Why rich guys want to raise the retirement age

[UnderTheRadar]

I agree with Scrabbler1. I would be in favor of removing the cap as long as the "bend points" were "re-progressivised" so that there was some benefit to all. There has to be some incremental benefit for people to work harder and make better choices, or they won't.

 

[BLS53]

Do Simpson-Bowles and forget about it for a few decades.

 

[Khufu]

The question should be: why should the income of upper income people be blessed with lower tax rates? These people don't need incentives to become rich, they are already doing quite well. By incentives I mean
much lower effective payroll tax rate, because of the cap
lower income tax rate on dividends and capital gains
no Social Security tax at all on dividends and capital gains

Lower income people, of course, have little or no dividend and capital gains income.

One of the main benefits of Social Security is that poverty among the elderly has been drastically reduced. To me that's a real benefit, even if I might have been lucky enough myself to avoid old age poverty without it. The 1%ers as a group don't agree.

 

[LOL!]

Since wealth tax was mentioned a few times in this thread, what's your take on this OpEd piece in the New York Times: http://www.nytimes.com/2012/11/19/opinion/to-reduce-inequality-tax-wealth-not-income.html wherein Daniel Altman writes:

Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

Forget about Safe Withdrawal Rates when your portfolio is taxed at 2% annually although maybe he meant in lieu of income taxes.

OTOH, this guy has a warped sense of taxes and wealth because he apparently lives in NY City.

 

[ChrisC]

I agree with Scrabbler1. I would be in favor of removing the cap as long as the "bend points" were "re-progressivised" so that there was some benefit to all. There has to be some incremental benefit for people to work harder and make better choices, or they won't.

We have a regressive payroll tax so that the poor or lower wage earners pay at the same flat level as the rich; the bend points are already engineered in a "progressive" manner to benefit lower wage earners who may not live long enough to take full advantage of the old age retirement benefits of Social Security. Do you really think the 1% or 2% folks in the upper wealth chain need an incentive to work harder because they would draw a bigger benefit check from Social Security? If you have some behavorial studies to support the notion that rich people will work harder because they will get increased social security benefits I'd like to see the studies. I admit there is some "fairness" issue here with removing the payroll tax cap and not making any adjustment to the income replacement calculations, but I think we've crossed similar fairness bridges when we have progressive income tax brackets, estate taxes and exemptions, or permit the myriad of other tax deductions, loopholes or expenditures for specific segments of our society.

 

[Spokane2303]

So, would a 1 to 2% wealth tax count the value of private and government pensions or would it exclude the value of our 401K and IRA's?

 

[Lazarus]

Social Security already does not pay off very well for high wage earners. I found that stopping at 55 or stopping at 62 made only about $100 per month difference in benefits. So if I paid in for the next 7 years it would be nothing but a tax to me. Zero return.

Social Security should be funded by itself and not counted as part of the federal budget. It should be pay as you go year by year. If there is not enough coming in then either the taxes have to go up or the benefits go down or a combination. This would keep all the drama about SS running out of money to a minimum.

 

[ChrisC]

The question should be: why should the income of upper income people be blessed with lower tax rates? These people don't need incentives to become rich, they are already doing quite well. By incentives I mean
much lower effective payroll tax rate, because of the cap
lower income tax rate on dividends and capital gains
no Social Security tax at all on dividends and capital gains

Lower income people, of course, have little or no dividend and capital gains income.

One of the main benefits of Social Security is that poverty among the elderly has been drastically reduced. To me that's a real benefit, even if I might have been lucky enough myself to avoid old age poverty without it. The 1%ers as a group don't agree.

I agree with your entire post except I question the last line. Many, perhaps most, of the 1%ers want to be taxed at higher levels for precisely the reason you mention. Consider that 8 of the 10 richest counties in America voted for Obama in the last election who ran on a platform for the rich to pay more in taxes: Obama Wins 8 of 10 Wealthiest Counties in US - Yahoo! Finance.

 

[scrabbler1]

The question should be: why should the income of upper income people be blessed with lower tax rates? These people don't need incentives to become rich, they are already doing quite well. By incentives I mean much lower effective payroll tax rate, because of the cap
lower income tax rate on dividends and capital gains
no Social Security tax at all on dividends and capital gains

Lower income people, of course, have little or no dividend and capital gains income.

