Archive | Social Security

When will it be a good time to raise the Social Security payroll tax?

8 Dec
Roosevelt Signs The : President Roosevelt sign...

It's insurance I said!

 This year’s 2% payroll tax cut was paid for by increased deficit spending. In other words we “temporarily” turned Social Security from a self-funded program into a Congressional budget allocation funded by more debt. That is exactly the opposite of the original design of the program.  On this path Social Security becomes another form of welfare subject to the political whim of each new Congress . . . but it’s only temporary. When you look on your paystub you will see “FICA” opposite the deduction for this tax.  Do you know what the I stands for?  It stands for Insurance, the Federal Insurance Contributions Act.  Messing with something that is supposed to be insurance funded by employer and employee contributions is nuts.  It undermines the very essence of the Social Security system for political expediency and places its funding not with the beneficiaries, but at the mercy of Congress.

Some ideas to pay for extending and enlarging this tax break, and I use the term loosely, include raising airport fees, gasoline taxes or taxes on other parts of the economy.  Even someone like me who got a C in Econ 101 can see the irony of this; raise the cost of gasoline… that should help the middle class. 

The many promises for this 2% tax break; new consumer spending, job growth, etc., we’re so successful politicians want to do it again also on a “temporary” basis. This time they want to raise the success level by cutting the tax rate to 3.1%, fully half the worker portion of 6.2% needed to fund Social Security (well, more is actually needed but that’s another story). This time they are actually going to pay for it by increasing taxes someplace or cutting spending someplace else thereby allowing some other federal money to be transferred to Social Security where it can be used to buy Treasury bonds to fund ongoing deficit spending, just like the payroll tax.

Social Security Poster: old man

Nothing to smile about now

Given this is all “temporary” (like the estate tax in 1918) what’s the big deal?  The big deal is what happens at the end of 2012?  Will the middle class be able to withstand a 3.1% tax “increase” then better than a 2% “increase” now?  Has the average beneficiary of this entire stimulus absorbed the 2% into their standard of living? Have they incurred new debt based on their new-found ability to repay?

To date we have sent stimulus checks to most Americans, we lowered their out-of-pocket health care costs, gave them tax credits to buy a car, a house, put in central air, new windows and I lost track of what else, now at the end of 2011 we are told diverting another $550 a year from Social Security to lower the average family tax bill will do the trick.

These tax games may be temporary, but it appears common sense is gone forever. 



Are your taxes going “up?”

6 Dec

From the AP:

The president has been seeking an extension and expansion to the payroll tax cut that will expire at the end of the year. The White House says taxes on the average family would increase by $1,000 if the cuts are not extended.

To make its point, the White House went so far as to put up a countdown clock during spokesman Jay Carney’s briefing to show when middle-class taxes would go up “if Congress doesn’t act.”

Fiddling with the isolated stream of Social Security revenue is a bad idea, we’ve talked about that before.  But it is also a bad idea to propagate false concepts and politically expedient rhetoric. If the scheduled expiration of a temporary reduction of the payroll tax on December 31 is a pending disaster, what will we call it on December 31, 2012?

According to the President, extending the tax reduction “Will spur spending. It will spur hiring and it’s the right thing to do.”  That’s a tall order for a tax reduction that has been in effect for a year with little or no such effect.  The latest version of paying for this is a lower temporary surtax on millionaires and new fees on lenders.

And then we have this from the White House:

Good afternoon,

It’s simple. If lawmakers don’t vote to extend the payroll tax cut, taxes for 160 million Americans will go up on January 1st.

President Obama just left the press briefing room at the White House where he called on Congress to extend the tax cut, pay for it responsibly, and expand it so middle class families get a $1,500 break next year.

He told Congress to put country before party and stop wasting time.

Every day, folks are fighting to make ends meet and businesses are working to keep their doors open. The longer Congress waits to extend the payroll tax cut, the more uncertainty it creates for ordinary Americans. So we’ve put a clock on every page of the White House website, counting down the days, hours, and minutes until taxes for the middle class increase. In the briefing room, where the President just spoke, that same clock is ticking down as well.

And to make sure you have the information you need to know exactly what this means for your family, we’ve put together a calculator to show how much of your money hangs in the balance.

This calculator illustrates for you what nearly every independent economist has said: letting this tax cut expire will be a blow to the economy. We can’t let that happen. Now is the time to make a real difference in the lives of the people who sent us here.
Check it out and pass it along:

David Plouff

Senior Advisor to the President

The clock is also ticking on a 27% reduction in  fees paid  to physicians treating Medicare patients. If that is fixed how  will it be paid for?  Perhaps a new temporary tax on health insurers, that won’t have any negative impact on anyone.    The estate tax was supposed to be temporary and the AMT was only to affect a handful of people who escaped paying any income tax.  Politicians have no common sense and economists find a way to validate that.

