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Op-Ed Thu Feb 17 2011

A Solution for Social Security

This Op-Ed was submitted by John Fitzgerald

In late 2010, Democrats and Republicans in Washington recently reached a grand bargain on the Tax Cuts. Included in the deal is a temporary provision to reduce the Social Security payroll tax to provide working Americans with a little more tax home pay every week, and so spur economic growth. A couple months ago a bipartisan debt commission told us that we need to reform Social Security, lest it lead to massive shortfalls, and eventually bankruptcy, over the coming decades. Thankfully a simple, common sense fix exists to the dual problems of our anemic economic growth and Social Security financing.

First, a brief explanation of how Social Security works. Social Security taxes are levied on both the employee and the employer. The tax rate is 6.2% for both employees and employers. Employees see this deduction on their regular paycheck. They do not see the employer's portion, but this is still, in effect, a tax on the employee's earnings, to the tune of 12.4%.

Amazingly, however, high level earners do not pay this tax on any income over $106,800 a year. (This cap increases slightly each year). So a janitor making $25,000 a year pays an effective social security tax rate of 12.4%. A dentist making $100,000 pays an effective tax rate of 12.4%. But someone making $1,000,000 a year pays an effective rate of only 1.4%.

My simple solution is to cut the rate both employees and employers pay to 5% (so a total of 10% versus the current 12.4%). This means more take home pay for workers every week. It also makes it less expensive to hire new workers, and to retain existing ones.

We would also end the tax cap on earnings, so millionaires pay the same rate as janitors. The breakeven point, where one would pay more taxes under this new scheme is on earnings more than of $120,000. Now, in addition to being a tax cut on more than 95% of earners, and on almost businesses that aren't Goldman Sachs or pro-sports teams, this plan would provide $79 billion a year to support the long term health of Social Security. (Over the next 75 years, in today's dollars, and with annual aggregate wage growth of 2%, we would add $13.5 trillion to the Social Security Trust fund, dwarfing the $5.3 trillion shortfall we have heard so much about.)

This flat tax would no doubt have it detractors. Most assuredly, small and medium sized businesses would be held as one group that would be hurt by this proposal. But a medium sized business with 100 employees earning an average of $50,000 a year would save $60,000. And this does not include the additional $60,000 that would be in the pockets of the workers at this company; money to invest in their kid's education, save for the future, pay down their mortgage, or go on vacation. And it is well documented that the most effective tax stimulus is to put money into the hands of low and middle income workers.

And, of course, familiar refrains will be heard about penalizing the "most successful" amongst us. I have no specific qualm with hedge fund managers or firstbasemen. But it strikes me as foolhardy to hamstring small businessmen and women, and over tax workers, so that millionaires can afford ivory back scratchers. This helps no one, save ivory dealers.

So, to recap, lower taxes for workers and businesses and a real fix for Social Security. We can cut benefits for the elderly, throwing grandma and grandpa out on the streets, or we can do something, real, now.

Spreadsheet with calculations here.

John Fitzgerald is a former union organizer and financial analyst, making him a freak. He has a firm grasp of basic arithmetic and loves his country. He has lived in Chicago for 7 years.

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Pete / February 18, 2011 10:35 AM

So, would this also entitle high earners to greater Social Security benefits? If so, wouldn't that negate the impact of their higher contributions?

social security / February 18, 2011 11:10 AM

Social Security is a Ponzi scheme that requires more people to join the system to afford the payouts.

I for one would support a voluntary opt in/out system so that people can choose whether to have government in control over their retirement funds or not.

I like your articles, while I don't agree with them always it is mentally stimulating. keep up the great work.

John Fitzgerald / February 18, 2011 1:28 PM

Payouts would not be affected by this plan. However, high earners tend to live longer, so a stable system would benefit them by being around when they get to be 90.
But, really, high earners don't really need social security. I have heard suggestions that high earners be excluded from Social Security, but this would be a mistake, in two ways:
1) those that fell on hard times would be screwed, and
2) they would no longer be stake holders in the program.

But a stable program that increases unemployment would be benficial to all.

Further, a solvent social security system would be have ample money to lend the US Government, lessening our dependence on foreing governments to buy our bonds, and keeping interest rates lower.

John Fitzgerald / February 18, 2011 2:43 PM

Ponzi Scheme?

I think you should think of Social Security more as a massive insurance program. Besides abeing a retirement program, it also provides disability benefits. And our problems with Social Security are bascially an actuarial problem. Former Labor Secretary Robert Reich, discusses it hear (

Top earners are capture more income than the Alan Greenspan and the other folks the fixed Social Security during the Regan administration thought they would.
Think of it this way:
if Insurance Company X miscalculated how much in premiums it had to take in to pay benefits, it would go broke. That wouldn't make it a Ponzi Scheme, it would just mean the actuaries hadn't done their job.

As far as voluntary opt in/ opt out retirement plan, we already have IRAs and the like. The problem with a voluntary scheme would be:
1) many people, espeically low wage earners would skimp on saving until it was too late (you can see this in how little money most people have invested in current voluntary retirement schemes),
2) pulling that much money out of the program would destabilize it, especially during times of duress, like we have now,
3) most folks will natrually be agressive in their investments (equities and the like). Some times that would be great for them (80s and 90s). But sometimes it wouldn't (2000s). Social Security is a backstop.

John Fitzgerald / February 18, 2011 2:44 PM

Sorry about the typos.

J D / March 4, 2011 1:57 PM

Opt in/opt out should never be an option. You would end up with a group like the tea party conning all their little people to opt out, only to help the wealthy, once again. Can you imagine if Bush would have got his way when he wanted to invest social security in the stock market? Bernie Madoff would have loved it!
You can always make it so that everyone has to contribute a percentage of their earings, but keep the monthly payout premiums capped at a place where it is uninviting for the rich to even apply for, while keeping the program status quo for the layman.

Dating / April 15, 2011 11:39 AM

I wanted to thank you for this great read!! I definitely enjoyed every little bit of it. I have you bookmarked your site to check out the new stuff you post.

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