Is Social Security Progressive?
When various changes to the Social Security program are proposed, one frequent objection that is heard from folks of many different political stripes is: "That would turn Social Security into a welfare program." Let's ignore the question of whether that's a good or bad thing, and instead ask: is Social Security *already* a welfare program? The question seems to presume that it is not (i.e., that people, regardless of income, get benefits that are roughly proportional to what they pay in).
A new CBO study (http://www.cbo.gov/ftpdocs/77xx/doc7705/12-15-Progressivity-SS.pdf ) attempts to answer this question. Their conclusion may be surprising to some: Social Security today is already a welfare program.
First, a caveat about the study. It makes an assumption that does not seem terribly likely to hold: "The analysis assumes that scheduled benefits are paid even after trust fund exhaustion." In practice, *some* sort of tax increase or benefit cut is probably inevitable, which would in turn reduce the payout ratios for at least some classes of workers.
Another important methodology note: the study presents numbers in present-value terms. The discount rate used is inflation plus 3%, which is assumed to be the essentially risk-free return you can earn by holding Treasury bonds. The 3% figure could be debated but seems roughly plausible to me.
What we see is that Social Security's retirement program is very slightly progressive, and that its disability and survivors' programs are extremely progressive. As the study explains, this is a function of both life expectancies (rich people tend to live longer) and benefit formulas (SS benefit formulas tend to be progressive). In all, SS could definitely be called a welfare program: someone at the 10% income percentile will on average see a payout of roughly 170% of what they pay in. Someone at the 50% percentile will get back approximately 100%. Someone at the 90% percentile will get back approximately 70%. (See Figure 2.)
Some additional caveats apply; see Figure 4 and the associated analysis, which shows that a good chunk of this apparent progressivity is really just because disability *causes* low income. However, the overall conclusions do not change very much.
In other words: yes, Social Security is a welfare program. Those above the median income-wise are subsidizing the benefits of those below the median.
Is this a good thing? Should it be more or less a welfare program? Now we delve into the realm of opinion. My take is as follows: it is best to think of Social Security as more than one program. Social Security is, in part, a welfare program for the old and disabled. It is *also* in part a forced retirement savings program for everyone. So really we should ask three questions:
1. Should we have a welfare program for the old and disabled? If so, how should it be structured?
2. Should we have a forced retirement savings program for everyone? If so, how should it be structured?
3. If the answer to both (1) and (2) is "yes", should these be separate programs or part of the same program?
The easiest question for me to answer is (3) -- I would most resoundingly say: "No, they should be kept separate!" Combining the two into a single program is an act of fiscal trickery that can do nothing but deceive. Our government has no business trying to deceive us like this.
The next easiest question for me to answer is (1) -- I would say: "No, we shouldn't have such a thing. No one should be forced to aid the plight of the less well-off." Of course I am well aware that many people disagree with me on that one. Insofar as we *do* have welfare programs, though, I would want them structured as a negative income tax built directly into the tax code, rather than as separate spending programs that are distinct from the tax code.
Finally, the hardest, question (2). I would say: I (like millions of other Americans) personally know how to manage my finances just fine. I am already saving money for retirement and will continue to do so no matter what the government says or does. I consider it insulting for the government to presume that I cannot manage my finances intelligently and therefore must be *forced* to save for my own retirement. Further, I consider any restrictions on how I invest my retirement savings to be equally insulting. I should be free to save as much or as little for retirement as I want in any particular year, and I should be free to invest those savings in absolutely anything and withdraw those savings at any time for any reason at any age. ***BUT***...
...there are some bad apples out there who do *not* manage their finances reasonably. It's not so much that they don't earn enough money... it's that they manage the money they do earn very poorly, spending money on all sorts of nonessential things, running up outrageous amounts of credit card debt and not paying it off promptly, and neglecting the fact that, even in your 20s, you had better be saving at *least* 10% of your income for retirement. I personally know a few people who fall into this category -- people who are on the edge financially, and yet go out and buy things that are luxuries at best rather than paying off their debts and building up a nest egg.
A rule that I must save at least, say, 10% of my income is no big deal -- I was going to save a lot more than 10% of my income anyway. But to say that I cannot invest this money in the stock market definitely angers me. In reality, a conservative 50% stocks/50% bonds portfolio of index funds is *less* risky for a young person than a 0% stocks portfolio. By having all your money in bonds you are running way too much interest rate and inflation risk, and because you aren't taking on any market risk you will almost certainly earn inadequate returns over the long haul.
