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

New Sources Of Revenue 1 - New State & Local Employees

New Sources Of Revenue 1 – New State & Local Employees

The BEST Social Security Mod Plan proposes to improve Social Security’s solvency without increasing the retirement age or cutting benefits by adding new sources of revenues to the trust fund.

One source is requiring newly hired State and local government employees to be covered by the Social Security program and to contribute payroll taxes to the Social Security trust funds.

Currently, some State and local governments participate, but some do not. They were offered the option of participating and some governments have opted in.

As background information, the federal government’s original pension and retirement system, the Civil Service Retirement (CSR) system predated the advent of the 1935 Social Security program. These federal employees did not pay Social Security payroll taxes. However, on January 1, 1987 revamped its retirement programs and effectuated the Federal Employees Retirement System (FERS) which made paying into Social Security and collecting Social Security benefits an integral part of the federal government’s retirement system.

States and local governments were required to pay the 1.45% (2.90% including employer share) Medicare payroll tax in the 1990’s. At that time, State and local employees who were not under any kind of pension plan were also required to be covered by Social Security and to contribute payroll taxes. An example of this type of employee could be a school crossing guard, a part time employee or substitute teacher. However, the definition of a “pension plan” was pretty loose and some governments merely set up minimal 401k type accounts for these employees to get around the law change.

Given that many State and local pension funds are very stressed, it may make sense for them to revamp their pension programs and join Social Security. Historically, whether or not to mandate participation in the Social Security program has been viewed as a “States’ Rights” issue.

As noted in my November 26, 2013 post, one of the important features of the Social Security program is that contributors are eligible for Disability benefits. A thirty one year old, or older worker, is required to have paid Social Security payroll taxes for five of the ten years immediately preceding the onset of a disability. This is known as being “currently insured” for disability benefits.

Newly hired State and local employees who stop paying Social Security payroll taxes immediately upon their hiring, lose their currently insured status after working in non-covered State and local employment within five years or sometimes more quickly depending on their work history. Unfortunately, for these workers, they may not be vested in their new non-covered pension plan, and if they become disabled will be ineligible for Social Security disability or a disability payment from their State and local employer. As a result, despite having a full work history, these workers are force to rely on public assistance for their existence due to their inability to work.

Thus, at minimum, The Best Social Security Modernization Plan proposes that all newly hired State and local employees be required to pay Social Security payroll taxes for a minimum of five full years from the date they are hired. This will provide them and their families with much needed disability insurance protection during their working transitional period.

Mandating all newly hired State and local employees to permanently pay Social Security payroll taxes should also be considered.

Data, Statistics, Number Crunching & Exactitude

Data, Statistics, Number Crunching & Exactitude

Before I go further, it is important for all to understand that I do not have access to all the data and statistics that are available to the Social Security Administration (SSA) and the Internal Revenue Service (IRS). In addition, the BEST Social Security Mod Plan is a broad, extensive framework for Social Security reform and for preventing program cuts and for advocating program expansion. Thus, many of my proposals could be changed, tweaked or adjusted as long as my broader goals are preserved.

For example, I do not know the exact affect implementing a more progressive payroll tax will have on the Social Security trust funds. While my proposal to define short term capital gains as wages is not negotiable, the length of time differentiating short term from long term capital gains might be, depending on how they affect the Plan.

However, I do fully support my proposals and my goal is to gain widespread support for the plan as a whole. Once that occurs, I expect that SSA & IRS actuaries will be expected to provide detailed analyses to determine each component’s effectiveness and the effect of any modified or adjusted scenarios.

Future Posts: New Sources of Revenue, A Progressive Payroll Tax, and more …

Scrapping The Cap Is A Crappy Idea

Scrapping The Cap Is A Crappy Idea

While it is commendable that members of Congress are proposing bills http://www.salon.com/2013/07/24/the_new_fight_to_expand_social_security/ which would enable Social Security expansion or benefit increases, scrapping the Social Security payroll wage cap is a crappy idea which in the long run would damage the Social Security program. This is why The BEST Social Security Modernization Plan wants a seat at the table. Social Security solvency legislation can be BEST proposed by those who fully understand all the workings and nuances of Social Security and its rules and regulations.

