AP’s Ohlemacher: Taxing All Earned Income to ‘Save’ Social Security Would Be ‘Modest Change’
Democratic President Franklin Delano Roosevelt signed the Social Security Act on August 14, 1935.
In anticipation of the New Deal-era program’s 80th anniversary, the Associated Press’s Stephen Ohlemacher presented as facts several unfortunately widely believed distortions. His worst offense against common sense was an item in his list of “modest changes” which could “save” the actuarially bankrupt (to the tune of at least $10.6 trillion) program. The AP reporter included in his list of what he claimed would be “modest changes” the idea of applying the 12.4 percent payroll tax to absolutely all earned income. Modest, schmodest.
Here are excerpts from Ohlemacher’s exercise in reality avoidance (bolds and numbered tags are mine):
Social Security at 80: Modest changes could save program
As Social Security approaches its 80th birthday Friday, the federal government’s largest benefit program stands at a pivotal point in its history.
Relatively modest changes to taxes and benefits could still save it for generations of Americans to come, but Congress must act quickly, and even limited changes are politically difficult.
The longer lawmakers wait, the harder it will become to maintain Social Security as a program that pays for itself, a key feature since President Franklin Roosevelt signed the Social Security Act on Aug. 14, 1935.
… The options fall into broad categories: benefit cuts, tax increases or a combination of both.
None is popular.
… Options:
— apply the payroll tax to all wages, including those above $118,500. This option would wipe out 66 percent of the shortfall.
The top federal tax rate on earned income is currently 42.5 percent, consisting of the 39.6 percent federal income tax rate and the 2.9 percent Medicare tax which, unlike the payroll tax, has no earnings limit. Throw in a rough 6.5 percent average top bracket for state taxes (in states like New Jersey and Califorinia, the figure is much higher, while states like Florida and Texas have no income tax), and you’re at 49 percent.
Ohlemacher’s “modest change” would add 12.4 points to that top rate, bringing the greedy hand of government’s average total take on each marginal dollar of earned income to 61.4 percent.
Ohlemacher’s “modest change” is an average 25.3 percent tax increase (12.4 divided by 49) on all earned income above $118,000 per year.
Ohlemacher’s “modest change” is an average 24.3 percent tax decrease in take-home pay (12.4 divided by the current 51 percent average remainder after taxes) affecting all earned income above $118,000 per year. (In California, where the top income tax rate is 12.3 percent, the reduction in take-home pay would be over 27 percent.)
The daily koolaid delivery to the offices of the Associated Press must be especially strong if Stephen Ohlemacher really believes that this “modest change” would “wipe out 66 percent of the projected Social Security shortfall.” Such an increase would do serious harm to the economy, holding back economic growth, overall employment, and tax collections. The degree of the “wipe out” would be far, far less than 66 percent.
If Stephen Ohlemacher thinks that a 24 percent decrease in take-home pay is a “modest change,” then he must think his economic decisions and behavior wouldn’t change a bit if he was forced to accept a 24 percent cut in take-home pay. You should know better, sir. How can you be so dense as to pretend that it won’t negatively affect the choices and behavior of those affected by this “modest change”?
Three other obvious errors in Ohlemacher’s report include the following:
- The pretense that the Social Security system has $2.7 trillion in “money.” It doesn’t; all it has is that much in IOUs from the rest of the government. The government facetiously and deceptively characterizes the balances in the various Social Security “Trust Funds” as “reserves.” They are obviously no such thing.
- Ohlemacher failed to note that the program’s annual financial performance has serious deteriorated since Barack Obama took office in 2009. The system has paid out much more in benefits than it has collected in taxes for the past five calendar years, i.e., the program does not “pay for itself,” — something which has never happened before. This has occurred primarily because the economy’s post-recession recovery is the worst by far since World War II.