So where does that leave us? Personal accounts. Okay, I'll tolerate the fact that some people maybe have to be forced to save for their retirement. But give us legal and inviolable property rights to the money (so Congress can't vote to take away our retirement savings -- remember, Congress could vote *tomorrow* to slash your Social Security benefits in half and you'd still have absolutely no grounds for a lawsuit), and, for God's sake, provide some half-decent investment choices. For 5-10 basis points (0.05%-0.1% of assets every year) Vanguard or Fidelity will be happy to run a program where you can invest in a few simple index funds: a total stock market index fund, a total bond market index fund, and a money market fund. Those 3 are plenty; don't make it too complicated. Enroll people by default in a nice conservative asset allocation appropriate for their age, and make it hard for them to change the asset allocation without clicking through 5 pages of caveats about how putting 100% of your money in the stock market is dangerous.
This isn't the ideal solution -- my preferred solution is the complete abolition of Social Security and unlimited unrestricted tax-free savings (think Roth IRAs with fewer restrictions) for everyone -- but until more people get their act together on their personal finances, it's probably the best we can do, and would be a huge improvement over the status quo. And in the long run, our schools need to do a better job of teaching people that they need to be responsible with their personal finances, and then we can gradually lift the restrictions.
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Comments :
Is Social Security a Welfare Program?
I have paid into it for years. How is that welfare?
The best dollars we can spend are for public education. It is the great equalizer. Not charter schools, not vouchers but public education, a system that is accountable for results.
The assault on public education system by those that want to see every government service "privatized" is a disservice to this country. Our school system USED to be the best in the world.
Social Security is a great program that has helped to make us a great society.
If the government would keep their hands off the money I put in there I would appreciate it.
Social security has allowed you the freedom to not have to provide for your parents, or your wife's parents.
It is the economy, stupid.
My parents are doing just fine...
Simple: per the numbers from the study, if your lifetime earnings are below the national median, you will probably earn more in benefits than you paid in taxes. If your lifetime earnings are above the national median, you will probably pay more in taxes than you earn in benefits.
In other words, the rich are being made to subsidize the poor. If that isn't a a welfare program, I'm not sure what is...
Actually, my parents are doing just fine providing for their own retirement without my help. My grandparents also did just fine providing for their retirement without my or my parents' help.
It is not fundamentally difficult for most people to save enough money for their retirement. The real problem is that many people *choose* not to save enough. Instead, they spend their money on unnecessary luxuries -- for example, buying a $30K car when a $15K car does the job just fine, or a $200 pair of jeans when a $30 pair of jeans doers the job just fine, or a $70/month cell phone plan when $30/month plans or even $10/month prepaid plans are available if they would simply use fewer minutes.
I know for a fact that I spend less money than many people who earn half as much as I do and who have the same family status (single, no children, no roommates). Over the last several years my average all-inclusive expenses (rent, insurance, food, gas, entertainment, etc. -- everything except for taxes) have been roughly $2500/month.
If I hit a financial crunch, I could *easily* cut back that $2500/month to $2000/month by dropping a few things I consider to be luxuries. For example, I could eat out less, and I could take fewer vacations, and I could drop my satellite TV and go with basic cable. If I really needed to squeeze things, I could get to $1500/month or even less, although that would require having roommates.
And that's in Silicon Valley -- hardly a cheap place to live. There are other places in the country where I could easily live on less than $1000/month. It would not be a luxurious lifestyle, but still a perfectly reasonable one.
Sure, having a family doesn't make it easier, but I know of people who feed a family of 6 on a food budget of $1000/month. There are also people who spend more than $1000/month on their own *personal* food budget. It's just a question of how frugal you are. Do you need to eat brand-name cereal or is toast and generic oatmeal OK?
lala land
I'm not as much an optimist when it comes to human nature and would really hate to live in a society where swarms of old and handicapped people and children beg for food in the streets. We live in the society we have - not in the society we would like to have. Solutions to social problems should address the reality as it IS and not non-existing circumstances upon which our perfect solution will work for everyone.
We can no more expect that every, or even most members of the society, will provide for their future without forcing them to do so than we can expect the crime to disappear because we wish that everyone ought to be good.
