto partisan support when you consider all the Democrats willing to erode benefits and raise retirement ages rather than even consider increasing the cap (let alone eliminating it). The other party just wants to turn its trust fund over to the rapists on Wall Street.

  •  Excellent. (0+ / 0-)

    We need to end the Social Security Tax Exemption for the Wealthy.

    Can we call it the "Millionaire's Loophole" or the "Hundred-Grand Loophole"? More brainstorming may be needed.

    Whatever we call it, we need to frame why we are doing it: We are doing it to Protect Social Security.

    •  MM - this is no loophole (0+ / 0-)

      Recall that SocSec was designed as "wage insurance" so that at retirement age a portion of your wages would be paid to you during your retirement. It is not an income redistribution program and FDR was very ademant that SocSec not be viewed as a welfare program and that is why it has its own funding mechanism and isn't paid out of the general fund. If you understand the wage insurance concept its easy to comprehend why there is a cap and why it would be inappropriate to charge dividend and interest income any "payroll" taxes. The theory is that people who earn over a certain amount, currently $106,800, likely have other resources that can supplement their retirement income and don't need more SocSec provided wage insurance. Because dividend and capital gains are not dependent on working, or wages, and continue into retirement there is no need to "insure" them. There could, and likely should, be an increase in the cap and a corresponding increase in the benefits paid to high income earners. However, many of the proposals call for raising the cap without raising the benefits, or making dividends and capital gains income subject to SocSec taxes. Both of these ideas would change SocSec as it was structured by FDR and would end SocSec as we know it putting the entire program at more political risk.

      "let's talk about that"

      by VClib on Sun Dec 11, 2011 at 12:48:23 PM PST

      [ Parent ]

      •  Personal or Social insurance? (2+ / 0-)
        Recommended by:
        ManhattanMan, Fireshadow

        Is SS personal wage insurance or social wage insurance?

        Certainly there is a measure of both. Retirement benefits are, somewhat, proportional to what you pay in - it is by no means an income equalization program, no matter how many times it is condemned as a "socialist" income transfer scheme.

        Calling it wage insurance is a much better frame than the usual, and inaccurate, "pension" frame. Social Security is disability and survivors insurance with a retirement benefit, not a pension. The whole concept of insurance is that you are putting a large number of people together to share risk and guarantee compensation for those who qualify. With SS everyone (or nearly so) is part of the group.

        Yet by limiting contributions to just the lowest levels of income - and making the participation of the very wealthy marginal, we are excusing them from the responsibility the rest of us have assumed under social insurance.

        •  Blue Mark - a cap of $107K is low? (1+ / 0-)
          Recommended by:
          maybeeso in michigan

          While SocSec is now only applicable to about 80% of total wages, less than the 90%+ that is needed, it is hardly limiting contributions to just the lowest levels of income. SocSec is a much better deal for low wage earners as currently structured, which has broad support. I favor raising the cap to move the contribution number back over 90% of wages, but the high income earners should also receive higher SocSec benefits commensurate with the higher payments by them and their employers.  

          "let's talk about that"

          by VClib on Sun Dec 11, 2011 at 01:55:39 PM PST

          [ Parent ]

          •  Only 42% of personal income is taxed for SS (1+ / 0-)
            Recommended by:
            Fireshadow

            You say SS taxes are only applicable to about 80% of wages ... I say it is only applicable to 42% of personal income. Neither of us is wrong.  I just don't see any good reason to exempt non-wage income. Yes, people who pay more into the system will receive more back, I don't have a problem with that when they are paying their share of the risk-taking to insure all of us. What I object to is saying their share of the risk-taking should be smaller because they are more privileged.

            I understand why you think there should be an exemption for the wealthy, I just don't agree.

            •  See my earlier comment (0+ / 0-)

              SocSec is wage insurance which isn't needed for dividend and capital gains income. Those sources of income don't end at retirement so there is no reason to insure them. Adding payroll taxes to dividend and capital gains income would violate the historical basis of, and change, SocSec as we know it. The program can me updated as it always has, by raising the cap on wages and allowing for higher benefits.  

              "let's talk about that"

              by VClib on Sun Dec 11, 2011 at 03:58:55 PM PST

              [ Parent ]

              •  Social Security is NOT wage insurance, it is (0+ / 0-)

                SOCIAL insurance, an insurance on the security of our society as a whole, not any one individual, poor or otherwise. That's how I see it.  ALL income should be taxed equally and have that used for the security of our society in the form of social security... in fact tie that in with universal healthcare at some point and we'll have made a huge leap forward in the development of a sane, just, and compassionate society.

                Use this for our causes! "Goodbye American Dream" music: http://tinyurl.com/3hhtuyo lyrics: http://tinyurl.com/3jm7g2k

                by Fireshadow on Sun Dec 11, 2011 at 08:27:39 PM PST

                [ Parent ]

                •  Fireshadow - it's fine if you see it that way (0+ / 0-)

                  However, that is not how it's historical roots were developed by FDR. It may be time for a change, but I don't favor such a fundamental change in SocSec as we know it. I favor raising the cap on FICA wages and raising marginal income tax rates on high incomes. I don't believe that SocSec should become an income redistribution program. That was never the intent, in fact FDR warned against it.

                  "let's talk about that"

                  by VClib on Sun Dec 11, 2011 at 08:45:56 PM PST

                  [ Parent ]

  •  SS cheats many people.... (0+ / 0-)

    I can name several people who had SS paying jobs for 30 years or more, paid into the system by the rules, then got teaching jobs with a small retirement benefit after teaching for only 10 years.

    Because of that, their SS payment  was slashed by more than half when they got SS after retirement. They were robbed by SS and the corporation serving politicians that set up this screw job and rip off.

    After taking the money in, government changed the rules so that it would not have to pay the money out according to its side of the agreement.

    So anybody considering a public service job needs to understand they are kissing their SS retirements goodbye even though they have paid into the system many years.

    Then again, the primary purpose of our government these days is war crimes and subsidizing corporations.

    Msongs www.hawaiilovesart.com batik, digital design, photography, songwriting

    by Msongs on Sun Dec 11, 2011 at 07:59:03 PM PST

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