From The Archives 4 - Social Security Turns 75 On August 14, 2010

From The Archives 4 – Social Security Turns 75 On August 14, 2010

Today, I am reprinting another article from the BEST Social Security Modernization Plan archives. This article was printed in the Berkshire Eagle on Friday, August 13, 2010. Keep in mind that at the time the BEST Mod Plan was known as The 2009 Progressive Social Security Modernization Plan.

Social Security Turns 75

On Saturday, August 14, Social Security turns Seventy Five. It has been a fantastically successful program serving all American citizens.

Recently there has been a growing debate about what should be done to “Save” Social Security. Some want to increase the retirement age while others want to cut benefits. Defenders of the program say small changes can make the program solvent and continue to be self funded as always for the next 75 years.

Social Security has always evolved with the times. However, in recent years the Social Security definition of WORK has fallen behind the times.

The federal government has always taxed “work” as a higher, more aggressive rate, than wealth. The well-to-do or rich may or may not pay taxes on their wealth while workers/employees pay BOTH income taxes and the Social Security payroll tax (which includes the Medicare tax) of 7.65% or 15.3% for the self employed.

Work is work, and wealth is wealth. Right? Maybe! When someone uses their wealth and actively works to aggressively increase it, it is no longer merely wealth; it IS Work.

The 2009 Progressive Social Security Modernization Plan proposes updating the legal definition of work to include those who make short term investments and increase their wealth. Thus, these individuals would be subject to paying the 7.65%/15.3% Social Security payroll tax in addition to any additional income taxes which might be owed on these wealth or earnings. Under the proposal, all rentals from real estate would also be subject to paying Social Security taxes.

These added tax revenues will serve to bolster Social Security’s solvency and obviate the need to raise the retirement age or lower benefits.

Properly and fairly taxing these two forms of earnings would also serve to stabilize the stock market and real estate prices by slowing wild speculation.

Since the Social Security payroll tax tends to be a regressive tax for low wage workers, the proposal also reduces the payroll tax for all those whose annual earnings are below the minimum wage level, refundable via income tax return. This would help young workers, students, fledgling businesses, and older retired workers.

New Sources Of Revenue 3 - Capital Gains And Dividends

New Sources Of Revenue 3 - Capital Gains And  Dividends

My third source of new Social Security trust fund revenues is capital gains and dividends. I grouped them together as they often may be closely related.

Currently capital gains are differentiated by whether they are short-term capital gains or long-term capital gains. Assets held a year or less are short-term capital gains, while those held longer than a year are defined as long-term capital gains. Capital losses are deductible and used in determining net capital gains by subtracting long-term losses from long-term gains. Long-term capital gains are generally taxable at no higher rat than 15%, sometimes lower. However, short-term capital gains are subject to taxation at your ordinary tax rate which can be much higher. Here is IRS Topic 409 on this subject: http://www.irs.gov/taxtopics/tc409.html .

The Balanced, Equitable, Solvent, Tested (BEST) Social Security Modernization (Mod) Plan proposes two changes here. One is defining short-term capital gains as earnings subject to the Social Security tax. The second is extending the period that an asset must be held before it is defined as a long-term capital gain from more than one year to more than 30 months.

Remember, these people are actively, and diligently working by using capital to earn money.

These changes will affect several things. More funds will be credited to the Social Security trust funds. General tax revenues will also be increased as a result of having more capital gains being defined as short term capital gains causing them to be taxed at higher income tax rates. The shift to defining long-term capital gains to longer than 30 months may also motivate investors to consider holding on to investments for longer than a year to avoid paying both Social Security taxes and income taxes at a higher rate. This incentive may also serve to decrease financial speculation which, for example, causes commodity inflation like those documented causing higher oil prices.

Dividends are generally paid to those who invest money in corporations as a form of profit distributions. http://www.irs.gov/taxtopics/tc404.html . Dividends are categorized as either ordinary dividends or qualified dividends. Ordinary dividends are subject to income taxes at the rate of ordinary income, but qualified dividends are taxed at lower capital gain tax rates. In order to meet the requirements as qualified dividends the stock has to be held for a certain period. Perhaps the qualification requirements to meet the definition of a qualified dividend could be made more stringent and more reflective of the proposed new 30 month demarcation which would differentiate short-term and long-term capital gains.

While I am not currently proposing that dividends be redefined as earnings subject to Social Security taxes, they could be considered to be defined as wages whenever the stock is held for 30 months or less.

In recent years, there has been considerable discussion of a stock transfer tax. http://www.web.gpnys.com/?p=7538 . The BEST Social Security Mod Plan’s proposal to tax short term capital gains as wages/self employment earnings is a better idea.

