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How To RAISE Social Security Benefits Now

Social Security is much in the news with claims that it’s going bankrupt and cries that benefits must be cut. But that isn’t the case, in fact if everyone simply paid their fair share of the costs — if bosses paid as much of their income as their workers — benefits could be maintained or even increased without raising Social Security tax rates.

Don’t believe it? According to the nonpartisan Congressional Research Service, “If
all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years.”

How It Works

Social Security is a regressive tax. That means the more you make the less you pay. Social Security is funded with taxes paid on the payments of wages for services performed as an employee — but not all wages and certainly not all income.

For 2011 the rates look like this:

2011 Social Security Tax Rates
Worker 4.2% on earnings up to $106,800
Employer 6.2% on earnings up to $106,800
Self-Employed Workers 10.4% on earnings up to $106,800
Source: Social Security Administration

If you look at the table above you can see the source of Social Security funding problems — and the gross unfairness of the system. Simply put: The households with the most money pay the lowest Social Security taxes relative to income.

Earnings

The term “earnings” for Social Security purposes does not mean all the money someone earns. It means the wages received for labor but generally not dividends, interest, rent, royalties or capital gains.

Why is this important? Imagine you’re a self-employed real estate broker, computer programmer, carpenter, plumber or attorney. You have a net taxable income of $100,000. Of this amount you must pay $10,400 for Social Security. (The self-employed pay 10.4 percent because there’s no employer to pay a portion of the tax.)

Now imagine that the Johnsons receive $100,000 in dividends, interest, rent, royalties or capital gains. Their Social Security tax on such income is zero, so the Johnsons have $10,400 more than someone who sells, programs, saws, plumbs, sues or whatever because monied interests have better lobbyists on Capitol Hill than workers.

Percentages

The table shows that in 2011 the Social Security tax is applied to the first $106,800 in income. For most workers this means the Social Security tax applies to 100 percent of their income. According to the Census Bureau, in 2009 — the latest year for which we have statistics — the median household income was $49,777. And remember that in a “household” we can have more than one wage earner.

Imagine that Smith makes, oh, $50,000 a year as a self-employed daycare operator. The Social Security tax is $50,000 x 10.4 percent or $5,200.

Now imagine that Jones makes $250,000 as a consultant. Jones pays 10.4 percent x $106,800 or a total of $11,107 in Social Security taxes.

Jones plainly pays more in cash than Smith — but then Jones has five times as much income and will receive a vastly larger Social Security pension when he retires. His effective Social Security rate is 4.4 percent — less than the rate paid by his maid or the person who mows his lawn.

But Isn’t Social Security Broke?

Social Security is not broke now and it will not be broke for decades. This year, 2011, it’s expected to produce $121.3 billion in net interest.

“The Social Security Trust Fund currently holds approximately $2.6 trillion and can pay full benefits through 2037,” says Rep. Xavier Becerra (D-CA), ranking member on the House Subcommittee on Social Security.

What About The Deficit?

Federal spending, deficits and surplus figures do not include money paid into the Social Security.

“By law,” says Rep. Becerra, “Social Security can only spend what it has: the contributions workers make from their paychecks, the bonds purchased with those contributions, and the interest earned on those bonds. By law, Social Security cannot contribute to the federal deficit (Chapter 7, Subchapter II, Section 401(h) of the Social Security Act).”

Why Not Privatize Social Security?


If Social Security were privatized big Wall Street banks and brokerages would be able to extract billions of dollars in fees and charges from the retirement accounts of all Americans — meaning there would be an expense where now there is none. More important, unlike Social Security and its guaranteed payments, putting retirement money in the stock market is hardly a sure thing.

According to the Federal Reserve corporate equities were worth $9.643 trillion in 2006 — and $8.514 trillion in the fourth quarter of 2010, a loss of more than a trillion dollars.

How Much Will I Get?

You can estimate your benefits by using the government’s Social Security calculator, but until you look at the numbers don’t make a down payment on a yacht just yet. The typical monthly check is paltry: According to the Pension Rights Center in 2009 the average annual benefit for retired workers was just $13,836 while the typical benefit for couples was $22,512.

What If All Wages Were Taxed?

The Congressional Research Service points out that if the Social Security tax was applied to incomes above $106,800 the actual rate could be reduced.

“Raising the taxable earnings base would lead to an increase in total federal revenues. The Joint Committee on Taxation has estimated that raising the wage base to 90% of earnings, to $186,000 in 2008, would generate $221 billion in additional revenue over the five-year budget window of 2008-2012. Over 10 years, the policy would generate more than $524 billion.”

The obvious point is that if all wage income is taxed and benefits were limited to a reasonable maximum there would be no need to reduce Social Security benefits. Indeed, so much money could be generated the actual tax rate could be lowered for everyone.

