How Social Security Cheats You to Pay the Rich

MSN Money ^ | 4 February 2004 | Liz Pulliam Weston

[UCSC Republican]

What would you think of a tax system that took money from the poor to give to the rich?

That’s essentially what’s happening with our Social Security and Medicare tax system, where low-income workers are dunned to pay benefits for high-income seniors.

[Lancey Howard]

Bump for later laughing at.

[leadpenny]

Thanks for posting. For years I have been saying what the author says.

Remove the FICA Cap!

[nickcarraway]

Let's end it then. I'm game.

[Kozak]

OH. So then do I get to keep increasing my BENEFIT in this wonderful retirement plan too? Or do I JUST PAY more? Thats your idea of fair right? To turn into a straight welfare, income redistribution plan?

[leadpenny]

Ya got me! That's on the other side of the ledger. All I know is that the middle class is getting hammered. Maybe it's time to talk about means-testing?

[AntiGuv]

Let's end it then. I'm game.

That's doubtful if you're well-off. This article doesn't even touch on the true Social Security rip-off which is that FICA revenues are diverted into general expenses which permits higher federal spending and lower tax rates than would otherwise be the case. Particularly as Social Security benefits are reduced over time, this does indeed amount to a massive upward transfer of wealth from the lower classes to the more wealthy.

If FICA taxes were suddenly done away with, tax rates for upper income brackets would quite soon rise and they would rise quite sharply. They would no doubt rise more than whatever amount is paid in FICA taxes for the first $87,000 of income.

[GeronL]

Then let us change that system!

[clee1]

WAY PAST time to talk about means testing.

[dyed_in_the_wool]

This may be the dumbest article I've ever read.
I feel stupider for having glanced at it.

[Fledermaus]

Ridiculous article.

The gist is this: "you get taxed when you start working, say at 24, for Social Security and if you are dumb enough to work hard and make a good living and plan for your retirement regardless of the horrible tax code, you should just have to give up all the money you paid in".

Yeah, that's really American. That's socialism. I don't give a crap what someone at 67 makes in retirement, they had to pay the same amount of money into the system as everyone else. It's not like they are making a killing on Social Security at 67 even if they paid in the maximum most of their lives (which for 2004 is $10,899.60) every year.

If you want to get rid of this ridiculous system, just say so. But to play the class warfare, envious of the rich card to "fix the system" is just as stupid as anything the Democrats come up with.

Think about what you are saying. What if you, tomorrow, won a lottery and you were paying almost $11,000 a year into Social Security. I'll bet good money you'd want your taxes back when you turned of age and could file.

The answer is to slowly start privatizing the system. It bites...you still have to FORCE people to save, but that is because they've been lied to and indoctrinated to think Social Security is a retirement plan. But that is changing with more and more people owning a 401(k) plan and insurance plans, etc.

They are seeing that the Social Security tax of 6.2%, matched by the employer or self-employed, is ripping them off when they only put 5% of gross wages, pre-tax, into a 401(k) and barely, if at all, matched by the employer. They see that account, regardless of the economy, growing and it's an asset. You can't take your future Social Security earnings to bank as collateral for a loan.

As to those that say upcap Social Security, like the 1.45% (again matched by employer or self-employed) part of FICA for Medicare, you again are making the wrong argument. That argument only strengthens the current system in higher taxes and does nothing to start the decline of both SS and Medicare as government programs.

All the money is just an unfunded, future liability anyway. So there is really NO "transition" cost in slowly changing the system by letting more and more out in exchange for less, little or no benefits in the future. Any good mathematician can come up with tables for current ages, percentages, income level, money already paid in, etc. that would give us all options to make voluntarily.

You want to change? Fine, here are the choices. Want to stay in the current program because you might be older and have more invested? Fine, works for me.

But the key is choice. Unfortunately, the true anti-choice party, the Democrats, demagogue the issue and Republicans shy away.

Bush needs to run again on this issue. It's a winner.

[Fledermaus]

Oh, by "you" I meant the writer of the article. Bad habit, I reply like I'm talking directly to them.

[Blue_Ridge_Mtn_Geek]

Thanks for posting. For years I have been saying what the author says.

Remove the FICA Cap!

