Wednesday, July 8, 2009

The Health of Social Security

first published on Automaticfinances.com

A committee of Social Security trustees has published another report on the financial health of the Social Security System. The new report tells us what social security reports always tell us; the social security system is failing, or headed for collapse “Alarm Sounded, on Social Security” the caption reads on the Washington Post article of May 13th.

New Social Security reports allow politicians to reassure retirees of their commitment to shore up the system and make sure it remains solvent. It also allows these same politicians to recite the status quo by telling us they have only two choices: cut benefits or add another percent on to the steeply regressive payroll tax.

This time is the same as always. The article quotes unnamed administration sources who say Congress can save the system by raising payroll taxes from 12.4 to 14.4 percent, or it can cut benefits 13 percent or a combination.

As of 2009 the payroll tax for Social Security, the OASDI(Old Age Survivors and Dependents Insurance) deduction on pay stubs, continues to be 6.2 percent with an additional Medicare tax of 1.45 percent for employees. The OASDI tax is actually 12.4 because the employer has to match the employee contribution. The same matching occurs with the Medicare portion of the payroll tax, but there is a difference because OASDI has a wage cap, which stops the tax for wages over the cap.

In 2009 the cap is $106,800; in 2008 the cap was $102,000; in 2007 it was $97,500. Beginning in 1991 Congress doubled the cap on the Medicare part of the tax. In 1994 the rising cost of health care convinced a majority of Congress to lift the cap for the Medicare portion of the tax, but they did not do so for the 6.2 percent of payroll taxes going to OASDI.

The Social Security Administration reports data for the distribution of workers by compensation. The year 2007 is the most recent year reported, which shows 146.7 million workers with wages of $99,999.99 or less. It shows 8,869,798 with wages above $100,000 including 151 who earned wages of $50 million or more. In other words, 146.7 million pay a 6.2 percent payroll tax on all of their wages while 8.9 million get a special privilege and pay nothing on wages over the cap.

Someone earning a salary of $25,000 already pays $1,912.50 of payroll tax for Social Security. Raising the tax as proposed would bring it to $2,162.50, before any other taxes are paid.

If the Congress adds another percent to the employee half of the payroll tax, making it 7.2 percent, then the extra revenue will be $51.3 billion, using the same data as above.

If the Congress treated America’s wage earners equally and applied the 6.2 percent tax to all of America’s wages reported by the Social Security administration, then the additional OASDI revenue from the employee half of the tax comes to $103.9 billion dollars. Dropping the wage cap would end a lucrative privilege for the well to do and the very rich and raise lots of money for the allegedly failing Social Security system, but as always that is a topic the politicians refuse to talk about.

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