One of the main benefits of Social Security is that poverty among the elderly has been drastically reduced. To me that's a real benefit, even if I might have been lucky enough myself to avoid old age poverty without it. The 1%ers as a group don't agree.

Khufu, as I have mentioned here before in this thread, the effective payroll tax on wage income goes down above the cap because there is a cap on benefits. Wage income above the cap is not replaced by SS. Do we want to send out 6-figure SS checks to Bill Gates every month to replace his higher wage income?

And there is no payroll tax levied on dividends and cap gains because they, too, are not replaced by SS. And why should they be? They don't disappear when someone retires. As all of us early retirees know, and as I described in a thread a few months ago, I like having my money work for me instead of me working for my money.

Now should dividends and cap gains be taxed at higher income tax rates than they are today? That's a different question from SS taxes. On that I would say yes.

 

[scrabbler1]

Social Security already does not pay off very well for high wage earners. I found that stopping at 55 or stopping at 62 made only about $100 per month difference in benefits. So if I paid in for the next 7 years it would be nothing but a tax to me. Zero return.

Lazarus, when I was coming up with a projected SS benefit based on my ~24 years of full-time or part-time work (not counting summer jobs), I figured out that had I worked another 11 years (even at a low, part-time salary) to get rid of those zeroes in the SS benefit calculation, my monthly SS beneft would rise only about 11%. This is because my current AIME (Average Indexed Monthly Earnings) is right near the top of the 32% bend point, so most of those added wages would be replaced at only 15% (the next bend point). So that's a lot of years of extra work, even only 2 days a week, just to get me 11% more SS.

 

[ERD50]

So, would a 1 to 2% wealth tax count the value of private and government pensions or would it exclude the value of our 401K and IRA's?

+1 - thanks for beating me to it!

If I have $2M and decide on a 3.25% WR, I can pull inflation adjusted $65,000 a year. That would be an annual tax of $25K on my $65K withdraw (38.5%)?

If they suggested taxing a pension at that rate, there would be howls. But it is the same thing (except that the nest-egg may have a residual value - or not).

As far as other comments regarding progressive tax rates and 'fairness', I do support progressive rates. I might even feel that they could be more progressive than they are now. But I find it almost impossible to discuss, since the tax codes are so complex and convoluted, we never really know what we are talking about.

If I tell you two people made $10M in 2011, and two others made $1M in 2011, no one could tell us what their federal tax rate was. There are too many unknowns. So how can we even talk about it until the tax code is simplified (and once again, I'll say that a NST with pre-bate strikes me as the fairest of all - I think spending levels are a better measure of ability to pay tax than anything else).

-ERD50

 

[UnderTheRadar]

1. Do you really think the 1% or 2% folks in the upper wealth chain need an incentive to work harder because they would draw a bigger benefit check from Social Security?
2. I admit there is some "fairness" issue here with removing the payroll tax cap and not making any adjustment to the income replacement calculations, but I think we've crossed similar fairness bridges when we have progressive income tax brackets, estate taxes and exemptions, or permit the myriad of other tax deductions, loopholes or expenditures for specific segments of our society.

1. I think we all need incentives. Weather that be to work towards a promotion, lose weight, study Spanish, or bake cookies for the neighbor.

2. when you say "crossed" - I think "compromised". I am weary of the term fairness which means completely different things to each of us, and none of us are qualified to measure. We should dis-incentivize those things as a society we do not want and we should reward actions we do.

Note: i was arguing for removing the cap (even though there would be small incentive to high-income earners) in order to open a currently closed revenue source.

 

[Khufu]

Khufu, as I have mentioned here before in this thread, the effective payroll tax on wage income goes down above the cap because there is a cap on benefits. Wage income above the cap is not replaced by SS. Do we want to send out 6-figure SS checks to Bill Gates every month to replace his higher wage income?

And there is no payroll tax levied on dividends and cap gains because they, too, are not replaced by SS. And why should they be? They don't disappear when someone retires. As all of us early retirees know, and as I described in a thread a few months ago, I like having my money work for me instead of me working for my money.