---

Fine. Let's also remove the benefits floor, and also cut the FICA tax rate, so that Congress can't continue the scam of "investing" excess FICA revenues in Treasury Bonds that can only be cashed in by further tax revenues from future income tax payers. All of this should crash the system even faster than SSA itself currently projects.
http://www.ssa.gov/OACT/TR/TR03/II_project.html#wp105057
http://www.ssa.gov/OACT/TR/

Not that we have a reliable estimate of the future crash - - just that the projected deficits are severe enough to have reasonable confidence that the system will collapse at some point in the not too distant future:
http://www.cbo.gov/showdoc.cfm?index=3235&sequence=0

[dyed_in_the_wool]

The crux of her argument is based on percentage of income taxed. However, what she fails to mention is that in terms of income replacement, she and Eisner (her example) get a significant percentage less. So even if he's paying in @ .5% for Social Security, his income replacement is still going to be capped at whatever SS max is (@ $13K I think).
SS is a sop to anyone the closer they get to the Covered Comp limit. Any benefit person worth their salt knows that.
If she thinks the percentage is too high or is trying to suggest a 'graduated' rate, well no way.
Outside of the covered comp limit, the flat tax would work the same way.

[Cacique]

bttfl

[litany_of_lies]

Where to begin? The premise that the working class is ripped off by SocSec and Medicare is laughable for at least these reasons:

- (best-kept secret of the SocSoc system) The more you make the less you get (as a percentage of what you paid in). Someone making an inflation-adjusted $60,000 per year during their working career retiring at Normal Retirement Age this year will get a benefit of about $18,000. Someone in the same situation except with $30,000 per year career earnings will get a benefit of about $13,000. So the person who paid twice as much into the system gets a benefit that's less than 50% more. The lower middle-class gets a hugely disproportionate share of SocSec benefits.

- Additionally, the upper-middle income earner is much more likely to have to pay federal income tax, or a higher level of income tax, on his Social Security benefit. The worst case is that he has to pay tax on 85% of his benefits. So there already effectively is a form of means-testing that is run through the income tax system.

- Every dollar of earnings is taxed for Medicare (There is no cap at $88,000), even though the benefits paid to retirees in the form of covered costs are the same regardless of income level. This means that someone making $1 million will pay $29,000 into Medicare (the 1.45% employee and 1.45% employer portions). There's no way this person will ever get that money back in Medicare benefits.This is a direct (and huge) transfer of wealth from the "rich" to the lower and middle class.

Those are the easy points to make--There are others, but these will do for now. The author's ignorance is breathtaking.

[litany_of_lies]

Re "means testing," see my #16.

[conservatism_IS_compassion]

FICA is a sort of "stealth" tax; people don't fully realize its extent, usually.

When an employer considers hiring you or raising your pay, he balances the benefit of your future servicesto his business against the total cost to his business of paying you. He does not decide what to pay you and then get flummoxed to learn that he has to pay as much Social Security "payroll tax" as you do; what kind of employer is naif enough not to already know that??!

So in essence you pay the "employer's contribution" as well as your own. Thus, Social Security tax is way over 10%--which if prudently saved and invested would be quite ample for a comfortable retirement. But of course the money is not saved--it is by law "invested" in claims on future general fund revenues, a.k.a. "risk-free government bonds." Which simply means that the government spends the money as fast as it comes in, if not more so--and if it did not spend the money, the result would be deflation.

Clearly then, if there is to be a real Social Security Trust Fund which actually prevents poverty and does not cause a macro economic meltdown, it must be invested in the private economy. But if the government invests that kind of money in the private economy, it will quickly acquire a huge stake in our major corporations--and the Democrats will put politicians on the boards of directors thereof. IOW, socialism.

The conclusion is that the SSTF must be invested in the real economy rather than in government bonds, but that investment must be controlled by the taxpayer individually rather than by the government.

[leadpenny]

Keep it simple. Look at it from a taxation point of view.

The lower income folks get Earned Income Tax Credits which tend to offset the effects of FICA. Those making above the arbitrary Cap pay FICA at a lower rate in relation to income. The middle income person gets squeezed. No EITC and the Cap is always just out of reach. Taxes are a daily, quarterly or yearly thing for most people. This is not a conservative or liberal issue to me - it's a fairness issue.

