Ask Dems About Social Security

Cao Institute ^ | January 15, 2004 | Michael Tanner

[yoe]

The nine Democratic presidential contenders have been swarming all over Iowa for the past several weeks, and we can expect to see even more of them between now and the caucuses on January 19. At diners and county fairs and union halls they will be talking about their views on Iraq, jobs, tax cuts and terrorism. But on one issue of great importance to the people of Iowa -- Social Security -- they are likely to remain curiously quiet.

Social Security is not only the largest U.S. government program, accounting for 23 percent of federal spending, it is the largest government program in the world. The Social Security payroll tax is the largest tax paid by the average American working family. In fact, nearly 80 percent of us pay more in Social Security taxes than we do in federal income taxes. At the same time, millions of the elderly rely on Social Security for much, if not most, of their retirement income.

The 68-year-old program is also in crisis. In just 15 years, Social Security will begin to run a deficit, spending more on benefits than it takes in through taxes. The federal IOUs in the Social Security Trust Fund are an accounting measure, not real assets that can be used to fund the program. Unless the program is drastically changed, taxes will have to be raised or benefits cut. But taxes are already so high that younger workers are receiving low, below-market returns from Social Security. Cutting benefits would be a severe burden to millions of low- and middle-income elderly.

And what do the presidential candidates think should be done to fix this problem? George Bush has made his position clear: He would allow younger workers to invest a portion of their payroll taxes privately through individual accounts. White House sources have spent the last several weeks telling reporters that support for Social Security changes will be a central domestic plank in Bush's reelection bid. Whether you support his proposal or not, at least you know where he stands.

But, so far, whenever the Democrats are asked about their views, their responses have been equal parts pandering and evasion. All of them favor "saving" Social Security. Sometimes they are for "protecting" the program, and occasionally for "preserving" it. And all of them oppose "privatizing" the program -- even Joe Lieberman who dropped his support for individual accounts when he became Al Gore's running mate. With little effort, they can all work themselves into a fury of righteous indignation over the president's "secret plan" that would leave elderly Americans eating dog food.

But what do they actually favor?

Wesley Clark is "still working on" a proposal, along with the rest of his domestic agenda. In a recent debate, his comments on the issue were so vague that even the reporter asking the question pronounced himself "not satisfied" with the answer. Howard Dean used to favor raising the retirement age. Now he doesn't. John Kerry backs means-testing benefits, except that maybe he doesn't. Richard Gephardt wants to "get back to an economy where we have a surplus so we can fix the Social Security problem." Exactly how he would fix it remains unclear. And poor Joe Lieberman, having abandoned individual accounts, has been reduced to clichés. "The first thing to say about Social Security is we've got to keep it strong and not mess around with it," he said, not very helpfully, a short while ago.

Frankly, that isn't good enough. No one should be running for president if he can't stand up and tell the American people what he would honestly try to do about Social Security. This is not a complicated matter. In fact, the Democratic contenders can take a lesson from a party stalwart, former President Bill Clinton. It was Clinton who clicked off the three options for reform: raising taxes, cutting benefits, or getting a higher rate of return within the system through private investment. Since the current crop of Democrats all oppose private investment, they should tell us which taxes they will raise and which benefits they will cut. It's a fair and simple question.

But don't hold your breath waiting for an answer.

[American_Centurion]

Yet each and every Democrat, whether running for President or not repeatedly levels the accusation that President Bush's plan for Social Security won't work.

Come on 'Rats, put up or shut up!

[leadpenny]

There are only two meaningful alternative solutions to fixing SS:

1) Plunge a knife through the heart of it and kill it once and for all, or . .

2) Lift the cap on FICA contributions (currently in the $80,000+ range) so we all can go down the path of complete socialism together.

You'll never hear that on the campaign trail.

[yoe]

Under the Federal Insurance Contributions Act (FICA), 12.4 percent of your earned income up to an annual limit must be paid into Social Security, and an additional 2.9 percent must be paid into Medicare.

There are no income limits on Medicare taxes -- so even if your income is well above the cap for Social Security tax, you will still owe Medicare tax on the total.

If you're a wage or salaried employee, you pay only half the FICA bill (6.2 percent for Social Security + 1.45 percent for Medicare), and the tax is automatically withheld.

Your employer must contribute the other half.

For most people that means 7.65 percent of their paycheck is withheld and their company pays another 7.65 percent on their behalf.

If you're self-employed, however, you're expected to cough up both the employee and the employer share of FICA. You are, however, permitted to deduct half of this self-employment tax as a business expense.

[leadpenny]

Yes, I know all that . . .

If you're a wage or salaried employee, you pay only half the FICA bill (6.2 percent for Social Security + 1.45 percent for Medicare), and the tax is automatically withheld.

. . . but that's misleading. YOU pay it all either way; self-employed or employed. The employer accounts for the other half, but it is otherwise your money. Part of the flim-fam.

