Destroying Social Security to Save It
Connecticut Representative John Larson Proposes Plan To Destroy Social Security In Order To Save It, by Dale Coberly
Connecticut Congressman John Larson introduces H. R. 860, Social Security 2100 Act which will cuts taxes, strengthen benefits, prevents anyone from retiring into poverty, and ensure Social Security remains strong for generations. larson.house.gov
It sounds good, but of course he wants it to sound good. In the past we have had to be worried mostly about plans from the “Right,” the crazy people who want to Save Social Security in order to destroy it. Their plans sounded good, too.
To make it easier on myself, I am going to just list Larson’s points and offer a few words about them in the hope you will think twice.
Larson: The Social Security 2100 Act Expands Benefits
There is a benefit bump for current and new beneficiaries — Provides an increase of 2%.
Me: A 2% increase in benefits would mean nothing to beneficiaries. Unlike the reduced inflation indexing the bad guys were proposing, this increase will not accumulate over time.
What Social Security faces is a potential 20% cut in benefits if the payroll tax is not increased to keep up with increases in life expectancy. The increase needed would be about 2% of payroll. 2% of payroll becomes 20% of benefits because the 2% you pay is matched by 2% your employer pays for. That extra 4% over 40 years of working becomes 8% over 20 years of life expectancy, and that 8% becomes roughly 20% due to the effective interest that arises automatically from pay as you go financing.
Larson: Protection against inflation. Increases the COLA formula to better reflect costs incurred by seniors.
Me: Probably a good idea. But the “normal” inflation adjustment, if paid for by that 2% increase in the payroll tax, will provide increased benefits that may be adequate. The question is how are we going to pay for a higher COLA? My suggestion is that a tiny bit larger increase in the payroll tax would not be felt, and would avoid the politically suicidal “make the rich pay” part of Larson’s plan unnecessary.
Larson: Protect low income workers. A new minimum benefit will be set at 25% above the poverty line.
Me: Again, probably a good idea. But not if it changes the “worker paid” feature which is so important to Social Security’s political future.
If the workers want to pay more for a higher benefit dedicated to those who paid for the insurance against ending among the poorest, then that’s fine. It’s not so fine if the increase is paid for by “the rich,” because the rich will not pay for it. And it’s not so fine if it becomes subject to increased hiding of income to free-ride on others paying the tax. Not to mention the costs of managing the means testing that this implies.
Larson: Cut taxes for beneficiaries.
Me: Social Security is supposed to be insurance against ending up poor. Currently no one pays taxes on their Social Security income unless they have other income over $25.000 per year. Combined with their SS income this would suggest an income in retirement of about $45,000. This is not poverty.
There are other ways to jiggle around the SS ‘break points” or taxing of benefits. The tax on part of SS income for those with enough other income to stay out of poverty turns out to be the simplest and fairest. Might be important to remember that SS is not only “what you paid in,” but is about double what you paid in because of the effective interest of pay as you go.
You pay taxes on gains from every other investment. So there is nothing immoral or counterproductive about taxing part of SS benefits for those who otherwise have sufficient income. This tax is returned to the Social Security trust fund and is part of what helps pay those increased benefits for the poor.
Larson: Strengthens the Trust Fund
Have millionaires pay the same rate as everyone else.
Me: This is the bit that destroys Social Security. Currently millionaires pay the same rate as everyone else: 12.4% of the first $130 thousand per year. This is enough for them to pay for what they get from Social Security… an effective real interest of around 1 or 2 percent, plus the insurance value in case their millions of dollars disappear before they retire, or when they become disabled or die leaving dependents.
They only get that 1 or 2% compared to your 2 or 3% and the poorest up to 10% or more because the money they would get if everyone got paid the same interest is what enables SS to pay the bigger “interest” needed to pay for basic needs of the poorest.
“Making” them pay 12% on ALL of their income would be a huge tax increase they would get nothing out of. They would fight it forever.
It would be like having a cop watch the check-out line at the grocery and demanding every customer show their tax returns and “making” anyone with “too much” income pay for the groceries of the next ten people in line.
This sounds fair to some people who think that the “rich” stole their money from the “poor.”
Maybe some did, but this is not the way to fix that problem. If you want to tax the rich more, fine. If you want more welfare, fine. But don’t do it to Social Security, which works, and has worked for eighty years exactly because it is NOT welfare. NOT “soak the rich.”
Larson: 50 cent per week to keep the system solvent. Gradually phase in an increase in the tax by an average of 50 cents per week.
Me: Sounds familiar. Question is why stop at 50 cents when a dollar will keep the system solvent forever without the political dangers of “make the rich pay”?