What about corporate short-term capital gains or corporate earned dividends that cannot be attributed to be earned by individuals? This is a labyrinthal concept and may be difficult to clearly untangle, but certainly, corporations should be required to make at-large contributions to the Social Security trust fund if determined appropriate.

After all, to quote 2012 presidential candidate, Willard M. Romney, “Corporations are people, friend.” http://articles.washingtonpost.com/2011-08-11/politics/35270239_1_romney-supporters-mitt-romney-private-sector-experience .

Update: I want to add that earnings and Social Security trust fund contributions from short-term capital gains workers will have the added bonus effect in that workers who earn their living from capital gains may have much longer working careers than those who perform physical labor related work. Rather than the typical 40-45 year working career, capital gains workers are likely to have 60+ year working careers.

Since Social Security payments amounts are presently calculated using the highest 35 years of indexed earnings, capital gains workers have the potential to make larger overall long-term contributions to the Social Security trust fund without significantly increasing their monthly benefit amount.

From The Archives 3 - The BEST Mod Plan Factsheet

From The Archives 3 - The BEST Mod Plan Factsheet

Today, I am reprinting a Factsheet from November 11, 2010:

The Balanced, Equitable, Solvent, Tested (BEST)

Social Security Modernization (Mod) Plan

Overview

• The BEST Social Security Mod Plan is superior to other Social Security solvency plans because it does not raise the retirement age, does not reduce benefits, and it does not privatize Social Security.

• It works by updating the definition of work and earnings and adding new classes of workers to the list of those who pay Social Security payroll/self-employment taxes.

• It corrects a defect in the law which causes many high earners to pay income taxes at lower rates than low and mid income workers.

• It adds progressivity to the Social Security payroll tax rate, creating a three tier system, and also corrects a defect in the law which prevents the Social Security wage base from increasing during periods of low inflation and stagnant wages.

• It does not eliminate the income wage cap, nor does it significantly raise it. While eliminating the income cap would bring more revenue into Social Security coffers, it would also significantly increase the amount of benefits paid out to these high earners, creating an acceleration of cash outflow from the Social Security trust funds.

New Sources of Program Revenue

• Requires non-covered state and local governments to pay Social Security taxes for new employees during their first five years of employment. This insures that these workers will be covered for Social Security disability benefits during the transitional period when these workers are not yet vested in the state or local retirement plan.

• Requires rental income from all real estate rentals to be subject to Social Security taxes.

• Requires short term-capital gains to be taxed as wages or self-employment earnings. These investors are working and should be required to pay taxes at the same rates as other workers.

• Redefines short term capital gains to be all investments held thirty or fewer months, an increase from the current twelve month rule.

• These newly defined forms of Social Security Earnings would be subject to both the Social Security payroll/self employment tax and paying income taxes at the current marginal tax rate instead of the lower long term capital gains tax rates.

Making The Program More Progressive

• Lowers the payroll tax rate for employees/self-employed whose total annual earnings are at or below the federal minimum wage level from 7.65%/15.3% to 4.65%/9.3%.

• Increases the payroll tax rate for that portion of wages which exceeds the 2010 wage cap from 7.65%/15.3% to 9.65%/17.3%. This higher tax rate will apply to only that portion of earnings which exceed the 2010 wage cap over a rolling ten year period. After ten years, the 2011 portion which exceeded the 2010 level will revert to the original 7.65%15.3% rate. Rather than removing the wage income cap, this will serve to increase revenue without causing benefits to be increased.

• Corrects a defect in the law which caused the income cap to stagnate for 2010 and 2011, by recommending corrective legislation which increases the wage income cap to increase annually by the higher of either the current methodology or by the average of the ten previous yearly increases from 2000 to 2009 or the last ten years. Using the figures from these ten years, the 2011 wage cap base would increase by $3,420 from $106,800 to $110,220.

What The BEST Social Security Mod Plan Accomplishes

• One effect of the BEST Social Security Mod Plan is that low earnings, part-time, younger & older workers as well as many small start-up businesses will get a payroll tax break. This will encourage these workers to enter or stay in the workforce and will help to inspire Social Security program confidence.

• Adding a payroll higher tax rate to only that portion of earnings which exceed the wage base or cap over a rolling ten year period will increase program revenue without triggering higher benefit outlays.

• The three new types of work and earnings subject to the payroll/self employment tax will provide an additional source of program revenue, and provide a source of additional federal income tax revenues without the consideration of whether or not to extend the Bush tax cuts.

• Improves the long-term solvency of the Social Security program.

Join the Best Social Security Mod Plan Team!

November 11, 2010