How to fix Social Security

[Speculator]

Quite a few interesting comments out there on how to remedy this mess, so I figured I'd throw my "fix" into the Colosseum for the lions to munch on. I think the earnings cap on wages should be removed completely and all the folks who are receiving Social Security should have their dividends and capital gains taxed at the rate of regular income, with the additional taxes they will pay being directly deposited into the Social Security Trust Fund. After all, lower wage earners pay Social Security taxes on their entire income, why shouldn't higher paid workers? And most well-off retired folks I know, or have heard of, receive most of their retirement income through dividends and capital gains (Warren Buffett?) which I believe are generally taxed at preferential rates compared to younger workers who usually pay a higher rate on their earnings. I think this would be fair to everyone and would get the current system "back on it's feet" in short order.

 

[ChiliPepr]

I think the earnings cap on wages should be removed completely

I assume you are not increasing the amount received by the high wage earners. Currently a person who makes $110,100 and a person who makes $300,000 in income pays the same into SS. And they both receive the same payouts when they hit 65. Are you proposing people making more than $110k pay more into the system and not receive any additional benefits?

all the folks who are receiving Social Security should have their dividends and capital gains taxed at the rate of regular income, with the additional taxes they will pay being directly deposited into the Social Security Trust Fund. After all, lower wage earners pay Social Security taxes on their entire income, why shouldn't higher paid workers?

Basically, because SS is a method to make sure nobody starves in retirement. It was not meant to be a tax, where money from some is moved to another. (other than the young to the old)

And most well-off retired folks I know, or have heard of, receive most of their retirement income through dividends and capital gains (Warren Buffett?) which I believe are generally taxed at preferential rates compared to younger workers who usually pay a higher rate on their earnings.

There are many articles on why dividends and capital gains are taxes at a lower rate than income and a lot of different of opinions. I won't go into detail, but I will say I do not think capital gains or dividends should not be taxed differently depending on whether or not it is retirement income.

I think this would be fair to everyone and would get the current system "back on it's feet" in short order.

I guess that depends on your definition of "fair"

 

[marko]

Quite a few interesting comments out there on how to remedy this mess, so I figured I'd throw my "fix" into the Colosseum for the lions to munch on. I think the earnings cap on wages should be removed completely and all the folks who are receiving Social Security should have their dividends and capital gains taxed at the rate of regular income, with the additional taxes they will pay being directly deposited into the Social Security Trust Fund. After all, lower wage earners pay Social Security taxes on their entire income, why shouldn't higher paid workers? And most well-off retired folks I know, or have heard of, receive most of their retirement income through dividends and capital gains (Warren Buffett?) which I believe are generally taxed at preferential rates compared to younger workers who usually pay a higher rate on their earnings. I think this would be fair to everyone and would get the current system "back on it's feet" in short order.

So are you saying that
1) if a person understood that SS is not intended to be a retirement plan but instead merely one of several required income streams, and then
2) responsibly took actions to create other streams (savings, 401k, investments, LBYM etc)
that his dividends and cap gains of those actions should be taxed higher than they are now?

...and somehow this is fair?

 

[rescueme]

Welfare and Social Security are not related.

It still amazes me that folks continue to look at both programs as the same thing, under the same circumstances.

BTW, my adult disabled (child) receives Social Security Disability (not SSI) based upon his disability, and his former credits built up during the time that he worked.)

And today? He works in a sheltered workshop (for disabled folks), receives his SSD check every month, but still pays SS (and all other taxes) as a "normal" person would do - or be expected.

Sometimes (regardless of the program) we need to say to ourselves, "for the grace of god, there go I"...

 

[MuirWannabe]

Quite a few interesting comments out there on how to remedy this mess, so I figured I'd throw my "fix" into the Colosseum for the lions to munch on. I think the earnings cap on wages should be removed completely and all the folks who are receiving Social Security should have their dividends and capital gains taxed at the rate of regular income, with the additional taxes they will pay being directly deposited into the Social Security Trust Fund. After all, lower wage earners pay Social Security taxes on their entire income, why shouldn't higher paid workers? And most well-off retired folks I know, or have heard of, receive most of their retirement income through dividends and capital gains (Warren Buffett?) which I believe are generally taxed at preferential rates compared to younger workers who usually pay a higher rate on their earnings. I think this would be fair to everyone and would get the current system "back on it's feet" in short order.