Do we think an extra 50 cents per week out of an income of 50k per year is going to be felt? Note that for the poorest people making 20K per year, the “dollar per week” turns out to be 20 cents per week (The increase needed to keep SS solvent forever is one tenth of one percent of income per year.)
This is mindless greed. Greed so stupid it defeats itself.
Could we just change tax law so that any income tax raised from taxing social security income goes directly to the the trust fund?
Coberly, I certainly agree with your theory, but not sure how it translates to the future.
First, I applaud any Congress Critter who is talking about social security even if we disagree with their ideas.
Second, the oligarchs have taken over this country and while service professionals and entrepreneurs continue to maintain middle class/upper middle class incomes and the savings that come with that, the vast majority of American workers can only achieve a middle class income with at least two working adults in the household. This means that instead of being the third leg of the retirement stool, for most social security is the principal source of retirement income–the same people who are not getting any type of pension and struggle to save anything, are also the least able to work into their 70’s or 80’s.
Finally, while the cutoff for social security has increased significantly since 1980–real wages have not, nor has the minimum wage. At the same time the rich have gotten richer and everyone else has gotten poorer. Trump and the Republicans are going to contest the 2020 elections by lying about the “socialist” Democrats, but what happens if the Democrats nevertheless win big? The bottom line is that the American Dream is increasingly a mirage to most and that will not be sustainable in a democracy. Of course, the Republican’s solution is to end democracy, but if they fail, the rich are going to have to agree to more wealth redistribution or their wealth will be taken from them.In the greater scheme of things, paying more to support the aged is not as bad as nationalizing some big companies
Terry:
I took a liberty with your comment and split it apart to make it transparent to the reader. If you dislike it, I can change it back. It appears (my opinion only) to give greater emphasis to your points whether right or wrong.
On a second point, have you read NDD post on the 14th amendment and how it could be applied to gerrymandering?
Theo
as far as i know, any income tax raised from taxing benefits DOES go to the SS trust fund.
i say “as far as i know” because things change and i don’t check every day.
Terry
i agree with everything you say. i wish you would read what i said.
all that redistribution may be necessary, but NOT by calling it Social Security, which is NOT redistribution any more than fire insurance is redistribution. and that is why it has worked, and lasted, so long.
Social Security can be “saved” forever if we just pay for what we get… about 2% of our income today because we are going to be living longer tomorrow.
if that turns out not to be enough, thinking fairly about what “enough” means, then some kind of welfare or “make the rich pay” would be worth considering if we can’t just find a way to control predatory capitalism or find better jobs at better pay for everyone.
but meanwhile DO NOT DESTROY SOCIAL SECURITY by turing it into welfare as we knew it, by turning it into welfare as its enemies both have always called it, and as they want to make it… in the first step toward destroying it.
i have to go way for awhile.
sorry for my bad writing.
will try to answer questions when i get back. maybe about five pacific time.
Dale:
There is nothing wrong with your writing.
1. Leave benefits as they are presently calculated.
2. Raise the age of “must collect” from 70 to ∞. Let those who think they will live forever try to beat the system.
3. Raise the collection wage cap at 2x inflation for 20 years.
4. Eliminate the SS tax penalty for those working between 62 and 67.
Return in 10 years and see how we are doing.
Dave Barnes
always great to meet someone who can solve the problem in his head without ever looking at the facts. maybe you could get a job in Congress.
Run
thank you. but there were a couple of sentences there that i should have worked harder on. and apparently at least a few others that people did not understand…. in this case perfectly well-meaning people unlike certain trolls who didn’t come today.
You write “Currently no one pays taxes on their Social Security income unless they have other income over $25.000 per year. ” This is not correct. The $25,000 threshold is for taxable non-Social Security income *plus half of Social Security income*. So someone getting $2000/month Social Security ($24,000/year) only needs $13,000 in other taxable income for part of Social Security to be taxable. Also, the $25,000 threshold is not indexed for inflation, so over time more people are paying taxes.
More than half of households now pay tax, and an average of about 8% of benefits are paid in taxes on benefits, which is expected to increase to 11% by 2050 (and this assumes that the law will be changed so tax brackets increase with wages rather than prices, without which this number would be higher).
Of course, a lot of the tax is paid by higher-income people, but people in the middle are projected to be paying about 5% of their benefits in taxes within about 10 years (median tax on benefits).
