How worried are America’s wealthy about the possibility they’ll be hit with a higher tax for Social Security?
Plenty, judging from the endless creativity of their proposals to improve the program’s fiscal condition by cutting benefits rather than raising revenue (typically from our most affluent taxpayers).
The latest run at this fence comes from the Committee for a Responsible Federal Budget, which as I’ve explained before is an offspring of the late billionaire hedge fund operator Peter G. Peterson, who was an obdurate foe of Social Security. The committee dubs its proposal the “Six Figure Limit,” which is accurate enough: It would cap annual Social Security benefits at $50,000 per person, or $100,000 per couple.
Make no mistake: This is a benefit cut. The proponents say it will affect only the richest, but true only as a snapshot of current conditions. Only about 1.2 million of the 53.6 million retirees receiving benefits today, or about 2.3%, receive enough to breach the $50,000 annual cap.
Typically they’re retirees who earned the maximum taxable wage income — $184,500 this year — almost every year of their work careers, and also opted to defer receiving their benefits until age 70 to receive a higher monthly stipend. Thanks mostly to inflation, however, the cap will creep into the middle class as sure as water seeks its own level; that may take years, but by the time today’s youngest workers retire, it would be entrenched in the system.
The proposal reflects one of Pete Peterson’s hobby horses, which was the idea that scads of money could be saved by means-testing Social Security so billionaires like himself don’t get handouts they don’t need.
The Six Figure Limit reads like a stepchild of that notion, but as I’ve reported before, the problem with it is that means-testing Social Security wouldn’t save the program much money unless you started cutting means-tested benefits at incomes as small as $50,000.
The CRFB’s proposal, as embodied in an explanatory manifesto posted on its website, doesn’t explain why $100,000 should be the cutoff, other than that maybe it’s a nice round number.
“This is a program that, when you go back to its founding, was a measure of protection against falling into poverty,” Marc Goldwein, the committee’s senior policy director, told CBS News. “The fact that an income support program would pay six figures is a little silly.”
I asked the committee what’s “silly” about a couple receiving $100,000 from Social Security after they’ve paid for it all their working lives, and given that U.S. median household income was $1,071 when Social Security was founded in 1935 and today it’s $83,730. I didn’t hear back.
The committee acknowledges that only “a small fraction of retirees” currently receive benefits of $50,000 or more today. But it frets that “$100,000 benefits will become increasingly common as Social Security’s benefit formula leads benefits to grow over time.” This isn’t quite true: It’s economic growth, more than the benefit formula, that does that, by advancing average wages.
Social Security advocates and experts have responded to the proposal with disdain. Nancy Altman, president of Social Security Works, labels it a “Trojan horse.”
That’s because of its proposed structure. The committee presents three possible models: Two would fix the cutoff at $50,000 per person for 20 or 30 years. The third would allow it to increase in accordance with the chained consumer price index, a little-used inflation metric that rises more slowly than the commonly used urban CPI.
Either way, Altman observes, “the $100,000 amount will continue to erode to the point that it is a subsistence level benefit unrelated to prior earnings, just as conservatives have been advocating since 1936.”
The CRFB manifesto is a scary document. It asserts that the cap would be a boon for economic growth by reducing federal borrowing and prompting retirees to rely more on resources such as personal savings and investment returns.
This happens, it says, according to “a large body of research” finding that “workers — especially high-income workers — increase their private retirement savings in response to reductions in expected public pension benefits.” In other words, if you’re afraid your Social Security is going to be cut, you put more in your IRA.
That makes sense, but only superficially. First, what about everyone other than “high-income workers”? Many middle- and working class households already struggle to meet common everyday expenses, let alone saving for college and retirement. Where will they find the money they’ll need once Social Security is gutted?
Second, who says workers invariably save more when they’re afraid of Social Security cuts? The committee footnotes this assertion to a Congressional Budget Office meta-analysis of 30 studies, conducted in 1998. What did the CBO learn? It was that no one knows.
Some studies, the CBO said, found that each dollar of expected Social Security reduces personal savings, but the range of reduction was “between zero and 50 cents.” In other words, the phenomenon may or may not be real. And if not, this pillar of the Six Figure Limit crumbles to dust. People will be thrown back on personal resources that don’t exist.
The CRFB manifesto contains other specious arguments. For example, it argues that America’s Social Security benefits are unduly generous in global terms. It validates this conclusion by comparing the maximum benefit in the U.S. in 2024 ($93,452 for a couple) to those of such other advanced economies as France ($69,403 in purchasing parity with the U.S.), Canada ($43,608) and the Netherlands ($41,765).
Yet the comparisons are suspect. National pension systems are highly diverse. France’s social security program, for example, is a mandatory supplement to private pensions, unlike in the U.S. In some countries, old-age benefits are part of broad social programs that include universal government-paid healthcare as well as government child care and other social services that don’t exist in the U.S. I asked the CRFB to respond to these issues, but received no reply.
It’s important to keep in mind that proposals like this have one fundamental goal: sparing the wealthy from an increase in their Social Security payroll tax, which is the only way to ensure the program’s fiscal feet stand on dry ground other than cutting benefits.
This year, the tax of 12.4% is levied on wage income up to $184,500, with half paid out of worker paychecks and half directly by employers. That means workers will pay a maximum $11,439, with employers paying the same.
On wages higher than the income tax cap, the rate drops to zero. For someone with income of, say, $500,000, the effective rate for each side falls from 6.2% to about 4.3%; for those with $1-million incomes, it falls to 2.28% on each side. Since the tax is on wage income alone, wealthier taxpayers get an additional break — half of the income or more for the richest Americans is in the form of investment income, which isn’t taxed at all for Social Security.
Making such so-called unearned income part of their tax base and eliminating the tax cap would improve Social Security’s fiscal balance far more than the Six Figure Limit, but that would significantly increase the Social Security tax liability of millionaires and near-millionaires. That may explain why their cat’s paws in Congress and at conservative think tanks expend so much energy finding alternatives to a tax hike.
It’s tempting to relegate this latest idea to the pile of transparent maneuvers to avert a higher Social Security tax, but the danger is that policymakers and pundits will parrot the argument that $100,000 is just too much for a retirement pension. The Washington Post editorial board started the process on March 24 with an unsigned editorial headlined, “Nobody needs over $100,000 per year in Social Security benefits.”
The piece balanced the putative generosity of Social Security against the federal government’s $39-trillion debt and a federal deficit “larger than during the Great Depression,” as though those are the consequence of providing for 53 million retirees, disabled persons and their dependents, rather than enormous tax cuts provided for the wealthy. The Post’s owner, Amazon.com founder Jeff Bezos, is one of the richest men on Earth.
Anyway, the Post’s screed elicited a well-deserved beat-down from Max Richtman, president of the National Committee to Preserve Social Security and Medicare, who crisply informed the board that its editorial was “based on the fallacy that Social Security is a welfare program. It is, in fact, social insurance.”
As he explained, “workers pay into the program and receive payments to replace income upon retirement, disability or the death of a family breadwinner. These are the ‘hazards and vicissitudes of life’ that President Franklin D. Roosevelt referred to when signing Social Security into law.”
Richtman is right about Social Security, and the CRFB is wrong. For the beneficiaries who have been saved from poverty in their old age or after disability, the difference is more than rhetorical. It’s a fact of life.
The post A proposed new ‘fix’ for Social Security that harms workers and protects the rich appeared first on Los Angeles Times.