Now should dividends and cap gains be taxed at higher income tax rates than they are today? That's a different question from SS taxes. On that I would say yes.

The fix to this problem is quite simple: the cap on the payroll tax should be removed, but not the cap on benefits. Doesn't sound fair, does it? Well, possibly not until you consider that the real problem that SS funding will face 25 years from now is not do to an unforseen increase in retirement longevity, but an unforseen polarization of income in the US. The inequality of income distribution in the US is comparable to China and Thailand, and very unlike more egalitarian countries like Europe and Japan. The result is that the increases in income that resulted from productivity increases in the last 30 years have gone exclusively to the upper percentiles of the population. Because of the payroll tax cap and the exclusion for dividends and cap gains, these income gains have escaped contributing to SS. The increases themselves are not due to greater economic contributions of the supposed "job creators" but to rent-seeking enabled by an increasing and excessive level of influence on govt, of which the Citizens United decision is only the most recent and egregious example. So, removing the cap on payroll taxes and the exclusions for dividends and cap gains only begins to correct for the distortion of an economy increasing dominated by rent-seeking.

 

[MichaelB]

An interesting discussion, but some recent posts are taking it into porcine territitory.

Sir Yoda of the Round Table would say "Strayeth from it's path right and true this thread dost, methinks."

 

[scrabbler1]

The fix to this problem is quite simple: the cap on the payroll tax should be removed, but not the cap on benefits. Doesn't sound fair, does it? Well, possibly not until you consider that the real problem that SS funding will face 25 years from now is not do to an unforseen increase in retirement longevity, but an unforseen polarization of income in the US. The inequality of income distribution in the US is comparable to China and Thailand, and very unlike more egalitarian countries like Europe and Japan. The result is that the increases in income that resulted from productivity increases in the last 30 years have gone exclusively to the upper percentiles of the population.

Totally incorrect about the longevity issue. When the program was first designed, the life expectancy was much lower than it is today. And having a much greater ratio of workers to retirees back then contributes greatly, too.

Income inequality has nothing to do with SS's finances. Think about it, if everyone who has wage earnings above the cap had earnings at exactly the cap, SS would take in no more than it does today. And SS would pay out no more than it does today. The presence of those earning more wages than the cap has nothing to do with SS's income or payouts.

Because of the payroll tax cap and the exclusion for dividends and cap gains, these income gains have escaped contributing to SS. The increases themselves are not due to greater economic contributions of the supposed "job creators" but to rent-seeking enabled by an increasing and excessive level of influence on govt, of which the Citizens United decision is only the most recent and egregious example. So, removing the cap on payroll taxes and the exclusions for dividends and cap gains only begins to correct for the distortion of an economy increasing dominated by rent-seeking.

Once again, you are totally missing the point. SS does not replace nonwage earnings such as dividends and cap gains, just as it does not replace wage income over the cap. If nobody had any nonwage income, SS would take in exactly the same amount in payroll taxes as it does today, and it would be paying out exactly the same amount in benefits as it does today.

If this is any sort of agreement, the income taxes paid by those with wage earnings over the cap as well as for nonwage income will be used, at least in part, to pay SS when it redeems the cashless trust fund's bonds which have built up over the years. And I have no problem with raising the income taxes on nonwage income.

 

[Letj]

The fix to this problem is quite simple: the cap on the payroll tax should be removed, but not the cap on benefits. Doesn't sound fair, does it? Well, possibly not until you consider that the real problem that SS funding will face 25 years from now is not do to an unforseen increase in retirement longevity, but an unforseen polarization of income in the US. The inequality of income distribution in the US is comparable to China and Thailand, and very unlike more egalitarian countries like Europe and Japan. The result is that the increases in income that resulted from productivity increases in the last 30 years have gone exclusively to the upper percentiles of the population. Because of the payroll tax cap and the exclusion for dividends and cap gains, these income gains have escaped contributing to SS. The increases themselves are not due to greater economic contributions of the supposed "job creators" but to rent-seeking enabled by an increasing and excessive level of influence on govt, of which the Citizens United decision is only the most recent and egregious example. So, removing the cap on payroll taxes and the exclusions for dividends and cap gains only begins to correct for the distortion of an economy increasing dominated by rent-seeking.