As far as the fairness, people pay income taxes on their Social Security taxes. You say that benefits are more than that, so the difference should be taxed. By for Roth accounts, people pay taxes on the money going in but not on the increase, and for traditional retirement accounts, taxes are paid on everything but not until the money is taken out, which reduces the tax significantly. These retirement accounts are used mostly by wealthier people to reduce taxes on investment earnings (and for non-retirement accounts, they can pay capital gains taxes, which are lower than income taxes). So I don’t think paying regular income taxes on Social Security benefits is fair.
Source for the numbers above:
https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html
Mike B
you may be right about at the formula for taxing benefits. i’d have to look it up again to be sure. i was taking Larson’s numbers and trying to keep it simple.
but as for the rest of it, i’ll stand by my take on the fairness of i: it’s not a question of simply “unfair to tax money that we put in ourselves.” which is the way i usually hear the complaint.
and Larson’s plan (i’d have to look that up again, too) calls for SS benefits to be tax free up to 100k in income.
First, that’s not poverty. Second, SS income is not just “money we put in ourselves.”
please feel free to do the analysis yourself and convince yourself that it’s worth wrecking SS in order to maximize your income and satisfy your sense of what is fair.
“the rich” think SS is not fair because they know they can make more on the market than they get from SS. the poor think SS is not fair because the rich have more money than they do. women think SS is not fair because women don’t make as much as men do. blacks think SS is not fair because they don’t live as long as white people. you don’t think SS is fair because you pay taxes on income you think you shouldn’t have to.
and all of these people want to change SS to make it more fair to them, even if those changes will bring the whole thing down and leave them nothing to live on when they can no longer work.
it makes me think of a couple of kids arguing over who got the biggest piece of burfday cake.
Dale,
I have no objection to taxes as long as I’m working. When I retire, staying out of poverty is not my only goal. I’d also like to be able to pay my bills, even though I have no idea how long I’ll live, what my medical expenses will be, whether I’ll need assisted living at some point, etc. So then I will be concerned about taxes. If I have high medical expenses one year and have to withdraw taxable savings to pay it, that could easily put me in a higher tax bracket, and then I’d have to pay additional tax on Social Security benefits, just when it would hurt the most.
I’m not concerned about myself, because I know about this and probably will be able to get most of my taxable savings out before I start taking Social Security. But I think a lot of middle-income people will be hurt by these taxes.
According to Social Security’s analysis, “enactment of this provision alone [the tax one] would increase the long-range OASDI actuarial deficit by 0.16 percent of taxable payroll and would increase the annual deficit for the 75th projection year (2092) by 0.01 percent of payroll.” So I don’t think that is going to “bring the whole thing down.”
https://www.ssa.gov/OACT/solvency/LarsonBlumenthalVanHollen_20190130.pdf
Mike
first, thank you for bringing this to my attention. i don’t have a lot of time myself to analyze it as thoroughly as might be necessary to come to an agreement, or well informed disagreement, with you.
but here is a start:
social security is intended and designed and has succeeded in vastly reducing the rate of old people living and dying in grinding poverty, as well as the disabled, and dependents of those who die young.
it is made of many parts which combined have achieved the near elimination of deep poverty in old age. it is not designed to help you maintain a middle class lifestyle.
the problem is that it has to be paid for. the option that Roosevelt rejected was to make “the government” (that is, “the rich) pay for it. rather it was designed so that workers paid for it themselves. that is the critical point that makes it successful.
taxing benefits is part of the way Social Security gets enough money to pay out enough money to keep people out of dire poverty. another way to accomplish the same thing would be to raise the FICA “tax” a small amount (haven’t calculated exactly how small yet). another way would be to “tax the rich,” another way is to change the “break points” so those who end up with higher earnings over a life time get a lower percentage return in benefits…. all of these involve trade offs that you might not have considered.
eliminating the tax on benefits by itself will not bring the whole thing down, but when everyone else gets their bigger piece of the burfday cake, it will.
please try to reexamine your analysis with consideration given to the effects of alternates to your favored solution, and especially to the long term success of the whole program in eliminating much of the poverty, real poverty, that used to be common in America.
i’ll try to find time to take a look myself.. mostly at the details you find so important that, frankly, i find unimportant. be grateful you can afford to pay taxes. those taxes actually make you richer in the long run even if you can’t see it..
for what it’s worth, i didn’t think the tax on benefits made a lot of sense myself until i was forced to think about it for awhile.
there are other ways “middle income’ people can (and do) protect their earnings/assets. and there are better ways that lower income workers can be made “more equal” to the rich than turning them into permanent welfare recipients.
if you have the time you might try to calculate how much you paid into Social Security (i think that “current dollars” might be the right measure),
and then figure out how much your benefits are (before the tax on benefits).
then see how much more you get than you paid in (i think you have to count “inflation” as part of your gain, because every other way of earning income (wages as well as investments) has to keep up with inflation first before “real” gains are counted). then look at what your tax is on that income. i think you’ll find it quite small.
probably, just to avoid the whole argument, i’d personally prefer raising the payroll tax that one one hundredth of a percent that i think you said (though that figure looks a little small to me). if you come up with an answer that we can agree is accurate (show your work) i will include it in my future estimate of the increase in FICA to keep SS “solvent” without taxing benefits.