Sic semper tyrannis
I don't have a problem with Social Security.
I'm always amazed at conservatives who do, as most of them, aside from the pampered elite (who are not posting here or in RedState, they're busy overseeing their money) end up collecting Social Security for themselves and their spouses.
Here's my suggestion to making sure Social Security remains viable for the next 100 years:
Eliminate the $89,000 cap on Social Security taxes. Once that's done the program will be fully funded for the next 90 years.
Now is that fair to those who make more than $89,000? It sure is. It guarantees you a healthy society that you can happily retire in. That is worth the money, for everyone in the USA.
I think some version
of what you suggest is the most logical suggestion for this problem. That's where the money is.
yes eventually
the money is in the pockets of the rich, to be used in case you need it when your pet programs for the poor start running out of steam.
"To discuss evil in a manner implying neutrality, is to sanction it." AR
Will I collect it? Sure...
Yes, of course I will end up collecting my SS check, just like everyone else (assuming I don't die first).
That doesn't mean I am a hypocrite for favoring the abolition of the system. It only means that I want to get *something* back in return for the fact that 12.4% of the first $94K of my earnings are being forcibly confiscated from me, without my permission or consent. Unfortunately, as this study tells me, I will probably end up getting less money back than I put in, even in the complete absence of any benefit cuts or tax increases (which is improbable).
Actually the cap this year is $94.2K (http://www.ssa.gov/pressoffice/pr/2007cola-pr.htm
).
No, it ain't. You're giving me a raw deal and now you're coming back and telling me that I should accept a substantially rawer deal, and be *thankful* for it? Thanks, but no thanks.
How about one better and let me opt out of the whole system entirely? I will take care of my own retirement, thank you very much.
Social Security
is popular even in Red States, even more so in some red states than some blue states. By far the majority of the country couldn't care less whether it looks like welfare or not. They like it just as it is and are worried that it will go insolvent down the road. A big challenge over the next couple of decades will be finding a way to ensure its solvency. (link
) President Bush underestimated the backlash to suggested tinkering with Social Security and replacing it with private accounts. A lot of people are saying this "misunderestimation" had a lot to do with the outcome of the 2006 elections.
Agreed.
I'm a little unclear why lordzorgon feels the overlap between welfare and retirement program is problematic: it seems to me that the circumstances are such that some combined program is necessary, rather than trying for a "purer" one-or-the-other. It's like trying to squeeze a program invented for situation A into a nonsimilar situation B.
Here's how I see it:
Welfare, regardless of whether it has been successfully fulfilling this purpose, was designed as a social safety net. Implicit in the structure is an exit from the program: a person on welfare can at any time get a job (in theory) and stop receiving welfare. For the elderly, this isn't an option - so if anything, a program for the elderly has to be more secure than a standard welfare program. There's no pushing your great-grandfather off the nursing home bed if the system caves, and this fear is one of the reasons there's been such a strong backlash against suggestions for pulling money out of the program (because everyone immediately saw that, in the short term, allowing people to put their money into private investment meant less money for those currently on welfare, necessitating either massive cuts or tax raises). (Incidentally, that's also the elephant I'm missing in this diary - while I admire lordzorgon's number crunching, I can't see how this could be taken from the abstract into the practical, given how insurmoutable the short-term problem would be.)
On the other hand, unlike welfare, not everyone needs government benefits. But unlike other programs, there's no good method of predicting who is going to need them: which is what lordzorgon admits in the discussion about poor investment strategies.
In a way, I understand the desire of people on the right to shift more to private investments. People need to take responsibility for their choices, and if they decide to make risky investments, they really shouldn't be getting the same benefits as people who save more conservatively. But how do you - to return to example above - kick an old man out of his nursing home bed?
Imperfect world we live in, so it's nearly futile to look for perfect solutions. I don't mind paying a little more into a system if it guarantees me basic security when I'm too old to work. And I think that's where a lot of people come from on this issue.
Apologies for the rambling comment.
Saint, n. A dead sinner revised and edited. - Ambrose Bierce
Combined vs. separate system
When I see a program as complex as Social Security, what I see is the government trying to trick and deceive its citizens.
How many people actually understand the nuts and bolts of the Social Security funding formulas? Very few. How many people realize what this study tells us, namely, that a full 50% of the population will get less money back out of Social Security than they put in? Maybe a few more, but not a lot.
