Monday, January 14, 2013

What to do about Social Security?

It's all a lie: the idea that there's something terribly wrong with Social Security, and that paying for it is putting the country in hock, and that it won't be there for young people anyway is just propaganda from the system's enemies. Remember the Republican prescription for health care reform: just die. The same goes for growing old without sufficient income.

Social Security is fully funded by our past taxes through 2033 (2012 estimate) and will be funded longer if the economy ever recovers and more people start paying in. Even if nothing is done about projected shortfalls (that may or may not be of the scale estimated) the system can pay 75 percent of benefits through 2086.

But there's a possible significant tweak that seldom gets discussed but ought to be the first direction to look to ensure Social Security remains solvent. We can raise the cap on the amount of income on which we pay SS taxes. Nicholas Beaudrot explained this so succinctly and clearly that it seems worthwhile to pass along here.

Social Security is paid for through payroll taxes. For every $1 of wages or salary, $0.062 is withheld as social security, so the worker only sees $0.938 today (though they'll get paid back, in essence, through Social Security wages when they retire). But, this only applies to the first $110,000 or so in income, though that threshold is adjusted every year for inflation. Historically, the payroll tax cap has meant that about 90% of income is subject to social security taxes, but the explosion in inequality over the past generation means that the tax covers only about 84% of income. Taxing the first $200,000 or so in income would get us back to the historical 90% threshold while still mostly preserving the "you get out what you get in" nature of Social Security, which is a big reason for the program's political stability.

If politicians aren't open to raising the cap, they aren't interested in fixing the system. They just are pretending to worry about budgets and debt in order to gut supports for old people. I'd make raising the cap a litmus test for all of them.


Anonymous said...

So you believe Obama has explained this as clearly as he could should he have so desired?

janinsanfran said...

Hi Anon: I do not trust Obama on the issue of Social Security. Much as I like having the guy as President, I fear that in the interest of appearing "reasonable" he is willing to give a little on working people's main source of retirement funds. And that is scary.

Let's hope I'm wrong.

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