They spent the 'Trust Fund'. Any solutions that start and end at taxing more to build up the Trust Fund ignore the fact that spending is the root cause. If spending is not cut then any additional taxes going into the 'Trust Fund' will just get spent again on who knows what. Likely not on SS. Then SS is still in the same boat as today. The solution must first begin with spending cuts. Big ones. We've already seen that other movie. Heck, we're starring in it.

 

[FinanceDude]

If the upper limit was removed on SS wages, it would help, and affect the 1% in a much palatable manner than the war that's being waged against them. It think it would pass pretty easily, and is one of those "small steps" that are better than bad huge legislation that the current Congress seems to be in favor of..........

 

[Danmar]

Didn't read all the posts but there were many interesting and civil ones. perhaps the Canadian system might shed some light on possible solutions. We have 3 components of gov sponsored retirement programs. The Canadian Pension Plan (CPP) is a mandatory, funded, pension plan that pays out about maximum $12k at age 65 to those that contibuted.
Second component is the old age supplement (OAS) that pays about $7k per year but is clawed back(15% rate) from people earning more than $70k. This is non funded and paid out of general gov revenue. They recently announced the eligibility for this would be raised from 65 to 67 in about 15 years. This program is the one that may cause problems re demographics and funding but at least they have started dealing with the issues.
The last program is for very low earners and called Guaranteed Income Supplement(GIS) and really is welfare that pays around $6k but clawed back very quickly.
I think these programs work pretty well and have basically eliminated age related poverty in Canada.

 

[73ss454]

They spent the 'Trust Fund'. Any solutions that start and end at taxing more to build up the Trust Fund ignore the fact that spending is the root cause. If spending is not cut then any additional taxes going into the 'Trust Fund' will just get spent again on who knows what. Likely not on SS. Then SS is still in the same boat as today. The solution must first begin with spending cuts. Big ones. We've already seen that other movie. Heck, we're starring in it.

Thank you, I'm glad someone is paying attention.

 

[FinanceDude]

They spent the 'Trust Fund'. Any solutions that start and end at taxing more to build up the Trust Fund ignore the fact that spending is the root cause. If spending is not cut then any additional taxes going into the 'Trust Fund' will just get spent again on who knows what. Likely not on SS. Then SS is still in the same boat as today. The solution must first begin with spending cuts. Big ones. We've already seen that other movie. Heck, we're starring in it.

Until there's a shakeup in the Senate, and we get younger Senators in there who will agree to cut, we will go nowhere. The Senate has not passed a budget in over 3 years nor do they intend to, because they would ahve to admit thay have an addiction to spending............

 

[Culture]

They spent the 'Trust Fund'.

The way things are set up now, the federal government HAS to spend the trust fund. There are four things the SSA can do with the trust fund:

1) Store cash in a giant vault AKA Scrooge McDuck;
2) Loan the money the the federal government (Treasury bonds AKA they spend it);
3) Loan the money to US state or foreign governments (as known as bonds AKA they spend it).
4) Loan the money to the private sector (Stocks and private sector bonds - What do you think they do with the money they get?).

Which one would you prefer? If you loan it to the federal government, by definition they have to run a deficit. If you use option 3 or 4, it gets spent by someone else. The only way to avoid spending it is option 1.

The best way to preserve the trust fund is to:

1) Make sure that Federal deficits are under control, with no deficits outside of borrowing money from SS.
2) Make sure the economy is strong so future tax payers can handle the trust fund debt.

 

[MasterBlaster]

The best way to preserve the trust fund is to:

1) Make sure that Federal deficits are under control, with no deficits outside of borrowing money from SS.
2) Make sure the economy is strong so future tax payers can handle the trust fund debt.

Private accounts that nobody buy you can dip into. There just any trust in the trust-fund idea.

 

[Animorph]

They spent the 'Trust Fund'.

Just like they spent all the money from selling U.S. bonds. Think you'll ever see that money again? Only if they find a bigger fool next year?