How many people are aware that, unlike a bond or annuity that you can hold a legal property right to, they have no property right to their Social Security benefits? That Congress can vote to slash or eliminate them at any time for anyone? (See the Nestor case: http://www.ssa.gov/history/nestor.html
)
When I look at Social Security, what I see is the same sort of wheeling-and-dealing salesmanship ("trust us! your retirement will be secure if you just trust us! you're not just buying insurance, you're buying peace of mind!") I would expect out of a shady life insurance broker.
At least if I buy life insurance from a shady life insurance broker and he doesn't actually sell me the annuity he promised for the price quoted on the paperwork I sign, I can sue him for fraud.
Yet, when the government *forces* me and millions of others -- I'm not allowed to say "no thank you" -- to buy this ripoff life insurance policy (which they are allowed to cancel at any moment without refunding me a cent and I have *no* legal recourse), it gets showered with praise?? Huh??
Remind me why I want to "save" Social Security "for future generations?" So they can be ripped off without their consent, too?
What I'm looking for is the phone number for Social Security's customer service line where I can tell them I'd like to cancel my policy and have my money refunded, please.
While I understand your point, I should note that my grandfather retired at age 88, long after he had started receiving SS payments. There are millions of people well above the SS eligibility age who nonetheless continue to work and earn income from their jobs.
I personally would have no objections to doing so. A nursing home run by a private organization, unless they have contractually obligated themselves otherwise, ought to be free to kick out any patient at any time for any or no reason. Nonpayment would be one reason, but there could be other reasons also. For example (and this is a true story) -- my *other* grandfather was turned away at an assisted living facility for making racist comments about how he didn't want any (insert derogatory term here)'s serving him where he lived. And after he made that comment, I can't say I had a whole lot of sympathy for him.
But if that's really what you are concerned about -- old people starving to death on the streets -- then, of all conceivable government programs, Social Security is hardly the simplest or most effective or least invasive way of preventing that from happening. Surely we can come up with a simpler, far cheaper, and much less deceitful program than Social Security that would solve the narrowly targeted problem of "old people starving to death on the streets."
At bare minimum, I *really* do not understand why we can't at least structure SS as an annuity that you gain a legal property right to over time as you pay into the system and get older, so that Congress is prohibited from cutting the benefits of people who have already retired.
Price-Earning Ratio
This statement below says all you need to know about fiscal responsibility and the free markets invester class.
Did you catch that........ The CEO should not be held responsible for oversight of his company!
As I recall the CEO of Enron had pie in the sky price-earnings ratios.
This opinion regarding Sarbanes-Oxley
which I am sure you abhor.
It is the economy, stupid.
Privatizing SS--overinflated Stock market
I disagree on privatizing Social Security because it really is a ruse to further overinflate stock market prices which is already overinflated from 401K and IRAs.
So when comes ENRON or the TYCO etc---with jackup stock prices--there is no more motivation to improve their company--just prop up stock prices then run.
Immigrants will fill SS gap
I disagree that SS will be insolvent.
With the baby boomers aging, demographics will be changing, less working people but greater needs--thus there will be a push for more immigration to fill the worker gap and the immigrants will be the one to fund SS gap.
Thus, it is important to legalize the undocumented workers so that they can start contributing to Social Security. There are 12 million illegal immigrants and will go a long way to help improve the solvency of SS.
While I am all in favor of immigration...
Can you point to any research backing up the idea that increased but still realistic levels of immigration alone could cover SS's funding gaps?
It would be great if true, but without evidence, this seems like wishful thinking.
Demographics
Today there are 30 beneficiaries being funded by100 workers. In 2030 it is projected to be 50 to 55 beneficiaries for every 100 workers.
So it makes sense that if you increase the number of workers to contribute to Social Security so that again it will go back to the ratio of 30: 50. The only way you can do that is through immigration.
Besides if less people work and you have more dependent elderly people, the economy cannot survive unless someone will take the place of retiring workers.
Again the only way that can be done is through immigration. Unless Americans decide to have more babies right now to fill the workers for 2030.
So why not legalize all the 12M illegal aliens currently working so that they contribute to Social Security fund.
30:100 correction
Great point.
I have never really thought of it from the perspective of a company as "all stock and no cattle", so to speak!
It is the economy, stupid.