I couldn't agree more.

 

[Midpack]

The fix to this problem is quite simple: the cap on the payroll tax should be removed, but not the cap on benefits. Doesn't sound fair, does it? Well, possibly not until you consider that the real problem that SS funding will face 25 years from now is not do to an unforseen increase in retirement longevity, but an unforseen polarization of income in the US. The inequality of income distribution in the US is comparable to China and Thailand, and very unlike more egalitarian countries like Europe and Japan. The result is that the increases in income that resulted from productivity increases in the last 30 years have gone exclusively to the upper percentiles of the population. Because of the payroll tax cap and the exclusion for dividends and cap gains, these income gains have escaped contributing to SS. The increases themselves are not due to greater economic contributions of the supposed "job creators" but to rent-seeking enabled by an increasing and excessive level of influence on govt, of which the Citizens United decision is only the most recent and egregious example. So, removing the cap on payroll taxes and the exclusions for dividends and cap gains only begins to correct for the distortion of an economy increasing dominated by rent-seeking.

Like the earlier reply stated, you're statement in red is terribly misleading at the very least. While income inequality (with payroll tax caps) may contribute, demographics is the overriding issue. Google for yourself, it's well discussed on the ssa.gov site as well...

 

[Khufu]

Like the earlier reply stated, you're statement in red is terribly misleading at the very least. While income inequality (with payroll tax caps) may contribute, demographics is the overriding issue. Google for yourself, it's well discussed on the ssa.gov site as well...

Nope. Demographics is not the overriding issue.

What your graph of workers per SS beneficiaries actually shows, and why it's not the cause for hand-wringing that you suppose, is a the growth in productivity of American workers. That's the reason that, although the number of workers per beneficiary has declined, the living standards of both the workers and beneficiaries has dramatically increased.

Here is a long-term graph of the real increase in productivity of US workers:

Here's another graph:

 

[Khufu]

Totally incorrect about the longevity issue. When the program was first designed, the life expectancy was much lower than it is today. And having a much greater ratio of workers to retirees back then contributes greatly, too.

Income inequality has nothing to do with SS's finances. Think about it, if everyone who has wage earnings above the cap had earnings at exactly the cap, SS would take in no more than it does today. And SS would pay out no more than it does today. The presence of those earning more wages than the cap has nothing to do with SS's income or payouts.

You have failed to understand the issue. First of all, you ignore productivity increases since 1935 which have resulted in a higher standard of living for both workers and SS beneficiaries despite the change in ratio between the two. Longevity gains have mostly occurred in the upper income brackets as you can see from this CBO chart:

The increase in Full Retirement Age from 65 to 67 more than compensates for the smaller increase in retirement life span in the bottom half of the distribution. The upper half of the distribution not only secured the lion's share of the longevity gains, but their income gains were mostly excluded from the payroll tax!

Once again, you are totally missing the point. SS does not replace nonwage earnings such as dividends and cap gains, just as it does not replace wage income over the cap. If nobody had any nonwage income, SS would take in exactly the same amount in payroll taxes as it does today, and it would be paying out exactly the same amount in benefits as it does today.

If this is any sort of agreement, the income taxes paid by those with wage earnings over the cap as well as for nonwage income will be used, at least in part, to pay SS when it redeems the cashless trust fund's bonds which have built up over the years. And I have no problem with raising the income taxes on nonwage income.

You are missing the point. The specifics original SS formula has been made obsolete by the fact that the increase in labor income has been sequestered by the upper percentiles. In addition, the share of GDP that has been captured by the corporations to the detriment of the workers has also increased. At the same time the income tax rates on dividend and cap gains have decreased! None of this is the "natural" economic outcome, but the result of investing their wealth in political control to bend the tax structure to their benefit, at which they have been extraordinarily successful.

 

[scrabbler1]

Khufu, you are missing the point. All you have to do is count people. All of your statements about productiivity may explain income inequality and the standard of living but not the problem of SS funding. Remember, all of those income gains by those at the top which are shielded from the payroll tax (above the wage cap or nonwage income) are also shielded from the SS benefit formula. Nothing you have posted here has contradicted that.