[litany_of_lies]

The lower income folks get Earned Income Tax Credits which tend to offset the effects of FICA.

Great point, further reinforcing my #16.

[leadpenny]

All due respect, you are mixing apples, oranges and grapefruit. Apples as FICA, oranges as Income Taxes and grapefruit as possible benefits.

Assume for a moment that two 65 year old people die on their way to apply for SS benefits. One had always made at the cap. The other had always made at 10 times the cap. Neither one will get anything out of SS now that they are dead. One paid 12.4% FICA during their working years. The other paid 1.24%. Fair?

[Fledermaus]

I agree. In many places I worked at, we made mention of our mathcing funds to FICA to our employees!

[litany_of_lies]

Both people were entitled to the same SocSec benefit during retirement, because both people paid exactly the same amount of money into the system. That would appear to be the essence of fairness. The fact that the "rich" guy made a lot of other money, or that what he put in was a smaller percentage of his income, is irrelevant--he paid the same dollars in as the "cap" guy, he should get the same benefit.

[litany_of_lies]

Of course, my answer was based on how the system should work--as a kind of funded retirement benefit. The reality is that your and my FICA taxes are paying your and my parents' Social Security benefits--there is no trust fund, blah blah.

If you look at SocSec as a system for current workers to pay current retirees, then the means-test arguments become stronger. Before we allow that to happen, it would be nice for the government to acknowledge the reality that SocSec is nothing but an intergenerational welfare program, instead of maintaining the fiction of "accounts," etc.

[leadpenny]

You and I will just have to agree to disagree on the meaning of fairness. SS is mandatory - which makes all the difference in the world. Think about it, Bill Gates pays his FICA obligation for the year before you get up on New Year's Day. The same can be said for untold numbers of people who can swing a bat or dunk a basketball.

[anoldafvet]

Let me get this straight. By the time I am eligible for retirement, I will have worked and paid into the Social Security "Retirement" system for 48 years. If because of hard work and continually educating myself, I have a few bucks tucked away to supplement my retirement, you want to take away my S.S. because I am "Rich"? Yeah, that seems fair.

If you really want to solve the Social Security problem, get the politicians hands out of it. Put the money in a real Trust Fund to be used ONLY for Social Security and STOP paying benefits to people who never contributed (look up SSI or Supplemental Security Income sometime).

[anoldafvet]

You need to run for Congress.

[kittymyrib]

No, no...you can only have choice if it means killing babies, not if it means killing a government program. Actually, the group who is most ripped off in the Ponzi scheme of Social Security is black men. Their shorter life expectancy lets the government keep everything they paid in....because of course, the family can inherit none of their SS contributions when they die. And this is the party of the "little people"...what a joke! No wonder the dems want to keep people from choice in education, too.

[alisasny]

No matter how well I am when I retire I will take my SS check and use it for green fees. Unless of course they let me opt out and invest my own money very soon.

I dont care if I am a billionaire.

[leadpenny]

You are right about black men getting the worst deal on SS. On the other hand, white women get the most out of it because of their life expectancy.

[Puddleglum]

My solution is to turn Social Security into a WPA type program, where old people build our roads and dams and bridges and record histories and etc. You might just see an improvement in quality. Of course, you'll also have some roads that just wander on forever without getting anyplace.

[Wolfie]

Cheats me to pay the poor, too. I don't expect any changes in my lifetime.

[TaxRelief]

Remove the FICA Cap!

Yea! Tax the rich! They can afford it! < / sarcasm

[leadpenny]

You're rich, I'm middle class. We agree to run a foot race for a mile with ten pound weights on our ankles. All I know is that you get to shed your weights somewhere before the finish line. Makes sense to me. NOT!

[TaxRelief]

Remove the FICA Cap!

Remove the loopholes!

Reinstate the death tax!

Make the rich pay!

Eliminate class envy!

End the deficit!

The rich can afford it!

Make the greedy, rich people pay!

More benefits for the poor!

[TaxRelief]

Work harder.

[leadpenny]

Great comeback! You must be so very proud.

[leadpenny]

Remove the FICA Cap! ~ me
Remove the loopholes! ~ you

We agree!

