Op-ed on social security and regressive taxes
by Dale Coberly
A kind person suggested I be ready to be crucified about calling for increasing a “regressive tax” if I call for raising the payroll tax forty cents per week.
The people who say Social Security is a regressive tax are suffering from brain damage caused by parrot fever. Having been taught to say “regressive tax, regressive tax” when they were young and impressionable, they can’t stop themselves. They don’t mean anything by it, but they think they do.
They don’t know what a regressive tax is. They don’t know what a tax is. They don’t know what regressive means. And above all they have no sense of proportion.
The “tax” increase needed by Social Security is forty cents per week. This is the cost to the average worker of saving a program that will give them about twenty thousand dollars a year when they retire. But the “liberals” call that forty cents a “regressive tax, regressive tax” and would see the poor loose that twenty thousand dollars in order to save forty cents worth of “regressive tax, regressive tax.”
A regressive tax is a tax that falls more heavily on the poor than on the rich as a percent of income. The usual case is a “sales tax” as compared to a graduated “income tax.” As long as either tax is used to pay for the same government expenses, the sales tax is more “regressive” than the graduated income tax because the poor spend a larger percentage of their income than the rich on items covered by the usual sales tax schemes.
But Social Security does not pay for government expenses. It pays for the retirement of the person paying the tax. So it is not a tax in the usual sense in which a tax is a payment to the government for government expenses.
And Social Security is designed so that people who end up poor after a lifetime of work get a much higher return on their “investment” than those who end up “well off.” So the poor are paying LESS for what they get than the rich. The poor are getting MORE for what they pay than the rich. This is called “progressive.” It is the opposite of “regressive.”
But you will never convince someone who got his PhD by saying “regressive tax, regressive tax.” And that, my children, is why you won’t get Social Security when you get old. Because the professional liberals will save you from that bad old regressive tax, regressive tax.
This is the first time I have heard of anyone describing Social Security (FICA) taxes as “regressive”, but then perhaps I don’t watch enough Fox News. would also argue it’s not “professional liberals” calling for an end to Social Security –it’s the very well financed professional right.
I do see a factual basis for such a complaint though: FICA taxes top out at $110K of income. Meaning rich people pay a far lower % of their total incomes than do working class people.
Raising the income ceiling would be a good idea in that it would (a) help adequately fund the program, and (b) end any complaints about SS being “regressive”. Of course we cannot raise taxes on our saintly “job creator” class that has all branches of government in its pocket, so that will never happen.
This is the first time I have heard of anyone describing Social Security (FICA) taxes as “regressive”, but then perhaps I don’t watch enough Fox News. I would also argue it’s not “professional liberals” calling for an end to Social Security –it’s the very well financed professional right.
I do see a factual basis for such a complaint though: FICA taxes top out at $110K of income. Meaning rich people pay a far lower % of their total incomes than do working class people.
Raising the income ceiling would be a good idea in that it would (a) help adequately fund the program, and (b) end any complaints about SS being “regressive”. Of course we cannot raise taxes on our saintly “job creator” class that has all branches of government in its pocket, so that will never happen.
Well HARM, I wish you hadn’t said that. Social Security is not “regressive” and it’s not (really) a tax. And it is “liberal professors” who keep saying it is. Because, you see, they can’t think of a higher morality than making the rich pay for the poor. Even if that means the poor get nothing.
The workers can continue to pay for their own Social Security retirement benefits and insurance by raising their own “tax” one half of one tenth of one percent per year… about forty cents per week. This will turn out to work a lot better for them than asking Mr Richman to pay for their retirement. He won’t. But he might say he will, long enough to let the Left kill off Social Security for him.
FDR increased top marginal rates several times during his Presidency and both before and after the outbreak of WWII. http://en.wikipedia.org/wiki/Income_tax_in_the_United_States
In fact the year that the very top rate jumped the most (from 63% to 79%) was 1936, the first year of implementation of Social Security Title 2 or what we know as the FICA funded Social Security system today. And how much of this new source of income from the top rate payers did FDR devote to Title 2? Zero, zip, nada. Same thing with the Social Security Amendments of 1939 which established a new ‘entitlement’ that which added ‘Survivors’ to ‘Old Age’ to give us the OAS Trust Fund. That is even as the top rate went from 79% to 88% (in two steps in 41 and 42) FDR’s Brain Trust directed not a nickel of the income raised in that new bracket to SS Title 2.
