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Social Security History

By JLP | July 28, 2009

Take a look at the following graph which shows the maximum dollar amount subject to social security taxes each year:

Income Subject to Social Security Taxes

Using the base amount of $3,000 in 1937 and $106,800 in 2009, I calculated that the amount subject to social security taxes has increased 7.67% per year (the CPI has increased an average of 3.88% over the same time period). Yes, these are the MAXIMUM amounts subject to social security tax. So, I decided to run the numbers again using average wages. I found the data for average wages on the social security website (here). Notice that it runs from 1951 – 2007, so it’s not an exact comparison with the other numbers. Here’s what I found:

Social Security Taxes on Average Wages (1951 - 2007)

Expressed as a graph it looks like this:

Social Security Taxes on Average Wages (graph)

NOTE: None of these figures include the employer’s portion of the taxes.

What’s sad is that even with all these increases over the years, the program is still destined to go broke unless they…

1. raise taxes (either by raising the tax rate or by increasing the maximum amount subject to taxes).

2. reduce benefits (somehow I don’t see this happening with the one of the biggest blocks of voters retiring at this very moment).

or…

3. a combination of the two

I’m against raising taxes. We pay in enough as it is and I’m certain that my wife and I will NEVER receive back the amount we paid in.

My solution: Make social security like a “medicaid for retirement,” essentially taking it back to what it was meant to be when it was created: a safety net. We could reduce the amount taken in taxes or even create individual accounts. Those who needed assistance in retirement would have to qualify for it.

I think what has happened over the years is that the program has morphed (with the help of our politicians) into a program promising bigger and better benefits (entitlements) on the backs of the Baby Boomer Generation due to their large numbers. Now that they are beginning to retire, we are figuring out the flaws of the pay-as-you-go system. It’s too late now…those politicians already got those votes.

Sources:

Social Security Tax Rates
Contribution and Benefit Base
CPI Data

Topics: Social Security | 35 Comments »


35 Responses to “Social Security History”

  1. LOL Says:
    July 28th, 2009 at 3:01 pm

    The government has a filing cabinet where they keep all of the IOUs (loan documents) that are owed to the Social Security trust fund. Currently the amount the government owes to social security (stolen surplus) is at 17.5 TRILLION. But that is peanuts compared to what is owed to medicare: which is another 89 TRILLION.

    I expect the government will default on these obligations. Since it is the low/middle class that had 100% of their salaries taxed (due to the cap), it is once again the low/middle class that will get the shaft.

    http://www.msnbc.msn.com/id/7393649/
    http://www.ncpa.org/pub/ba662

  2. JLP Says:
    July 28th, 2009 at 3:10 pm

    LOL,

    I take issue with your last sentence.

    Social Security taxes are capped but so are the benefits. There’s no way that a person who gets taxed at the maximum level is going to receive benefits even close to the taxes collected over the years.

  3. LOL Says:
    July 28th, 2009 at 5:21 pm

    JLP: Good point on the benefits being capped as well. Even though Larry Ellison made $72 million last year, he still qualifies for Social Security benefits, but is based on the max of $106k.

    If you want to reduce benefits, then lets start with eliminating the benefits for the top 0.1% of the population and work our way down — this way the neediest people will not have their benefits cut until they are the only ones receiving it.

    The problem though is the $17 trillion that was taken from the fund already (the IOUs I was talking about) — that money needs to be payed back by the entire population, since the money was taken to pay for wars, education, bail-outs and everything else that theoretically benefited everyone. That $17 trillion was NOT used to pay for social security (it was a surplus).

    Now, if the $17 trillion is not paid back (because the govt defaults), then technically it was the people above the cap that benefited disproportionately, because all of their income was not taxed in the first place. 100% of my income helped pay for wars, education and bailouts, yet only %0.14 of Mr. Ellison’s income help pay for the same.

    Hope I’m making sense.

  4. Colin Says:
    July 28th, 2009 at 7:03 pm

    My solution is much more drastic and bound to make many people mad. Let’s phase out Social Security with the idea that we will eventually eliminate the program altogether. The U.S. Constitution does not authorize the federal government to offer taxpayer-funded retirement benefits to the public.

