Social Security

Regressive taxes?

The New York Times editorial board writes in part July 21:

… Meanwhile, the tax burden on everyone else has increased. One reason is the gradual rise of federal payroll taxation, the flat-rate income tax that provides funding for Social Security and Medicare. The Social Security tax is particularly regressive because it applies only to income up to $132,900…

Wait a minute, the Social Security tax is not regressive, not when you consider its purpose as a social insurance program and its intended funding method. Taxing up to $132,900 as it is today provides a benefit based on no more than that level of earnings. The program was designed that way; a benefit based on years of work and relative income and funded accordingly.

Social Security was never intended to be a welfare program (although in some measure it is). The problem is not the way the tax is structured, but the way benefits are structured. It’s not millionaires and billionaires we are talking about taxing more, but upper middle class individuals.

When you talk about fairness look at how spousal benefits work.

In addition, when the benefit is calculated, a higher benefit based on percent of covered earnings results for the people who paid the least in taxes. For example:

The first $926 of indexed earnings are multiplied by 90% over $926 by 32% and over $5,583 by 15%. The higher one’s income the lower replacement percentage Social Security will provide, even within the taxable wage base. And, of course total income determines the taxability of Social Security benefits.

Now as for Medicare, all earnings are taxed, yes at a fixed rate, but let’s look closer. Earnings include money a person may never receive. All deferred compensation is taxed even before it is received. Take my example which is modest by comparison to many. A portion of my pension is considered non-qualified deferred compensation, that is it can’t come from a trust and is not guaranteed. When I retired I was required to write a check for Medicare tax on the expected future value of that pension. In my case I owed $16,500. Highly compensated CEOs, etc will pay considerably more. I once had to ask a retiring CEO for $55,000. There is no guaranteed the retiree will even collect the full compensation value on which they were taxed.

Then there are Medicare premiums. The standard premium is $135.50, but based on income it can be $460.50 plus additional for Part D as well.

Hey, I’m not asking you to shed a tear for higher income Americans, just to recognize that in many different ways they do pay their fair share, certainly including Social Security and Medicare.

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Categories: Social Security

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6 replies »

  1. “A regressive tax is a tax imposed in such a manner that the average tax rate (tax paid ÷ personal income) decreases as the amount subject to taxation increases.”

    That’s the definition of a regressive tax. And, that’s exactly how payroll taxes work.

    I think you’re arguing that some of the regressive nature is offset during the benefit phase, as a lower income individual will receive proportionally more in benefits vs what they paid in.

    But, the progressive nature of that benefit disappears after only 5k of income, so the effect for typical earners is de minimis and hardly offsets the regressive nature of the tax itself.

    Consider someone making 35k. They’ll pay 6.5% of their income (really 13%, because the 6.5% paid by your employer comes out of your paycheck — it’s not charity). Someone earning 500k will pay 1.7% (3%). The guy making 35k will get about 12k in benefits, or 34% of what he paid in. The person making 500k will get back 45k…34% of what he paid in.

    When you consider that higher earners have a significantly higher life expectancy and are far more likely to not only live to see the benefits, but to live well into the benefit years, the regressive nature of the tax becomes even more pronounced.

    Social Security is a horribly designed program and I’m not at all advocating for it. But, to say it’s not regressive is patently false. It’s a regressive tax on steroids.

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    • I disagree. If the benefits were not based only on the taxable wage base you would have a point or if the formula was not structured as it is (and likely going higher) you also have a point. You may even have a point between zero $ and the taxable cap, but to include the total earnings of a person as part of that determination is not accurate in my view. Everyone pays the same percentage in taxes relative to their benefit.

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      • I think your point is that both high and low earners get back what they pay in and, if anything, low income workers get a little more proportionately because of the accelerated benefits at the (very) low end. In that view, it’s not even a tax, let alone a regressive one, because the “benefits” offset the “tax”.

        That ignores a couple important things, though:

        – Not everyone lives to see benefits. The financial integrity of the system depends on a lot of people NOT living to see their benefits. And, as already mentioned, the poor are less likely to see anything.

        – It’s indisputable that lower income workers pay more of their income for the privilege of participating in the system. Even if you think it’s a great system that everyone should be thrilled about being able to enjoy, they still have a smaller percentage of their income available for other desires (and there’s something Big Brotherish about this rationale anyway).

        – Of course, the system is NOT a great system. Even for those that live to see retirement, the “return” on what they paid in is far less than the market price discount value. Just about everyone is ripped off, but lower income workers are disproportionately more so.

        When considering the last two points, total earnings is absolutely the correct way to make the determination. That’s what makes the tax regressive. Given the definition I provided, earlier, literally so.

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  2. The New York Times is a propaganda voice for the democrat socialists …reporting fake news and distorting the facts is and will be their legacy.

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  3. I always find it funny that people want to tax the “rich” more, do it in a progressive manor, and want bigger COLAs. I think what they should do is make social security benefits free from all income taxes. A one year instant COLA. I just find it amazing that one arm of the government wants to get their hands on the money that another part is giving you as a benefit. Nobody talks about how the benefits are progressively taxed and effectively your benefit are reduced because you have another income source. Most married couples will be paying income taxes on 85% of their benefits at whatever income tax bracket they happen to be in when they file. Where is AARP on this issue?

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