Why not? Well a good question, and one that Dale has been trying to answer/explain for years now. But for me it brings up another more pertinent one. Obviously FDR wasn’t adverse to taxing the wealthy in progressive ways, we have a top rate going from 63-88% over six years and then to 94% at the height of the war. But even granting the clear priority of the war there was nothing really preventing FDR and Frances Perkins from at least sending some of the new 1936 dollars to their brand-new, starting up in 1936 program. I can’t force anyone to listen to Dale’s explanation but I would like an answer to this?
Why when it comes to the relation between SS and progressive taxation do you’al think you are smarter than FDR? Did Zeus just nod? Or what?
Thanks Bruce
I need to say that I am not opposed to progressive taxation. I think the rich need to pay more taxes, if only to pay for what their Congress already bought.
But Social Security is already highly progressive even if it only taxes ‘the rich’ just enough to pay for their Social Security benefits…. and most of the “enhanced” benefits received by those who end up poor by the time they need to retire.
And what is really depressing is that I know if I say this, brilliant readers like sammy and kharris will say, “see, Coberly always was in favor of soaking the rich, therefore nothing he says about Social Security can be trusted.” this is what they call “logic.”
Everyone pays 6.2% of “earned” income up to an annual wage maximum ($106,800 in 2010) for Social Security and a tax of 1.45% of all wages for Medicare. I don’t see how raising that income cap to, say, $250,000 or $1million, or not having any cap at all would be the least bit unfair or forcing “Mr. Richman” to pay for anyone’s retirement.
Rich people already enjoy thousands of perks and tend to pay a lower effective tax rate that you or I do (as evidenced by Mitt Romney’s 13.9%). Why shouldn’t the rich pay FICA tax on 100% of their income –as the great majority of Americans already do? It would help keep Social Security solvent well into the future and –get this– changes Social Security from an arguably “regressive” tax to a truly FLAT tax!
Liberals will love it because it helps “save” SS and isn’t “regressive”. Conservatives love any kind of “flat tax” so they should immediately get behind it, right? 😉
http://en.wikipedia.org/wiki/Payroll_tax
If you’ve seen any of my posts online you generally see I beat the Georgist drum whenever I can, and this is one of those instances.
Part of the Georgist thesis is the “All-Devouring Rent” observation, that what the taxman doesn’t take from wages tends to be on the table for the real estate sector (landlord or mortgage banker) to grab.
This applies to FICA pretty transparently, the money we pay towards FICA actually dampens increases in rents and home values.
(like what Tolstoy said about Georgism, I don’t think anybody who looks at this dynamic can really dispute it)
Germany has very high social insurance taxes; I wonder what their land market looks like. I know houses are very expensive, but I hope my thesis at least holds with their rents adjusting downwards to accomodate their high tax rates.
Same thing with the other quasi-socialist states with very high tax-to-GDP rates (Denmark, Sweden).
^ and thus, also:
who can gainsay the idea that Obama’s 2% FICA cut just juiced rents 2011-2012?
http://research.stlouisfed.org/fred2/graph/?g=79p
HARM
you are missing the point. Social Security is not a “tax.” It’s a way for people to save their own money, safe from inflation and market losses, and insured against certain kinds of personal losses such as bad health, disability, job loss, “failure to thrive”… It does not make sense to ask the richman to pay for your insurance, any more than it makes sense to ask him to pay for your groceries.
I’m sorry if I can’t make this clear enough for you. But asking the rich to pay for Social Security is the surest way to kill it. And it has been the best “anti poverty” program Americans have ever had.
Troy
I’d go further than that. The employer pays the lowest wage he can possibly pay… especially to “low wage” workers who have no bargaining power. The lowest wage a worker can accept is that which just barely pays for food and rent. The employer has to pay that much “take home.” So the “payroll tax” is a way to force the employer to pay enough so the worker can save for his retirement as well as buy groceries and rent. Now if we could only apply the principle to a payroll tax for health care.
Then “minimum wage”might begin to mean something.
Hey Dale I’ve been googling to find the arithmetic/spreadsheet on the 40 cents a week thing. Is it up on the Bear and I just can’t find it? Can you give me sources/calcs? Thanks.
