Retiree Entitlements ‘Undermine’ Everything Else

[bld999]

Khufu wrote in part:

...."the payroll tax cap should be removed completely and, if that does not fully solve the funding problem, an SS tax should be instituted on forms of income not currently subject to the payroll tax."....

Lets do it, damn the politics.

 

[Khufu]

I was over the cap while I was working as were many of my colleagues. I wouldn't have objected to raising or eliminating the cap and I don't think many people over the cap would object as long as the increase was totally dedicated to solving the SS problem in the long term.

That along with increasing the retirement age for those currently in their 20s (our children in my case, like they did for my generation) would go a long way towards preserving the system.

Me, too, on the cap. But I think you are wrong about the opinions of the others high income earners. Consider the spokesmen for the movement to cut SS benefits, for instance, Alan Simpson, who previously described the SS system as a "milk cow with 310 million teats." How do you think he feels about making the payroll tax more progressive?

The suggestion to raise the retirement age is an exceptionally cruel one. The gains in life expectancy have largely accrued to the high-income group, who are, as we know, already the winners in life and depend less on SS benefits as Krugman's graph shows:

The age of eligibility for SS benefits has already been raised. If it were raised further the lower-income people who need it most would see their benefits cut while the higher income people, who already paid a lesser percentage in because of the regressive nature of the payroll tax, would end up claiming even more of the benefits, because of their (our?) longer retired life, denied to the lower-income workers.

While it may not be your intention, those who support raising the retirement age, like Mr. Teats-on-a-Cow Simpson, are engaging in class warfare that would increase the inequality in American society.

 

[mpeirce]

If we were to remove the cap, we should really just fold the whole thing into regular income taxes and budgeting instead of segregating it. Admit it's not a "pension" that has anything to do with what people pay into it (post-cap). It would simply be a basic income program that paid to old folks so they don't have to eat dog food if they haven't saved enough to live on after they can't work any more.

Of course we'd nuke the "hidden" employer portion (self employed people always saw through that slight of the hand) and so have to raise federal income taxes across the board by 15.2% : 6.2% + 6.2% + 2.9% (include the medicare tax too).

I don't see it happening...

 

[pb4uski]

My friend, I think you are confusing correlation with cause. While there is indeed correlation between income level and life expectancy the cause of the lower life expectancy has more to do with differences in health habits. For example higher proportion of lower income people smoke - that is a fact and a choice that reduces the life expectancy of lower income people as a whole. While you might grant them a pass on SS for making bad decisions, I wouldn't. My guess is that they also don't eat as healthy as higher income people because many of them are buy expensive, unhealthy prepared foods rather than fresh ingredients and cook for themselves. DW was a WIC nutritionist for many years and saw this first hand. While there may be correlation between income level and life expectancy it is because of the poor choices many make. They have the same opportunity to not smoke or to eat healthy that higher income people do.

I would suggest to you that if you looked at a subset of low income people who don't smoke and eat healthier that they probably have life expectancy similar to higher income people who don't smoke and eat healthy.

.....The suggestion to raise the retirement age is an exceptionally cruel one. The gains in life expectancy have largely accrued to the high-income group, who are, as we know, already the winners in life and depend less on SS benefits as Krugman's graph shows:

 

[photoguy]

I would suggest to you that if you looked at a subset of low income people who don't smoke and eat healthier that they probably have life expectancy similar to higher income people who don't smoke and eat healthy.

This is a pretty strong claim. I'm not saying you are wrong but do you have evidence to back this up?

And how would you treat something like a low income making it harder to eat healthier? or if you live in urban depressed areas, you can't get to a grocery store with healthy food (because you have no car and the nearest grocery store is miles away)?

 

[Khufu]

My friend, I think you are confusing correlation with cause. While there is indeed correlation between income level and life expectancy the cause of the lower life expectancy has more to do with differences in health habits.

They have the same opportunity to not smoke or to eat healthy that higher income people do.

I would suggest to you that if you looked at a subset of low income people who don't smoke and eat healthier that they probably have life expectancy similar to higher income people who don't smoke and eat healthy.

Ah, now I understand. You live in a just world, where those who succeed do so because of their superior abilities, discipline, intelligence, etc. Very probably, since the average wealth of a group of early retirees would likely be way above the societal average, you yourself are among these virtuous who have been so justly rewarded. Your world is wonderfully simple since there are really no social problems at all, just a collection of individual failures, none of whom is in any way your responsibility.

