OCTOBER 17, 2016
ROBBING THE OLD
THE SITUATION
Some will escape the challenges of old-age through the misfortune of an early death. Most will get old. Some will live into the far distance of their eighties, of their nineties, and a few may reach the century mark or more. In a Barron’s news report this week in an article titled “Many in U.S. Have Zero Retirement Savings” by Randall W. Forsyth he quotes these findings:
From the National Institute on Retirement Security:
“. . . 40 million working-age households, some 45% of the total, have accumulated exactly zero in retirement savings.”
From a report of Moody’s Investors Service:
“. . . state pension plans were short by some $1.25 trillion at the end of their 2015 fiscal years, equal to 119% of state revenue.”
This is a bad situation for the prospects of elders in future decades. Since the 1970s the ever increasing share of earned income paid out for ever higher priced housing has made saving for anything else much more difficult. In America Social Security is a significant contribution toward retirement security for most older citizens. Yet Social Security is often alleged to be the cause of the ever larger debt of the Federal government. That allegation is false. Since the 1980s more than enough has been withheld from employee’’s wages to cover the full cost of social security benefits through the mid-2030s. At current tax rates 70% of promised benefits will be covered after that time.
THE CURRENT PROBLEM
So what went wrong?
In the 1980s politicians had a choice about what to do with the massive excess payroll taxes that were being withheld from employee’s wages:
Option 1 - Deposit excess taxes collected but not needed with the Federal Reserve to collect interest until needed; or
Option 2 - Use excess taxes collected but not needed to buy U.S. Treasury bonds and use the proceeds from the sale of those bonds to pay for current government expenses.
Option (1) would have guaranteed that excess taxes collected but not needed would have drawn interest income and would have been available now to pay social security benefits.
Politicians in the 1980s chose option (2) and thereby guaranteed the future social security payment crisis that is now the cause of great concern.
So what was the result of actions in the 1980s — who won, who loss?
The short answer is: The wealthy won and the workers loss.
Consider these Social Security and Medicare tax rate changes:
In 1966 the combined withholding rate was 4.20%.
In 1985 the combined withholding rate was 7.05%.
Since 1990 the combined withholding rate has been 7.65%.
Consider Income taxes and Social Insurance taxes as a percent all Federal government income:
In 1960:
Income taxes of $40.7 billion or 44.0% of total.
Social Insurance taxes of $14.7 billion or 15.89% of total.
In 1985:
Income taxes of $334.5 billion or 18.41% of total.
Social Insurance taxes of $265.2 billion or 14.59% of total.
In 1990:
Income taxes of $466.9.5 billion or 45.24% of total.
Social Insurance taxes of $380.0 billion or 36.82% of total.
In 2010:
Income taxes of $898.5 billion or 41.54% of total.
Social Insurance taxes of $864.8 billion or 39.98% of total.
So who really pays the most in taxes?
Some frequently claim that the wealthy pay 50% or more of Federal income taxes. That may be true.
However, those who have no great wealth far outnumber those who are wealthy. And those who have no great wealth pay almost all of the social insurance taxes that are tied to employment.
If the very wealthy equal 5% of all employed persons and the very wealthy pay 55% of all Federal income taxes and 20% of all social insurance taxes, then the breakdown of taxes paid would have worked out like this in 2010:
For the very wealthy:
55% of income taxes or . . . . . . $494.20 billion.
20% of social insurance taxes . $172.96 billion.
Total share paid by wealthy . . . $667.16 billion or 30.85%
For those with less wealth:
45% of income taxes or . . . . . . $404.30 billion
80% of social insurance taxes . $691.84 billion
Total paid by the rest . . . . . . . . $1,096.14 billion or 69.15%
There is nothing progressive in the above Federal tax breakdown:
The wealthy are putting up 31% of Federal taxes collected.
Everyone else is putting up 69% of Federal taxes collected.
The above estimated breakdown actually overstates the amount that is likely paid by the wealthy.
Your question is:
How can that be possible?
It is quite simple:
A large portion of the income of the wealthy comes unearned income: rental income and capital gains. Such income is not subject to social insurance taxes.
In addition, there is a ceiling to the amount of earned income that is subject to social insurance taxes. For the social security withholding tax in 2016 that limit is $118,500. There is no social security withholding tax taken from earnings that exceed $118,500.
Social Security payroll taxes and benefits paid have not caused our national debt problem in the United States.
What politicians chose to do with Social Security payroll taxes collected but not required for current benefit payments did contribute to our national debt problem.
PUTTING IN THE FIX
When Social Security payroll taxes were raised in the 1980s, promoters of that action claimed it was needed to protect the future retirement income of the baby-boom generation born in the United States between 1946 and 1964. The excess taxes collected were used to purchase U.S. government bonds and the proceeds of those bond sales were used to meet current budget requirements.
The above action and other policies established over the thirty-six years after 1980 have had these consequences:
- Decrease in the highest Federal Marginal income tax rate from 70% to 39.6%.
- Increase in the Federal debt to $17.4 trillion from $909.4 billion.
- Increase in Federal spending to $3.95 trillion from $940.2 billion.
- Increase in Federal revenue to $3.34 trillion from $885.8 billion.
- Increase in the U.S. Median House Price to $232,400 from $62,900.
So the less-than-wealthy saw the cost of a median priced house increase by $170,000, saw their inflation-adjusted wages and salaries stagnate, their manufacturing and high-paying tech jobs outsourced, and the interest paid on their retirement savings reduced from 5% to 1% or less. This is hardly the kind retirement solution the baby-boom generation were expecting when they accepted a 20% increase in their Social Security and Medicare taxes in the 1980s.
Meanwhile the wealthy among the population got over 95% of all income gains since 2008 while paying less than 32% of all Federal taxes collected. And the wealthy and their lobbyists continue to insist that government managed and financed social benefits be cut further or be privatized to cover the cost of more and greater tax cuts for themselves.
Is it any wonder that dissent and protest are rising up on the streets of America?
Given the quality of the current 2016 political debate, is there really any need to ask the question?
SAVING RETIREMENT FOR THE AMERICAN WORKER
In any country surely the measure of the common good is the level of well-being below which no citizen is allowed to fall.
Since Social Security began withholding from employee’s wages and matching contributions from their employer’s have been enough to fund payments for social security benefits. That will remain true until the 2030s. If no changes are made, benefits paid after that time would only be 70% of the current promised benefits.
An increase of a quarter of one percent in the current payroll withholding tax rate along with an increase in the ceiling to $130,000 for the withholding of social security from the current ceiling of $118,500 would help to resolve any future problems in paying the social security benefits currently promised. For every $10,000 of annual earned income up to $130,000 this proposed increase would reduce take-home pay by $25 a year — about 48 pennies each week — slightly more than 1 penny for every hour worked. For someone earning the ceiling amount of $130,000 the annual cost would be $325 a year or $6.25 a week.
Is it possible to provide a minimum level of retirement security to the aged among us who earned that benefit through personal effort as employees or by running a small business as self-employed workers?
As citizens who support the common good surely we can do this.
