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More on fixing Social Security

By Jennie L. Phipps · Bankrate.com
Tuesday, November 2, 2010
Posted: 4 pm ET

I wrote two days ago about a report that recommended eliminating the option to collect Social Security at age 62. The author, who is affiliated with the conservative think tank American Enterprise Institute also advocated leaving Social Security Disability as is and eliminating Social Security taxes for workers who have worked more than 35 years.

I got a couple of responses from readers who thought this retirement planning proposal was lousy, including a loud raspberry from my Bankrate colleague Barbara Whelehan, who shares this retirement blog with me. Barbara said:

"You make a good case, but I have to say that I agree with Mary (another reader who commented) -- lift the cap on Social Security taxes so that high earners don't get a break. Why should low- and middle-income earners pay on all their earnings, but high earners only pay taxes on up to $106,800 of their earnings? Lifting the cap would help make Social Security solvent for another 75 years, an argument I made in a recent blog here on Bankrate. ..."

The American Academy of Actuaries calculates that gradually raising the annual earnings cap from $106,800 to cover 90 percent of all wages (current cap covers about 83 percent of all wages) and using the higher cap for calculating benefits, too, would solve 37 percent of the Social Security shortfall -- but obviously not all of it.

To solve all of it, you would have to eliminate the cap and ask high earners to pay Social Security tax on all their earnings but only calculate benefits on earnings up to the current cap.

Barbara says, "I vote for raising the income ceiling, but not the payouts."

With all due respect, Barbara, I think that's totally unfair. To increase Social Security taxes without increasing the amount people who pay those taxes get in benefits would be an enormous tax increase on people who really aren't all that wealthy. Earning $106,800 is a good income, but it doesn't make you Bill Gates, especially in high-cost parts of the country.

The actuaries outline various alternative scenarios, but none of them are perfect and all of the ones that eliminate the entire shortfall involve either cutting benefits or raising taxes. Nothing surprising there, but no matter how you cut it, it's painful for somebody, and I think the pain level on your proposal is unacceptably high.

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7 Comments
Vince
December 28, 2010 at 12:03 am

Social security Benefits have effectively two components. One is an earned component that is effectively paid for by the worker and the employer. This includes the disability component that the Diabetic can benefit from. The other is a welfare component that is not directly paid for by earnings. Benefits for dependent spouses fall in this welfare area. You don't pay for them, you just get them. Dual income couples pay double but get nothing in terms of spousal benefits. There is no rational reason whatever that the welfare component of Social security should be paid for by earnings subject the earnings cap. Remove the cap and tax the previously untaxed income at a level sufficient to pay the welfare benefits. My wife and I have been at the social security limit for many years. We pay more towards the welfare component of social security than Bill Gates.

Darrell
December 21, 2010 at 2:03 pm

My suggestions:

1. Remove the SS taxes from the general budget revenue, as it was before Lyndon Johnson got it changed.

2. Permanently cut the SS tax rate in half from 6.2% to 3.1% and raise the earnings subject to tax from the current $106,800 to whatever level would raise enough to balance the SS budget.

John
November 29, 2010 at 10:14 am

I would like to have access to the data showing where illegal and even legal immigrants are taking our money out of Social Security but have never paid a dime into it.

I suspect the math itself on this matter would show why the influx of immigrants, gathering around the free bird feeder, are evacuating any and all available money for the Americans that paid in to the system. AND, it is not the immigrants' fault. Our liberal congress likes to give away everything and then find reasons to increase what we pay for everything in taxes and hidden subsidies.

George
November 06, 2010 at 2:09 pm

Social security can be fixed by simply takeing it away from the general fund and then stop useing it for expensive gifts for friends in high places.
Now take the money we are giving to Governments that hate us away and put that money into S.S. You will find that S.S. would have more than enough money for the people comming into social security

Tom
November 04, 2010 at 5:26 pm

Social Security is evil, and needs to end. I have a brother who is diabetic: he will not live long enough to collect social security benefits. Yet he must pay taxes for a benefit that he is unable to collect: Social Security taxes the weak and sick to pay for benefits for those with the health and wealth to live long.

Explain to me again why my brother with two young children who will not receive much of any inheritance should pay taxes to support payments to people like Warren Buffett?

End the Ponzi Scheme
November 03, 2010 at 10:20 am

Given the trust fund is empty, and no IOUs from the taxpayers is not the same as actual money, Social Insecurity needs to end. It's not a contract between generations, I'm forced at the end of a gun to pay, that's not a contract, that's flat out theft.

Why because I plan, save, and behave responsibly should I pay for folks who don't? Over half of the country pays no income tax, so those trust fund IOUs fall squarely on me too.

Barbra always sides on the tax the rich theme, so I'm not at all surprised. There is already a shift to taxpayers to cover the shortfall, so we already carry more than the SS tax to keep the Ponzi Scheme going.

AM
November 02, 2010 at 6:05 pm

"With all due respect, Barbara, I think that's totally unfair. To increase Social Security taxes without increasing the amount people who pay those taxes get in benefits would be an enormous tax increase on people who really aren't all that wealthy. Earning $106,800 is a good income, but it doesn't make you Bill Gates, especially in high-cost parts of the country."

There's nothing fair about wealth distribution. Federal taxes do a whole lot of that, too.

Like it or not, we need to do something about SS. It will not be able to continue in it's present form. The least painful way is to pull off that silly cap.

We need to stop pretending that SS is a "contract between the generations" or that it's a public 401(k). It's not. It's a tax that redistributes wealth based on age. Welfare for old people, many of whom are completely capable of working. You don't count up your Federal taxes and think that "rich" people should have to stop paying in at some point because they don't see it back.

In my wildest dreams, I want to see SS be 100% disability based. No collection because you are 65, but because you are no longer able to work at that age. You'd need to apply for it, like everyone else. It would stop age discrimination, too, because no one would assume automatically that you'd be able to retire.