    There are many people today sounding the alarm about recently implemented and proposed policies steering us toward socialism, but programs like Social Security show that we’ve had deeply embedded socialist policies for decades. Why is their no alarm about these socialist programs already in place?

    At least let me have the freedom to opt out of the program so that no future taxes will be collected from me for Social Security and I will receive no benefits when I am eligible. I will even gladly forfeit roughly 15 years of tax contributions to the program in exchange for my opting out.

  5. Stacey Says:
    July 28th, 2009 at 7:25 pm

    @LOL…why do I have deja vu over this argument…I’m not taking the bait…

  6. LOL Says:
    July 28th, 2009 at 7:51 pm

    Colin: I agree — social security is just a big pyramid scheme that was destined to fail, similar to pension funds. It needs to be ended, but how do you slowly kill off a pyramid scheme?

    I think we should eliminate the social security tax immediately. Institute a new tax on the entire population to repay the 17 trillion in IOUs. This done to specifically change the perception that you are paying into a personal account (which you are not) — and to finally collect the tax on money that was used for other purposes. It would be notice to everyone that you are personally responsible for your own retirement needs.

    The new tax-rate should be based on the amount actually needed to help the ‘needy’ the program was originally intentioned for, and to not catch a bunch of retirees off guard — this new tax should NOT generate a surplus. Once this new tax has re-payed the 17 trillion (hopefully would take 20+ years), kill the new tax completely and call the whole thing done.

    Now, fixing medicare is a whole new ball of wax.

  7. LOL Says:
    July 28th, 2009 at 7:57 pm

    Stacey: I think you just did take the bait :)

    Anyhow, we would not even be talking about a Social Security Crisis if we actually had the $17T in cash, instead of a bunch of IOUs…

  8. LOL Says:
    July 28th, 2009 at 10:02 pm

    Here is a link to a page on the Social Security Administrations website for the most recent status for social security and medicare:

    http://www.ssa.gov/OACT/TRSUM/index.html

    Here is their opinion on the immediate needs of social security:

    Social Security could be brought into actuarial balance over the next 75 years with changes equivalent to an immediate 16 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system remains solvent on a sustainable basis beyond the next 75 years would require larger changes because increasing longevity will result in people receiving benefits for ever longer periods of retirement.

    Also, I need to correct my original posts: the trust fund has a $2 trillion surplus (in IOUs). The $17 trillion figure is current plus future obligations.

    At least we have plenty of warning on the financial problems with these programs so that little changes now would easily avoid a future crisis.

  9. Dan Says:
    July 28th, 2009 at 11:36 pm

    LOL,

    .14% of $72 millions is $100,800. So he paid a lot more taxes than we made.

  10. david Says:
    July 29th, 2009 at 4:36 am

    OP,

    You do realize that you are missing the biggest reason that SS is having a problem staying actuarially sound???

    When SSA was created most people died prior to getting benefits and those that did begin getting benefits died within a few years. Now many more people make it to retirement age and they get benefits for many more years.

    Thus your numbers about increases in SS taxes to increases in wages is nothing BUT SMOKE AND MIRRORS used to CONFUSE PEOPLE. Which then allows you to say scrap the program it is a big and look at all the GOVERNMENT WASTE.

  11. LOL Says:
    July 29th, 2009 at 9:42 am

    Dan: basically I was saying that 100% of my income is subject to the SS tax (I make under $106k) — yet only 0.14% of Ellison’s income is subject to the same tax — just showing the effects of having the cap for the highest earner in the US.

    Ellison’s is only paying a few hundred dollars more a year than me in SS tax — though he is paying quite a lot more than me in Income Tax and Medicare in dollars — but approximately the same percentage wise (supposedly).

  12. LOL Says:
    July 29th, 2009 at 10:12 am

    david: the biggest waste I see with Social Security is that people with large incomes in retirement still qualify for 100% of the benefit as long as they are at full retirement age (66 or 67).

    Why are we sending Social Security checks to billionaires, or millionaires, or just plainly people who do not need it?

    We need to cap the BENEFITS (on income) like they capped the TAX (on income).

