Dale Coberly: This is part 2 of a comment I began July 18 on Angry Bear. It is a reply to an article appearing on the internet by Andrew Herrig at wealthynickel.com under the title. “With Social Security on Brink of Collapse, Dramatic Changes Coming – Some With ‘Bipartisan Support,’” WEALTHY NICKEL, written by Andrew Herrig. The first part of my commentary noted that Herrig ignores that Social Security can fix itself simply by raising the payroll tax one tenth of one percent each year for a few years. This is not “brink of collapse”: With no fix at all, Social Security would still be able to pay benefits out of its payroll tax income. Those reduced benefits would not be best policy, but the reduced benefits would still be more in real
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Dale Coberly: This is part 2 of a comment I began July 18 on Angry Bear. It is a reply to an article appearing on the internet by Andrew Herrig at wealthynickel.com under the title.
“With Social Security on Brink of Collapse, Dramatic Changes Coming – Some With ‘Bipartisan Support,’” WEALTHY NICKEL, written by Andrew Herrig.
The first part of my commentary noted that Herrig ignores that Social Security can fix itself simply by raising the payroll tax one tenth of one percent each year for a few years. This is not “brink of collapse”: With no fix at all, Social Security would still be able to pay benefits out of its payroll tax income. Those reduced benefits would not be best policy, but the reduced benefits would still be more in real dollars than they are today.
This part will be mostly comments on the “fixes” Herrig says have bipartisan support.
Herrig says
- Raising the Payroll Tax Cap
Overall Support: 81% (Republicans 79%, Democrats 78%)
Currently, only the first $147,000 of income is subject to the payroll tax. A proposal to raise the payroll tax cap to $400,000 would go a long way to closing the budget gap. Researchers estimate this fix alone would eliminate 61% of the shortfall. An overwhelming majority of both Republicans and Democrats in the survey supported this proposal, which may embolden policymakers to put forward legislation that would sign this into law.
There has already been some movement in Congress, with one proposal by Bernie Sanders and Elizabeth Warren to increase the payroll tax on all income over $250,000, including capital gains. Another proposal called Social Security 2100: A Sacred Trust would increase the payroll tax cap to $400,000 on earned wages.
I say
What is wrong with raising the payroll cap is that the cap was created so that very high earners would not have to pay more into Social Security than it was worth to them. Roosevelt knew that if the rich were forced to pay more than it was worth to them, they would simply destroy Social Security because they had the political power to do so.
Those very high earners already pay more into Social Security than lower income workers. They pay 12.4% of their wages just like low-income workers. But 12.4% of a hundred and sixty thousand dollars (the current cap) is more than 12.4% of 50 thousand dollars.
The rich person pays 20,000 dollars per year for his Social Security, and the average person pays about 6,000 dollars for his. If that average person is not self-employed he only pays three thousand dollars, and his boss pays the other 3000 dollars. [Presumably the boss is a “rich” person.]
A poor person making 20,000 per year would pay about $1240 and his boss would pay the other $1240.
The 50k worker will get a pension of about 20k per year in adjusted dollars (that is adjusted for inflation, and with an effective real interest that comes from the growth in the economy). The rich person will get a pension of about 40k per year.
The rich person’s pension is bigger, because he paid in a lot more: The average worker paid 6000 per year for 40 years, or 240,000 dollars, to get a pension of 20,000 per year for 20 years (average life expectancy in retirement) or about $400,000.
The rich person paid in 20,000 per year for 40 years, or 800,000 dollars, to get a pension of 40,000 per year for 20 years, or 800,000 dollars.
That is, the average worker gets a pension that is one and two thirds times as much as he paid for it [in adjusted dollars], while the rich person gets back only about exactly what he paid in. Actually, both of them do a lot better than this. That “paid-in” is more than they actually paid in:
Social Security adjusts what they paid in in order to pay effective interest of about 5% to cover inflation and a modest real rate of return. Also, both of them will see their pension increased every year to cover the cost-of-living increases during retirement. I have seen some people want to discount the correction for inflation as not “real,” but any time you try to save for the future you have to first meet the cost of inflation. And it is not all that easy to find a “safe” investment that will pay a reliable 2% real interest.
The actual amount an average worker paid in from 1985 to 2020 was about 146 thousand dollars. After adjustment, Social Security calls this 56 thousand per year times 35-year times .12.4%=243 thousand dollars and uses that number to calculate his pension at about 22 thousand dollars per year. That times 20 years is 440 thousand. So he will get 440 thousand dollars in benefits for which he paid 146 thousand in taxes, so he gets back 3 times as much as he paid in…. not counting cost of living adjustments over the twenty or more years he is retired.
Note the SSA counts his working wage as 56 thousand per year and pays a pension of 22 thousand for a replacement rate of 39% [trustees report says 40%, but there are enough small variables going on that this counts as a “check” and not a “disproof” of what we are saying here]
Meanwhile, the very low earner is getting a pension check of about 70% of his working wage. So he pays in about 6% of a $20,000/year wage, or about 1200 dollars for 40 years or $48,000 to get a pension of 14,000 dollars per year, times 20 years equals about $280,000 or about 6 times as much as he paid in [in adjusted dollars…already almost twice what he actually paid in taxes].
The following is from another source. coming from AARP. –How Much Social Security Will I Get? (aarp.org). The numbers are different from mine because the years being looked at are different…but not so different that it changes anything.
AARP says “To calculate your benefit, Social Security determines your lifetime average monthly income, adjusted for historical changes in U.S. wages, and applies a formula that slices that monthly figure into three portions and gives the most weight to the lowest one. (The parameters change annually; for people who become eligible for retirement or disability benefits in 2023, the low portion is the first $1,115 of monthly average income.) The result is that the less you earned while working, the more of your income Social Security replaces.
In an June 2022 analysis, Social Security actuaries calculated the replacement rate for hypothetical retirees across a wide income range. For workers who claim benefits in 2023 at the age of 66 and 6 months — the full retirement age for people born in 1957 — they found that the replacement rate would be:
- 75.3 percent for someone with “very low” career earnings (defined as an average of $15,006 per year).
- 54.8 percent for someone with “low” average earnings ($27,011 per year).
- 40.7 percent for someone with “medium” average earnings ($60,024 per year).
- 33.6 percent for someone with “high” average earnings ($96,039 per year).
- 26.7 percent for someone with “maximum” average earnings ($147,775 per year).
This does not look “regressive” to me. Unless you are a liberal economist for whom “regressive” is a magic word meaning “unfair to the poor no matter what the pay back is.”
Note that none of the “raise the cap” plans actually solves the SS actuarial defict problem, and none of their sponsors actually look at what the actual payback is, it being so much more fun to “demand the rich pay their fair share.” Nor do they understand that the rich already think they are paying more than their fair share, thus giving the bad guys an issue they can win on simply be being more truthful than the “good” guys.
I need to stop here.