Let me introduce you to Sir Michael Marmot, director of a WHO commission in 2005, who studied life expectancy differences just among Whitehall (UK Foreign Office) civil servants, a group all of whom would be at least middle-class by UK standards.

In the 1980s, in a series of ground-breaking studies among Whitehall civil servants, Professor Marmot showed that the risk of death among those on the lower rungs of the career ladder was four times higher than those at the top, and that the difference was linked with the degree of control the individuals had over their lives.

The interim report of the commission, in the online edition of The Lancet, says the effects of status syndrome extend from the bottom to the top of the hierarchy, with Swedish adults holding a PhD having a lower death rate than those with a master's degree. The study says: "The gradient is a worldwide occurrence, seen in low-income, middle-income and high-income countries. It means we are all implicated."

Thirty years: difference in life expectancy between the world's rich and poor peoples - Health News - Health & Families - The Independent

Marmot's study doesn't attempt to account for all of the sources of difference in life expectancy, but it does describe a world that is incompatible with the comfortably just world that you imagine.

Since you mention smoking as an example of completely personal decision, you should know about one of the outcomes of the Framingham Heart study.

Researchers analyzing changes in smoking behavior over the past three decades within a large social network found smokers quit in groups and not as isolated individuals. Those who continued to smoke also formed clusters that, over time, shifted from the center of the social network, where social connections are more numerous, to the periphery of the group.
Press Releases for the Framingham Heart Study

Information, including the effects of lifestyle on health, spreads through society through social networks. Those who are plugged in at the top level with friends who are well-educated, read widely, include professionals such as doctors, etc. will have earlier access to better information that will enable them to improve their lifestyle even if their motivation is just to avoid ridicule for being the last smoker in their social circle. This view is also incompatible with a model of society that assumes everyone has the same access to information and the same means to process it.

You can be sure that if the opponents of the SS system succeed in raising the retirement age further, the discrepancy in life expectancy between the low-income and high-income groups will increase. Some no doubt will attribute that increase to individual failings of the low-income group.

 

[pb4uski]

Khufu, I am fortunate to live in the good ol' USA, a land of opportunity. I think of a good friend and his three siblings. They were all raised middle class and had essentially the same opportunity to succeed. One is a successful professional who is now upper middle class. Another is a small business owner who has also been successful, albeit less so. Another, arguably the most handsome and accomplished of the siblings in his youth, found the demons of alcohol and is now dead. The last squandered his opportunity and is chronically unemployed and struggles from paycheck to paycheck. So while these siblings had the same parents and the same home environment and upbringing, the outcomes have been very different because of the decisions and sacrifices they made.

You seem to suggest that one's success or lack thereof is preordained. While there may be some truth to that hypothesis in other parts of the world, I reject that it is true in this great land of opportunity. There are far too many instances of people of low or modest means having success through guts, grit and determination to make what you believe true.

My advantage in life was a college education and parents who grew up poor and wanted a better life for their children. My graduating class included a broad mix of people from poor, middle and upper income backgrounds. But from graduation forward, it was all up to me and I took advantage of the opportunities that presented themselves. Some of my classmates did better, and some did worse. but we all started from the same point.

 

[donheff]

My guess is that they also don't eat as healthy as higher income people because many of them are buy expensive, unhealthy prepared foods rather than fresh ingredients and cook for themselves. DW was a WIC nutritionist for many years and saw this first hand. While there may be correlation between income level and life expectancy it is because of the poor choices many make. They have the same opportunity to not smoke or to eat healthy that higher income people do.

While the proportion of smokers among the low income is high it is not most and you have it exactly backwards on food "choices." A lot of people have studied food costs trying to figure out the obesity epidemic. They find that it is much more costly to eat whole fresh foods than processed foods. Our government subsidizes the sugar, corn (HFCS), and wheat that goes into those cheap boxes, cans and bottles making them the frugal choice for poor people. We smart, rich people can afford to buy fresh vegetables and lean cuts of meat while we sneer at the poor, dumb neer-do-wells getting fat on the crap we subsidize for them.

 

[Texas Proud]

What makes you think I was overlooking it? I was simply responding to a previous post that didn't go anywhere near there.