    Everybody pays taxes for ‘food stamps’ — does everyone collect that benefit? Why should SS be any different…

  13. JLP Says:
    July 29th, 2009 at 10:32 am

    LOL,

    The difference is that food stamps is a welfare program and SS is not. Each year you get a statement showing how much you can expect to receive at retirement. Why shouldn’t rich people get their money back? It’s THEIR money! They paid it in and they should be entitled to get it back.

    Benefits are capped…we’ve already addressed this. Besides, how much could we possibly save by taking away from billionaires what is rightfully theirs? How many billionaires are there?

    You stated in one of your previous comments, we should start taking social security benefits from the rich and move down from there. Well, who’s to decide who is rich and who isn’t?

    Finally, you must not forget that self-employed people are basically paying in DOUBLE what everyone else pays. Why should they have to forfeit their contributions? Many of them made good decisions and worked their butts off to achieve success while others COULD have done the same thing but instead spent everything they made supporting their lifestyle (I have some of these people in my family).

    SS got messed up when the politicians figured out that they could use it to get votes.

  14. BD Says:
    July 29th, 2009 at 11:19 am

    LOL, as JLP has said a couple of times, benefits are already capped. There is no way for anyone, regardless of income, to get more out of Social Security than what they put in.

    What you’re advocating is known as “means testing”, and it’s different than a benefits cap. Means testing checks applicants income and assets when determining eligibility, and is a standard part of food stamps and Medicaid programs. To date, it has not been used in social security, which is one of the few publicly-funded social benefits I ever expect to qualify for.

  15. LOL Says:
    July 29th, 2009 at 11:53 am

    JLP: The money you pay in today, funds the people in retirement today (including billionaires). There is no personal savings account that the government is holding for you — it does not exist at all. They do however keep track of how much you have paid in, to see if you have earned the “credits” (which you see on your yearly statement) to qualify.

    So, in this sense, when you pay in, it is not your money anymore — the money you paid in has already been spent.

    As for deciding ‘who is rich and who isn’t’ — there is no need to decide. If SS is running a deficit, and does not have enough money to pay out all promised benefits — then to solve the problem, eliminate the benefits on the highest earners by paying the neediest first and work our way up. Every year, just pay out all the benefits we can till we run out of money collected through the SS tax.

    There is no distinction of rich/poor here, just that we pay the neediest people first. If there is enough money for the billionaire to get their ‘welfare check’ then good for them — if not then at least the neediest got the resources first. This eliminates the ‘waste’ of giving a check to a billionaire who does not need it.

    Or we can raise taxes, as the SS Trust committee recommends, so that everyone can continue to get the promised benefit (which you stated you were against a tax increase).

    Self-employed people do not pay double the tax. Employers pay half of the tax and they surely use that knowledge to limit paychecks (or to decide whether to offshore a job). Everyone is paying the same 12.4% one way or another.

    You’ve already stated that you don’t think you will get what you’ve paid in. How is that fair if what you are paying in today is going to billionaires today, yet you know you will get short-changed in the future?

  16. TMS Says:
    July 29th, 2009 at 12:11 pm

    Social Security is welfare. The government has done an excellent job brainwashing the public.

    My wife and I paid $50,000 income tax for 2008. We could quit our jobs and live in a van by the river and collect benefits until we get our 50 grand back. We would be entitled, just as Social Security recipients are entitled to other people’s money. There is no difference.

    It’s all welfare – and every worker pays “both halves” of Social Security taxes. The employer half is reflected in lower pay to the employee; it just isn’t itemized on a pay stub.

  17. LOL Says:
    July 29th, 2009 at 1:34 pm

    BD: I thought people collect way more than they put in all the time — it just depends on how long you live.

    If the choice is to either raises taxes, or cut benefits — and nobody wants higher taxes — I am suggesting a decent way of cutting benefits without hurting the neediest among us…

    Or do you want to cut benefits across the board, so the billionaire still get’s his ‘welfare check’ like the poorest among us — hence having the program not living up to it’s original purpose (which is to help the destitute, widowed, and crippled).

    See the Supreme Court ruling for Flemming v. Nestor (1960) — the outcome is that: entitlement to Social Security benefits is not a contractual right

  18. JimmyDaGeek Says:
    July 29th, 2009 at 2:58 pm

    As my mother is wont to say, from your mouth to G-d’s ears.