By what metric of valuation?
Can you point to a metric of stock market valuation to back up your claim that the stock market is currently "overinflated?"
For reference, the metric I would use is P/E ratios vs. bond yields. Because long-term bond yields are exceedingly low right now, I see little evidence that the stock market is overheated. The current bull market *has* had quite a run, but so have corporate earnings.
Maybe you can point me to a contrary set of economic indicators that would show otherwise?
I don't know
It seems too often folks are mixing running a business
and the stock market.
Corporate earnings......... based on stock, or corporate earnings based on what a company actually produces.
I don't consider production, to be equal to future values in the stock market.
I don't know the terms, but if folks are disappointed when the dow jones doesn't rise every day by a hundred points isn't that cause for concern, or irrational exuberance.
The headlines the dow took a hit today and is up by seven points, when the numbers are the highest they have ever been ever seems odd. By this value the stock market should hit 1,600 by next year. Would that be grand. Or are there concerns about inflation.
It is the economy, stupid.
Link to current high PE ratio
http://www.kc.frb.org/publicat/econrev/PDF/4q00shen.pdf
This link shows charts that show the average P/E ratio is 14 but during the stock market bubble/inflation it went up to 30 then a bubble occured.
PE ratio of 14 is high enough--one is paying for stocks for future 14 year prices. Google has PE of more than 100.
Just imagine if SS is privatized it will drive P/E ratios to the roofs. So what is the incentive for a company to
think long term. That is what happened in the stock market bubble.
Companies main goal will be to increase stock prices not improve fundamentals of their business. Once it is in their target range--they close shop and let company fail because the CEO got their money.
ie., WORLDCOMM, Pet.com, ENRON, PSI.net, etc.
Your link
I agree with everything in the Federal Reserve study you linked to. It is a great summary of the historical behavior of the stock market and how it relates to P/E ratios and bond yields.
There's just one problem: that study was written in 2000. (I don't see a specific date of publication, but the link itself implies 4th quarter '00.)
Moving 6 years ahead to January '07, let's get some new data.
http://quicktake.morningstar.com/FundNet/Portfolio.aspx?Country=USA&Symb...
The P/E ratio of the S&P 500 is currently 15.2 -- very close to the historical average quoted in the Fed paper, 14.5. Other data sources other than Morningstar quote slightly different numbers, due to methodological differences, but they are all pretty close to one another. For example, the following link says the P/E is 15.55: http://finance.yahoo.com/q?s=SPY
(all numbers accurate as of the time I posted this comment -- of course they will change on Monday depending on what the market does)
Further, looking at Chart 4, where would we be today? P/E of 15.2 means earnings yield is 6.58%. The 3-month T-bill yield (which is what they are using) is 5.06% (http://www.treasurydirect.gov/RI/OFBills
). That gives us a spread of 1.52%, which is roughly in line with the spread circa 1994, and well above its level circa 2000.
This evidence does not seem to support the proposition that the stock market is currently overvalued. The paper only supported the proposition that the stock market was overvalued *in Q4 2000* -- which turned out to be an accurate assessment.
Bad Apples
The problem is that "bad apples" make up 90% of the population. Since the government almost always spends money better than I do (they hire people with adanced economics degreees, and I can barely balance my checkbook), I don't see how it would benefit me, personally, to have my SS funds at my disposal.
The slim minority in this country who knows how to successfully save for retirement on their own are just that: a minority. Their skills and assets are not primary considerations in a democracy; the majority's are. And, also in a democracy, the only just action by a government is that which benefits a majority of its citizens ("justice" being defined at the polls, natch).
While there are some who would try to force an involuntary 20% tax rate on a population that wishes a 25% rate, the truth is that whether high or low, if the tax rate and welfare scheme is approved by at leat 51% of the electorate, it is just. It would be undemocratic, and therefore immoral, to impose a lower rate than what the public wants. Thus, you can hardly call SS "progressive" or "socialist" any more than taxes of 20% are more socialist than taxes at a 25% rate. "Left" and "right" have nothing to do with it; it is simply the will of the majority imposing its wishes on the majority, which happens in all democracies and only civili liberties are exempt. (And low taxes are not a civil liberty!)
The magical secret trick for how to save for your retirement
There's absolutely no logical reason why this must be so.
