From The Archives 1 - A Published Op Ed Piece

From The Archives 1 - A Published Op Ed Piece

Originally, The BEST Social Security Modernization Plan was called A Progressive Social Security Modernization Plan. This brief paper was published as an Op Ed piece in the North Adams Transcript on August 30, 2008. The article was picked up by a few syndicated online publications. It is being re-printed here in its entirety.

A Progressive Social Security Modernization Plan

Strengthening Social Security

Social Security solvency discussions often note that the ratio of workers to beneficiaries has been decreasing over the years since the program’s inception on August 14, 1935. Of course, some of the decrease during the early years was due to the fact that, at that time, there were very few Social Security beneficiaries. Recently, it has been estimated that 90-95% of those who constitute the current “workforce” pay Social Security taxes. Nevertheless, an increase in the numbers of those paying Social Security taxes or an increase in the ratio of workers to beneficiaries would do wonders for Social Security’s long term fiscal solvency.

On the other hand, the Social Security payroll tax has rightfully been criticized as a “regressive” tax for low income workers. These workers may have income so low that they pay no federal or state income tax. However, they are still liable to pay a 7.65% Social Security payroll tax, or if self employed, a 15.3% tax, even if they owe no income taxes.

Despite this regressive characteristic for low income earners, the positive effects of the lifetime Retirement, Disability, Medicare, and Survivor benefit protection provided by the Social Security programs have been well documented.

This paper attempts to address two issues:

1. Improve Social Security’s long term solvency by increasing participation and Social Security tax revenues.  

2. Providing more equitable treatment, as well as some tax relief, by establishing different levels of Social Security taxation

Increasing Workforce Participation

Social Security has been around for roughly 73 years. During this time, many changes have taken place in America. America has moved from the Industrial Revolution to new, unimagined ways of conducting business and new ways of working. Social Security was designed as a program where workers and, later, the self-employed, pay a tax on their earnings and in return are provided with Retirement, Survivors, and Disability benefits based on the amount of their contributions. However, Social Security has failed to evolve with the times. It has failed to update its definition of covered earnings which should now be subject to the Social Security program tax.

Here are two new earnings types and a new class of workers which should be subject to Social Security taxes:

·        Rentals from real estate Currently, Social Security only taxes rentals from real estate if the owner performs personal services for their tenants such as cleaning the premises and changing the sheets. Those who buy properties for the purposes of renting them to others are working and they are engaging in a business. They should be required to pay Social Security taxes on their profits. Should this tax have a chilling effect on investments in rental properties, which had been skyrocketing until the recent sub-prime interest scandal, it would also have the favorable benefit of slowing the inflation rate of property values and the cost of housing. Owner-occupied duplexes could be exempted once the owner reaches the full Social Security retirement age.

·        Short term gains from investing in the stock market Those who invest and buy and sell are working at a job. They should be required to pay the same payroll taxes as other workers. Gains from “long term” investments (This shall be defined as part of this discussion, but not in this paper.) shall be exempt from the Social Security payroll tax.

What does this mean? Very young and very old investors (and all those in between) will be required to pay Social Security taxes. This includes many who may be already receiving Social Security retirement benefits. The bonus (or side effect) of this law change may discourage short term investments, and encourage long term investments, which may contribute to stock market stability and less market volatility.

Today’s Social Security workers are required to pay both Social Security payroll taxes and, when appropriate, income taxes. Stock market investors who are also working should be required to do the same.

·        Newly hired state and local employees in localities which are not currently covered by Social Security The coverage requirement should be for the first five years of a new employee’s tenure. Very often, these state and local employees are not tenured in the state & local plan until working in it for five or more years. This means they not only are not eligible for a state or local  pension should they become disabled during this time, they have also lost their prior Social Security disability benefit coverage after spending five years or more not paying Social Security payroll taxes.  After the five year period, tenured employees could revert to 100% coverage by the state or local retirement system. This provides these American workers with extended disability coverage which in many cases today is totally lacking.

Requiring these three groups to pay Social Security taxes will increase the numbers of workers paying Social Security taxes as well as the amount of income subject to Social Security taxes, and will extend Social Security’s ability to pay 100% of its currently promised benefits farther into the future.