The wealth gap … not what you think. Fixing Social Security without hurting anyone

17 Nov

From an article in Money Watch:

According to a recent analysis by the Pew Research Center, the gap in wealth between Americans over age 65 and under age 35 has widened considerably since the 1980s; the median wealth of this older American age group is now 47 times the median household wealth of the younger group, up from a ratio of just 10 to 1 in 1984.

What was that you said AARP, “don’t touch my Social Security or Medicare!”

Nobody is going to cut anyone’s benefits, but they must change what happens in the future. Here are ideas to save tons of money with virtually no one being harmed.

Medicare & Social Security Deficits Chart

First, adjust the COLA as has been suggested to a chained inflation calculation starting in 2012. [no benefits are cut, however they may rise slightly less than under today's formula and I do mean slightly.]

Second, beginning in 2025 new Social Security beneficiaries do not receive a COLA during the first five years following the start of benefits with a possible exception of some kind for those receiving disability before age 65. [there would be time for people to save and plan for this period of fixed income]

Third, effective 2025 anyone receiving the maximum Social Security benefit at the time they begin benefits (highest income group) will be eligible for a COLA every other year during their retirement with no catchup for skipped years. [This is both fair and realistic]

Even though these ideas do not save cash immediately, they greatly reduce future liabilities thereby extending the period of solvency without additional revenue.

Remember, at one point incoming taxes were more than sufficient to pay benefits with the surplus buying Treasury bonds. Today incoming taxes are not sufficient to pay benefits and interest on the previously purchased bonds must be used. Unless we do something down the road, the bonds will have to be redeemed to pay benefits and finally when there are no bonds to pay interest or redeem, incoming payroll taxes will be sufficient to pay only a portion of promised benefits.

Why wouldn’t we want to fix this now?

Perhaps seniors giving up a little they never had in their pockets will leave a little in the pockets of the Americans hoping to be seniors some day.

P. S. Those interest payments on the bonds held in the Social Security Trust and the cash to redeem those bonds comes out of another area of the federal budget and contribute to the deficit. As I have noted before, the money given to Treasury by the Social Security Trust (your payroll taxes) to purchase bonds has already been spent by the government. The money to pay interest on the bonds comes from … well, thin air and wishful thinking … Feel like Greek or Italian takeout tonight?

Pass this along to AARP and you Congressman and Senator

Cutting Medicare and Social Security benefits: senior citizens do not have a right to special treatment. AARP is doing America a great disservice.

31 Oct

While the AARP runs TV ads threatening politicians that 50 million seniors will get even on election day if they touch Social Security or Medicare, there are a few of us who see it differently.  Take this comment from a blog post of mine that I fully agree with.

Keep up the good work. Some of us older folks who have been on “senior wefare” enjoying the unwarranted payments from Medicare and Social Security look in horror at the bills to be paid by our kids and grandkids. AARP, the largest special interest group in the country, has just sent out a request to contact our representatives to preserve our Social Security and Medicare benefits. It seems as if seniors should not have to share in the effort to reduce our national debt.

* * * * * * * * * * * *

From the AARP website:

AARP’s new national television ad tells lawmakers to cut waste and tax loopholes, not Social Security and Medicare. It urges lawmakers not to treat seniors like line items in a budget and lets them know that 50 million seniors are counting on them to protect their benefits.

Cuts to Medicare and Social Security benefits could:

dramatically increase health care costs for seniors and future retirees.
threaten seniors’ access to doctors and hospitals.
reduce the benefit checks seniors rely on to pay their bills.

Watch the latest advocacy video from AARP telling lawmakers that “before you even think” about cutting Medicare or Social Security, remember the 50 million seniors who have earned their benefits. Seniors are putting Washington on notice that they will speak out as long as Medicare and Social Security benefits are threatened .

Those of us who paid our Social Security taxes for decades must realize that those taxes paid the benefits of Social Security recipients during those decades and the surplus purchased special treasury bonds. Today the incoming taxes are insufficient to pay our benefits and those payments are supplemented by interest on bonds…there is no surplus to purchase bonds for our children.

Oops, the next generation wants theirs too.

Medicare is funded by a combination of payroll taxes, general revenue and current premiums. We may count on these benefits because we assume they will always be there, but we have been and are paying only a fraction of the cost.

