Is Removing the FICA Cap a Viable Solution for Social Security's Future?

[rcgldr]

Currently once a person's income exceeds $106,800 per year (the cap for 2009 and 2010), the FICA tax of 6.25% goes away. Essentially this is a negative tax bracket where FICA tax rate goes from 6.25% to 0.00% once incomed exceeds $106,800. If the cap was removed, then the FICA tax would remain at 6.25% regardless of income level.

I'm wondering how much this would help with Social Security where 2037 is the predicted year SS goes bankrupt if no changes are made.

 

[WhoWee]

I'm for raising the cap (on payments and benefits) - with one condition - eliminate the Earned Income Tax Credit.

It's basically designed as a giveback program of Social Security taxes paid in up to about $50,000 gross. Unfortunately, many people receive checks each year that far exceed their personal contribution.

 

[russ_watters]

I was always of the impression that the intent there was to raise/eliminate the cap without raising the benefits, in essence taxing people for future benefits they are not eligible to receive. Doesn't seem fair to me, though that's not to say taxes are necessarily intended to be fair.

 

[Vanadium 50]

I'm wondering how much this would help with Social Security where 2037 is the predicted year SS goes bankrupt if no changes are made.

It took me under three minutes to find this out with Google. It's $125B a year in additional Social Security revenue. This is about 9% of the Social Security revenue.

 

[rcgldr]

It took me under three minutes to find this out with Google. It's $125B a year in additional Social Security revenue. This is about 9% of the Social Security revenue.

So how many years would this extend the year SS goes bankrupt if no other significant changes are made? Seems an additional 9% over 26 years would help quite a bit.

> fair tax ... exceed contribution

Most of the people that retired before the 1970's got much more than they paid into SS, but most of those folks have since passed away. Still the basic premise in the last few decades has been the current generation is paying SS taxes to support the previous generation, and will never get back the money they paid into SS, so essentially it's been just another tax.

 

[WhoWee]

Again, the EITC is designed to give back Social Security payments in the year collected - to the people MOST likely to need the benefits when they do retire - in other discussions this might be labeled "double dipping".
http://www.irs.gov/individuals/article/0,,id=150513,00.html

"2009 Tax Year
New for tax year 2009: The amount of EITC increased for workers with a third qualifying child* and the rules changed for determining who is a qualifying child.

Earned Income and adjusted gross income (AGI) must each be less than:

$43,279 ($48,279 married filing jointly) with three or more qualifying children
$40,295 ($45,295 married filing jointly) with two qualifying children
$35,463 ($40,463 married filing jointly) with one qualifying child
$13,440 ($18,440 married filing jointly) with no qualifying children
Tax Year 2009 maximum credit:

$5,657 with three or more qualifying children
$5,028 with two qualifying children
$3,043 with one qualifying child
$457 with no qualifying children"

Also, Russ is correct - the discussion of eliminating the cap on SS deductions rarely includes a discussion of raising benefits for people who paid more into the system.

Any effort to reform the system should be fair to everyone.

 

[loseyourname]

I'd never heard that the EITC is a means of relieving FICA burden on low-income earners. You're still eligible for the EITC even if you're exempt from paying FICA taxes.

As for the fairness of Social Security, frankly, I think the whole notion that it should be fair is the reason it's going to fail. SS was meant to keep elderly people who can't work out of complete destitution. It wasn't meant to be a defined contribution pension plan with payout proportional to your contribution. The first people to receive SS contributed nothing at all. It's a program that transfers income from the working to the non-working and that's it. They should not only eliminate the cap, but reduce the actual tax rate, and cap payment to retirees actually living below a certain proportion of a local poverty line. It's supposed to be a safety net, not a retirement plan.

For those of you under 50 like me, do you really expect you're ever going to need SS? I don't care if I ever see a cent. They can completely eliminate it for all I care. But as long as it operates on the principle of income transfer and its mission is to act as a safety net for otherwise impoverished retirees, it may as well do so in a manner that actually works. The only reason it won't is every old person in the country will start grumbling about "fairness" and "I paid in so I deserve what I expected."

Nobody gets what they expected in a recession and you were lied to in the first place. We can't transfer to everybody of a certain age where there are more receiving than there are paying. Deal with it. Deal with reality.