“If the base was completely eliminated for both employers and employees so that all earnings were taxed, but those earnings did not count toward benefits, solvency would be restored to Social Security. The increased revenue would eliminate 115% of the projected shortfall and the program would have a projected surplus equal to .28% of taxable payroll. Under this scenario, the payroll tax rate could be immediately lowered from 12.40% to 12.12% and the system would remain solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.”

Notice that we’re still talking about a payroll tax — no one is being asked to pay Social Security taxes on their dividends, interest or capital gains. The rich will still have an advantage, but merely less of an advantage.

And notice one other point: If all payroll income was taxed we could keep the Social Security tax rate where it is — and raise monthly benefits for the elderly.


And notice one other point: If all payroll income was taxed we could keep the Social Security tax rate where it is — and raise monthly benefits for the elderly.

An Entitlement Program For The Rich

What’s being discussed here will be described by critics as, oh my, a tax increase. What’s being ignored, what will not be mentioned, is the imputed government subsidy now being paid to upper-income households in the form of lower Social Security rates and no Social Security rates. In effect, the tax not paid or underpaid is an entitlement program for the rich.

The issue, as I have said on Patrick.net, is not the rich versus everyone else, but rather a mindset which says there can never be enough personal wealth even if other people are impoverished and hurt. With such thinking it’s okay to reduce Social Security benefits if only to keep taxes low. The term “reduce Social Security benefits” is a polite way to say that some are willing to have elderly people live out their last years deciding whether their few dollars should be spent on food or rent.

Alternatively, many who are rich would readily accept higher taxes — think of Bill Gates and Warren Buffett — because they understand that higher taxes are cheap when compared with the cost of social anarchy.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Even the King of Saudi Arabia gets this concept. According to Human Rights Watch he recently increased benefits to Saudi citizens with a “$35 billion package of financial assistance to the unemployed and support for first-time home buyers,” meaning he has $35 billion less but, he hopes, also less social discontent. It’s just a guess, but the betting here is that he will not miss a meal — or close a palace.

Paying For The Benefits of America

There is — and there must be — a cost for those who want access to the vast American marketplace and the security of American society. If you’ve traveled overseas you know that the cost to be an American is entirely worthwhile, especially if you have been to poor or nondemocratic countries.

But the cost to operate our national government is now being paid disproportionately by the poor and the middle class, an arrangement which will inevitably corrode if people don’t feel they’re vested in the system — or doubt that the system is vested in them.

You can already see this. Consider the erosion of social and financial norms represented by the large number of people walking away from their homes and their mortgages, people who do not fear bankruptcy or foreclosure.

“Leaving aside the ethical question of deliberately defaulting, not making mortgage payments has left more money in the pockets of Americans,” says Barron’s. (See: Foreclosures Boost Incomes? March 30, 2011)

Whoever heard of such a thing 10 years ago? As Kenneth Lewis, a former CEO with the Bank of America, explained to the Wall Street Journal, “we’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.” (See: Now, Even Borrowers With Good Credit Pose Risks, December 19, 2007)

If Mr. Lewis were on the other end of the financial spectrum perhaps he would be less amazed. Or, he might consider the words of a former President:

“My position as regards the monied interests can be put in a few words,” said Teddy Roosevelt. “In every civilized society property rights must be carefully safeguarded; ordinarily and in the great majority of cases, human rights and property rights are fundamentally and in the long run, identical; but when it clearly appears that there is a real conflict between them, human rights must have the upper hand; for property belongs to man and not man to property.”
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Copyright 2011 Peter G. Miller, All Rights Reserved. For permission to re-print or re-post this commentary in whole or in part send email to OurBroker.

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19 Comments on "How To RAISE Social Security Benefits Now"

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  1. Ken Nowak says:

    Even if you subject all earnings to the payroll tax, Social Security is still a ponzi scheme and bankrupt and we are just pushing the issue out further and further. Basically, we are taxing new people to pay for previously committed benefits.

  2. karen says:

    the other annoying thing about Soc Sec was it was a tax created to make a nationalized pension/disability fund…when it was going to go insolvent in 80s, they increase taxes to insure fund would build up while boomers working to pay for when boomers retire….so now the inevitable has happen, Soc Sec is dipping into the fund that was socked away for pay for boomers, and Soc Sec is spending more than it is taking in, as planned since for many years it took in more than it paid out and built up surplus, but now that it is cash flow negative the act like its insolvent..not

  3. karen says:

    Technically, anyone that is self-employed for more than a year at a time can make themselves an S corp and report most of their earnings as dividends and get the same benefit as rich people, but should be sure to have wages at some point in career to max out Soc Sec benefit.