Here is how to retire securely in 5 steps:
1. Take your year of birth and add 65 to it. I don't know how old you are, but let's just pretend you're 30 years old and therefore were born in 1977. Result: 2042.
2. Round this number to the nearest 5 years. Result: 2040.
3. Go to https://flagship.vanguard.com/VGApp/hnw/FundsByType#Domestic_Balanced_Li...
and find the "Target Retirement" fund for that year, or if it doesn't exist, the one closest to it. In this case we end up with: https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0696&FundIn... 
4. Click on "Buy this fund." Open a Roth IRA and put in at least $3000 (the minimum investment to open an IRA).
5. Every year, put as much money as you can afford into the account, subject to the legal limits on Roth IRA contributions.
If you make a maximum contribution each year ($4000 in 2007), and you earn an 8% average nominal rate of return, in 2042, your account will be worth roughly $1.25M. That will be enough to withdraw a retirement income of roughly $50K/year.
Anyone who is not genuinely poor should be able to scrounge up a few thousand bucks a year by saving up a few months of receipts, looking at their expenses, and figuring out where they can cut back. $4000/year is only $77 a week. If you eat out once a week and spend $40 for two people, that's half of it right there. If you have $10000 in credit card debt at 20% and you pay it off, that's the other half right there.
Of course if you have an employer 401(k) match, you should do that first before opening a Roth IRA, but I'm not claiming that the steps above are the *perfect* way to save for retirement -- merely that it isn't at all complicated. Saving for retirement is not complicated unless you make it complicated.
Say what...??? Surely you don't *really* believe that if 51% of the population agrees with a given policy, it is automatically a just policy.
See Federalist #10 by Madison about how the premise of the Constitution is to protect minorities against oppression by the majority. Madison's examples of unjust policies a majority might seek to undertake ("A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project") are in fact all economic in nature.
Impact on taxation levels?
Let's say that SS is indeed a welfare program as any other. Then that means that SS taxes are just income taxes under another name.
If federal taxation rates are recalculated assuming that EE and ER payroll taxes are individual income taxes, does that significantly alter the progressivity of the current income tax structure? Has anyone run those numbers?
"Perplexity is the beginning of knowledge" -- Kahlil Gibran
SS makes it *more* progressive, not less
It is a misconception to think that simply because SS taxes cut off at $94.2K, adding SS payroll taxes into the mix makes the federal tax code "more regressive." In fact, SS, on a net basis, increases the effective average tax rate for the rich and decreases it for the poor.
SS would only make the tax code more progressive if we took all the money from SS taxes every year, piled it up in a big stash of dollar bills, and lit a nice big bonfire.
In practice, you get benefits back in exchange for the money you put in. While the formulas are complicated, at least for the retirement program, you *very roughly*, *on average* get money back proportional to what you put in.
If that's all that SS really was -- a forced savings program that didn't redistribute income, but that paid you back in the end proportional to what you paid in, with interest -- then, in fact, from an economic point of view, SS would have *no* impact either way on marginal tax rates.
In reality, however, as the study shows, SS *does* redistribute income on average from the rich to the poor.
Therefore, on a *net* (rather than gross) basis, SS tips the tax code even *more* steeply against the rich than it already is. (It is already quite tilted, and, contrary to popular belief, has become even more tilted against the rich during the Bush admin: http://www.taxfoundation.org/publications/show/1941.html
)
If I am at the 10th income percentile, this study tells us that I get back 170% of what I paid in. I am paying 12.4% in taxes, but I am getting 21.08% back in return. Therefore, SS, on net, is a *negative* income tax of -8.68%.
If I am at the wage cap, I get back 70% of what I paid in. I am paying 12.4% in and getting 8.68% back. Therefore, SS, on net, is a *positive* tax of 3.72%.
(These are average tax rates, not marginal tax rates. Marginal analysis would be quite a bit more complex.)
If we add Medicare, the tax code once again becomes *even more* steeply tilted against the rich. Medicare is not subject to any wage cap, and Medicare benefits are *not* related to what you paid into the system over your lifetime.
It is hard for most people
to identify with economic populism of the rich and the persecution of the wealthy.
If you use the Cayman Islands as a tax shelter you may be able to escape this persecution by the poor.
The wealthier can higher tax lawyers who can discover many ways to avoid paying taxes, and rarely pays an unfair amount.
Why can't you be glad to pay taxes. It means you are making money.
