Social Security is a compact between generations. For more than 70 years, America has kept the promise of security for its workers and their families. But now, the Social Security system is facing serious future financial problems, and action is needed soon to make sure that the system is sound when today's younger workers are ready for retirement.That's off the front page of my "Your Social Security Statement," which I got in the mail just last week. Chances are you've gotten one too, or soon will. "OH MY HEAVENS, WHATEVER SHALL WE DO?" is sort of what I said. Sort of.
...Without changes, by 2040 the Social Security Trust Fund will be exhausted. By then, the number of Americans 65 or older is expected to have doubled. There won't be enough younger people working to pay all of the benefits owed to those who are retiring. At that point, there will be enough money to pay only about 74 cents for each dollar of scheduled benefits. We will need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations as it has done in the past.
On the inside of this nice letter, after first informing me that there'll be about 25% less for me than they're about to tell me I'll have, and after telling me that if that wasn't true, I'd get the equivalent of one week's 2007 pay per month (if it was going to be possible, which it isn't), I read the following:
You currently pay 6.2 percent of your salary, up to $97,500, in Social Security taxes and 1.45 percent in Medicare taxes on your entire salary. Your employer also pays 6.2 percent in Social Security taxes and 1.45 percent in Medicare taxes for you.Here's a concept I wish that congress could embrace: the marginal value of money. Everybody understands this concept completely, most of us without realizing it. To quickly demonstrate:
Johnny and Tommy are 10 years old. Johnny's Dad is an attorney. He went to work for Big Law in 2002, where they offered him 140,000 dollars a year starting salary not including benefits and bonuses. Five years later, he's making 210,000 per year, and gets a Christmastime bonus of about 10,000 if he meets his billable hours requirements. He's a tough but fair father, and every week, if Johnny does his chores and cleans his room and doesn't smart off to his mom (Dad is rarely home), Johnny's dad gives his son an allowance of $10. Pretty good, for a 10-year-old!
Tommy's Dad is also a lawyer, in fact he was a classmate of Johnny's Dad and they're still good friends (though they don't see each other as much as they wish they could). They would study together and made a great team--top of the class. Tommy's Dad went to work for Dogooders NGO in 2002 at a starting salary of 30,000 dollars a year, less benefits. Five years later, he's making $45,000 per year (more than a teacher but less than a plumber). He gets home at 6p, most nights, but there's no bonus in it for him other than the time he gets to spend with Tommy. Tommy's Dad is also tough but fair. If Tommy holds up his end of the deal, he gets $5 in allowance.
Tommy and Johnny are good friends, too. (Being a socially conscious, civic-minded guy, Johnny's Dad sends him to public school.) One Saturday, they go to Megalo Books to pick up remaindered copies of
Here is what the marginal value of money is: Tommy's dollar number 5 is his last dollar. If you take $.20 from his last dollar, you've put him eighty cents away from complete bankruptcy. If you take 20 cents from Johnny's dollar number five, he still has dollars 6,7,8,9 and 10 in his pocket. You'd have to take five more dollars from Johnny to put him in the same position.
And on the other hand, if Tommy got just one more dollar in allowance, that would mean a huge raise: a 20 percent raise! Woo Hoo! If you gave Johnny just one more dollar, that's just a %10 raise. Still not bad. But not nearly as exciting. Half as exciting, actually.
Under our current Social Security System, Tommy's Dad (TD), who makes less than 1/4 of what Johnny's Dad (JD) makes, pays $2790 in SS taxes per year. But because you stop paying social security taxes above 97,500 (seemingly arbitrary number), JD pays $6,045. More than four-and-a-half times base pay, but only twice as much in SS tax.
But here's the real pinch: That $2790 that TD pays hurts a lot more than JD's $6045. Why? The marginal value of money. $2790 is 6.2% of what TD makes every year. Because he makes so much less money than JD, the marginal value of money makes sure that that hurts him in many other ways: He gets less healthcare. He lives in a more dangerous neighborhood. He can't save as much for retirement. He can barely afford his house; thankfully his wife works. (JD's wife can stay home with J. She's deeply involved in the PTA and a local land trust, too.) When Tommy needs new glasses or shoes or a haircut or $200 for a field trip to the Science Museum in Boston, the vise tightens a little more. That vise is simply the marginal value of money. The closer your checkbook comes to zero, the more the remaining money is worth to you.
In contrast, $6045 is only about 2.9% of JD's base pay. The 97,500 cut-off means that even though his dollar figure is higher, he actually pays half as much in SS taxes as a percentage of his income. And because he has many times as much income, it pinches much, much less. In fact, even if JD paid 6.2% SS tax on all his income, he'd be much further away from feeling the same vise TD does.
That very reason is why we have a graduated income tax.
...for as many as were possessors of lands or houses sold them, and brought the prices of the things that were sold, and laid them down at the apostles' feet: and distribution was made unto every man according as he had need. Acts 4, 34-35Social Security was authored as a supplement, not the whole (as "Your Social Security Statement" makes very clear). But for a program designed as a safety net, helping to buoy those among us least able to secure savings for retirement, there isn't a whole lot of equity in evidence. A flat tax is hardest on those on the bottom and easiest for those on top. But we didn't stop there: we actually cut off the top. It naturally gets easier the more you make. But under this regime, if you make a tremendous amount, it gets even easier -- artificially easier, exponentially easier. We take an already advantaged situation and increase its advantage.
And if someone falls through the cracks? We all pay even more in medicare costs, insurance costs, social services, jails, etc. and etc. Except for the very rich: they continue to float along the top, enjoying preferential treatment for the income they get from capital gains -- a blessing those of us with no money to invest will never receive.
So here's a quick fix: make the 6.2% payroll tax applicable to all payroll salary. Here's the real beauty behind that plan: It honors the rich for their success by recognizing and multiplying their worth to society. Here's an example:
Let's say average household income is $46,000 (about what it was in 2006). That's $2852 in Social Security Taxes.
Under that assumption, with taxing for all payroll, JD is worth four and a half average guys! He's 4.5 times the man you are! He gives $13,020 in payroll taxes to Social Security every year. We'd solve the problem quickly just by taking that simple step.
Not only that, but it's more than fair. Life's still a lot easier for JD than the rest of us, the average guys who support his existence and make his job both necessary and profitable. He's still feeling less of a bite than the average working man. Why? Chorus: The Marginal Value of Money.
This makes too much sense, though. We'll have to keep shouting about this for a while--just like lobbying and campaign finance reform. They're so much more useful to the GoP and the DLC as problems that remain unsolved.