Fixing Social Security

The weird thing about Social Security is that the fix for future problems with it is so simple — yet is never seriously discussed by ‘responsible’ media or politicians.

All you have to do is to remove the income cap, and Presto, all future financial problems disappear.

Why is this cap a problem? The cap means that FICA/Social Security taxes are only paid on the first $106,800 of income, but no additional money earned gets taxed.

Right now, if you earn up to $106,800 per year in wages and salary per year, you pay a flat rate 6.2% of your income to FICA, for a maximum of $6,621.60.

However,when a really wealthy person earns, say, a couple of million dollars per year in wages and salary, they pay that exact same maximum, $6,621.60.

What about somebody like Warren Buffett or Bill Gates, who most likely earn most of their billions from stocks, dividends, and other investments? How much do they pay in FICA (Social Security) taxes on that money?

Zilch. Nil. Nada. Zip. Zero.

So if a wealthy person earns $2,000,000 per year in wages and salary, and another $2,000,000 in income, dividends, and investments, their TOTAL Social Security tax for the entire year is that same magic number: $6,621.60.

Now, if we divide that tax by their total income (four million dollars), we get an effective tax rate of 0.16554%.

No, I didn’t just say sixteen percent.


Roughly one part in 625.

Rather than about 3 parts out of 50, which most taxpayers (those not millionaires) have to pay.

If this hypothetical millionaire had to pay the same rate of payroll taxes as everybody else, then they would contribute $248,000 to the Social Security trust fund. As opposed to about $6,600.  So this person pays less than one-twentieth of the tax rate of everybody else.

Which is why the rich are so dead-set against making Social Security taxes fairer. They like regressive taxes. They want the poor and the middle-class to pay.

Instead, the millionaires and their bought-and-paid-for politicians plan to cut benefits on folks who could really use the money. And they propose raising the retirement age, and to impose penalties if you retire early, and so on.

These selfish SOBs of course have lackeys like writers for The Economist and the Heritage Foundation who will try to twist facts in a desperate effort to show how it’s bad to have the rich even pay the same tax rates as the rest of us. Don’t believe their self-serving propaganda.

What’s more, in addition to making FICA taxes somewhat more fair, removing the income cap would remove all danger whatsoever that the Social Security funds will ever run out of money.


Published in: on January 26, 2011 at 12:50 pm  Comments (7)  

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7 CommentsLeave a comment

  1. Guy,

    This is so obvious a fix it amazes me this gets no traction. Additionally that cap applies to per person income, so a family with two earners where neither earns above the cap, but their combined income is, still pays the full freight.

    Does your income figure include all income, or only payroll income. A lot of the highest income earners earn most of their income at the lower capital gains tax rate, and that income isn’t subjected to social security either, even if that income is less than the cap.


  2. I think that it *should* include all income, but clearly right now, as you say, income from stocks, interest, dividends isn’t assessed any payroll taxes like FICA or Medicare at all. The official projections about removing the cap don’t include any tax on ‘capital gains’. I suspect that we could solve a lot of our national budget problems if capital gains were taxed as ordinary income. Instead, our system gives all kinds of special breaks to the very rich.


  3. I think capital gains is a good idea -BUT- it should be for INVESTMENT in the US. That means it shouldn’t be for any short term investment, like holding stocks for less than 5 years, or for investment offshore. It also shouldn’t be for what a number of hedge funds do, buy a company, borrow piles of money on the company’s credit and dump the company piled with debt. Narrowing this tax credit to investment relevant to improving the economy instead of gambling and pillaging would actually be worthwhile.


  4. Thoroughly enjoy your blog. Thanks for your effort.

    Have you considered this possible drawback to your suggestion. As currently constituted, with benefits also similarly capped, SSI does not significantly transfer wealth from rich to poor. At least not so much that it compromises the generally bipartisan support for the program. Might lifting the cap on earnings, without a similar increase in benefits that would mitigate against your solvency argument, not stir the resentment we’ve managed to avoid for decades?


    • You have a point, but I think we need to deal with the fact that some folks have way, way, way too much money, and others really struggle to get by at all.


  5. Gosh, only a few rich people against this idea, it should be a slam dunk … and it is … for the rich people, further establishing the fact that our government is bought and paid for by those very same people and that is whom our government represents, not us.


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