Social Security is Wage Insurance
VClib wrote this excellent article for the 5th day of the SSD blogathon @daily kos last week, it made the front page of the rec list.
There seems to be a lack of understanding of the fundamental foundation of Social Security. It is wage insurance. Each participant insures a portion of their wages or salary depending on their income level and the payments made by each individual and their employers. Those insurance benefits are paid based on a formula depending on the payments made during their working life and age of the person at the time of retirement. What Social Security is not is an income redistribution program to transfer income from high earners to the less fortunate. FDR was very clear on this point and that is why Social Security has its own funding mechanism, separate from the income tax, and its own Trust Fund, separate from the general fund. It was FDR’s view, which I share, that Social Security should be an earned benefit and should never be allowed to be characterized as welfare. As FDR noted. “not the dole, never the dole”. The concept of wage insurance is a primary reason there is a cap on earnings subject to Social Security payroll taxes. The theory is that at higher incomes those individuals likely have other retirement income, pensions and investments, in addition to Social Security so there is an income amount above which “insurance” isn’t needed, and that’s why their is a cap. It’s also the reason that investment income isn’t subject to Social Security taxes. Investment income doesn’t stop when our wages or salary stop so it does not need to be “insured”. As FDR said “from capital nothing is asked and to capital nothing is given”.
There is significant sentiment here at DKOS for removing the cap and a characterization that the cap is unfair to lower income workers and ultimately retirees. There are two primary issues with raising the cap; the first is that higher income earners may not need the additional “insurance”. Second, we would have some Social Security recipients with six figure (or more) benefit payments. Others have argued that we should eliminate the cap, but cap the benefits. This is often referred to as “one small change” that would significantly benefit the Social Security Trust Fund. Such a change would end Social Security as we know it, and violate several of FDR’s founding principles. I certainly understand in this era of declining middle class incomes, and significant income inequality, why people would propose a fundamental change in Social Security. However, I would ask people to be honest about the fact that this would be a fundamental change in Social Security shifting it to an income redistribution program, and in no way should be characterized by the term “one small change”. The reality is that removing the cap, without a corresponding increase in benefits, would be a substantial second, “back door” income tax on high income earners, particularly the self employed who pay both the employer and employee portions of the Social Security payroll taxes. While many here at DKOS would favor any additional income tax on high income earners, let’s at least be honest about what it would be.
There has also been much discussion about the cap and “fairness”. Social Security has several fairness qualities. First, everyone who pays in the same amount receives the same benefit. So if we have one person who earns at the cap amount and one who earns twice the cap amount their benefits will be the same because they paid in the same amount into the system. The fact that the person who earned twice the cap amount paid a much reduced percentage of their income is an interesting fact, but the reality is that they both paid in the same and both earn the same benefit. Surly people should not have to pay more for the same benefit. There is also fairness in how payments are determined. The benefit algorithm is highly weighted in favor of low income earners. The “return” on the first dollar contributed by a low income worker is six time higher than the “return” earned by those contributions at the top of the cap amount. In addition, the benefits are not subject to income tax for lower income beneficiaries, while taxed for high income beneficiaries. I favor raising the cap, and substantially, with a corresponding increase in maximum benefit payments. To capture 90%, of salaries and wages, the recent stated goal for a sound Social Security system, it is estimated that the cap amount should be approximately $200,000. I think higher income workers would embrace the higher Social Security amounts and benefits. With traditional pensions evaporating, and 401Ks a less reliable retirement vehicle, a new top benefit of approximately $60,000 for people at the new cap amount would be significant.
Read the rest here:
http://www.dailykos.com/story/2013/03/29/1197639/-Social-Security-is-Wage-Insurance
