Ron Pearson is a long-term friend, a retired financial planner, as well as a retired Navy fighter pilot. Ten years ago, he wrote about the sad state of Social Security. With his permission, I’m republishing it here – to show how the problems of Social Security are not new, and that we have been writing about it for too long.
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Government-Speak – Do you know what OASDI is? It’s Old Age, Survivors and Disability Insurance, known by the more common name, Social Security, today. Since it’s inception in 1935, everyone paid “premiums” in accordance with the Federal Insurance Contributions Act (FICA). Currently, employees pay 6.2% and employers pay 6.2% in FICA tax (self-employed pay the whole 12.4%).
The “Making Work Pay” Tax Credit just passed in the stimulus package includes $400 per person refundable tax credits for those with adjusted gross income below $75,000 ($150,000 for married filing jointly). This credit also applies to those who pay no income taxes.
The purpose of this tax credit is to eliminate the requirement for people to pay their share of the OASDI insurance premium. Thus, after 74 years, we have changed OASDI from an insurance program to which everyone pays premiums into a wealth transfer program where those who pay income taxes will be subsidizing those who no longer have to pay their insurance premiums. In government-speak, not paying your premiums becomes a “tax cut”. This one change will cost $116 billion over the next 10 years.
To “pay” for this wealth transfer, Congress plans to raise taxes on those making higher incomes (some say greater than $250,000). This tax increase may be delayed until after the recession is over, but it is coming.
There is no doubt that payroll taxes represent a large burden on the working poor. However, this burden cannot be viewed in a short-term context because payroll taxes represent future benefits for workers. The Social Security system is an insurance program into which workers pay so that they can receive benefits when they retire.
Social Security was designed to provide higher rates of return for those with the greatest financial need. Accordingly, the system already redistributed a substantial amount of money from mid- and high-income workers to low-income workers.
A Congressional study showed that low-wage workers could expect to receive Social Security benefits which exceeded the value of their payroll tax contributions (roughly a 2% return). In contrast, middle- and high- wage workers were expected to pay substantially more into the system than they would receive in benefits. Middle- and high-wage couples were expected to suffer net losses throughout their lifetimes as large as $120,000 and $200,000 respectively.
Thus, the original Social Security program was, in part, a wealth transfer to low income workers. This new “tax cut” further increases the wealth transfer.
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