Steve
the short version is CBO Option for Social Security number 2. or number 3. note that with number three the 40 cents is “combined.” with number 2 the 40 cents is “each.”
the long version i would recommend you read in my pdf… 18 pages. i’ll send if you ask for it (c/o Angry Bear if you don’t have my email).
the long version is what Bruce calls the Northwest plan, it calls for a one tenth of one percent increase in the tax, each, whenever the Trustees Report short term actuarial insolvency… and it averages 20 cents per week (in today’s terms) over about 70 years… surprisingly the same as CBO option 3, only better…. in that by running for 70 years it closes the 75 year gap entirely AND “funds” SS entirely “over the infinite horizon” at least, as far as we can see from here.
BINGO
This is why I’m not that worked up about PPACA. It’s a step in the right direction.
the problem with this math tho is I think CBO’s projections for real GNP 2020-2050 are uttter poppycock.
well, they’re not THAT different from the Trustees projections. and they are “what we have” as a starting place for talking. if we take your projections, and my projections, and that guy over there’s projections, we will still be standing here shouting and waving our arms when 2050 has come and gone.
meanwhile, as far as Social Security is concerned, we don’t need any projections at all. we could just pay the cost “pay as you go.” then when it actually DOES get too high, if ever, we can talk about making some of those changes the very serious people are telling us we have to do RIGHT NOW BEFORE IT’S TOO LATE!
Doing Nothing is still the best answer except for doing a tiny bit now that can be repeated as the continuing projections suggest.
“But Social Security does not pay for government expenses. It pays for the retirement of the person paying the tax. So it is not a tax in the usual sense in which a tax is a payment to the government for government expenses.”
Wrong. Social Security does pay for government expenses. Everybody knows this. We have been engaging in this fiction for decades now about the fact that Social Security is being placed in a “trust fund” and being held for future payments of the working who are “contributing” to it. Nonsense.
What are the assets in this so called trust fund? Treasury obligations! That means the government is taking the money being paid in by workers and using it to pay general government expenses.
But, you say, the amount I pay in gets credited to an account, which determines how much I get paid when I retire. Again, true, but that’s just bookkeeping. The money isn’t there.
And just so we are clear that this is the case, why are there so many proposals to start cutting benefits for future retirees? It’s because at some point in the future, the amount the government receives in payroll taxes from the workers will not be enough to fund current social security benefits.
“But I have an account with money credited to it!”
No, you don’t. The money isn’t there. The government has used it for other purposes. When those bonds mature, the government is going to have to get the money from somewhere to pay your benefits. And when the money from repayment of the bonds runs out (which is what is expected to happen in 2031), the government will cut your benefits. And you will have no recourse. The law establishes how much you are entitled to get, and Congress always has the power to change the law.
In fact, Congress could change the law and cut benefits now, and cancel whatever obligation they have to repay those “bonds” being held in the “trust fund.” Any other than the political backlash, you would have no recourse. You have no contractual rights to receive those payments in the future. You only have the expectation because that’s what current law provides and you have no expectation that it will be changed.
This is not how any retirement plan I know of works.
Now, I don’t have a problem with a tax that is based on compensation for services, with everyone having to pay a certain percentage of their income (although I believe that all compensation should be taxed – there shouldn’t be a cap on the amount of subject to the tax). I don’t mind a system of retirement benefits paid to the workers who, while they were working, paid those taxes. I don’t even mind that the system provides that the more taxes you paid the higher your retirement benefits will be.
But this is not a retirement plan. Social security benefits are current government expenditures paid for out of current government revenues. Social security taxes are current government revenues being used to fund current government […]
“But Social Security does not pay for government expenses. It pays for the retirement of the person paying the tax. So it is not a tax in the usual sense in which a tax is a payment to the government for government expenses.”
Wrong. Social Security does pay for government expenses. Everybody knows this. We have been engaging in this fiction for decades now about the fact that Social Security is being placed in a “trust fund” and being held for future payments of the working who are “contributing” to it. Nonsense.
What are the assets in this so called trust fund? Treasury obligations! That means the government is taking the money being paid in by workers and using it to pay general government expenses.
But, you say, the amount I pay in gets credited to an account, which determines how much I get paid when I retire. Again, true, but that’s just bookkeeping. The money isn’t there.
And just so we are clear that this is the case, why are there so many proposals to start cutting benefits for future retirees? It’s because at some point in the future, the amount the government receives in payroll taxes from the workers will not be enough to fund current social security benefits.
“But I have an account with money credited to it!”
No, you don’t. The money isn’t there. The government has used it for other purposes. When those bonds mature, the government is going to have to get the money from somewhere to pay your benefits. And when the money from repayment of the bonds runs out (which is what is expected to happen in 2031), the government will cut your benefits. And you will have no recourse. The law establishes how much you are entitled to get, and Congress always has the power to change the law.