Consider this from

“In 1959, seniors were the poorest demographic cohort, with 35 percent living in poverty, compared with 27 percent of children in poor families. In 2010, only 9 percent of people age 65 and older were poor, while 22 percent of those under 18 were living in poverty, according to U.S. Census Bureau data.

The trend coincides with a generational gap in federal spending. In 2008, per capita federal spending on those 19 and younger was $3,660, compared with $23,900 for those 65 and older, according to a report by the Urban Institute and Brookings in Washington.”

Have we “earned” our benefits any more than younger people have earned the right to support their families and save for their futures?  Have we earned these benefits so that we have a right to take more from future generations?

The AARP wants to cut waste and loopholes, so does everyone else. Except even if that is done, less spending and more revenue is needed for many areas of the federal budget, not just Social Security and Medicare although those two items equal more than forty percent of federal spending.

We seniors have a right to be treated fairly along with all other Americans. We do not have a right to be protected as a special class. We do not have a right to have our benefits protected to the detriment of others.

Nobody is talking about reducing benefits for existing beneficiaries, or reducing benefit checks. What has to be done is to reduce the future long-term liability of these programs and that means changing the growth of future benefits and asking future generations to pay more for these generous benefits. It may also mean that us seniors who no longer pay Social Security or Medicare taxes will have to give up some of our health care flexibility and pay a bit more for services. Why should it be otherwise for the common good?

Tell the AARP to go sell insurance.

Social Security payroll tax cut for 2012 is a risky bet and not all it appears to be

22 Oct

I am not an economist, I have no mathematical models or sophisticated programs to project anything. However, I do have a great deal of experience dealing with people and their perceptions about money, retirement, savings and health care. For this modest reason alone I must question the wisdom of another cut in the Social Security payroll tax. What gives me the first clue of concern? It’s the spin. Read the papers and you will see that for 2012 the Obama jobs proposal will cut the employes payroll tax in half. For example:

“The President asked for a $175 billion one-year extension and expansion of the employee payroll tax holiday now in place, halving the tax rate to 3.1 percent in 2012.”

Here’s the problem, the payroll tax is already cut from 6.2% to 4.2% in 2011 so a further reduction to 3.1 is not halving the tax but reducing it by 26%. In addition, the results of that “stimulus” are hard to see. Did you even notice the difference in your pay, what did you do with this windfall? A further cut to 3.1% will add about $10.50 a week (before taxes) to the average family’s income. Will this stimulate your spending? And, keep in mind this plan has no impact on the spending by one sixth of the population that is retired and collecting Social Security today. Despite the perception of all-encompassing poverty, this group has a great deal of spending potential.

In addition, the 2012 plan calls for a tax reduction for employers under several conditions.

This reduction in Social Security payroll tax will cost the Social Security trust fund $240 billion. Or, you can accept this estimate:

The tax cut would cause a $289 billion loss in Social Security revenues, which would be replaced by general tax revenue funds transferred from the Treasury.

Social Security is already short $49 billion a year because of higher benefits and lower payroll taxes. In the past the incoming taxes were more than enough to pay benefits. That is no longer the case.

Under the Obama jobs plan general revenue would replace the lost revenue to the Social Security Trust Fund by issuing more Treasury Bonds (debt) which would be offset by higher income taxes on the “wealthy” or under the Reid plan, just on real millionaires. You can be sure these additional taxes will not be temporary for the length of the payroll tax holiday, so now more taxes are in the mix to be spent in the future.

This plan would put an end to the myth that Social Security has no impact on the budget or deficit.

But the real unanswered question for me is what happens at the end of 2012? Once Americans have become accustomed to this extra cash in their pockets, how will they react to a 3.1% cut in pay when the tax is restored, a cut larger than most pay raises (if any) given in a year.  Have our policymakers thought of that?

Will people then reduce their spending, cut retirement savings, hide more of their income or simply Occupy Pennsylvania Avenue? Will employers retain the people they were encouraged to hire when their tax break ends? Even worse is the possibility that gutless politicians will not have the nerve to reinstate the tax thereby assuring that Social Security falls into the abyss of the federal budget. There are worse possibilities of course like politicians convincing people that the shortfall should be permanently shifted to Wall Street and all those millionaires and billionaires who don’t pay their fair share thus making certain Social Security become the largest of welfare systems.

Installation of a sidewalk in Middletown, Rhod...

The sign maker had employment stimulated

The bet is that by the end of 2012 the economy will improve, more workers will be on the job paying Social Security and other taxes, more spending will occur and all the rest that goes with a recovery. Given that the 2009 Economic Recovery and Reinvestment Act  and the current tax holiday seem to have had minimal positive outcome (I know, it saved jobs), this all seems like a risky bet to me.

