More Troubled Ideas To Reform Social Security In the US

Posted by jerry as finance

I read this blog post recently, proposing an idea for social security tax reform.  The net of the story is that the FICA tax is regressive - it impacts the poor more than the rich, so lets turn it around.  Put a lower limit in place for salaries, below which there is no FICA burden.  Remove the cap that is currently in place where FICA drops off after the first $97,500.  Then, lower the overall FICA rate from 6.2% to 3.2%, making the people in the middle income brackets happy as well, but sticking it to the rich.

I don’t agree.

Here’s my response to the plan:

Let’s assume that the total income of the nation is $1,000,000.
So, currently the 60% of people making less than $97.5k contribute $37,200 to the pot. Let us generously assume that the greedy buggers over $97.5k don’t pay any money into the pot (which we know is not the case, but we can not derive the right percentage).

Under your plan, all 100% of the income is taxed at 3.2% (which we know is not true, because people below the poverty line would not contribute). 3.2% of $1,000,000 is $32,000. Which is less than the $37,200 above. $32k is actually going to be less, and $37.2k is actually going to be more. So, you have made the problem worse.

Now, being one of the greedy buggers making over $97.5k, I will actually see my overall FICA contribution drop by about 1/3. not bad. Now, another approach is to leave FICA at 6.2% and drop the ceiling. The problem then becomes that I, and all of my money grubbing, elitist cohorts will demand equity for the increased contribution. So, the amount of money required to fund my retirement is going to be substantially higher if I pay more in. Again, this doesn’t fix SS.

The system is fundamentally flawed. It is a pyramid scheme and it is suffering the fate of all pyramid schemes once you pass a critical mass. In this case, the rate of growth of the work force is not sufficient to keep the program solvent. So, we are forced to drop it, introduce gross inequities, or fund it through some new tax scheme de jure.

The major problem with reforming social security is inequity.  The plan presented above seems to make a lot of sense.  Those that can least afford it will not be burdened, while those that can most afford it will contribute the most to the pot.  The two fundamental problems are:

1. people making less than the lower limit will have their retirement subsidized, potentially without ever contributing any money.
2. in order for the plan to work at all, there would need to be a fairly dramatic cap on benefit payments, meaning that someone who contributed $10,000,000 to the social security fund is only eligible to collect his or her $3000 per month

Both of these problems will are foundational issues that will prevent a reform including these ideas from being passed.  Like it or not, in the US it is not the poor that make laws.  It is the wealthy - be it democrat, republican, independent, green party, etc.
I am certainly not on the side of leaving things as they are.  I am proposing that we look for solutions that have a chance in hell of being enacted.