 

[WhoWee]

I'd never heard that the EITC is a means of relieving FICA burden on low-income earners. You're still eligible for the EITC even if you're exempt from paying FICA taxes.

This might help
http://www.ehow.com/about_6519048_history-earned-income-tax-credit.html

"Birth of the Earned Income Tax Credit
Originally enacted in 1975, the Earned Income Tax Credit was borne out of welfare reform efforts of the early 1970s. The Tax Reduction Act of 1975 originally added the credit to the Internal Revenue Code. After expanding during the years, the credit is now one of the principal anti-poverty programs for working families in the federal budget.
Purpose of the Earned Income Tax Credit
The EITC was intended to offset Social Security taxes of low-income families and provide them with an increased incentive to work. Eligible taxpayers could claim refundable credits equal to 10 percent of their earned income for the taxable year, up to a predetermined dollar amount. The original EITC was enacted and available to taxpayers only for the calendar year of 1975.


Read more: The History of the Earned Income Tax Credit | eHow.com http://www.ehow.com/about_6519048_history-earned-income-tax-credit.html#ixzz10MbmwEkl"

 

[loseyourname]

I actually looked up the history right after I posted and saw that was the original intent.

Seems to have deviated pretty far from that ever since. The credit rate tops off at 40% of earned income now, more than 4 times the FICA rate. If you want FICA relief, just exempt income under a certain threshold from FICA taxes. Our tax programs just make no sense sometimes (or most of the time).

 

[Jack21222]

I was always of the impression that the intent there was to raise/eliminate the cap without raising the benefits, in essence taxing people for future benefits they are not eligible to receive. Doesn't seem fair to me, though that's not to say taxes are necessarily intended to be fair.

I've always considered Social Security taxes and Social Security benefits to be completely separate. The money I'm putting in now won't start coming back to me for nearly 50 years. Who knows what the laws regarding SS benefits will look like in 50 years? We don't know what the benefits will look like in 10, let alone 50.

 

[Astronuc]

I was always of the impression that the intent there was to raise/eliminate the cap without raising the benefits, in essence taxing people for future benefits they are not eligible to receive. Doesn't seem fair to me, though that's not to say taxes are necessarily intended to be fair.

That's the way I see it. The government could raise the cap/ceiling without raising the corresponding benefits.

As far as I can tell, the SS/Medicare/Medicaid system is unsustainable. Too many people people receive way more than they put in.

At this point, I don't plan to collect SS, nor should I need to. I'd rather pass on my contributions to my children.

SS was supposed to be insurance to assure that folks don't end up in poverty. It's become more like a gravy train for some who have generous benefits, e.g., pensions, outside of SS.

I really don't plan on retiring, and if I did, I don't need SS.

 

[turbo]

Currently once a person's income exceeds $106,800 per year (the cap for 2009 and 2010), the FICA tax of 6.25% goes away. Essentially this is a negative tax bracket where FICA tax rate goes from 6.25% to 0.00% once incomed exceeds $106,800. If the cap was removed, then the FICA tax would remain at 6.25% regardless of income level.

(Bolding mine) Not entirely accurate. FICA only applies to wages, so even if the FICA cap is removed (I still consider that a good idea) the wealthiest earners (who tend to have a lot of unearned income vs wages) would still not get hit with it. FICA is not levied against dividends, capital gains, interest earnings, etc, so it is regressive in that sense.

SS is progressive for some, in the sense that some people gain get benefits that are greater than their FICA contributions. I hit the FICA cap every year since 1982, except one year in which I was self-employed as a programmer and was building my client base.

 

[lisab]

I've always considered Social Security taxes and Social Security benefits to be completely separate. The money I'm putting in now won't start coming back to me for nearly 50 years. Who knows what the laws regarding SS benefits will look like in 50 years? We don't know what the benefits will look like in 10, let alone 50.

I've never seen it as a "pay your money in today, get your money back in x years" kind of program. It's nothing like your 401k. Rather, it's a trans-generational payment to assure elderly won't starve (like they used to before SS).

Today, us working stiffs pay the elderly; when we're elderly, tomorrow's working stiffs will pay us. There's a *huge* amount of trust built into the system.

 

[turbo]

I've never seen it as a "pay your money in today, get your money back in x years" kind of program. It's nothing like your 401k. Rather, it's a trans-generational payment to assure elderly won't starve (like they used to before SS).

