Social Security or the (OASDI) Old Aged Survivor Disability Insurance is comprised of two taxing components. The first tax component is the old aged portion which is a tax on wages of 6.2% on wages up to $137,700 in 2020. The second is Medicare which is a tax on wages of 1.45% with no wage limit. An additional 0.9% in Medicare taxes applies to individuals with annual earned income of more than $200,000, and $250,000 for married couples filing jointly. The employer matches these contributions at the exact same rate.
Do not let the government fool you; this program is funded by the US citizens tax paid and is NOT included in the annual Federal Budget Deficit. The Social Security trust fund is currently in deficit yet will receive enough general revenue transfers (financed annually by your taxes) to pay full benefits until 2034. Medicare’s trust fund will go belly up in 2026. By law, Social Security cannot contribute to the federal deficit, because it is required to pay benefits only from its trust funds. Those, in turn, are funded through the dedicated payroll tax of 12.4 percent of income, split evenly between employees and employers, levied on income. The program’s revenue and expenses are accounted for through two federal trust funds that have operated with large and growing surpluses in recent years, and they finished fiscal 2018 with an estimated $2.89 trillion. By law, Social Security must invest these surplus funds only in special-issue U.S. Treasury notes, which have the same full faith and credit guarantee as any other federal bond. The trust fund surplus will be drawn down as an aging population claims benefits, and as the U.S. fertility rate continues to decline, which means fewer workers are coming along to pay taxes into the system.
A second argument that Social Security contributes to deficits is related to the longer-run outlook of the program. The trust funds are projected to be exhausted in 2034; at that point, incoming revenue would be enough to continue paying only about 75 percent of promised benefits. We might or might not reach that point – we could eliminate much of this long-range shortfall by gradually increasing payroll taxes and raising the cap on covered income. I do not advocate the reduction of benefits by further increasing the full retirement.
The solutions to this regressive tax law are to reduce the tax rate from 6.2% to 2.2% and remove the cap on taxable wages of $137,700 to unlimited. Next is to increase the Medicare tax to a flat 1.75% with no limit and omit the .9% tax altogether. In addition, income from capital gains and dividends should be taxed at 1% for social security and 1% for Medicare up to gains of one million dollars indexed to the Chained CPI. Also, the government should include income from royalties in excess of one million dollars and tax the amount over at 1% each year. The effect on taxes of all US citizens would be a reduction in tax of up to $5,921 per year (6.2-2.2+.3+.9). In all likely hood, due to the regressive nature of the tax burden on those earning up to $137,700 per year is that this money would be spent in the economy. Due to the increase spending the multiplier principal would manifest itself by increasing GDP by some factor up to and greater than $5,921 per wage earner per year. The increase in consumer spending as compared to the stagnate return of surplus funds invested in special-issue U.S. Treasury notes which stays invested and therefore not spent would further increase GDP. As a result, the Social Security System and Medicare would be solvent for as far as the eye can fathom.
By transferring the money tied up in government investments at low returns to consumer spending would be a GDP increase that is completely factual. The increase GDP can be proven by taking the wage base and multiplying it by the tax rate as compared to the current tax revenue and rates found on the US Government web sites for Social Security and Medicare. Next all the individuals who do not have W2 wages who do not pay this tax would do so because capital gains and royalties would be taxed at 1%, a small price to pay for the systems solvency. Transferring this money to the consumer spending side is multiplier positive and economically expansionary monetarism, monetizing this pool of money. The increase in GDP would increase the wealth of all US citizens in all classes of income and assure Social Security and Medicare to all without placing a burden on those who make up to $137,700 per year. Those who earn more than $137,700 per year would have a tax decrease of the $5,921 offset by a small marginal increase in tax by taxing capital gains and royalties along with all wages over $137,700 per year. There would be a reduction in taxes to employers who mostly pay taxes on wages of less than $137,700 per year which is a new pool of money entering the economy. The business owner would then use the savings as desired further increasing the GDP due to spending and the multiplier principal, again monetizing the tax reduction.
In conclusion, this type of policy would satisfy the aristocracy and common house holds who are kept at bay by the aristocracy. This policy can be tested by using the numbers from the web sites of the Federal Reserve, Bureau of Economic Analysis, Social Security, Treasury Department and Bureau of Labor and Statistics. Feel free to do the math and test my conclusions on the following web sites:
By: Jeffrey Waks
Accountant and Financial Analyst
February 7, 2020
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