[Puppage]

LOCK BOX!

[ReleaseTheHounds]

Hey, yoe:

You might want to correct your link... it's the CATO Institute, not the CAO Institute.

[G L Tirebiter]

2) Lift the cap on FICA contributions (currently in the $80,000+ range) so we all can go down the path of complete socialism together.

While I agree that lifting the cap would be a stupid idea it is not a potential "solution". The amount of revenue it might raise is meager in comparison to the amounts needed if there isn't a basic, fundamental restructuring.

The only pols out there talking about this idea are the dedicated class warriors (e.g. Teddy).

[Jack of all Trades]

For myself, I see another alternative solution: screw Social Security. I have 15 years to minimize my need for income from wages. Here's the plan:

1) Practice financial austerity: stay out of revolving debt, save and invest to the hilt, emphasize purchases of durable, useful items.
2) Continue to develop personal skills that can be performed for cash or bartered for things of value.

Granted, my plan has several holes in it. It doesn't provide a solution as much as a path to a solution for taxpayers, and most people probably wouldn't choose this path. The more people that adopt this plan, the more SS recipients will be left in the lurch. In the years leading up to the Federal budgetary s#!! hitting the fan, the ability of individuals to use cash will be limited because the FedGov will become desperate for money. Also, it does not take into account what will happen to people who come of age after the crash, if or when it comes.

A naive and grandiose plan, I know, but at least it gives me a little hope.

[leadpenny]

It's not a stupid idea as long as we're going to keep the system. The cap is arbitrary and unfair to the middle class (me). I don't care what fat Teddy thinks.

[leadpenny]

I love it when a plan comes together. :)

[leadpenny]

Besides, Fat Teddy and the rest of congress reach their cap half-way through the year. If I gotta pay the 12.4% on all my income, why not Teddy? (If we keep the system)

[G L Tirebiter]

Keep the "system" going. Hah!

The oncoming tsunami of baby boomers is going to sweep away the fragile structure of the current "system".

Your view is, to say the least, short sighted and self serving. Your beggar thy neighbor approach adds not a single iota of light to the subject.

It reflects an all too typical "let someone else pay for my party" attitude.

[leadpenny]

I notice you have not offered a solution. I gave two early on at post #3.

[G L Tirebiter]

The sloution is to restructure SS away from its current unsustainable "pay as you go" model to one that offers participants their own private accounts.

[leadpenny]

The "Titanic Deck Chairs" solution, I see.

What about the cap? The cap for the medicare contributions was removed, why not the cap for FICA contributions?

[yoe]

Thanks*~*

[G L Tirebiter]

The "Titanic Deck Chairs" solution, I see. What about the cap? The cap for the medicare contributions was removed, why not the cap for FICA contributions?

Wrong, again. I've seen many critics of the privatization approach - but none has ever characterized it as a deck chair shuffle. Typically it the "this proposal will destroy SS as we know it" or "this is a scheme to enrich Wall Street fatcats."

However the whistle past the graveyard crowd never acknowledge the fundamental imbalance that makes a SS train wreck certain.

And regards your medicare comment: Has lifting the cap on medicare "fixed" it? Answer: No. Only fundamental reform will do that.

[leadpenny]

I wasn't necessarily criticizing privatization. I was criticizing reform. Reform, in any form, obviously is not going to happen before a collapse of the system. All pyramid schemes eventually collapse under their own weight.

I favor the knife through the heart approach, but take a look at the political will on both sides of the aisle in Washington. There ain't none and it won't be fixed. Privatization might be the best solution if we weren't knee-deep in alligators trying to drain the swamp.

Back to the cap. There is no SS system except in the way the Feds pay money to recipients and keep a ledger on who pays how much under FICA. There is no Trust Fund. So, FICA is just another way for the Federal Government to collect from the middle class. It all goes into the same pot. You and I are paying 12.4%, without deductions, on the first 80+ grand plus whatever we pay in Federal Income Tax. If you are fortunate enough to make more than the cap you are NOT paying 12.4% - you are paying something less, plus your Income Tax.

ie., if the cap is 80 grand and you make 800 grand, you are paying 1.24% in FICA.

Talk all you want about reform (or in my case about killing the system), that is not fair and equitable. Until the system fails we all should be paying equally or not at all.

[Jimmy Valentine's brother]

Ah, but even though we've long ago left the agrarian oriented society and spent billions of dollars on education you are too stupid to decide what is best for you. Just look at how you spend, spend, spend. The average American couple owes $25,000 and has little or no savings. Thank goodness FDR was smart enough to implement a German ponzi scheme imported via Chile during the depression so that you could be fleeced of 12.4% of your money. Why if you were left to invest that money on your own, at a 10% annual return, you'd be a multi millionaire by the time you were 65. Then where would you be?

I get confused too. ;>)