Let’s hope it has been well thought out beyond November 2012.

Social Security COLA of 3.6% for 2012 confirmed by September inflation index

19 Oct

Look for a COLA in Social Security benefits next year of 3.6%.

This is based on the increase in the CPI-W index from the third quarter 2008 to the third quarter 2011. The index for the 2008 period was 215.495.

The index for 2011 is: July 222.686, August 223.326 and 223.688 September for an average of 223.2337.

Subtract 215.495 from 223.2337 and you get and increase of 7.738 or a change from 2008 of 3.590% which means a Social Security COLA of 3.6% (assuming I have the rounding right)

This also means the Part B Medicare premium will increase for the 75% of beneficiaries who have had their premium frozen for the last several years.

Medicare Part B Premium and Social Security COLA for 2012

14 Oct

I am going out on a bit of a limb here, so remember this is not all final. I have been reviewing a variety of sources and it appears that for 2012:

The Medicare Part B premium will be about $106.60, a 10.6% increase over the current premium for hold harmless beneficiaries at $96.40. This also means that those Medicare beneficiaries who are paying more than $106.60 will see a decrease in their monthly premium. Why such an apparent modest increase? Because now, given there will be a Social Security COLA, all beneficiaries are in the pool to offset the costs of Part B, not just the 25% who have not had their premium frozen for the last several years.

Given we are still looking for about a 3.5% increase in Social Security benefits, you can now do the math and see what your net increase in monthly Social Security is likely to be.  For example, let’s say your benefit is $1,000.  A 3.5% increase gives you $1,035 less the increase in Part B of $10.20 for a net new benefit of $1,024.8 or a net percentage increase of 2.48%.

If I am right in all this, you can send flowers.  If I am wrong, I will run for President and blame someone else.

What happens to the money you pay as payroll taxes for Social Securty

11 Oct

Image by Third Way via Flickr

What happens to the money you pay as payroll taxes for Social Security?

If comments received on this blog are any indication, most people think “their money” is used to pay their benefits. That’s wishful thinking, but you are not alone. A new Rasmussen poll indicates that only 10% of Americans know that the federal government can spend Social Security taxes anyway it wants to.

Here is how it works. Incoming taxes are used to pay current benefits to old folks like me, the excess over what is needed to pay current benefits is used to buy special treasury bonds that pay interest to the Social Security Trust Fund. The government then takes the proceeds from the bonds it sold and … you guessed it … spends the money on everything the government spends money on. Think of it this way. Your last several payroll tax deductions helped pay the $1500 tax credit I received when I installed efficient central air conditioning … and I appreciate it.

There is one problem with all this. The incoming taxes are no longer sufficient to pay the current benefits so interest on the bonds already purchased is also being used to pay the benefits. At some point both incoming payroll taxes and the interest will not be enough to pay benefits. When that happens the Social Security Trust will knock on the Treasury Department’s door and redeem the bonds it purchased.

Now, since the proceeds from these bonds has already been spent where is the Treasury going to get the money to give to the Trust Fund to pay benefits? That’s a good question. Where do you think they money is going to come from? You might want to ask Sen Bernie Sanders of VT he thinks talk about Social Security going broke (projected in 2036 by the way) is “total nonsense.” He also thinks Social Security has nothing to do with the federal budget or deficit – where is Treasury going to get the cash to give to the Trust Fund? Think about it

One other conundrum to consider; if the current payroll taxes are insufficient to pay benefits how can it be prudent to further reduce that source of revenue by having a Social Security payroll tax holiday as proposed by the President? On the surface it seems absurd, but the idea is that by getting more people working they too will be paying Social Security taxes and thereby increase the revenue. Of course, that assumes hiring is stimulated and these workers are able to stay on the payroll beyond 2012. Let’s hope that is an accurate assumption.

However, in the short run Treasury is simply going to issue more debt to provide IOUs to the Trust Fund to offset the lost tax revenue.

Now you know what happens to the Social Security payroll taxes you pay.

Medicare Part B premium 2012 and the possible impact on your net Social Security benefit

5 Oct

As we get closer to 2012, you will read more about Medicare Part B premium increases. Some commentators will call a modest percentage increase a whopping increase based on the fact that for most Medicare beneficiaries there has been no increase in the premium since 2009. However, that does not mean costs have not increased as have the real premiums for Part B.

