Get printable version
MACROECONOMIC OUTLOOK |
||
Volume 00 |
Social Security |
Issue 01 |
This article will address unconscionable conduct of the federal government concerning Social Security. We will see that over the last few decades, the government has been raiding Social Security funds from lower and middle class Americans and spending it, while at the same time the government has considerably lowered the taxes of the wealthy. The 95 percent of the people who have suffered the most from this exploit are obviously not well aware of it otherwise there would have been a massive outrage.
We will try to clear up the confusion that millions of Americans have regarding Social Security. After the great depression of 1930, many older Americans had no financial future. The Social Security Act was founded by Edwin Witte to prevent this from ever recurring. It was signed into law by FDR in 1935. The initial tax was 1% levied on the employee only for the first $3,000 of earnings. Today the employee and the employer both pay 7.65% on the first $97,500 of earnings. However, the original philosophy of Social Security has largely been abandoned. It has evolved from a social welfare program into a retirement income program, and then to a general tax, with retirement as a secondary issue.
Definitions:
A Progressive Tax is levied at a progressively higher rate for higher income groups. Progressive taxes are the fairest because they are based on your ability to pay, which is your income. The higher your income, then the greater is your ability to pay. Federal Income taxes are Progressive.
A Regressive Tax is levied at the same rate across all income groups, or worse, at a declining rate for higher income groups. For example property taxes are Regressive because they are flat tax rates, independent of the income of the owner. Sales taxes are also Regressive with flat rates independent of the income of the buyer. It is the type of rates that determines whether a tax is Progressive or Regressive, not the amount.
Social Security
Social Security is a regressive tax and has a declining rate for higher income groups. It has a flat, constant percentage rate for income groups up to 97.5 K annual salary base. For richer folks with a higher income than that base, the Social Security tax declines as a percentage of income because they pay Social Security tax as though their top salary were only 97.5 K.
Social Security is a two part tax on your income. The first part is the Medicare Tax which is a 1.45% tax on all your earnings with no earnings limit. The second part is the Social Security Tax which is a 6.2% tax on the first $97,500 of your earnings. Below $97,500 you are taxed at the combined rate of 7.65% and above it at the 1.45% rate. Since the rate is a flat 6.2% up to $97,500 and then declines to 1.45%, Social Security is a very Regressive Tax since the percentage of the tax levied actually decreases with income.
Thus, because of this tax structure, not only do the poor and middle income groups pay a higher percentage of their income in Social Security taxes, but as we shall shortly see, they now subsidize upper income wage earners. Upper income groups subsidize public retirement programs in all other countries except in the US.
A SOBERING HISTORY OF TAXES
| Year | Top Income Tax Bracket | GDP Growth Rate |
Maximum Social Security Tax Is Rate x Tax Base = SS Taxes Paid |
| Year | Top Income Tax Bracket | GDP Growth Rate |
Maximum Social Security Tax Is Rate x Tax Base = SS Taxes Paid |
| 1960's | 80% | 4.4% | 3.00% x 4.8K = $144 |
| 1970's | 70% | 3.3% | 4.80% x 7.8K = $374 |
| 1980's | 50% | 3.1% | 6.13% x 25.9K = $1,588 |
| 1990's | 40% | 3.1% | 7.65% x 51.3K = $3,924 |
| 2000's | 35% | 2.8% | 7.65% x 97.5K = $7,495 |
Data sources for the above chart are from the government: The tax rates are from the Internal Revenue Service; the growth rates are from the Commerce Department; and the Social Security tax rates and tax bases are from the Social Security administration.
- As shown in column 1 above, the top income tax bracket has declined from 80% to 35% or a 56% REDUCTION for the top income wage earners. Federal income taxes are becoming less progressive due to the reduction of the top tax rates. Over the decades this has become a huge tax savings to the top income groups.
- Tax and economic growth theory asserts that if you reduce income taxes it will increase tax collections and will promote economic growth. It did increase tax collections but the economic growth rate actually declined from 4.4% to 2.8% as shown in the middle column above.