If you want to discuss income inequality and worker productivity, start another thread.

BTW Midpack's pictures are the ones which matter, not yours.

 

[ERhoosier]

SS has strayed so far from its original path that it has indeed become an increasingly problematic de facto social welfare program. A far cry from what Pres Roosevelt CLEARLY envisioned to be a self-funded RETIREMENT program separate from other gov't welfare programs.
-SS Benefits were to be based on payroll tax contributions that the worker made during his/her working life. (e.g. Soc Sec ACCOUNT Number linked that worker to his/her contributions & future benefits)
-The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a joint fund. It was thus distinct from the welfare benefits provided under Title I of the Act and from the various state "old-age pensions." As President Roosevelt conceived of the Act, Title I was to be a temporary "relief" program that would eventually disappear as more people were able to obtain retirement income through the contributory system.
from-- Social Security History

Of course any economic issue (inc taxation) must be interpreted differently in 21st century vs early 1930's. Economic globalization has made it easier for the ultra-wealthy to legally move huge income & capital internationally to meet economic challenges- inc changing tax burdens. Individuals & corporations clearly vary their behavior with major changes in tax policy. Consider consequences of recent major "tax the rich" moves in France-
Actor Gerard Depardieu joins French tax exiles in Belgium | News | The Week UK
It would be logical to assume such reactions would occur (again) in the US with similar tax law changes. Despite indicated top income tax rates varying from 28-90% over post WWII era, US population paid similar rates of overall ACTUAL total Fed tax revenues of ~17-18% of GDP.
Historical Tables | The White House (Table 2.3 download as XLS)

Clearly US SS is not sustainable without significant program changes, but durable solutions are most likely to come from tweaks in both revenue and benefits.

 

[Khufu]

Khufu, you are missing the point. All you have to do is count people. All of your statements about productiivity may explain income inequality and the standard of living but not the problem of SS funding. Remember, all of those income gains by those at the top which are shielded from the payroll tax (above the wage cap or nonwage income) are also shielded from the SS benefit formula. Nothing you have posted here has contradicted that.

If you want to discuss income inequality and worker productivity, start another thread.

BTW Midpack's pictures are the ones which matter, not yours.

You have a fundamental misconception. If you only count people where does productivity show up? GM makes more cars with 40,000 workers than it did with 400,000. If counting people were sufficient how would you explain the ability of the worker population to support the current population of retirees while both enjoy a higher standard of living? Things should be made as simple as possible, not more so.

All those income gains that are shielded from the payroll tax would not have gone only to the group paying them because SS always has had a distributive function and because only survivors would have collected them, as in any annuity system. The SS system was not designed to serve as a retirement system for the rich, but as an insurance system providing a minimum standard of living in old age for all Americans. Therefore, there would be no reason to remove the cap on benefits at the same time as removing the cap on the payroll tax.

Midpack evidently doesn't recognize a productivity graph when he posts one.

 

[ChrisC]

SS has strayed so far from its original path that it has indeed become an increasingly problematic de facto social welfare program. A far cry from what Pres Roosevelt CLEARLY envisioned to be a self-funded RETIREMENT program separate from other gov't welfare programs.
-SS Benefits were to be based on payroll tax contributions that the worker made during his/her working life. (e.g. Soc Sec ACCOUNT Number linked that worker to his/her contributions & future benefits)
-The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a joint fund. It was thus distinct from the welfare benefits provided under Title I of the Act and from the various state "old-age pensions." As President Roosevelt conceived of the Act, Title I was to be a temporary "relief" program that would eventually disappear as more people were able to obtain retirement income through the contributory system.
from-- Social Security History

Of course any economic issue (inc taxation) must be interpreted differently in 21st century vs early 1930's. Economic globalization has made it easier for the ultra-wealthy to legally move huge income & capital internationally to meet economic challenges- inc changing tax burdens. Individuals & corporations clearly vary their behavior with major changes in tax policy. Consider consequences of recent major "tax the rich" moves in France-
Actor Gerard Depardieu joins French tax exiles in Belgium | News | The Week UK
It would be logical to assume such reactions would occur (again) in the US with similar tax law changes. Despite indicated top income tax rates varying from 28-90% over post WWII era, US population paid similar rates of overall ACTUAL total Fed tax revenues of ~17-18% of GDP.
Historical Tables | The White House (Table 2.3 download as XLS)

Clearly US SS is not sustainable without significant program changes, but durable solutions are most likely to come from tweaks in both revenue and benefits.