    But I agree with point, it infuriates me the wages are the most taxes earnings…ridiculous

  4. Peter G. Miller says:

    >>>Yes, robbery exists throughout our society in the form of taxes. I am forced to pay for them even though I don’t want to. That is because the Govt’s business model is ‘Pay up or go to jail’ :)

    Gosh, imagine if you were a needy student studying medicine. Would you have any costs from those unfair universities?

  5. Hardworker says:

    >>If you pay taxes you are paying for local >>schools, especially property and state taxes. >>If you don’t pay them then you get to meet the >>law enforcement folks you like so much.

    Yes, robbery exists throughout our society in the form of taxes. I am forced to pay for them even though I don’t want to. That is because the Govt’s business model is ‘Pay up or go to jail’ :)

    But the existence of robbery does not justify creation of new forms of robbery.

    I am an Indian citizen who came to the US with $50 in my pocket and now am well off through sheer hard work and smarts. I have no sympathy for whiners.

  6. Peter G. Miller says:

    >>>The responsibility of paying for a child’s education falls on the child’s parents, not the neighbor.

    If you pay taxes you are paying for local schools, especially property and state taxes. If you don’t pay them then you get to meet the law enforcement folks you like so much.

    I notice you have not responded to my question regarding travel overseas.

  7. Hardworker says:

    >>No, it’s the way the world works. Again, I >>pay taxes to support local schools even >>though my children have graduated.

    That is the way YOUR thinking works. The existence of robbery in one place does not allow you to rationalize the creation of new forms of robbery. The responsibility of paying for a child’s education falls on the child’s parents, not the neighbor. If you want to pay taxes to fund schools, that is your individual decision. You cannot force that on other people.

    >>Guess what, you’re able to achieve such >>independence because you live in a society >>that provides a safe place to live and work. >>Get rid of various programs and society will >>be very much less safe. Just ask the recent >>leaders of Libya, Egypt, Tunisia, etc.

    You mean some people will turn violent if wealthier people don’t pay them? Those people are called robbers. What you are saying in effect is that poor people can rationalize robbing wealthy people.

    You as a human beings should be courteous enough to not harm other people. That is pretty much the only guarantee that you should have in life.

    >>Because Social Security provides small but >>guaranteed results. Or do you prefer to live >>amid a nation of beggars — some of whom might >>kidnap you or your children? Would you really >>like to live in the financial equivalent of >>Haiti? Have you ever traveled to a poor >>country?

    Again, you are threatening violence. Why are you a violent person? Why not work hard and keep your earned money instead of sending that money into some giant pool (the govt) where the lines get blurred and then people think they are entitled to $100000 even tho they put in only $100.

    You can guarantee results even if the govt is not involved. You can force yourself to put money into various savings etc and pay yourself out of it when you are old. Govt just adds more bureaucracy.

  8. Peter G. Miller says:

    >>>You want contributions to be uncapped and benefits to be capped. That is plain robbery.

    No, it’s the way the world works. Again, I pay taxes to support local schools even though my children have graduated.

    >>>I DON’T want my taxes to fund someone else’s retirement, fund someone else’s healthcare, pay for someone else’s mortgage or someone else’s education. I can pay those things myself.

    Guess what, you’re able to achieve such independence because you live in a society that provides a safe place to live and work. Get rid of various programs and society will be very much less safe. Just ask the recent leaders of Libya, Egypt, Tunisia, etc.

    >>>Why not just put the SS contributions into your own investments or savings and cash it out in your old age or whenever you need it?

    Because Social Security provides small but guaranteed results. Or do you prefer to live amid a nation of beggars — some of whom might kidnap you or your children? Would you really like to live in the financial equivalent of Haiti? Have you ever traveled to a poor country?

  9. Hardworker says:

    And I DON’T want my taxes to be used to bailout someone or some company either.

  10. Hardworker says:

    Government should be kept as small as possible. There are some very basic things like national security (military), law enforcement and the justice system that need to be impartial. I want my taxes to fund just these basic necessities.

    I DON’T want my taxes to fund someone else’s retirement, fund someone else’s healthcare, pay for someone else’s mortgage or someone else’s education. I can pay those things myself.

    Keep Govt to a minimum.

  11. Hardworker says:

    You want contributions to be uncapped and benefits to be capped. That is plain robbery. If you think that everyone should pay the same % of net income into the system; then everyone should get back the same proportion from the system. You cannot say that one person will put in $5000 per annum in SS contributions and another person will put in $500000 per annum in SS contributions; and in the end say that both of them will get around the same benefits.

    But why have SS at all? Why not just put the SS contributions into your own investments or savings and cash it out in your old age or whenever you need it? Why do you need the Govt to take money from you in your working life and give it back to you in old age? Are you too inept to do that?

  12. Peter G. Miller says:

    We have spent the past decade sucking dollars out of the system by failing to fully extract taxes from those who should be paying. The reality is that the last four budgets of the Clinton Administration produced surpluses and the Bush Administration both cut revenue and increased the debt by $4.35 trillion. The inevitable result is a deficit.

