Government Takeover of Retirement Assets
How Social Security Cheats You to Pay the Rich
Workers earning minimum wage pay their full share, while those who pull down a few hundred grand pay much, much less. How about a tax break for real people?Originally Published in 2004
MSN Money - What would you think of a tax system that took money from the poor to give to the rich?
That's essentially whats happening with our Social Security and Medicare tax system, where low-income workers are dunned to pay benefits for high-income seniors.
Before the AARP strings me up for heresy, I'll quickly add that lots of folks paying into the system are better off than lots of folks who get money out of it. In fact, two-thirds of seniors rely on Social Security for more than half their income, and four out of 10 say it comprises more than 80%.
I'm also not saying there's anything wrong with drawing a Social Security check. You paid into the system, and you're getting what you were promised.
But that doesn't change the fact that some guy making minimum wage with no health insurance has to pay 7.65% of every dollar he earns, while some seniors worth millions get checks and discounted health care. That's Robin Hood in reverse.
The rich really do get a deal on Social Security
This is a reality that gets far too little attention, particularly when Congress is busy adding to the problem with a Medicare prescription drug benefit.
I'll make my biases clear: I work for a living, so I pay Social Security and Medicare taxes. But I'm one of the lucky ones, in that my annual income is above $87,900. That's the cutoff for having to pay Social Security taxes in 2004. [Update: In 2010, the Social Security wage base is $106,800 and the Social Security tax rate is 6.20% paid by the employee and 6.20% paid by the employer.] (I still have to pay Medicare taxes above that amount, since that particular tax has no income limit.) Roughly 20% of households report incomes above that threshold, according to the Census Bureau. The total income of that 20% of families represents half of all U.S. income.
So the proportion of my income that goes to Social Security and Medicare taxes is actually smaller than what most of America pays.
The Social Security outlay for folks like me and Michael Eisner, the chairman of the Walt Disney Co., is capped at $5,449.80 this year. (He makes a wee bit more than I do, so well use him as an example.) This maximum contribution is about half of 1% of Eisner's $1 million base salary. Eisner's Medicare taxes would be $14,500 -- the same 1.45% of salary as every other worker pays. All told, his bill would be about 2% of that base paycheck.
Meanwhile, the average working stiff must give up 6.2% of each dollar earned to Social Security and 1.45% to Medicare, for that 7.65% total.
No Social Security tax cuts
What's more, when income tax rates are cut, Mike and I really benefit. (Mike a bit more so than me, but I wont begrudge him.)
Social Security and Medicare tax rates, by contrast, have never been trimmed. Since the first payroll tax was collected in 1937, the rates have gone just one way: up.
| Social Security and Medicare tax rates since 1937 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Source: Social Security Administration
Not only haven't there been any tax cuts, but there aren't any credits, exemptions, deductions or fancy tax shelters to help that guy making minimum wage shield any of his income from payroll taxes.
And as he'll probably tell you, our minimum-wage worker has no assurance he'll get anything back for the money he's putting in. The systems hurtling toward bankruptcy, after all.
The Medicare drug benefit is, well, bizarre
So, Congress just had to go and make matters worse by adding a drug benefit to Medicare.
The idea was good -- let's make sure seniors can afford the drugs they need. But the result was bizarre, to say the least.
If you haven't already seen it, it's a doozy. First, it doesn't become available until 2006. Then, here's how its supposed to work:
| How the Medicare drug benefit works | ||||||||||
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Source: Social Security Administration
Now, does that make sense to you? Does it make sense to anybody?
The only reason to structure the benefit like that was to ensure that as many seniors as possible got a piece of the pie -- whether they needed the helping or not -- while still making the initial cost of the program halfway palatable.
And the real costs were off by a third
If the goal were to get benefits to the most cash-strapped seniors, the plan would have been means-tested. (That is, as your income increases, the benefit decreases.) If the goal were to prevent catastrophic drug bills from bankrupting older Americans, the deductible could have been higher, and there wouldn't be that ludicrous donut hole in the middle.
Reducing the package to cover just those who need the help, though, wouldn't have flown politically.
Meanwhile, we learn that the cost of this added benefit won't be a mere $395 billion over the next decade. The White House now says those guesstimates were off by one-third. The real costs now will be $534 billion.
I argued in The Tax Cut Taxpayers Need Most that working families really need a break from Social Security and Medicare taxes. We could give them one by exempting the first $10,000 of income from payroll taxes -- saving each worker $765 a year -- or by reducing the payroll tax rate by a point or two. We could swing such a break only if we get serious about Social Security reforms.
But, as the prescription drug benefit shows, there's no political will to do so. The only steps Congress seems to be able to make are giant ones in the wrong direction.
Which means, for the folks paying into the system, that there's no relief in sight.
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