Well, I don't agree with your interpretation and those of others posted here that Social Security, even with its old age retirement benefits, was designed simply as "income replacement" for wage earners contributing to the system. It was a New Deal income redistribution program designed to to replace the dragnet of ineffective, State old age social programs that resulted in old folks becoming wards of the State. We'll let FDR's words speak for themselves:President Roosevelt signs Social Security act [VIDEO] - UPI.com. The fact that it is funded through payroll taxes on wage earners and benefits are calculated on the basis of earnings is beside the point, in my opinion.

Financial stability to bolster the stability of the old age retirement program calls for out-of-the box solutions. I happen to think that raising the retirement age is a not a good idea and it's a carelessly thought out proposal for reasons mentioned by Ezra Klein in the article I posted. I really don't see how means-testing social security or raising the payroll tax cap limit (and leaving retirement benefits capped at a maximum level) would really create angst among the 1%ers. I don't hear a lot of angst by the 1%ers when the estate tax exmption falls from $5.2 million to $1 milliuon next year!

 

[scrabbler1]

You have a fundamental misconception. If you only count people where does productivity show up? GM makes more cars with 40,000 workers than it did with 400,000. If counting people were sufficient how would you explain the ability of the worker population to support the current population of retirees while both enjoy a higher standard of living? Things should be made as simple as possible, not more so.

All those income gains that are shielded from the payroll tax would not have gone only to the group paying them because SS always has had a distributive function and because only survivors would have collected them, as in any annuity system. The SS system was not designed to serve as a retirement system for the rich, but as an insurance system providing a minimum standard of living in old age for all Americans. Therefore, there would be no reason to remove the cap on benefits at the same time as removing the cap on the payroll tax.

Midpack evidently doesn't recognize a productivity graph when he posts one.

Sorry but you continue to miss the point. Productivity has nothing to do with SS. Counting people does. Your GM example is irrelevant. Today's ability of workers to support today's retirees comes from higher payroll taxes and cap than before the 1984 fix. But the surplus of payroll taxes over expenditures is dwindling in the last few years. Having an automatic COLA enables retirees to keep up with inflation.

And SS is still an income replacement system. If someone works for just enough time to qualify for the program, his benefit will be quite low, not necessarily enough to guarantee a minimum level of benefit. In my own situation, I will eventually have 13 years of zero wages in my benefit calculation which will depress my monthly benefit. I have no guarantee of some "minimum" benefit. My wage replacement will be low because my wages were, on average, low. If I had more zeros or earned less in my working years, I'd have a smaller benefit.

Suppose all of those million-dollar wage earners earned only the amount of the wage cap instead of their higher wage incomes, and they had none of their dividends and cap gains. Guess what would happen to the payroll taxes paid into SS? Nothing, they would be unchanged. And guess what would happen to the SS benefits paid? Nothing, they would be unchanged, too. But income inequality would virtually disappear. This is why income inequality has no effect on SS.

SS replaces wage income of lower income wage earners, thanks to the same cap on benefits as for wages. It is a good concept, don't change it by messing with the cap, especially on the tax side.

It is all too easy to describe the cap on wages but a lot tougher to explain the need for that cap because most people do not understand the far more complex benefit formula. Therefore, it is way too easy to fool people into advocating the raising of the cap on wages for payroll tax purposes.

 

[Khufu]

Sorry but you continue to miss the point. Productivity has nothing to do with SS. Counting people does. Your GM example is irrelevant. Today's ability of workers to support today's retirees comes from higher payroll taxes and cap than before the 1984 fix. But the surplus of payroll taxes over expenditures is dwindling in the last few years. Having an automatic COLA enables retirees to keep up with inflation.

Sorry, attempting to account for the ability of the American workforce to support the retiree population while deliberately excluding consideration of productivity [mod edit]

It's not worth my time to pursuse such a discussion.

Best of luck to you in all your future endeavors.