 

[EvrClrx311]

I find it interesting to see how the cap on SS taxes has changed over the years

In 1954 the max SS tax was on your first $3,600 wages... which in today's dollars would be the first $28,862 of your salary

In 1975 the max SS tax was on your first $14,100 wages... which in today's dollars would be the first $56,488 of your salary

In 1995 the max SS tax was on your first $61,200 wages... which in today's dollars would be the first $86,686 of your salary

In 2011 the max SS tax was on your first $106,800 wages... which is today's dollars


Could this be part of the problem with SS... has its sustainability over the last 50 years been partly due to its rising cap (bringing in more money), but now its gotten to a point where raising the max doesn't cover as much income anymore because its well beyond the average American salary?

Could the fix that people are now suggesting, that is removing the cap entirely, just be a temporary band-aid and in another 20 years we'll be in the same situation... except then there would be no cap to raise anymore?

 

[explanade]

In 20 years, the demographics are suppose to be more favorable if a lot of Baby Boomers are gone?

 

[EvrClrx311]

In 20 years, the demographics are suppose to be more favorable if a lot of Baby Boomers are gone?

supposedly... but what happens when the boomers children (that next ripple) reaches retirement age?

I could be wrong in this (I'm not SS expert), but the increase in the cap I'm sure has played at least a small roll in sustaining the program behind the radar... 50 years ago... maybe 25-30% of total US income was taxed by SS, but now something like 80-90% (I'm guessing) of it is. Raising the cap from 30K up to 100K in todays dollars raised A LOT more money... but raising it from 100K to 1 million will bring in a lot less total tax to SS's coffers.

I wonder if anyone has factored that into the longer term projections -that is, raising the total taxed income percentage is going to have less and less of an impact as SS tax approaches that 100% of total US income level?

 

[Independent]

In 20 years, the demographics are suppose to be more favorable if a lot of Baby Boomers are gone?

Sorry, but no.

The key demographic numbers for SS are life expectancy and birthrate. The problem with the BB's isn't that there are so many of them, but that they only had two kids per couple. The WWII generation had three. If the BB would have had that one extra kid, we'd have 50% more workers and nobody would be talking about SS.

The 2.0 or 2.1 birthrate rate didn't move up when the X-gen started having kids. See Table V.A1 here ASSUMPTIONS AND METHODS UNDERLYINGACTUARIAL ESTIMATES

 

[Independent]

I find it interesting to see how the cap on SS taxes has changed over the years

In 1954 the max SS tax was on your first $3,600 wages... which in today's dollars would be the first $28,862 of your salary

In 1975 the max SS tax was on your first $14,100 wages... which in today's dollars would be the first $56,488 of your salary

In 1995 the max SS tax was on your first $61,200 wages... which in today's dollars would be the first $86,686 of your salary

In 2011 the max SS tax was on your first $106,800 wages... which is today's dollars


Could this be part of the problem with SS... has its sustainability over the last 50 years been partly due to its rising cap (bringing in more money), but now its gotten to a point where raising the max doesn't cover as much income anymore because its well beyond the average American salary?

Could the fix that people are now suggesting, that is removing the cap entirely, just be a temporary band-aid and in another 20 years we'll be in the same situation... except then there would be no cap to raise anymore?

Interesting point. I think the most meaningful statistic is the percent of all earned income that is below the wage base. In 1955, the average wage was about $3,155. In 2011 it was $41,674. The wage base clearly grew faster than the average wage, so more wages are taxed.

The 1983 amendments indexed the wage base to the average wage. Contribution and Benefit Base Determination
The thought was that the percent of total wages that would be taxed would be stable. But, unequal wage growth has the recent trend going the opposite direction, with greater proportions of the wages above the wage base.

Even with that, as you say, eliminating the cap entirely does not completely solve the SS funding problem. We're currently taxing about 84% of all earned income, but the actuaries project that in 20 or so years the taxes will only cover 77% of benefits.

 

[NYEXPAT]

Sorry, but no.

If the BB would have had that one extra kid, we'd have 50% more workers and nobody would be talking about SS.

My young wife and I are planning two more over the next 10 years, So I will be doing my duty and also helping out one of you old slackers!