Today, us working stiffs pay the elderly; when we're elderly, tomorrow's working stiffs will pay us. There's a *huge* amount of trust built into the system.

Yes. Younger people don't have much appreciation for the "safety net", since it is ingrained, but prior to the establishment of SS, older people would have to move in with their children to survive, or get shunted off to the "town farm", where they would have to continue working to raise and process food for the consumption of the residents and/or for barter or for sale to the canneries. Every fair-sized town in Maine seems to have a "Town Farm Road". Lots of people fell through the cracks then, plus no network of social services to see that people could stay in their own home, get some reduced-cost or free meals, and generally live out the ends of their lives with some dignity.

 

[lisab]

Yes. Younger people don't have much appreciation for the "safety net", since it is ingrained, but prior to the establishment of SS, older people would have to move in with their children to survive, or get shunted off to the "town farm", where they would have to continue working to raise and process food for the consumption of the residents and/or for barter or for sale to the canneries. Every fair-sized town in Maine seems to have a "Town Farm Road". Lots of people fell through the cracks then, plus no network of social services to see that people could stay in their own home, get some reduced-cost or free meals, and generally live out the ends of their lives with some dignity.

Sounds vaguely Soylent Green-ish.

 

[turbo]

During the depression, my father's mother's family relied heavily on a town account at the local store to get through the winters. I found this out by reviewing town reports. They had a farm and a large wood-lot, but still needed help with staples when cash was hard to come by. They would go to the store and charge mustard, molasses, rice, dry beans, flour, etc, and repay the town by cutting and stacking firewood for the school and meeting house, and by re-building winter-damaged roads in the spring, replacing culverts, etc. It wasn't charity - it was an in-kind payment system for a family with no cash on hand. They were a well-respected family that worked their way through some very hard times.

They also paid their property taxes with in-kind services, firewood, etc.

 

[WhoWee]

Who are the Social Security Beneficiaries and how much do they get?

http://www.ssa.gov/OACT/ProgData/benefits.html


This might surprise you - of the $1,177,869,000,000 total benefits paid-> only $557,160,000,000 (47.3%) went to "Old Age and Survivors Insurance".
http://www.ssa.gov/OACT/STATS/table4a4.html

 

[turbo]

This might surprise you - of the $1,177,869,000,000 total benefits paid-> only $557,160,000,000 (47.3%) went to "Old Age and Survivors Insurance".
http://www.ssa.gov/OACT/STATS/table4a4.html

Not surprising, really. The medical benefits paid out cover a lot of people. You should realize that if you are getting SS benefits, you can qualify for Medicare part A (inpatient care), but if you want Medicare part B (outpatient care, doctor's exams, etc) your monthly benefits are reduced to pay the premium for that coverage. Part D coverage is a bit more complex, but still has to be paid for by the patient.

 

[russ_watters]

I've always considered Social Security taxes and Social Security benefits to be completely separate. The money I'm putting in now won't start coming back to me for nearly 50 years. Who knows what the laws regarding SS benefits will look like in 50 years? We don't know what the benefits will look like in 10, let alone 50.

The problem with that logic is that if you want to retire in 40 years, you need to start saving for it now and your interpretation of what SS is/what you will get from it is critical for properly planning. The purpose and use of SS has been consistent for some 80 years and now that that is starting to be called into question, it leaves people like me (upper middle income, age 34) having no choice but to assume they are going to get nothing out of it.

 

[russ_watters]

I've never seen it as a "pay your money in today, get your money back in x years" kind of program. It's nothing like your 401k. Rather, it's a trans-generational payment to assure elderly won't starve (like they used to before SS).

Or, *gasp*, they could have saved money for retirement on their own to ensure they wouldn't starve. What SS does is take a personal responsibility and make it a national responsibility because people are too irresponsible to save on their own despite the fact that saving on your own is a much more efficient/effective way to ensure your retirement lifestyle.

 

[turbo]

Or, *gasp*, they could have saved money for retirement on their own to ensure they wouldn't starve. What SS does is take a personal responsibility and make it a national responsibility because people are too irresponsible to save on their own despite the fact that saving on your own is a much more efficient/effective way to ensure your retirement lifestyle.

