OK, I'm listening to various arguments going on about ways to cut spending and reduce the growth of the costs for Medicare and Social Security. Most of the proposals (excluding Ryan's non-starter) center around increasing the eligibility age over the course of time. Since the average life expectancy is rising over time, this seems logical. It's simple: If we delay the starting date for providing benefits, we save federal outlays in both systems.
However, the life expectancy data do not hold up well under close scrutiny. Averages are made up of a broad range of ages and genders and socio-economic situations. For instance, the gap in life expectancy between African-Americans and their white counterparts has been narrowing over the past few decades. That's good news – and it's a piece of data that backs up the proposed increases in the eligibility age for Social Security and Medicare.
But wait. When we cut the data based on income, we find that the gap between those at the upper end of the economic spectrum and those near the bottom is actually growing, not narrowing. That is, the wealthy are living to an older age than their counterparts who earned less over their work-life. This means the wealthy, as a group, collect more benefit from Social Security and Medicare than their less-advantaged peers.
Social Security is funded by taxes on the employer and employee up to a designated "wage base." Income beyond this base amount are not taxed for Social Security. The wage base has been $106,800 since 2009. This means that no matter how much someone earns above that amount, no further tax is paid to support the Social Security system.
A person earning federal minimum wage ($7.25 per hour), working a 40 hour work week, and working 50 weeks a year makes $14,500 a year. Although this sounds like an unrealistically low income, in 2007 19% of households earned less than $20,000. The total income for this 19% of households represents only 3.1% of all earnings in the United States.
That same year, 77.9% of households (earning up to $95,000 a year) held 47.3% of the total US income. All this income was subject to the existing Social Security tax (the wage base in 2007 was $97,500.)
Twenty percent of households earned between $95,000 and $250,000, representing 40.8% of total US income. And last (but definitely not least) the top 1.9% of households (making more than a quarter of a million dollars) brought in almost 12% of all income. However, for both these brackets, no Social Security tax was paid once income exceeded $97,500.
So the relatively poor pay Social Security tax on 100% of their income, while those in the upper brackets clearly do not.
The actuarial tables tell us those at the lower end can expect to collect Social Security benefits for about sixteen (16) years, while those at the upper end will collect about twenty-one and a half (21.5) years after age 65 years. And this 5.5 year gap is growing (it was less than one year difference about 30 years ago.)
Based on this data, I would propose that those who are wealthy, who will generally live longer than their low income colleagues, could reasonably be asked to pay more into the system.
There are a couple of ways we could do this. We could simply raise the wage base again a few thousand dollars. But this would continue to tax the lower and middle classes which do not benefit from the system as much as those at the upper end. While I would prefer a progressive tax (hitting those at the upper end with a higher Social Security tax rate than those with less income) I don't think that would earn enough votes to pass Congress. So I propose that we eliminate the concept of the Social Security "wage base" and simply include all earnings when calculating the Social Security taxes due.
Your thoughts are appreciated.
Photo Source
Cultural Health News Blog, November 30, 2010