If congressman (and women) had the balls to do their job right, listen and then decide what is right for their constituents as a whole then it wouldn't be a problem. I seem to recall an old quote by someone in Congress long ago about eating the lobbist's food and drinking their wine and then voting how they damn well want but I can't find it. We need more patriots in Congress with that attitude.

It is folly to blame any taxpayer, corporate or individual, who structures their affairs so as to minimize the taxes they pay. Learned Hand made it clear that it was not a taxpayer's duty to pay any more tax than the law required.

I remember Charles Rangel having a debate with a Republican... someone in the audience asked why they can not just agree and 'get things done'... his response was something like 'don't trivialize our real difference in how we think things should be'...

IOW, the congress people are usually voting the way they believe.... and the different groups of people send them money because they believe this way.... I do not think many actually vote for or against anything because someone gave them money... they really believe in whatever it is.... even if it is different thinking than you or me...

 

[Bluetrekrider]

A controversial subject at any level. Just a few points about they why's of there being so many people in the "retirement"sector of our population. Why the national debt has grown so rapidly, and why the entire pension part of retirement is so deeply underwater. Obviously open to what others may see, but a snapshot that I see from having lived through the years that began the problems.
.......................................................................

In the 1950's it was common to hear "if you can't make it in business, go into teaching". The pay scale was low.
Through the next 20 years, teaching continued as a low paying positions, augmented by contract improvements for vacation, hours and most importantly, pensions.
Similar situations in the auto industry, and in municipal positions such as fire departments, police departments and some public works.
In many cases, this allowed long term employees to retire with pensions in as little as 25 years, meaning more and earlier retirees... (compared to the years before 1950, when most pensions did not begin until retirement age (60 to 65).
So, many public employees could retire with pensions as early as age 50.
In many cases, lucrative union contracts allowed final pensions to not only include Cola's, but pension payments based on the final year of work wages, rather than averages or the total employment averages.

A case in point: a friend who retired at the same time a I did, in 1989, was sergeant on the Chicago Police force, shared with me that during his final year on the force, he was allowed... encouraged to not only work regular hours, but as much overtime as he could handle. In fact, he averaged more than 60 hours over the final year, boosting his pension based salary by 50%. I don't know the actual amount of his pension, but in 1989, when we both retired at the same time, his pension was more than $80,000... a lot of money even now.
Also... same time, a neighbor teacher friend retired at age 53, with a $53,000 pension.
One more... same time... Canadian neighbors, husband and wife, who had worked at both Ford and General Motors retired at age 56, with $104,000 in (total) pensions.

So here's the point that I see. Of course YMMV, but these pension increases were paid in lieu of wage increases. It was easy to do. The money didn't come out of profits, and the cost could be pushed down the road, to be paid for out of future revenues. The current Pension shortfall in the United States is 2.5 Trillion Dollars. The Fund manager didn't have to answer for this shortfall, nor did the government officials who allowed it to happen. In Chicago alone, the Teachers Pension Fund is $800 Billion below its' obligations.

All of these people, and many more, including many US Military have retired early under contractual agreements.

In a non similar situation, the Social Security deficit was also easily avoided by politicians who refused to equalize the obligations along the way, as well as using (as was and is legal) the funds to finance current obligations.

Just as we borrow to finance "quantitative easing" so too have we been borrowing to avoid paying for necessary increases in Social Security payouts.
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Neither the Social Security, nor the Pension Plans were designed to "kick the can down the road".

From a regulatory standpoint. A failure
From an oversight standpoint. A Failure.
From the corporate standpoint. A success, as the taxpayers will support the unregulated failure of their defaulted pension plans.
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The current solution appears to be:

Cut Social Security.
1. Let the government (Taxpayers) pay for the underfunded Pensions. Not legal, YET!
2. Leave those persons who were honest in their payments into the system, and believed what they were told... Leave them out in the cold.

What in the world ever prompted them to think that their contract with the Government "entitled" them to anything.
..................................................................................

I don't have a personal axe to grind here. I think that DW and I are safe enough for what we expect will be our four or five more years of life. this is not intended as a political statement, as it matters not Republican or Democrat.

It's more of a throwback to what we learned as kids. You pay for what you expect out of life as you go along, and don't dump the expense on the next generation... and yet, that's just what happened, when no one was looking.

And now? Illinois is broke! Just a joke of a state as far as fiscal management.

 

[JoeWras]

And now? Illinois is broke! Just a joke of a state as far as fiscal management.