Can you bring yourself to admit that some people work all their lives to provide for themselves and their families, and still not have enough money to save for retirement? If it is "irresponsible" for poor people, or people who have experienced debilitating illnesses, or people who have suffered devastating job-losses, to have saved enough to support themselves through the crash, then you miss the point.

My parents and their parents lived through the depression. It wasn't easy, but they did it.

 

[CRGreathouse]

Can you bring yourself to admit that some people work all their lives to provide for themselves and their families, and still not have enough money to save for retirement?

Can you bring yourself to admit that some people have only Social Security and not private savings, and don't have enough money for retirement?


In that case, it's purely a question of the effectiveness of public vs. private savings. Suppose, as a thought experiment, that private retirement accounts yielded better returns. Then the people I mention above would have been better off not paying FICA, investing what they didn't pay, and retiring on that. If we can agree on this (and I hope we can!), then the discussion moves to: how effective is Social Security in terms of return on investment? How effective is it in terms of providing coverage in extraordinary circumstances? (The latter, of course, was its original purpose -- money for those who had lived far longer than expected, when their savings would be exhausted and their families unable/unwilling to support them.)

 

[loseyourname]

Who are the Social Security Beneficiaries and how much do they get?

http://www.ssa.gov/OACT/ProgData/benefits.html


This might surprise you - of the $1,177,869,000,000 total benefits paid-> only $557,160,000,000 (47.3%) went to "Old Age and Survivors Insurance".
http://www.ssa.gov/OACT/STATS/table4a4.html

Why would it surprise anyone that nearly half of the combined Social Security and Medicare benefits pay for medical services?

 

[rcgldr]

Regardles of the original intent, and the pros and cons of what SS has become, FICA is now just another tax, but one with a negative tax bracket, due to the cap (currently $106,800). I would like to see the cap eventually removed.

 

[Vanadium 50]

You keep saying "negative tax bracket". The marginal rate is zero, not negative, and the total rate is positive.

 

[CRGreathouse]

Regardles of the original intent, and the pros and cons of what SS has become, FICA is now just another tax, but one with a negative tax bracket, due to the cap (currently $106,800). I would like to see the cap eventually removed.

So you want other people to pay for your retirement.

 

[rcgldr]

You keep saying "negative tax bracket". The marginal rate is zero, not negative, and the total rate is positive.

OK, bad wording, but I doubt anyone was confused. It's a regressive tax, (the opposite of a progressive tax).

So you want other people to pay for your retirement.

That the way SS works. The original SS retirees never paid enough into the system, and since then, the norm is for the current working population to pay SS taxes to support the current retired population.

The main point is that a progressive tax make sense, since the people in the higher tax brackets have more disposable income and can afford higher tax rates. A regressive tax (FICA) doesn't make sense any more given the current situation with SS.

 

[russ_watters]

Can you bring yourself to admit that some people work all their lives to provide for themselves and their families, and still not have enough money to save for retirement?

Um...SS forces people to save for retirement. They have to do it. There is no "not have enough money to save for retirement". They are doing it. My point was simply that people could do better if they took that money and invested it themselves... and, there would be no talk of insolvency because it wouldn't be possible for the system to become insolvent!

 

[turbo]

Um...SS forces people to save for retirement. They have to do it. There is no "not have enough money to save for retirement". They are doing it. My point was simply that people could do better if they took that money and invested it themselves... and, there would be no talk of insolvency because it wouldn't be possible for the system to become insolvent!

If SS had been privatized, or if people had to invest on their own in the stock market, mutual funds, etc, they would have experienced huge losses over the past 3 years or so. The current system works, and it can be made solvent in perpetuity with only minor tweaks. That's what real fiscal conservatism would dictate. Keep what is working, and improve it if you can.

 

[WhoWee]

If SS had been privatized, or if people had to invest on their own in the stock market, mutual funds, etc, they would have experienced huge losses over the past 3 years or so. The current system works, and it can be made solvent in perpetuity with only minor tweaks. That's what real fiscal conservatism would dictate. Keep what is working, and improve it if you can.

I think we need more than a few "tweaks" to fix this mess.
http://www.ncpa.org/pub/ba662

"The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars! That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt."


This was before "health care reform" was enacted. Now before anyone posts as to how recent legislation "fixes" the problem - please find the MOST CURRENT info - not the propaganda from the debate.