If I had to PAY 8,000 dollars a year in taxes, I would consider myself lucky.
YOu may consider paying no taxes just grand, but most often it means you are in the lower income bracker or poor.
It is the economy, stupid.
Up in smoke
But isn't that (in concept) part of what you're saying is wrong with the Social Security setup?
Essentially, that is what has happened. Today's payroll taxes, just like today's income taxes, were in effect spent years ago. The government could in theory decide tomorrow that no further SS or Medicare payments will be made. So if we explore that hypothetical and say that SS is indeed just another welfare program that can be eliminated, then we must conclude that payroll taxes are just income taxes.
In other words, I'm asking if anyone has run the numbers of "who pays what portion of federal taxes" (a la Rush Limbaugh's pie chart) with the assumption that all payroll taxes are income taxes too. And maybe a list of actual taxes as a percentage and as a flat amount of total income by income bracket. Would the results be more or less progressive than the current income tax structure? (I'm sorry if the answer is obvious to you math types, but conceptual mathematics has never been my strong suit and I need to see the numbers)
I was curious about this a while back so I played around with my own tax information. When I assume that SS is just another income tax, my calculations show that my average tax rate over my entire career is 31%. Essentially a third of my gross income. To me that feels regressive, but naturally I'm biased ;}. How does this compare to other income brackets? That's my question. Has anyone seen that data already compiled or do I have to slog through the numbers to satisfy my curiosity?
I understand what you're saying about SS benefits and I agree wholeheartedly that anyone making even decent money (not just "the wealthy") will not get back anything close to what they paid in. The results of my analysis on my own tax records were incredibly depressing, even more so than your math showed.
"Perplexity is the beginning of knowledge" -- Kahlil Gibran
More on net impact
That's true, but it's unclear what effect this has on the net impact of SS on taxpayers.
Some government spending destroys wealth: for example, the Bridge to Nowhere in Alaska cannot be economically justified on the basis of how much money it costs. By building it, we are throwing wealth down the drain.
Other government spending can create wealth: for example, when the government builds a new road that relieves traffic congestion. This costs money, but the corresponding benefit is larger than the cost.
Other government spending does not create or destroy wealth, but merely transfers it around. Social Security payments are an example of this. It costs next to nothing for the government to print and mail an SS check. It is a nearly pure transfer of money from taxpayers to a certain subset of citizens.
Different people may disagree on the merits of a given government spending program. I happen to believe that the majority of government spending programs are wasteful and destroy wealth; others may believe that the majority of government spending programs are productive and create wealth. But we don't need to answer that question here.
Transfer payments, in and of themselves, are not economically harmful. What *is* economically harmful are the changes in behavior of various economic actors because of these transfer payments and because of the taxes required to finance them.
The real question is not whether the government spent the Social Security surplus. The government has almost no limit on how much money it can borrow. In the absence of the SS surplus, would the government have spent money differently? Would it have spent less money? Unclear. Arguably, it might have spent the exact same amount, and it simply would have borrowed more to make up the difference. We will never know.
The reality of the tax code is that it is *extremely* complex. If you produce a graph of marginal tax rates for a given taxpayer, it jumps up and down all over the place for all sorts of reasons. For an abbreviated version in graph form, see page 7: http://www.taxreformpanel.gov/final-report/TaxReform_Ch1.pdf
The point where SS taxes end is also very close to the point where taxpayers (1) start getting hit by AMT and (2) starting losing many other deductions and credits because of income phaseouts. For example, you start losing eligibility to make Roth IRA contributions at around that exact same income level.
The exact answer will be different for every single taxpayer because everyone is eligible for a different set of deductions, credits, and so on, and has a different family status.
Well, I can compare to myself. Let's look at my state and federal income taxes plus payroll taxes for the 2003-2005 tax years. Again, this is *only* income taxes and (SS and Medicare) payroll taxes. No property taxes, no sales taxes, no gas taxes. Also, I will only count the "employee" half of the payroll taxes -- I am not counting the "employer" half, so this is probably an understatement of my taxes.
Using my federal AGI as the denominator, over the 2003-2005 tax years, I paid 36.3% of my income in federal and state income and payroll taxes.
Of course, I live in a high-tax state. This number would be a lot closer to yours if, say, I lived in Washington or Nevada or Texas rather than California.