Tax Cut Taxpayers Need Most

[Timber Loftis]

http://moneycentral.msn.com/content/Taxes/P49928.asp

The tax cut that taxpayers need most

While virtually every other category of tax has been reduced, the levies for Social Security and Medicare -- which hit the working poor hardest -- have only gone up since their inception.

By Liz Pulliam Weston

With all the tax-cutting going on, there’s still one extremely expensive levy that’s never been touched: payroll taxes.

Congress has trimmed virtually every other category of tax -- income, corporate, capital gains, estate -- but the amount of your paycheck you have to contribute for Social Security and Medicare has only gone up since the programs’ inceptions.

This is no small matter. Consider:
42% of American families shelled out more in payroll taxes (Social Security and Medicare) than they did in income taxes in 1999, according to the Congressional Budget Office. If the employer payroll tax contribution is included, the percentage of families who paid more payroll than income taxes rose to 74%.

Given the two major income tax cuts since then, these percentages have likely increased.

Counting both employee and employer contributions to Social Security, only families with incomes over $100,000 contributed a larger percentage of their incomes to income taxes (13.7%) than to payroll taxes (6.7%), according to a 1999 Treasury Department analysis.
We are not talking small change. You contribute 6.2% of each dollar you earn to Social Security, up to a maximum tax of $5,394 this year. (That reflects the top taxable wage level of $87,000 for 2003; once you make more than this, you stop paying Social Security taxes.) You contribute another 1.45% for Medicare, and there’s no cap on how much you pay.

The hit to younger workers
Your employer contributes an equal amount, for a total tax rate on most earnings of 15.3%. If our taxes were enough to fund Social Security and Medicare, that would be one thing. But the brightest minds out there say we will need to raise payroll taxes by at least two percentage points -- and maybe by as many as 10 -- just to fund the benefits we’ve already promised today’s workers.

And it’s not like these workers are getting any great deal. Virtually all young workers will pay five to seven times more into Social Security than they’ll ever get out, according to Boston University economist Laurence J. Kotlikoff.
18-year-old workers who earn average incomes over their lifetimes, Kotlikoff found, can expect to pay $723,591 in taxes (in present value dollars) but will receive only $140,190 in benefits.

Young workers who earn above-average salaries can expect to pay in $1.3 million but receive benefits worth just $163,861.
And, as I wrote in “The myth of the marriage penalty,” many women working today will receive essentially nothing in exchange for their Social Security taxes. They won’t have worked long enough or earned enough to qualify for a benefit that’s larger than the check they would receive based on their spouses’ incomes. (Sixty-two percent of older women receiving Social Security checks now receive sums that are based on their husbands’ work record.) Although these women are better off than they would be if they didn’t have a spouse’s income to rely on, their contributions are nevertheless subsidizing the system.

Obviously, we can’t solve everybody’s problems with Social Security and prevent the system’s impending implosion simultaneously.

But if we’re serious about wanting to give working families a break, chopping payroll taxes is the way to go.

The Bush administration's tax cuts benefit most the people who pay the most in taxes. The working poor typically don’t pay income taxes, so they can’t get much out of a bill that decreases them.

One solution, proposed by tax expert and University of Southern California law professor Edward J. McCaffery, involves exempting the first $10,000 of wages from payroll taxes. That would give most people who work a $765 tax cut while proportionately benefiting the lowest-wage employees the most. Another approach would be to roll back the payroll tax by a percentage point or two.

It doesn’t take a genius to realize these changes would make Social Security’s fiscal imbalance even worse. To compensate, we’d have to take some drastic measures -- but drastic measures are going to be called for, anyway.

Privatizing Social Security could be one solution -- or it might not. The political realities probably will preclude entirely privatizing the system, anyway, which means we’ll still need a patchwork quilt of other reforms.

How effective would the fixes be?
The American Academy of Actuaries created a calculator, available on its Web site (see link at left) , that allows you to play with various proposed solutions to the Social Security deficit to see how much of the gap each would eliminate -- either by itself or in combination with other reforms. Three of the biggest fixes:

Reducing benefits for retirees whose incomes exceed $45,000 would, the actuaries say, fix 85% of the deficit. The Social Security system has always been designed to benefit low-income workers proportionately more than higher income workers, under the theory that higher-income workers are better able to save for retirement on their own. Reducing benefits further could preserve the safety net for the lowest-income workers.

Eliminating the wage cap on Social Security taxes and paying benefits on the additional taxed earnings would clear up 77% of the problem. Right now, the maximum amount of earnings that are considered in determining your benefit is equal to the maximum earnings that are taxed -- in other words, $87,000 for 2003. Making all wages subject to Social Security would more than offset the additional cost of computing benefits based on high-earners’ actual salaries.

Raising the retirement age to 70 and indexing it to increasing life spans thereafter, the actuaries say, would solve 68% of the current Social Security imbalance. We work safer jobs, enjoy better health and live much, much longer than we did in the 1930s, when Social Security was designed. Shoving off the full retirement age -- now 67 for those born in 1961 and after -- makes sense for most workers, although we may need to make accommodations for those with age-related disabilities or in dangerous jobs.

If we cut payroll taxes, we’d likely need to employ all three solutions to keep the Social Security ship afloat.

None of these approaches is particularly appetizing -- especially for high-wage earners who will pay the most and benefit the least. If we want to trim taxes for most working families, though, and preserve the Social Security safety net for those who most need it, this is the way to go.

Problem is...stupid ass congress people didn't invest the money they collected for SS and Medicare..they just spent it all,, now they are trying to fund it with taxes levied on younger people while the population growth has slowed...more people are old and collecting than are putting in..stupid stupid stupid stupid people who allow government to "take care of them" in their old age...if people would just plan for their own retirement we could get this congressional monkey off our back...errr dear me [img]smile.gif[/img] I seem to have been on a [img]graemlins/rant.gif[/img] hehehehehe [img]smile.gif[/img]

[harleyquinn]

Personally, I think SS should be voluntary. If you want to invest your $'s into it, you can. Otherwise, you could invest it in your own retirement savings plan. I can only imagine how much more money I would have saved up for retirement (not that I'm not doing ok in that dept), if I wasn't getting so much taken out of each paycheck for SS, money that I will probably never see, or if I do, it'll be almost nothing. I'd much rather be adding that money to my 401 K or IRA.