Consider this from

Most beneficiaries will continue to pay the same $96.40 or $110.50 premium amount in 2011.  Beneficiaries who currently have the Social Security Administration (SSA) withhold their Part B premium and have incomes of $85,000 or less (or $170,000 or less for joint filers) will not have an increase in their Part B premium in 2011. 

For all others, the standard Medicare Part B monthly premium will be $115.40 in 2011, which is a 4.4% increase over the 2010 premium.  The Medicare Part B premium is increasing in 2011 due to possible increases in Part B costs.  If your income is above $85,000 (single) or $170,000 (married couple), then your Medicare Part B premium may be higher than $115.40 per month. 

Note that the real increase in 2011 was 4.4%, a modest increase by health care inflation standards. Let’s assume the 2012 increase is also 4.4% thus driving the standard Part B premium to $120.48. However, it is also expected that there will be Social Security COLA in 2012 meaning that the Part B premium will no longer be frozen at the 2009 level of $96.40. Therefore, a Medicare beneficiary who has benefited from a frozen Part B premium could see a jump in premium from $96.40 to $120.48 (estimated at this point) or a 24.9% increase. That increase covers the growth in costs for the four years from 2009 through 2012.

This is what happens when premiums are artificially held at levels that do not support growing costs. Medicare beneficiaries who were protected by the law because of no Social Security COLA may have benefited for the last three years, but 2012 will be the year to play catchup. It has nothing to do with Obamacare, but rather simple math and a Social Security law that ignores the unintended consequences of not allowing revenue (premiums) to keep up with expenses.

If you apply an estimated 2012 3.5% increase in your gross Social Security benefit and subtract a possible Part B premium increase of $24.08 (assuming you currently pay $96.40 for Part B), you will have a general idea of the impact of all this on your net Social Security payment. However, your Social Security payment will not go below what it is today in any case.

Social Security COLA, how is it calculated and what is the possible COLA for 2012

12 Jul

For most people the Social Security cost of living adjustment is a mystery. The most important thing is will there be an increase. Following is a somewhat simple explanation of the calculation mostly copied from the Social Security website.

What is a COLA?

Legislation enacted in 1973 provides for cost-of-living adjustments, or COLAs. With COLAs, Social Security and Supplemental Security Income (SSI) benefits keep pace with inflation.

How is a COLA calculated?

The Social Security Act specifies a formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.

A COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.

COLA Computation

The last year in which a COLA became effective was 2008. Therefore the law requires that we use the average CPI-W for the third quarter of 2008 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 215.495.

The average CPI-W for the third quarter of 2010 was 214.136. Therefore, because there was no increase in the CPI-W from the third quarter of 2008 through the third quarter of 2010, there was no COLA for December 2010.

So what about 2012, will there be a COLA? We are still using the average for the third quarter of 2008 as the base.

In May 2011 the index was 222.954. If we assume the CPI-W stays at that level for July, August and September we have an average of 222.954 versus 2008 third quarter average 215.495 for a difference of 7.459 or a percent increase of 3.461 which could mean a Social Security COLA increase of 3.5%.

Of course we are making a major assumption regarding the CPI-W for the third quarter of 2011 and nobody knows today what it will be. Only time will tell the actual amount of the Social Security COLA for 2012, if any.

Medicare Part B premium increase in 2012 likely to fully offset Social Security COLA projected at 1.2%. This is a good lesson for anyone planning on retiring.

27 Mar

ALERT: Social Security COLA for 2012 to be 3.6%. It’s official! October 19, 2011


According to the Trustees projections, Social Security recipients may see a 1.2% cost of living adjustment in their monthly benefit in 2012. However, that increase will quickly disappear thanks to growing Medicare premiums.

The “hold harmless” provision which states that the Social Security benefit can’t decrease as a result of a Part B premium increase assures that most Americans receiving Social Security will not see their benefit go down, but neither will the benefit increase, for the third year in a row.

Higher income beneficiaries are not protected by the hold harmless provision and will see an increase in Medicare premiums and a resulting decrease in their net Social Security benefit.

Those new to Social Security and Medicare in 2012 will see the effects of all Part B premium increases over the last three years.

If you would like to see a more detailed explanation of all this check out the Kaiser Family Foundation Report.

Individuals paying for Medigap coverage or for employer based Medicare supplemental coverage will see a further reduction in their net income as a result of increases in those premiums. 

There is a lesson to be learned here for those who are not yet retired.  Health care costs and premiums will continue to consume an ever-increasing portion of your retirement income and those costs are largely income insensitive meaning that if you have a retirement income of $30,000 or $300,000 your health care costs will be very much the same.  The time to plan for this is now, now, now!