    Since people are stupid and politicians love stupid people, politicians will do nothing to upset the apple cart, except to keep putting their hands in our pockets. If Social Security really wanted to stay solvent, it would have automatically increased the retirement age as the mortality tables showed that people were living longer, as well as the amount of money they were stealing from us.

    Social Security has been a welfare Ponzi scheme from the beginning. It is not “insurance”.

  19. David Says:
    July 29th, 2009 at 3:24 pm

    JimmyDaGeek- you are right on – since we are living longer it only makes sense that we should be working longer. However, the opposite has been happening for many decades – this does not make any sense.

    The other thing people are forgetting is, if you have children and only worked for a few years – your wife and kids would get back much more than you ever put in.

    Also, if you get disabled you will get much more than you ever put it.

    One thing they should consider doing is getting rid of the SS tax and increasing the Federal income tax by the same amount. Then people will not feel ENTITLED to a SS benefit.

  20. Stacey Says:
    July 29th, 2009 at 3:49 pm

    LOL, self-employed folks DO pay the ER and EE portions of the tax: SS 6.4%*2+ Medicare 1.45%*2, or 15.3% times one’s net earnings. However, a credit can be taken “above the line” on page 1 of your 1040 for 1/2 the employment tax. As a self-employed accountant who works for someone else (he doesn’t want me to be classified as an employee and have to pay p/r taxes on me) it stinks. Methinks I should stay home and collect 1/2 of hubbies’ SS benefits in 25 years…it’ll still be higher than what I will earn on my own pay record. Thus as things stand, there isn’t much incentive to increase our country’s productivity…only my inability to face myself in the mirror daily, knowing I should be doing more w/my talents than *just* take care of the family and manage/clean the house…

    Perpetual/lifetime welfare recipients figured it out long ago…why work when the alternative is a better deal…maybe not as much money as working, but a whole lot more freetime to watch Jerry Springer…

  21. LOL Says:
    July 29th, 2009 at 6:46 pm

    Stacey: self-employed people pay 15.3%, but so do the non-self employed people, it’s just not itemized on the paycheck — the employer has factored in that cost into the wages.

    If the person you work for doesn’t want to classify you as an employee, you should automatically charge more to cover the tax burden that he is not paying. Factor it into your wages like the corps do.

    Financially speaking, and if you want to maximize the benefit, women should wait until full retirement age (max payout at 67) to start collecting the benefit, and men should take the benefit earlier (reduced payout at 62) due to life expectancies.

  22. Stacey Says:
    July 29th, 2009 at 7:48 pm

    LOL, actually one could argue delaying taking SS as long as one can afford to (i.e. wait til after FRA) to maximize your payout, betting that longevity is in the cards for you. Since SS is indexed…inflation protection on a higher base would result, agree?

  23. David Says:
    July 30th, 2009 at 5:52 am

    Stacy and LOL,

    FRA is NOT the MAX payout. Benefits decrease by about 8% for each year below it. HOWEVER, they also increase about 8% for each year above it until age 70. Thus, if waiting for the maximum benefit you should wait until 70. Most people do not know about the FRA to 70 increase – it’s called Delayed Retirement Credit.

    Stacy, you can make substantially less than your husband and your benefit will still be more than 50% of his – this is because the formula used for calculating SS benefits is weighted so that lower earning individuals replace a higher percentage of their pre retirement income.

    The formula which I got from SSA’s website is below:

    For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2009, or who dies in 2009 before becoming eligible for benefits, his/her PIA will be the sum of:

    (a) 90 percent of the first $744 of his/her average indexed monthly earnings, plus
    (b) 32 percent of his/her average indexed monthly earnings over $744 and through $4,483, plus
    (c) 15 percent of his/her average indexed monthly earnings over $4,483.

    For you high wage earners that were complaining about SS benefits – I just gave you more reason to complain!

  24. Stacey Says:
    July 30th, 2009 at 1:34 pm

    Thanks, David. That’s what I was referring to (Delayed Retirement Credit), but just didn’t know the technical term.