It saddens me greatly. I grew up as a proud Illinoisan. My mom even helped participate in some citizen committees to help draft their new constitution in the late 60s. We all participated in the civil process.

However, in the 80s, mom and dad got disillusioned with their "return on investment". As dad explained it, he voted for every improvement requiring money presented to them. By the time they hit their 60s, they saw negative results and they got disillusioned. They felt it wasn't being managed right.

I moved away, and saw a different way of managing affairs in other states. Not perfect, but different and a little more responsible.

Recently, I spent some time back in my native state and was constantly in distress by the news. It just really hurt me to hear about this. My friends and family don't seem to be as distressed, ironically. They see it as business as usual or something. You know, the "Chicago way" or something. Having the perspective of being away, I disagree. It is not usual.

So, I've pretty much made up my mind to not move back, ever. I don't want to pile on my native state, but something has to happen there. You are not going to be attracting outside money, talent and citizens if this continues. The state could spiral down quickly.

 

[pb4uski]

While the proportion of smokers among the low income is high it is not most and you have it exactly backwards on food "choices." A lot of people have studied food costs trying to figure out the obesity epidemic. They find that it is much more costly to eat whole fresh foods than processed foods. Our government subsidizes the sugar, corn (HFCS), and wheat that goes into those cheap boxes, cans and bottles making them the frugal choice for poor people. We smart, rich people can afford to buy fresh vegetables and lean cuts of meat while we sneer at the poor, dumb neer-do-wells getting fat on the crap we subsidize for them.

While I understand your point, I don't think it necessarily has to be that way. You are right that the food buying habits of the poor tends to lead them to processed foods that are cheap but are unhealthy. But these processed foods are also convenient (open the can or box and heat it up in a lot of cases).

It is possible to buy and cook fresh food that is nutritious on a low budget. My grandmother's generation did it out of necessity. DW's family did it out of necessity. DW has taught classes on the subject to low income clients. It can be done, but it takes work and in many cases moving people out of their comfort zone to follow a recipe to cook a meal rather than open the can or box and heat it up.

As an example, I just finished my breakfast today of a bowl of cream of wheat with a cut up banana mixed in. I'm pretty sure the ingredients were much less than a dollar, but I had to boil some water with a pinch of salt and mix in 3 tbsps of cream of wheat and stir for a couple minutes and cut up a banana. Healthier and cheaper than pop tarts or eggos that many kids get for breakfast because they are easy to prepare and one doesn't have to wash a pan.

 

[Independent]

It's correct that the 1983 Greenspan Commission set the level of labor income subject to the payroll tax to be 90%. Currently only 83.2% is taxed and that number is predicted to drop to 82.5%, worsening the funding problem.

The Tax Max charts in the first link of your post show that while the percentage of workers who earn over the payroll tax cap has remained stable at about 6%, the amount of earnings has increased more than that. This is another observation of the upward distribution of income that has increased inequality in America. Another way of explaining the same effect is the fact that the portion of GDP held by companies as earnings relative to the portion received by workers has increased. Still another way of stating the same effect is to note that real wages for the bulk of workers have stagnated for 30 years even in the face of productivity gains.

For this reason returning to the 90% level of payroll taxation instituted by the Greenspan Commission would not be adequate as you point out. Had the wages of American workers kept pace with productivity gains more of the increase in output would have been available to fund SS as Dean Baker argues here:

The Impact of the Upward Redistribution of Wage Income on Social Security Solvency | CEPR Blog

The payroll tax is a particularly regressive tax. Any of us who earned over the cap paid the same dollar amount every year as Warren Buffett. Buffett doesn't think that is fair and neither do I. The widespread practice of paying executives with stock options also moved income income to escape the payroll tax. Therefore, my own view is that the payroll tax cap should be removed completely and, if that does not fully solve the funding problem, an SS tax should be instituted on forms of income not currently subject to the payroll tax.

The founders of the SS system in the 30's and the Greenspan Commission in 1983 never envisioned an America with the levels of inequality that currently prevail. Such inequality can make it impossible to maintain SS which would bring back levels of poverty among the elderly not since since the Depression. In fact, what is needed now is to expand SS to replace the level of support that has disappeared with the decline of private pensions.