Dale,
The number is Social Security’s, not mine – I provided the URL at the end of my last comment (it’s an analysis of the whole bill). I agree that Social Security is still a good deal even with the taxes, but it would still be a good deal if benefits were cut 10%, but I’d be against that, too. Anyway, the bill is not going to become law, so it really doesn’t matter.
Mike
Mike
it wouldn’t be a good deal if benefits were cut. They are pretty marginal right now. Barely enough to live on for lower incomes. Barely enough to justify the cost for higher incomes.
I don’t have much time or energy anymore, not so much because the bill won’t become law as because no one talks sense about SS and that discourages me.
If I can get the time i’ll check your link. but i need to say i don’t always agree with SS. The Trustees Report is “fact” and I use that to try to tell be people what it actually says. Their analysis of their own projections in other documents often seem to me to suffer from too-clever math that misses the working parts and the very significant “not average” outcomes.
But I’ll try to see if I can make enough of it to make the case I think you are making and perhaps then make the case I am trying to make.
very glad you think it’s a good deal. most people hear talking don’t…because they don’t understand the first thing about it or most of the “facts” they have heard about it.
Mike B
i have no doubt the actuaries did the calculations correctly, but before you are sure what their numbers mean, consider
taxation of benefits counted for roughly 10% of income to SSTF last year.
so when they report that effect on income is .01% of payroll you might want to look more carefully. ten percent of SS income is roughy 1% of payroll, but that is still a hundred times bigger than .01%. but this .01% is the est change in balance for the 75th year of the projection. i suspect that the 75th year of holding the threshold at 50,000 while everything else is changing might account for the difference.
so look at the change in the 75 year deficit: about 0.16%. since the 75 year deficit is about 2.7% of payroll… the change in the deficit is about six tents of a percent of the current 75 year deficit. on the order of (about half) of the current percent of SS income that comes from taxation of benefits.
now, i have no idea if this is right yet. but it’s suggestive if it holds up under further thought and with more sleep.
if you spot my mistake let me know. if you don’t see a mistake you may begin to see why i thought the .01 percent was a bit low.
since SS needs the money to pay benefits, and benefits are just barely adequate, in order to find the money if they don’t tax your fairly high income including part of your benefits, where are they going to get the money? either taxing the rich as Larson proposes, or taxing the other workers (raising the payroll tax about 1%). how do you feel about other people paying for your tax break?
as i said, i don’t know if any of this is right yet, so don’t take it personally.
Coberly says:
“taxation of benefits counted
for roughly 10% of income to
SSTF last year.”
Actually taxation of benefits was $35B. Total income was $1T. So taxation of income is 3.5%, about 1/3 of Coberly’s estimate.
Page 32 of the TF report.
Krasting
you are right. my eyes are giving out. i was reading the interest line.
still a long way from .01%.
actually thats about 3% of SS income or about three tents of one percent of payroll.
still a lot more than one hundredth of a percent of payroll.
Dale,
Yes, the 0.01% seemed low to me also, but I think the explanation is that the new thresholds are not indexed to inflation, so by 75 years out almost everyone will have 85% of their Social Security benefits taxable, which is the maximum now and under the proposal.
I do not have a “fairly high income.” That’s part of my point – these taxes affect average income people (and will more so in the future), and they have the effect of benefit cuts. So I do not have any problem with a small increase in payroll taxes to reduce these taxes, just as I prefer an increase in payroll taxes to benefit cuts. I would rather pay more taxes while I’m working and less when I’m not.
I think we’ve gone around enough on this, so this is it for me. You can have the last word.
Mike
Mike B
i certainly agree with anting today more while working than after you are retired.
