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Quote of the Day – Social Security

By JLP | April 19, 2012

From the Concise Encyclopedia of Economics regarding Social Security:

Social Security retirement benefits are based on average indexed monthly earnings for the thirty-five highest earnings years prior to retirement. The benefit formula is set up to favor lower-income workers. For example, in 2004, someone with average monthly earnings of $624 received a benefit that replaced 90 percent of earnings. Someone whose average monthly earnings were $3,760 received a benefit that replaced 42 percent of earnings, while someone with monthly earnings at the then-taxable maximum of $7,325 received a benefit that replaced only 28 percent of earnings.

This kind of proves the point I have been trying to make over the years that Social Security is progressive and not regressive like some people try to make it out to be. It would become ridiculously progressive were the income cap removed thereby subjecting all earnings to FICA.

As a side note, I think it’s kind of funny that the author of the article I link to has the last name “Saving.”

Topics: Social Security | 18 Comments »


18 Responses to “Quote of the Day – Social Security”

  1. Jim @ Tax matters Uk Says:
    April 19th, 2012 at 5:25 pm

    I am a chorley based accountant and here in the UK and we have a very similar social security system. However it can tend to favour people who remain in secure employment and not encourage entrpreneurs who are actually contributing to expanding the economy.

  2. Valkyrie Frost Says:
    April 20th, 2012 at 5:46 am

    A Regressive Tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.

    FICA is a flat tax on the first 110K of wages (FICA cap for 2012). Therefore, it is neither a progressive tax or a regressive tax.

    These are 2003 numbers from the article and the benefits are clearly regressive in nature (the more put into the system, the less paid out).

    Those numbers equate to benefits of:
    $624 @90% => $562/mo = $6744/yr
    $3760 @42% => $1580/mo = $18960/yr
    $7325 @28% => $2051/mo = $24612/yr

    JLP’s point is that the regressive nature of the benefit schedule makes the FICA tax a progressive tax in nature.

  3. BG Says:
    April 23rd, 2012 at 7:26 am

    Valkyrie) if the tax rate isn’t the same for all income, then it is not flat. If the tax rate decreases, as income increases, then it is regressive. SS Tax rates drop to 0% at the $110k threshold so it is a regressive tax.

    It is regressive by definition before pointing out that only income from work is subjected to the taxes. The uber-wealthy derive their income from investments and other means that are not subjected to the SS Tax at all — so it is regressive in that way as well. The people with the least ability to pay the tax, pay the highest burdon: regressive.

    JLP) As for the benefits, they go to people who end up living long enough (old enough) to collect. Whom is more likely to live long enough to collect benefits? Someone who earned minimum wage their entire life, or someone who earned more?

    90% of $624 is $561/month ($6,739 a year): you are jealous of THAT?

  4. Jack Says:
    April 23rd, 2012 at 4:30 pm

    People with better grammer live longer, too!

  5. BG Says:
    April 23rd, 2012 at 6:48 pm

    The word is: grammar, numb nuts.
    :)

  6. Valkyrie Frost Says:
    April 24th, 2012 at 6:47 am

    BG – FICA is flat tax with a cap. In fact, it’s not a tax at all as it really is a govt run insurance plan. (I’m not saying that is good of bad, just that it is not a normal tax.) The fact that it caps at 110K is to prevent it from penalizing those who will not benefit from the plan more.

    I agree the rate is too high and those at the bottom are penalized more than those at the top (20K vs 100K). Especially the self employed who pay double.

    All of this is academic as the system is not sustainable. I ran the actuary numbers some time ago and the number in the quoted article are wrong based on US Census data by 50%. Regardless of the large error, the fact remains that the system will be over burdened with 20 years and will crush the US economy like a cancer.

    Personally, I like SS. Unfortunately, the Fed Govt over the years, in order to appear favorable to senior voters, has made it impossible to sustain without larger premium hikes in the FICA rate.

  7. Jack Says:
    April 24th, 2012 at 8:56 am

    I know, BG — it was a JOKE!

  8. BG Says:
    April 24th, 2012 at 10:10 am

    Valkyrie) “…a flat tax with a cap”, IS a “regressive tax”. I dont know why you are hung up on this.

    SS Taxes are highly regressive.
    SS Benefits are highly progressive.

    The question is do the two cancel out? I perceive the future benefits to be ‘theoretical’, in the sense that I doubt there will be any SS Benefits in 30 when I am theoretically allowed to collect them.

  9. Jack Says:
    April 24th, 2012 at 9:30 pm

    Here’s an idea, how ’bout everyone saves his own money for his own retirement? Then, those who die early can pass the remainder on to their children!

  10. BG Says:
    April 25th, 2012 at 2:21 pm

    Jack) absolutely!

  11. TMS Says:
    April 25th, 2012 at 8:15 pm

    As I see it, SS taxes are flat for the vast majority of folks while the payback is highly progressive based on income, age and longevity. The tax is capped as are the benefits, so what’s the problem? You wanna remove the tax cap to be fair – then remove the benefit cap.

    Unearned income is not taxed for SS purposes the same way sales taxes and property taxes and excise taxes and federal fees don’t feed into the retirement system; so any reference to capital gains or dividends or rental income or any other non-wage income while talking about regressivity of SS taxes is irrelevant.

    Good lord we have become a screwed up country with too many folks griping about what other people “owe” what has become a welfare program.

  12. Jack Says:
    April 25th, 2012 at 9:06 pm

    > so what’s the problem?

    My problem is that the program is unconstitutional.

  13. TMS Says:
    April 27th, 2012 at 12:26 pm

    Of course it’s unconstitutional. Good luck fixing that.

  14. BG Says:
    April 30th, 2012 at 7:37 am

    TMS) FICA-MED, the medicare tax, is the tax model I would like to see FICA-OASDI, the social security tax, transformed to be more like.

    FICA-MED is truly a flat tax on all income, with no caps. FICA-MED also applies to capital gains after a certain point (extreme profits on realestate transactions). FICA-MED also has a vastly lower tax rate because because more income is subject to the tax (less loopholes than SS).

    As for other people griping: would you gripe if everyone had to pay taxes except for me (a law passed explicitly exempting me, BG, from all taxation)? The point is that I deem the current SS taxation scheme highly regressive and unfair.

    The supreme court has already ruled that SS taxes ARE taxes, and paying them do not guarantee any FUTURE benefit — so why should ‘ the poor’ be taxed more aggressively than the wealthy?

  15. JLP Says:
    April 30th, 2012 at 8:03 am

    BG wrote:

    The supreme court has already ruled that SS taxes ARE taxes, and paying them do not guarantee any FUTURE benefit — so why should ‘ the poor’ be taxed more aggressively than the wealthy?

    Wow! How many times must we go over this?!?!?

    BECAUSE…

    The poor will get the benefits before the wealthy do.

    Disband social security now and turn it into a true savings plan.

  16. JLP Says:
    April 30th, 2012 at 8:08 am

    Not only that, the program is insulting! Taking MY money (taxing me on it, too), and then giving it back to me later (unless I have accumulated too much money elsewhere) is insulting and is in no way constitutional!

  17. BG Says:
    April 30th, 2012 at 8:55 am

    ….theoretical benefits….

    I seriously doubt there will be any SS benefits in 30 years when I am theoretically allowed to collect. Give me an iron clad contract (Supreme Court approved), then I would agree with you, JLP.

    I don’t know how old you are, but I desperately hope my generation, or at least my kids generation, dismantles SS completely.

  18. Jack Says:
    April 30th, 2012 at 12:07 pm

    Same here, BG. Just because our parents are stealing from us does not give us the right to steal from our children.

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