Observations on life

Just raise the Social Security payroll tax

Look at the survey results below. Americans are not prepared.

Is it time to give up? Should we conclude that most Americans are shortsighted, materialistic, undisciplined, or simply so poorly informed and thus they are incapable of planning and saving adequately for retirement?

Should we throw up our collective hands and surrender to the reality that government must do it for us? Should we just target 60-70% income replacement by Social Security, raise payroll taxes accordingly and move on to other things?

All but 5% of current retirees consider Social Security and a pension plan as their primary sources of retirement income, according to a Wells Fargo WFC 0.90% survey released Friday. More than six in 10 say Social Security is their primary source of income, and 22% say a pension is. Baby boomers aren’t far behind. More than 40% said Social Security will be their primary source of paying retirement expenses, and 19% said a pension plan (another 22% said they would rely on their 401(k) and individual retirement plan for this spending).

Less than a quarter of Generation X (21%) expect to use Social Security as a primary source of income, while 16% said pensions and 41% said a 401(K) or IRA. The survey, conducted by the Harris Poll on behalf of Wells Fargo, interviewed 2,700 working Americans between 18 and 75 years old (or older), and 1,000 retired individuals. Source: The 401(k) retirement is coming — are you prepared? –  MarketWatch

4 replies »

  1. We already have a 70% pay replacement, however, it only applies to those whose Average Indexed Monthly Income was equal to or less than $1,465.25, someone whose average wage over the 35 year period (INCLUDING YEARS AT $0 WAGES) was $17,583.

    The current tax rate for social security old age and survivors benefits is currently 12.4% of wages up to $132,900. However, someone who has always paid the maximum tax might (or might not) qualify for the maximum benefit of $2,771 per month (at age 66 normal retirement age), that is $33,252 per year, or 25% of $132,900.

    So, who should pay those added taxes to raise the replacement rate for everyone to be 70%? The average Social Security benefit for the 45+MM current beneficiaries is about $1,475 a month. Since the average wage in America is about $49,000. So, the average replacement rate for current retirees is about 34%. The September 2019 payout was $66.071 Billion, that’s about $800 Billion a year and growing quickly. That would double the existing tax rate (SS collected $826 Billion for OASI in 2018) – and remember, we are running the trust fund dry (by 2032 – 2034). So, to start, you would need to raise taxes about $1 Trillion or so a year, just for current Social Security beneficiaries.

    Then, you would need to raise taxes another $1 – $2 Trillion or so to reverse the erosion and start to build up the Social Security trust fund in anticipation of the retirement of the rest of the Baby Boomers. Who wouldn’t retire upon reaching their normal retirement age of 66 if they could count on a guaranteed, inflation-indexed, taxpayer paid 70% pay replacement ratio? I’m already over age 66, and, I guarantee you, I am done tomorrow if you offer me more than twice my current Social Security benefit (a 70% Social Security pay replacement ratio on my current wage income, which is currently less than the 2019 maximum Social Security wage base).

    So, that’s about $2.5 Trillion more than the $825 Billion currently collected for OASI, or a 300% increase – which would result in a combined employer and employee tax rate of 50%. Remember, those payroll taxes are not deductible for income tax purposes. So, even if half is shouldered by employers, and even if the employer-paid taxes are tax deductible, that’s still a 25% gross rate on wages up to $132,900. How do you think employers will respond? I know how they will respond – good bye 401(k), good bye paid time off, cut medical to the minimum required by law, eliminate retiree medical (if you haven’t already), etc.

    I’m sure current workers at median wage rates (< $50,000 a year) are more than willing to shell out 50+% of wages so current retirees and future retirees can have a 70% pay replacement rate – a federal income tax marginal rate of say 22% plus perhaps 5% for state income taxes, 1.45% for Medicare (and that probably needs to double given the exhaustion of the HI trust fund by 2026), plus that 25% FICA rate, …

    Sure,

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    • You know, thinking more about it, I’ll take that 70% replacement from Social Security, and because I am over age 66, i’ll Just keep working -as there is no earned wage offset after SSNRA.

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  2. The Social Security payroll tax should be raised. The tax should be indexed to inflation, since it has not been raised since 1990. But, benefits continue to go up, without enough revenue to cover current and future projected benefits. Employers are making record profits while providing less and less or no benefits to many low wage, part-time employees. Americans are not savers they are spenders. So, by increasing the SS payroll tax on employer and employee and providing the 70% replacement of income we have a more stable retirement for all. The math proves that it could be accomplished with very small increases per year in the SS payroll tax. Once the SS payroll tax exceeds 10% of wages, there could even be an opt out of future increases in benefit levels, for those who want to invest on their own.

    We also need to exempt all retirement contributions to 401K and IRA plans from any taxing authority, even for withdrawals in retirement. If someone is going to risk money by investing it for their retirement 40 to 60 years into the future, it is a great benefit to society, as they will not need to apply for any other government benefits in retirement. They will be better able to meet their needs and wants in retirement and shouldn’t all retirees be able to do it, not just the upper middle class, retirees.

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  3. It is definitely in the public interest to promote personal savings for retirement, emergencies and natural disasters. We get mad at the idea of increased taxes for safety nets, but we don’t do much preventatively.

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