Okay, that's consistent with the numbers. I wanted to point out that even if we had indexed the payroll tax cap at 90% of earnings, we'd still have a significant shortfall. Even if we entirely eliminate the cap, we have some shortfall. (and that's a substantial change from historic SS practice)

A politician who agrees with the bold would need to specify what income, other than labor earnings, he intends to tax.

FTR, I have to agree with mpeirce. If we get to the point of taxing non-labor income, it would be better to roll SS into the general fund and simply pay it out of income taxes.

 

[ChiliPepr]

The payroll tax is a particularly regressive tax. Any of us who earned over the cap paid the same dollar amount every year as Warren Buffett.

This is true, but come the time you retire, you will be receiving the same benefits as Warren Buffett. Social Security is not a "tax" in the sense of the word, it is what you pay to receive benefits after you reach retirement age.

 

[mickeyd]

Social Security is not a "tax" in the sense of the word, it is what you pay to receive benefits

If the government confiscates funds from you, it's a tax in every sense of the word. For example, they tax every gallon of gasoline that we pump and supposedly use that tax "for our benefit" to build roads and bridges. Or, so I have been lead to believe.

 

[travelover]

If the government confiscates funds from you........

It's like when my friend lost his wallet to knife wielding kids in St. Croix. The police said, " Did you give them your wallet or did they take it?"

 

[Mulligan]

It's like when my friend lost his wallet to knife wielding kids in St. Croix. The police said, " Did you give them your wallet or did they take it?"

Since my opinion won't change anyone's mind ( though I agree with pb4's line of thinking) I will comment on this... That is why I will never go to St.
Croix. In fact, I get on the first available shuttle from airport and sprint to the other end of St. Thomas as fast as I can, and ferry over to St. John where I actually feel safe.

 

[scrabbler1]

This is true, but come the time you retire, you will be receiving the same benefits as Warren Buffett. Social Security is not a "tax" in the sense of the word, it is what you pay to receive benefits after you reach retirement age.

Thank you. As I debated with khufu a few months ago, the same cap on wage earnings is a cap on benefits based on those wage earnings. Wage earnings over the cap result in no additional SS benefits. That is why Buffett's SS benefits will be small compared to his wage income. That is why nonwage income is not subject to the SS tax. Leave the cap alone.

 

[Independent]

Thank you. As I debated with khufu a few months ago, the same cap on wage earnings is a cap on benefits based on those wage earnings. Wage earnings over the cap result in no additional SS benefits. That is why Buffett's SS benefits will be small compared to his wage income. That is why nonwage income is not subject to the SS tax. Leave the cap alone.

I'm not sure how Khufu responded. He could have said "Fine, remove the cap and use the entire earnings to calculate benefits according to the current formula".

Because the current benefit formula has the 15% band at the top, SS makes a "profit" on those extra dollars (i.e. additional taxes exceed additional benefits). This doesn't close all the gap, but it contributes significantly. Long Range Solvency Provisions

 

[CH]

...The payroll tax is a particularly regressive tax. Any of us who earned over the cap paid the same dollar amount every year as Warren Buffett. Buffett doesn't think that is fair and neither do I. ...

At first the tax itself may be regressive, but the payouts are tilted to favor lower earners so it is not really regressive. "--Lower-income workers come out ahead. Low-income workers enjoy higher rates of return by design, because Social Security's benefit formula is weighted toward lower-earning beneficiaries and their payroll tax contributions will be relatively lower. A very low-income couple born in 1943 will receive a 6.79 percent annual return, compared with 3.92 percent for their high-earning counterparts." When the subject of the 47% who pay no income tax comes up, it is often truly stated that the 47% pay payroll taxes. What is usually not stated is they are receiving a much better return than the rest of us, so I don't buy the belly-aching.

The founders of the SS system in the 30's and the Greenspan Commission in 1983 never envisioned an America with the levels of inequality that currently prevail. Such inequality can make it impossible to maintain SS which would bring back levels of poverty among the elderly not since since the Depression.

The bigger part of the problem is the demographics issue. This has been on my radar for decades, and I kept wondering why congress did not address it.

Another part is the longevity issue, which would imply the age to draw social security should gradually be raised, in a way that gives people plenty of time to plan. Maybe the poor do not live as long. Maybe left handed women live longer and should retire later than the rest of us. We are all in this together and the age increase needs to apply to everyone. Using that same logic, the new health care law is not fair because rates for younger people are subsidizing those of older people, and sick people pay the same as healthy people. Life is not always fair.