    But, the deficit is a means to an end. The real purpose of the deficit is to shrink the size of the government, to starve it, so there will be less regulation — except, of course, for abortion and gay marriage.

    The problem is that in a complex society such ideas don’t work — the perfect example is the mortgage meltdown. The Federal Reserve under HOEPA had the authority to ban “unfair and deceptive acts or practices” — in other words, option ARMs, interest-only loans, no doc loan applications. However, by not enforcing existing regulations Wall Street went to the very excesses one would expect, excesses which require regulation.

  13. marty says:

    Why on earth would you call for further taxing wages but NOT capital gains or dividends?
    And why shouldn’t homeowners pay into the fund from their profits? Their investments are subsidized beyond all reason.
    Finally, means-test all spousal benefits. Those people are stealing fron the system. They don’t pay in. The benefit is pure welfare.

  14. Cory says:

    Peter – We have a spending problem. The promised benefits for SS, Medicare, Medicaid + Part D are massive. The spending increases of the Federal budget have exploded both in real numbers and as a percentage of GDP beginning with the Republican controlled congress with Bush in the White House. They have accelerated from there.

    So I sympathize with the notion that more sources of income ‘could’ be taxed but I do not think that will address the systemic problems built into these entitlements which are a result of demographic changes and political promises (kicking the can down the road).

    Corporations not paying taxes is always interesting as they are creatures of US Code. Large government and large corporate entities game the system. Truthfully I would like to see business regulation and tax reduced (for small to medium sized entities) such that smaller and more companies could be formed to hire more people vs massively connected large companies who continually game the system through regulatory capture (See Wall Street Banking).

    In short the current tax and monetary injections (inflationary pressure) along with zero interest rates, do nothing but hurt those on a fixed income (retired) or within the working middle class. I don’t see how a new tax will help in the long run. Even if your parents saved their entire lives hoping to augment SS they are seeing nearly a 0% return on interest.

    Some how I don’t think dumping more and more control and money toward Otto Von Bismark’s dream of SS is going to save us as long as the rest of the gov behaves in such an irresponsible way toward overall tax and spending policy which my friends call the Welfare/Warfare state.

    Lastly the German commentator had an interesting point regarding part of the payment being real property. I like that. As it stands now there is NO promise to pay you anything regarding SS benefits. There is no legal claim from an individual standpoint with regard to future SS income. It can be changed at whim by Congress. Politicians can say otherwise but court cases have found there is no legal claim to such future benefits. So my generation generally is skeptical of receiving anything of value regarding SS and doubly so when seeing the massive inflation hitting food and energy. Offer people a choice while continuing to pay the ‘promised’ benefits of those that are near retirement and that choice being some amount of control of real assets much like IRAs, 401ks, etc.

  15. Peter G. Miller says:

    Cory —
    As the posting states, there will be — oh shudder — a “tax increase,” but it will replace the unfunded and unjustified entitlement program that now exists for the upper crust.

    >>>The Trust Fund hold non marketable securities. This means in reality that they are redeemed simply with money directly from the General Budget which is running massive deficits.

    In other words, the Social Security fund is a creditor and not a debtor. Agreed. But we don’t have a “deficit problem,” we have a revenue shortage because taxes are not being paid. As an example, roughly two-thirds of all corporations pay no taxes. See the GAO study at: http://www.gao.gov/new.items/d08957.pdf

  16. shortguy54 says:

    I’ll have to concede the point. In the US FICA is in fact a tax. In Germany, where I live, SS is made up of about 50/50 tax EUROS and insurance premiums. The insurance part counts as your own “property”, so capping it at the high end gets in trouble with the courts.
    That notwithstanding, I agree totally that all income should be subject to SS withholding.
    Twenty years ago or so we had a debate here in Germany about introducing a SS tax on machines, because of the many people that were being put out of work! Didn’t pass though.

  17. Cory says:

    The Trust Fund hold non marketable securities. This means in reality that they are redeemed simply with money directly from the General Budget which is running massive deficits. Either marketable securities must be sold or debt monetized to pay current benefits.

    The rest of your post is valid but amounts to a tax increase. As the government is unwilling to cut spending across the board, I am unwilling to pay more in taxes.

  18. Peter G. Miller says:

    I disagree. I pay taxes that support local schools though my children have graduated. You pay taxes to pave roads where you will never travel.

    So, yes, people will pay taxes where they do not directly benefit. That’s the way the system works. There’s nothing confiscatory, unjust, or probably illegal about it.

  19. shortguy54 says:

    Good post, and good point. Of course, if SS contributions aren’t capped, then benefits can’t be capped either, otherwise the SS tax would be confiscatory, unjust, and probably illegal.

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