Implementation of The BEST Social Security Modernization (Mod) Plan is a far better solution. The reasons why will be addressed in future posts here. This post will deal with why scrapping the cap is a crappy idea.

My November 26, 2013 post noted that there have always been those opposed to the Social Security program. Many of the opponents are those with the highest income and wage levels. Eliminating the Cap, for which Social Security payroll taxes are payable, which in 2014 will be $117,000, will only create more and stronger opposition to the Social Security programs.

If the cap is removed, benefits amounts could skyrocket for very high earners, quickly creating a big drain on the Social Security trust funds. Creating a benefit cap has been proposed, but creating a benefit cap without a taxation cap would also only increase program opposition.

The current benefit formula uses the average of the highest thirty five years of a worker’s indexed earnings and then applies a weighted bend point formula to calculate the monthly benefit.

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2014, or who dies in 2014 before becoming eligible for benefits, his/her PIA will be the sum of these three bend points:

    (a) 90 percent of the first $816 of his/her average indexed monthly earnings, plus

    (b) 32 percent of his/her average indexed monthly earnings over $816 and through $4,917, plus

    (c) 15 percent of his/her average indexed monthly earnings over $4,917.

Thus, the addition of very high earnings would quickly increase someone’s average indexed monthly earnings and significantly increase benefits for high income earners.

Also, under current rules a worker is required to have ten years of work to qualify for a retirement benefits. Even if a benefit cap were imposed, a worker with nine years of minimally qualifying wage credits and one year of extremely high earnings with no cap limitation could actually be eligible for the same monthly benefit as a worker who under current rules had maximum earnings in every year under the current wage cap rules for a 40 year working career.

While I do not support removing the Cap on payroll taxes, if it is removed, rather than capping benefits, I would suggest creating a fourth bend point tier which for example would then provide an upper limit to the 2014 15 percent tier of earnings over $4917, and which would, for example, pay 5 percent for the earnings over the tier three upper limit. This way, the benefits of high earners would increase as a result of their paying higher payroll taxes but at a much lower rate of increase.

However, a reason to oppose removal of the payroll wage cap it that whenever any kind of tax reform law is instituted, the first thing that happens is that the upper income class hires lawyers and accountants to find loopholes so that they can avoid paying more or any taxes.  This is why some corporations and individuals with enormous wealth and income pay little or no taxes.

Those with the highest earnings are generally those in the best position to control how they are remunerated. A CEO will negotiate that rather than being paid $4,000,000 in wages, his/her salary will be $117,000 plus $3,883,000 in stock holdings and dividends.

Thus, as a result of the proposed Cap removal, Social Security would not collect more money, and the US Treasury will collect less in income taxes than if the CEO been paid wages, which are taxed at a higher rate than dividends and stock holdings, $117,000 of which were only subject to the payroll tax.

It was reported during the 2012 election cycle, that candidate, Newt Gingrich, and his wife, Christa, did exactly this in running a business they owned, by paying themselves an artificially low salary but high dividends.

While I am opposed to the outright removal of the payroll tax cap, annual increases to the Cap are an important source of revenue to Social Security, and the formula used to determine the annual increase to the maximum taxable earnings should be changed. For example, currently there is a formula for determining the annual increase based on the country’s wage growth. Why not pass legislation that says that the maximum taxable earnings amount shall increase each year by a $5,000, unless using the current formula would cause it to increase by a larger amount? This would provide additional program revenues without stoking increase major program opposition.

In 2010 and 2011, the tax cap did not increase at all. It remained stagnant at the 2009 level of $106,800. This was unthinkable and unconscionable, and should not have been permitted to happen. While the Social Security Administration followed the law, it is unlikely that Congress ever expected the level of wage stagnation that occurred at this time and that the cap and revenues would not be subject to an annual increase. Emergency legislation should have been proposed and passed to remedy this situation, but Social Security’s Commissioner during this time was appointed to a six year term by President Bush, whose goal had been to privatize Social Security.

At minimum, the law should be amended to this: “In any year in which wage growth is insufficient to result in a significant increase to the Social Security wage tax cap, the tax cap shall be increased by the average amount of the wage tax cap increase from the previous ten years.”

In summary, there are far better ways to fix Social Security than to eliminate the payroll tax wage cap. Future posts will address them.