Providing Social Security Tax Equity and Relief

One of the ideas often suggested for improving Social Security’s long term solvency is either simply removing the wage base cap for which F.I.C.A. taxes are collected or drastically increasing it. While this action will increase Social Security revenues, it will at the same time lead to a corresponding increase in benefits for high wage workers. Instead, the payroll tax should be made more progressive

 The current payroll tax for employees, including the Medicare tax of 1.45% (which has no cap) is 7.65%.  The current federal minimum wage is $6.55 an hour. A worker earning this minimum wage working 40 hours per week for 52 weeks would earn $13,624 on an annual basis. The proposed changes to the payroll tax are:

·        Lower tax rate on minimum wages Workers who earn $13,624 or less in wages pay an effective payroll tax rate of 4.65% with the 3% difference of a $408.72 maximum being refundable upon filing of an income tax return.  This would serve to benefit minimum wage earners including minimum wage earning couples, as well as serving as an incentive to older workers to remain in or enter the workforce after beginning to collect their Social Security benefits. The 4.65% bracket will rise as the federal minimum wage increases.

·        Lower tax rate on self employment income at or below minimum wage level   Annual net earnings from self employment at or below the minimum wage level (currently $13,624) be given a similar tax break. Rather than paying the full self-employment tax rate of 15.3%, they will pay 9.3% for self-employment earnings below the minimum wage level. These self employment tax reductions will also serve to encourage small start-up businesses.

o       These tax breaks for those workers who are both employees and self-employed will only apply to a worker’s combined wage and self employment earnings levels below the current annual minimum wage level.

o       The new, lower tax rates for workers and the self employed who earn at or below minimum wage levels may also serve to encourage more Social Security workforce participation and provide some incentives for small business start-ups.

·        Higher tax rate on wages above current maximum taxable limit The 2008 maximum taxable wage base is $102,000. This maximum wage base typically increases between $3,000 and $5,000 each year.

o       Any wages above the current cap which become taxable due to future increases in the wage base will be taxed at a higher rate of 9.65%. For example in 2009 if the wage base increases to $106,000, a worker earning $106,000 in 2009 would pay 7.65% on the first $102,000 of their wages and 9.65% on any wages between $102,000 and $106,000.  This 2% increase will not apply to the employer share of the payroll tax.

o       For the self-employed, the tax increase would be limited to 2%, as they will not be required to pay the equivalent of the employer share of the tax.

There will be a three tier system:

1. Tier 1 will include workers and self-employed individuals whose total wages or net earnings from self-employment are less than the federal minimum wage level will pay 4.65% including the Medicare tax.;  

2. Tier 2 will include workers and self-employed individuals who earn more than the federal minimum wage level. They and their employers will pay 7.65% on all wages up to and including $102,000.

3. Tier 3 will include workers and self-employed individuals who earn more than $102,000. They will pay 9.65% on any wages which exceed $102,000 up to the coverage earnings cap, while the employer rate will remain at 7.65%. The self-employed in the third tier will pay only an additional 2%. 

Tier 3 will have an additive, cumulative effect, and every year when the wage base is increased, more and more workers due to wage gains or inflation will fall into the third tier which starts at the $102,000 level. In order to eliminate an unintended creep effect, every eleventh year the third tier bracket will be rolled back one year so that no more than ten years of wage base increases will be included at the 9.65% rate.

Example: Using the current, 2008, $102,000 wage base with Tier 3 taxation beginning in 2009. For simplicity sake, we will say the wage base will increase $4000 each year. All employees who earn more than $102,000 will pay 9.65% on any wages over $102,000. The year 2018 will mark the tenth year of wage base increases under the three tier system. Thus, the wage base in 2018 will be $142,000. Any wages between $102,000 and $142,000 will be taxed at 9.65%. However, when the eleventh year, 2019, comes up and the wage base increases to $146,000, Tier 3 will be adjusted to $106,000 - $146,000, removing 2009 so it will only include the last 10 years. The same process will apply to the third tier self-employment tax rate of 17.3%.

Summary

These proposed changes will increase the size of the Social Security workforce and improve the ratio of workers to beneficiaries participating in the program and improve the program’s long term solvency. In addition, the implementation of a three tier tax rate will make the program less regressive and more equitable for low wage earners and serve to lower their tax burden.

These changes will strengthen the Social Security programs and make them more attractive to the American public and workforce.

Ken Swiatek

July 25, 2008

Ken Swiatek holds a Master of Arts degree in Psychology from the University of Texas. He has worked in construction, grocery stores, warehouses, the steel industry, music retail, as a school teacher, and he most recently retired from the Social Security Administration after thirty three years of service mostly working in community based field offices in managerial positions.