    So you’re saying I shouldn’t quit my rotten job? :)

  25. Stacey Says:
    July 30th, 2009 at 1:42 pm

    http://www.usatoday.com/money/perfi/columnist/block/2008-01-14-social-security-early-benefits_N.htm

    LOL, here’s an article which contradicts your premise that men should commence benefits at 62. It’s worth a read for the married men out there…

  26. LOL Says:
    July 30th, 2009 at 3:03 pm

    Stacey: you are right, I had it backwards.

    All else being equal, with married couples, the lower earner should claim earlier (age 62), and the higher earner should claim at age 70 to maximize the benefit.

    Now, if the man is single — take the benefit at 62. Single women should delay as long as possible.

    Not only is social security a pyramid scheme and welfare, it is a scheme devised by wives to keep husbands working till they die — hence ensuring the maximum benefit possible for themselves.
    :)

  27. Stacey Says:
    July 30th, 2009 at 5:30 pm

    Damn! One man figured out our evil scheme…our cabana boys won’t wait for us forever you know…

  28. david Says:
    July 30th, 2009 at 8:42 pm

    Stacy,

    The man does not need to continue to work to increase his benefit – he only needs to not file a claim with SS and begin getting benefits.

    This is what I PLAN to do. I plan to retire at 56 but not file for benefits until 70.

    Why would I do this, I want to ensure that I will have enough money to live on all thru retirement.

    Can I REALLY do this – maybe. I’m a federal employee and thus will get a pension when I retire and I have substantial money in a 401K and other savings. Only time will tell.

  29. david Says:
    July 30th, 2009 at 8:43 pm

    Sorry my comment should have been to LOL and Not Stacey.

  30. Stacey Says:
    July 30th, 2009 at 9:28 pm

    Yup,knew that. However, to get on medicare you’d have to start taking benefits, right?

  31. Nazim Says:
    July 30th, 2009 at 9:40 pm

    JLP, I think your social policy posts need to be much more in depth. I appreciate the fact that you got the numbers and put up two graphs, but that’s really not enough context. Just off the top of my head, I imagine that in the same period, the cost of food, the prices of houses, the cost of healthcare and the number in need for basic services has also increased in similar (although not identical) ways.

    And, worse of all, you move a criticism without suggesting a clear solution.

  32. Stacey Says:
    July 31st, 2009 at 7:22 am

    @#31 Did you miss the reading the paragraph:

    My solution: Make social security like a “medicaid for retirement,” essentially taking it back to what it was meant to be when it was created: a safety net. We could reduce the amount taken in taxes or even create individual accounts. Those who needed assistance in retirement would have to qualify for it.

    From my understanding of the English language, that’s about as close to a “clear solution” as one can get without writing it in flashing neon lights.

  33. LOL Says:
    July 31st, 2009 at 9:56 am

    David: why is it that there is still a federal pension plan when practically every corporation has gotten rid of them?

    Good for you to have it, but I expect federal (and state) pensions will have their turn on the chopping block — like us in the private sector have been through.

  34. David Says:
    July 31st, 2009 at 11:59 am

    LOL,

    I don’t have an answer for you. All I can say is I feel very lucky. Should the US and State and Local governments do something about there pension plans – YOU BET YA. They are going to bankrupt them all if they do not.

    Stacey,

    No you do not need to get SS benefits to get Medicare. Medicare is run by the US Department of Health and Human Services not the Social Security Adminsitration. You can get Medicare and just send your payment to them directly.

    to Stacey and LOL,

    Not sure I need Medicare anyways – as a federal employee I can take my healthcare into retirement with me. Yes, LOL I realize that most companies have done away with this benefit!

  35. Jason Says:
    August 19th, 2009 at 2:25 pm

    I’d like to point out a flaw in this reasoning. The United States government promises nothing to its citizens. The voters made these social security promises to themselves. As Lincoln noted, our government is “of the people, for the people, by the people”, is it not?

    The baby boom generation promised themselves these benefits and then did not set aside the resources necessary to fulfill them. They made their promises into lies. Furthermore, they have been warned for decades now that they were lying to themselves. Scienter is what turns error or mistake into fraud.

    Here is the bottom line: the baby boom generation is perpetrating the largest Ponzi scheme fraud in world history on their children and grandchildren.

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