- The column to the right above shows that the Social Security tax has gone from a $144 maximum to the current $7,495 or a 5205% increase for a $97,500 income. The increase is 1010% adjusted for inflation. The lower and middle income groups had their Social Security taxes raised ten times faster than inflation.
- Congress transferred some of the tax burden from the top income earners to the lower and middle income groups by increasing the Social Security taxes. Next, they took over $4 Trillion of excess dollars from the increased Social Security Taxes and transferred them to the general fund to offset the reduction in income taxes for the wealthy. Social Security tax was converted from a retirement benefit to an income tax for the poor and middle incomes.
- A person with a $1,000,000 income today pays $20,545 or 2.1% in Social Security taxes and everyone under $97,500 pays 7.65%.
We hope you finally get it: Regressive social security taxes have become higher income taxes for the middle and lower income groups while the tax was lowered for the wealthy. Over $4 trillion of social security taxes has funded government operations since 1965.
Each month the Social Security plus Medicare tax collections exceeds the beneficiary payments by roughly $20 billion. The $20 billion surplus at month-end is then sent to the treasury department and put into the general fund. The general fund gives Social Security an IOU with no interest paid for the $20 billion dollars. The $20 billion is then spent on Iraq, etc. There is no money in Social Security at month-end because all the excess dollars were transferred to the general fund and spent.
Tax relief was provided to the upper income earners by reducing their income tax rate by 56% since 1965. The public thought they were getting more money put into Social Security when taxes were raised during the same period by 5205%, or a factor of ten beyond inflation. In reality, over $4 trillion of their Social Security tax increases were used to finance the day to day operations of the government. The public was completely fooled. The government raised people's Social Security taxes with the intent to use them as income tax revenue to finance governments' operations, not future Social Security benefits. Guess who subsidizes who?
Not only has the huge Social Security tax increase provided income tax relief for the wealthy and a new Income Tax for the lower income groups, one further confounding problem is that the wealthy can claim a low 15% capital gains tax on much of their income, but that is another story. The bottom line is 95% of US citizens got screwed. Capitalism left unchecked will result in a small percentage of the wealthy owning and controlling the majority of the assets.
Here are two astounding realizations of this unconscionable fiscal irresponsibility of the government.
1. The government had the moral depravity to do this to the lower and middle classes.
2. There has not been an outrage by the people.
Do you understand this as a moral corruption of our government which exploits the vast majority of it's people? Don't you feel angry and want to do something about it?
Common Counter-arguments
Congress has successfully distracted the public by saying that the problem is due to the retirement of all the baby boomers. The facts are that the baby boomers already paid their fair share, and there easily would have been enough for them if over $4 Trillion of the increased Social Security Taxes had been kept in the trust fund and not used to finance the day to day operations of the Federal Government since 1965.
The flat tax advocates would like the tax rate to be the same for all income levels. They argue that this is fair because the wealthy are still contributing a higher share to tax revenue. These advocates are either ignorant, or, more likely, belong in the top level income brackets, and do not have a moral concept of monetary fairness.
One exception is the third wealthiest American, Warren Buffett who publicly pointed out the inequitable tax structure. He said that he was taxed at only 17.7% last year on $46 million in income, while his secretary paid 30% of her $60,000. He was able to keep 82.3% of his wealth because of the low tax for the top income bracket and the 15% capital gains tax.
Some argue that Social Security really should be paid by the poor and middle class, because they are the ones who benefit from it. This argument would only hold water if the poor and middle class didn't have $4 trillion raided from their retirement fund.
What the Foundation suggests to help alleviate the Social Security Problem
- First, the people should show their outrage and tell their congressmen to do the following.
- Restore the Trust Fund Status.
- Begin a plan to start refunding the $3.7 Trillion to Social Security from the General Fund.
- Reduce the regular budget by the amount of the annual Social Security surplus.
- Remove the $97,500 limit for levying the 6.2% tax on Social Security earnings.
- Permit no one to draw from the Social Security fund before age 65.
- Invest the Social Security surplus each year to enhance the funds for Medicare and Social Security.
- Treat the Social Security Funds as retirements benefits and not money to be wasted by the Government.