I think I agreed with your “not indexed to inflation? when i said “holding the threshold at 50k…”
and while i said “fairly high income” i think “average income” is fairly high.
thnks for helping me clarify all this. even Krasting was helpful in pointing out my “reverse typo”
still, i am getting old and since my mistakes will be held against SS as well as me, i should probably quit this business.
i don’t need the last word, but i think you should look beyond that “benefit cut” and see…as i think is the case… that SS provides you with an income in retirement you might not otherwise have had, and in order to make SS work this with other income that puts them out of deep poverty take less in SS income so that those who would otherwise be in deep poverty get a little more SS income. that’s what makes it insurance. you still get more out of SS than you paid in.
and… i think you said SS would still be a good deal even if you got less…
i have said that myself (even if i pay a hundred dollars today to make sure i have fifty dollars tomorrow if i am absolutely going to need that fifty dollars, this may be a wise investment).
i hop you don’t choke on that one. SS still pays you more than you paid in, it pays you less than you “might have” gotten by investing it something else. but you might have gotten even less from that something else.
and that’s the whole point of insurance,
thanks for your help.
typos
“this with other income” should have been “those with other…”
you can see what i am up against.
The actual language for the Tax on Bennies (from TF Report page 146). It’s interesting that the SSTF gets only 50% while HI gets the other 35%. It comes to about $20b a year. Who thought that one up?
Under current law, the OASI and DI Trust Funds are credited with income tax revenue from the taxation of up to the first 50percent of taxpayers’ OASI and DI benefit payments. (The HI Trust Fund receives the remainder of the income tax revenue from the taxation of up to 85percent of taxpayers’ OASI and DI benefit payments.) Benefits are taxed for beneficiaries with “combined income” (adjusted gross income, plus half of benefits and all non-taxable interest) exceeding specified threshold amounts. The threshold amounts are $25,000 for single filers, $32,000 for joint filers, and $0 for those married but filing separately.
Krasting
“who thought that one up?”
i dunno. probably congress in its infinite wisdom, or more likely the “experts” congress pays to do its thinking for it…to whom we may need to be grateful for Congress not always messing up things that are too important for “politics.”
i could guess about the reasons for the division and why congress, or the experts, might think it is “fair.” but people have different ideas about what is fair. as we have seen.
so all i can say is “it’s” (what is the it to which i am referring?) a complicated machine with many moving parts and positive and negative feedbacks. so before we start “fixing” it we ought to at least know what the machine is for and how the parts work, like the “choke” and the “throttle” that actually slow the machine down contrary to what you might expect, or want personally.
The original taxation was passed in 1983 and made up to half the benefits taxable. The purpose was to provide money for the OASDI Trust Funds, which were very low, and the “logic” was that, for most people, half the payroll taxes were paid by their employer, which could write that off their taxes. In 1993, the maximum tax was raised to 85%, in order to make Social Security taxation more comparable to pension taxation. The House wanted the extra revenue to go to the general fund, but the Senate wanted it to go to the HI Trust Fund, and that position won.
https://www.ssa.gov/history/taxationofbenefits.html
Mike B
thank you for the information. stay with us; we need someone who is informed, even if they don’t always agree with me.
Dale – Thanks. I wasn’t planning on going anywhere. I just thought that particular exchange had gone on long enough.
Mike
Mike
it had. but it was one of the better exchanges I have had on this subject.
I may come back to it if there appears to be a demand.
well, that’s over with.
interesting as it was, the sidetracks were into questions of no importance.
what is important is that you cannot expect “the rich” to pay for your every need. they won’t, and it’s not good for you.
much as you think they should, and much as they think maybe they should
when it comes down to it they will keep as much of their money as they can (not counting the occasional gratuity) because they think they earned it and they are afraid that some day they will need it themselves.
and that’s only the honest ones. there are a few who are simply mindlessly greedy.
there are ways you can enact laws and persuade behavior that will mitigate this somewhat. but “demanding the rich pay their fair share” is not one of them.
in the unlikely event someone reads this post and comments in the future
there are some trivial mistakes i made and much bad (unclear) writing.
one mistake that pops out at me today is “the dollar per week” becomes twenty cents per week for someone making 20k/yr. actually one tenth of one percent of payroll would be forty cents per week for 20k/yr.
trouble is i am going to keep making mistakes like this and they will be getting worse. so far they don’t matter much…. do not affect the basic truth of “one dollar per week per year” will keep social security solvent forever”, but they will make some people doubt my credibility.
since i don’t see anybody out there willing to take up the cause, i will just have to hope readers will be able to tell trivial errors from the basic truth…and that someone…some one million… take up the cause of protecting social security for themselves and their children
the cost is small and completely fair: you are paying for your own groceries ahead of the time you will need them.
pay as you go is not “burdening the young” it is you paying in advance to save yourself a place at the table. the kid whose dollar comes into SS the same day as your dollar plus interest comes out is just paying in advance for HIS place at the table when his turn comes. this is no different from any investment or savings account.
trouble is it is easier for them to think they are being robbed than to understand how they are being protected from being robbed.