Pointing out structural inequities in the US economic system, which I did in a recent blog post, is one thing. Proposing actual solutions is another. So I’m going to take a shot. First up? Social Security.
You all know the problem. At current projected rates, the Social Security Trust Fund starts running out of money sometime around 2037 – the surplus in the fund would be gone, and taxes coming in would no longer be sufficient to pay the benefits owed. Benefits would have to be cut, eligibility ages raised, or both, and probably drastically.
Currently, employees pay 4.2 percent of their income in Social Security taxes, while their employers pay 6.2 percent of each employee’s pay. Historically, employees and employers both paid the 6.2 percent, but the employee deduction was reduced during the recent economic crisis to try to inject more money into the economy. Presumably, employees soon will again be paying 6.2 percent.
Well, 88 percent of employees will. The highest earning 12 percent? A few of them will be paying close to that, but most of them will be paying less. Far less.
See, Social Security taxes are capped – higher earning taxpayers only pay Social Security on the first $106,800 of their wages this year – that figure is indexed for inflation. After that, the tax goes away.
Let’s do some math, shall we? Suppose you earn $200,000 a year. At the normal 6.2 percent rate, you would pay $6,621.60 in Social Security taxes. That’s not 6.2 percent of your income. It’s 3.3 percent. Suppose you make $1,000,000. That $6,621.60 you paid in Social Security taxes is only 0.7 percent of your income. Meanwhile, the 88 percent of American earning less than $106,800 a year all paid the full 6.2 percent on every cent they earned.
What is the Social Security Trust Fund losing out on in money? In 2010, the total amount of income reported on individual US tax returns was $7.6 trillion. But almost exactly half of that, just a shade less than $3.8 trillion dollars, was reported by taxpayers earning more than $106,800. In other words, the 12 percent of people making the most money make half of all the reported income in this country – and they pay a lower effective tax rate than everyone else because every cent they make above the Social Security tax threshold does not face the 6.2 percent Social Security tax.
Simply by eliminating the cap on Social Security taxes, we could DOUBLE the amount of money paid in to the Social Security trust fund.
Which would more than solve the problem.
Wait a minute, you say, wouldn’t the system then have to pay out more in benefits? As currently structured, yes. But by eliminating the cap and then imposing even a tiny means testing requirement – we’re talking about adjusting the formula for individuals who’s highest average earning years come out over $500,000, say, to provide them with benefits at a rate of around what 90 percent of lower earners receive, the problem would be solved. Permanently.
Some will say such a proposal offsets the spirit of Social Security – that it was never meant as a tax, but a plan where everyone pays in equally and everyone receives the same benefits. That’s never been exactly true. Hell, half the money going into the fund now comes from the employer – they don’t get anything out of that other than a deduction. And, even now, the Earned Income Credit, in effect, wipes out Social Security taxes for the lowest-earning workers. And I have no problem with that. A civilization, if it wants to call itself that, makes sure people don’t starve. And it makes sure that, if they’ve worked all their lives, they don’t spend their last days living in a box under a bridge eating dog food. Which means that those who earn the most pay a little more. Under the plan I’m proposing, I’d pay a little more. I’m fine with that.
Next up? How the uber-rich evade taxes through off-shore tax shelters, costing the US Treasury $70 billion (yes with a B) a year in revenue, and what to do about that.