In fact, Congress could change the law and cut benefits now, and cancel whatever obligation they have to repay those “bonds” being held in the “trust fund.” Any other than the political backlash, you would have no recourse. You have no contractual rights to receive those payments in the future. You only have the expectation because that’s what current law provides and you have no expectation that it will be changed.
This is not how any retirement plan I know of works.
Now, I don’t have a problem with a tax that is based on compensation for services, with everyone having to pay a certain percentage of their income (although I believe that all compensation should be taxed – there shouldn’t be a cap on the amount of subject to the tax). I don’t mind a system of retirement benefits paid to the workers who, while they were working, paid those taxes. I don’t even mind that the system provides that the more taxes you paid the higher your retirement benefits will be.
But this is not a retirement plan. Social security benefits are current government expenditures paid for out of current government revenues. Social security taxes are current government revenues being used to fund current government […]
gloverman
you just don’t know what you are talking about. the money you put in a bank “isn’t there” it’s out in the world doing stuff. your “money” is the “promise to pay.” the government’s promise to pay is better than the banks. (that’s why the banks pay for government deposit insurance.)
try to figure out what the “assets” of a bank or insurance company or accountant or lawyer is/are
and you will find it is the “business” which offers a service to customers which you can reasonably expect will continue to have customers. the “assets” of the united states of america are essentially the same. that is , no one is going to sell off aircraft carriers to pay the government debt. just as no one is going to sell off the desks in the bank to pay back your deposit if the money doesn’t keep coming in from future customers. or other folk paying back their debts just the way the bank, or social security will pay back its debt to you.
you can call this a fiction in your own mind. in fact you can find lots of friends who like a sucker when they see one.
gloverman
any retirement plan you know of can default on your payments in the future. they don’t even have to change the law. you would have no recourse… except, of course, the law. or government insurance.
the difference between “a tax” and social security is that your “tax” is recorded against you name and you have legal rights to collect a benefit that will be more than what you paid but based on what you paid. congress could change the law.. that’s why i am trying to explain to people that they shouldn’t let it. or did you forget that part about the United States being a democracy?
now, when your stocks don’t pay you back what you paid for them… what is your recourse? sell the company and divvy up the proceeds? Talk about your pure fiction.
Good column, Dale. SS benefits are an incredible deal when not only the pension but also the dis. and Surv. ben.’s are included. The overhead is incredibly low (no private program of any type comes close). The benefits are indeed progressive, as low earners end up with roughly 40% replacement earnings, the high earners 28%. Then, once retired, those individuals/couples with substantial other (non-SS) retirement income have 85% of their SS income subject to whatever marginal tax rate they are at, while those with little or no other ret. income get their SS checks non subject to the income tax (those with intermediate levels of other ret. income get 50% of their SS checks taxed). And these income taxes go back into a combination of SS and Medicare funds.
The mandatory insurance premiums (it s called FICA after all) pay for both current benefits and to purchase T-Bonds, which, last I heard are the safest investments in world history. Those who say “it’s been spent on general government” need to understand that EVERY dollar that the government borrows by issuing bonds is spent, whether the bond is held by the SS Trust Fund or the Bank of China or your mutual fund. The General Fund borrows (from whomever) because it taxes less than it spends in any given year.
If the surplus balances in the SS Trust Fund had instead bought stocks, corporate bonds, etc., there would still be no cash sitting in some bank vault somewhere. These private securities are also nothing more than claims on (likely but by no means certain) future revenue streams from companies that depend on future economic activity. Economically, there is no difference.
I have no particular bias against the SS Trust Fund holding a portfolio of both public and private sector securities. Nancy Altman herself has suggwted a version of this. SS detractors tend to leap from this idea to “individual accounts.” The latter, of course destroys the pooling of risk and places all risk upon the individual American. Why do this? If trust Fund directors determie that the risk/return calsulus for the fund as a whole would improve, making this change could be a reasonable reform.
The ultimate value of SS is the security for Americans who reach unemployable age or disability that market cycles, financial meltdowns, etc., will not do them in just when there is no alternative to poverty after a lifetime of work. That is impossible to create with 401-type systems.
Thanks Jim Z
now can you imagine carrying a sign board around the White House saying this?
nah. it’s so much easier to say “phony iou’s” or even go on Newshour and show the vault is empty… except for a few pieces of paper.