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

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.

From The Archives 2 - The YouTube Videos

From The Archives 2 – The YouTube Videos

These two videos, using The BEST Social Security Modernization Plan’s earlier name, The 2009 Progressive Social Security Modernization Plan, were video taped at the Northern Berkshire Community Television studios and uploaded to YouTube on November 10, 2008. Total viewing time is about fifteen minutes. At the time I uploaded them, there was a ten minute video time per upload restriction. Thus, I had to split the program into two segments.

Please watch both segments. The second segment some interesting number crunching for the first time.

Part One:

http://www.youtube.com/watch?v=90ErWsPtYXE

Part Two:

http://www.youtube.com/watch?v=lC2jLj73p5k

Keep in mind that these were taped in 2008. However, they are still relevant.

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.

A Seat At The Table

A Seat At The Table

The B.E.S.T. Social Security Modernization (Mod) Plan (BEST Mod Plan) wants a seat at the table when any discussions about the future of Social Security take place. BEST wants to make certain that “modernization” infuses new sources of revenue into the program, that Social Security taxation becomes more progressive and fairer, that benefits are not reduced, that the retirement age is not increased, that the program is not privatized, that the program is utilized to improve the U.S. economy, and that no decisions are made that, in the long term, hurt the popularity and the future of the U.S. Social Security programs.

BEST wants to discuss and debate the relevant issues and is available for presentations about the BEST Mod Plan before civic groups and Congress and Congressional staffs and committees.

No one should forget that  Social Security's programs and the monthly benefits that it pays out each month are an intrinsic part of the U. S. economy.

Since it is a comprehensive plan, it is extensive and has some complexities that will require several posts on this blog to fully explain.

The BEST Mod Plan has existed for several years and has been sent around to numerous economists, political leaders, and think tanks.

It is now time to take it to the next level.

Our next two posts will dig out information from the archives which will provide you with some useful background information.