Thursday, November 01, 2007

Social Security Proposed Change

The democrats were reported in the news today to be looking at “shoring up” social security. Their plan is to raise the base to which social security taxes are applied. Currently Social Security taxes the first $97,500 and anything above that is, let us say tax-free. Taxing those who make more than $97,500 sounds acceptable right? Why should a person making minimum wage pay a full 12.4% of their wage to social security while the person making $200,000 pays 12.4% only on the first $97,500?

You might change your support if you knew the dirty little secret behind the social security benefit. Your social security benefit is not based on the taxes you pay. It has nothing to do with the taxes you paid, but is based solely on the wages that were subjected to Social Security. Your total Social Security wages are adjusted by the change in the US Average Wage in the year they were earned and the US Average Wage in the year you turn 60. This is much better than inflation since it raise all wages to the current standard of living. The best 35 years are then averaged together to determine your average monthly wage index. This average wage index is then used to determine your Social Security benefit. The larger the average wage index, the larger the social security benefit. Thus subjecting more wages to the social security tax will increase average wage index and thus the social security benefit of those who are affected.

So how much can the Social Security Administration expect to get from this increase in the payroll base? Well that is pretty simple to calculate. Currently 83% of all wages are subjected to the social security base of $97,500. Social Security revenues would jump by 13% if all wages were subjected to the social security tax. However, of this 13% increase in revenue, Social Security would have to set aside 51% of this increase in order to accrual the cost of paying the higher benefits when these workers began receiving Social Security. This results in a 6.5 to 7% net increase in revenues.

Let us face the cold hard facts once and for all. Social Security needs in excess of $17 Trillion in the bank earning 5 to 5.5% a year. It has $1.9 Trillion. It is under funded by more than $15 Trillion. This $15 Trillion would be earning over $750 Billion a year in interest. A 7% increase in Social Security revenues would add $40 Billion in revenues and would extend the ability to pay full benefits by less than 3 years. This means those who now under age 41 would not benefit at all from this while at the same time continue to pay into a terribly tragically flawed program.

For anyone born after 1985, the best you can do from Social Security is to receive 29 cents in benefits for every $1 dollar in taxes and credited interest at the US Treasury rate. No matter what is done, raise taxes, raise retirement age, cut benefits, the sad fact remains that you will still only receive at most 29 cents in benefits for every $1 dollar paid. If they raise the tax rate to pay you full promised benefits, you pay more for the same lousy benefit. If they raise the retirement age, you pay longer, receive fewer benefits for the same amount of tax. If they cut benefits, you receive less for the same amount of tax.

Why are we trying to save this wreck?

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