Under the current Social Security rules, anything we do that creates a higher percentage of low paid workers than currently, results in a larger deficit for the entire government pension system and hastens the day when less money is paid into FICA taxes than is paid out in benefits. The reason: Social Security has been “adjusted” many times by politicians to become an extremely regressive program. As a result, the more you pay in FICA taxes, the lower the percentage of benefits you receive from those contributions.
Your salary and wage FICA tax is 6.2% up to $118,000 in 2015 earnings. Under the law your employer has to match this amount. Earnings above $118,000 are exempt from the retirement portion of FICA. Interest and dividend income is also exempt. If you are very rich and don’t need to work at a job, your income should be free of FICA taxes, unlike the servants in your home or the waiter at your country club.
Businesses don’t like to pay for pensions, and most of these programs for retirement are disappearing, and instead employees are offered 401Ks, savings that you fund with your own money. The only contributions from the employer (unless you have a union contract) are from the goodness of their heart. Fewer and fewer companies now offer such contributions (goodness) to 401ks, simply because they can get away with saving money by not partially funding your retirement.
Even without many company pension plans, some politicians still argue that enough is enough and we cannot pour more money into “entitlements” – Social Security, Medicare and Medicaid. (Actually, Medicare and Social Security are paid benefits, and Medicaid is a program to help the very, very poor.)
With a 401k at 67 and your mortgage paid, why would you need Social Security? Saving your money in a 401k and self-funding your silver years, sounds like a great concept, except…
The average retired couple receives about $21,000 in Social Security benefits. From that money they pay a Medicare premium of about $2,400, supplemental Medicare insurance of about $3,000, average prescription costs of $2,000, plus a few hundred dollars each time they are admitted to the hospital and they are responsible for all of their expenses for dental, hearing aids etc. With such basic medical bills, there’s not a great amount remaining for real estate taxes, transportation and food.
How much do you need in savings to replace that “inadequate” average Social Security benefit. At 2.1% net interest after inflation, $1,000,000 is required to pay out $21,000 a year. An average American household income of $50,000 (before taxes), requires you to save $25,000 a year for 40 years, exclusive of interest earned and inflation adjustment.
The deficit hawks in the White House and Congress, who want to reduce Social Security cost of living (COLA) adjustments, hike retirement age to 69 or 70, and means test the program to eliminate higher earners from benefits, are wrong-headed in a moral sense and ignorant in a critical economic analysis.
Rather than taking from the middle class, it would be wise to extend a program called overly generous by its detractors, to everyone. And, save money at the same time.
The dirty secret is that increasing the FICA income cap from $118,000 to a billion dollars or more, will bring in much more money than the benefits will cost. From Social Security website:
- “For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2015, or who dies in 2015 before becoming eligible for benefits, his/her PIA will be the sum of: 90 percent of the first $826 of his/her average indexed monthly earnings, plus
- 32 percent of his/her average indexed monthly earnings over $826 and through $4,980, plus
- 15 percent of his/her average indexed monthly earnings over $4,980″
If the cap is raised, payments from the wealthy will result in benefits from the higher amounts over $118,000 at 15% of the base wages, versus 40% average. Increased payments plus lower percentage payouts are a bonus to the system.
According to the IRS 85% benefits rule, virtuallyall of this new money will be subject to normal personal income tax rates. For the new contributors, all in the high bracket, the income tax on each additional $1,000 in these 15% benefits would be be subject to income tax of some 40%. That means the 15% benefit will be reduced 40% to just 9% of prior earnings. The bottom tier of beneficiaries would receive 90% and the top tier, 9%.
Top income employees would receive 1/10th of the benefit of the lowest bracket taxpayers. This positive ratio would contribute mightily to the financial strength of the system. While some have suggested a cap on benefits, extending them to all contributors squashes suggestions of an unfair tax to benefit only middle and lower classes of seniors, and still brings in far more money than would ever paid out in benefits..
If a higher FICA cap sounds reasonable, why not make the change?
Although the government would gain from a more fiscally sound Social Security program, and individuals would be assured of current or higher benefits, plus a positive margin to increase reserves, business owners would object. But there is a solution. Companies could just pay fewer persons huge salaries that need matching 6.2% FICA, and by lowering executive pay, also increase the profit share to stockholders, not just company managers.