Sanity On Social Security? Ctd

by Chris Bodenner

A reader writes:

In differentiating between blue collar workers and other workers, I think the biggest obstacle is that it would require more administration, bureaucracy, and paperwork (which would decrease the cost effectiveness of reform), as well as create a political problem of how you define the difference.

In regards to people suggesting that Social Security be means tested (and especially people who recommend it be shifted away from payroll taxes), I worry that it would undermine its base of support. FDR once remarked, "Those [payroll] taxes were never a matter of economics, they are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program".

If the link between contribution and compensation is weakened too much, I fear that in future reforms (which being a pension system, there always will be) it would be easier transition to a way that takes less consideration of low-wage earning Americans. Thus in my opinion, the great balancing act of Social Security reform is how do you keep the program solvent, without weakening its broad based political support.

Andrew Sprung argues that the program is already means-tested in a way:

What seems lost in this conversation is the fact that at present social security benefits are allocated disproportionately to low earners.

It's true that the tax is not progressive -- those earning $100k pay the same percentage as those earning $20k, while and those earning, say, $213,600 (twice the cap) pay half the rate on their total income.   But the benefits reaped constitute strongly diminishing returns as one's income increases.  Benefits are based on a taxpayer's  average indexed monthly earnings (AIME) up to the taxable cap. Of those earnings, averaged over 35 years, those who retire at age 66 currently get the following in SS benefits:

  • 90% of the first $761 of AIME
  • 32% of the AIME between $761 and $4,586
  • 15% for the AIME above $4,586 (up to $8900, beyond which there's no tax or benefits).

At present, if your work life is completed and your AIME is $8900, your monthly takeaway is $2,556, or 28.7% of your AIME.  At an AIME of $4586 (roughly $55k/year), you'd get $1909, or 41.6%.  If you earned just $3k/month over your working life, your monthly SS payment would be $1401, or 46.7% of your AIME.  For an income of $2k per month, the payout would be $1081, or 54% of income.

Attention fiscal wonks (who are probably the only people still reading this post): The Urban Institute is holding a forum tomorrow on the topic of raising the Social Security age and its effects on low income workers. Details here.