[kabar]

Your are right on the mark. People don't realize also that payroll taxes (Social Security, Medicare and the like) are nearly as large as the revenue collected from income taxes (40 percent vs 44 percent). The remaining 16 percent comes primarily from excise and corporate taxes, which the consumer pays eventually. If we don't fix these entitlement systems soon, we will have very little discretionary money (Defense is considered a discretionary expense) left in the Federal budget, especially when we also have to pay for the servicing of our increasing national debt.

[kabar]

The FICA tax will eventually be raised to capture almost everyone's income. The cap is raised every year based on cost of living. Oh the wonder of compound interest.

[leadpenny]

"Almost" ain't good enough, imo. BTW, according to experts, the plan is to always have 6-7% above the cap. Ain't that great?

Do the Medicare thing and REMOVE THE CAP!

Believe me, I think FDR should be dug up and B-slapped for ever starting this ponzi scheme, but until it dies, remove the cap.

[kabar]

If you raise the cap, you should also raise the benefits--agree?

[leadpenny]

That's the other side of the ledger. I don't know.

gotta go to work.

[wireman]

"Remove the FICA Cap!"

Nah! Just remove FICA.

[Axenolith]

What the hell for? Do you think the government will actually wisely spend any more extra money they get? The system was set up and sold as a pay as you go system, so theoretically you should get back what you put in. Since you DON'T, I don't see any reason why higher income earners should be punished some more to make up for the generational ineptitude and corruption of a bunch of pus sucking, windbag politicians. Raise the FICA Ceiling and sure as the sun rises some idiot there will say "See, we DO have enough money to pay benefits to Mexican Nationals!"

I can just hear the murmers of the politicians now in Washington if the FICA ceiling is lifted, it would be "HA!... SUCKERS!"

[RedWhiteBlue]

You're rich, I'm middle class. We agree to run a foot race for a mile with ten pound weights on our ankles. All I know is that you get to shed your weights somewhere before the finish line. Makes sense to me. NOT!

That analogy does not compute with me. For the sake of example, let's just grab some numbers. Let's say the "rich" guy pays $300/month in FICA taxes, and the "middle class" guy pays $100/month. If the weights they are carrying are the same, then the middle class guy gets to stop at 1/3 of a mile and the rich guy has to run the full mile. Or, if they both run a mile, then the rich guy's weights are 30 lbs, then the middle class guy's weights are 10 lbs. That is the only way the middle class guy can balance out the fact that he pays in 1/3 of what the rich guy has to.

Now take an upper-middle class guy and a rich guy. The rich guy makes a lot more, but they both pay $300/month. And in the end, they get exactly the same SS payment ... because they paid the same amount in taxes all those years. Even thought one made more money than the other, their race will be the same length and the weights they carry will be the same.

Of course, "fairness" is an illusion. Any of the guys could drop dead as soon as they retire and there will be no benefit to them or to their families. And the poorer guy could end up living to be 100 a receive far more than they ever contributed. And the rich guy will have most, if not all, of their SS taken back in the form of taxes, and the middle class guy is in danger of having the same thing done as well.

What is truly not fair is expecting people to pay into a system and then telling them that they get absolutely nothing for their years of payments. I know plenty middle class people that live frugally, and they would be considered middle class workers, white and blue collar. These people don't buy new cars every year, and most buy used cars and run them into the ground before they buy another. They don't live in the most expensive houses and wear the fanciest clothes. They only go to restaurants on special occasions, and they don't go on expensive vacations. But they are very good at living modestly but comfortably within their means and saving money. The have saved it in 401k's, IRA's, and anywhere else they could do so. Now they have a nice nestegg saved for retirement, and some are even millionaires, even though they never made any more than middle class salaries or wages. But because they were responsible and saved, they would be penalized and get no SS. The schmuck with the same income, bigger house, fancy vacations, new cars, and stuffed closets would get their SS payments. That is not fair.

[Axenolith]

If you're going to Means Test, then just ditch it and put the recipients on direct welfare...

[americanbychoice]

another Soc. Sec thread for you?
If you would remove the cap, by the way, I don't care one way or the other. Would you be upset that those with higher contributions would receive more soc sec than the average person?
Let me guess................................

[Protagoras]

It will be interesting to see which parts you find amusing.

[Protagoras]

Ending social security is the only possible solution.

Privatization is a good first step.