- Ohlemacher also ignored the fact that the system’s long-term viability has badly deterioriated during Obama’s presidency. The year in which serious benefit cuts will have to take place if no action is taken has gone from 2041 in 2008 (i.e., 33 years down the road) to 2034 (i.e., only 19 years from now) — and there is strong reason to believe that certain actuarial errors, if corrected, would bring the current cutback date even closer.
Cross-posted at NewsBusters.org.
First we need to dispell the myth that Social Security is a retirement system. The SCOTUS ruled that Congress can cancel this program at any time and you are not entitled to a payout because the money collected is via a TAX, NOT a contribution to retirement. No individual has a legal claim upon a tax revenue, period. Politicians have repeatedly lied claiming it is a retirement program and that you are entitled to a payout.
SS is merely a welfare program that attempts to put an economic floor under those who no longer work due to age. We all have paid into the program via a flat tax, proportional to income and as currently administered a pay out is somewhat proportional but is heavily weighted to those who pay the least tax.
SS is NOT a pension, if it were, then it would be run like a pension system with a rigorous actuarial application that would require solvency to protect the pensioners. All incoming funds would be properly invested to achieve the long term solvency of the fund. Hence any fiddling with SS eligibility age or increasing the tax in any way is merely Kabuki theater to justify a lower payout and more taxes as they never address the issue of investment of the funds. This is why Chris Christie’s plan is a non-starter.
IF you want a national retirement system say like Chile, then by all means do it, but don’t allow any politicians to run the program and subject the program to the same rules all pension programs are required to follow. Bush had the right idea of self directed individual retirement accounts with limited investment options. I would remind everyone, that IF you were to invest $100/month just in index funds like the DOW 30, S&P 500, etc, when you started your career in your 20′s, by the time you’re 55 you would have in excess of a million dollars in your retirement account. Even a simple 30 year payout starting age 65 would have you living quite well. That SS is going broke is totally inexcusable as they mal-invested the tax in low interest bonds.
Comment by dscott — August 10, 2015 @ 2:49 pm
“pay out is somewhat proportional but is heavily weighted to those who pay the least tax.”
Very heavily distorted.
Comment by Tom — August 10, 2015 @ 6:03 pm
IF you were to invest $100/month just in index funds like the DOW 30, S&P 500, etc, when you started your career in your 20′s, by the time you’re 55 you would have in excess of a million dollars in your retirement account.
Dick MacDonald did the math some years ago. His conclusion was that a median earner investing his 12% over 40 years would retire with a nest egg of over 3 million dollars a year.
That 3 million could then buy an annuity at a modest 5% per year. The annual income on that annuity would be 150,000 per year. Do you think a senior earning 150,000 a year can afford their own health insurance policy for their family?
Or they could invest the 3 million and live on the interest, and leave the principle to their heirs. Dick MacDonald points out that the current program cheats your heirs out of a rightful inheritance.
Social Security cheats everyone who pays in out of a rightful return. Its obscene that anyone will support this theft of your life’s labors.
Comment by Opinonated Vogon — August 12, 2015 @ 8:11 am
#3, Indeed, and following your point, it has siphoned TRILLIONS of dollars in potential busines capital which could have and would have been put to far better use, and seriously held back prosperity
Comment by Tom — August 12, 2015 @ 9:52 am
#3 and #4 And that is exactly the answer to people who insist the government should tax more than spend less. Siphoning of investment capital that would have created jobs and therefore reduced or eliminated the need of government to provide any social service from Food Stamps to HOC. The answer to poverty is a JOB, not a government hand out. The only reason for pushing more government services is to selfishly take credit at the expense of the poor. Liberals literally hate the poor by their selfish egotistical actions. People are poor because they don’t have a job OR have been denied the upward mobility of the on the job training and experience gives them in an economy flush with JOBS, even at the low end at minimum wage. You work yourself up the economic ladder to support yourself and your family. Your need and ambition is your incentive to earn more money. Government hand outs kill every incentive.
Comment by dscott — August 13, 2015 @ 9:08 am