We are so concerned with playing the class warfare game that we are being, as the old cliché says, penny wise and dollar foolish. This will be a very controversial statement, but we need to start giving more social security payments to the rich, not try to means test them and give them less.
OK, before you tar and feather me, give me a second to explain.
Each line of the preceding table represents $10,000 of income. The government collects the same 12.4% (6.2% times 2) on each $10,000 or $1,240 each year. Currently this is done for about 4 years for every year of retirement benefit that is paid out. Basically, the government collects $4,960 for each retirement year. When you compare the total amount collected from people of various incomes to the total "after tax" benefit paid out, you see that the system loses money on those with lower incomes and makes a nice profit on those with higher incomes.
So, the question is very simple, “Why are we going to stop collecting OASDI taxes at $113,700 in 2013?”
If we raised the OASDI limit by another $10,000, yes, we’d have to pay the rich person and extra $1,500, $1,181 after tax, for every year of their retirement, but we collected more than four times that amount, $4,960, for each retirement year. We are so blinded by the class warfare attacks that we are willing to give up a 76% profit for the system just to deny them their 24% payback. That is not class warfare that is blind stupidity.
You can’t just jump this number up to $250,000 all at once, but you could come up with a super-COLA plan whereby the top level is increased by 2 or 3 times COLA every year until it reaches some fixed level. If you try to do this and give back zero benefit, not only would it meet up with a huge resistance, but honestly, it wouldn’t be fair. But look at the bottom line. Anything above the $70,000 level, the government collects more than 3 times the amount it pays back each year.
So, the choice is simple. Raise the top level under all of the existing guidelines and make a nice 76% profit, or raise the top level and try to push through changes to the system so we can take all of the money. You could slip the first proposal through without much notice. The second one would meet up with huge publicity.
Let’s look at a situation that exists under the current system:
Line 1 represents an individual who has worked all their adult life and gets taxed on an index adjusted $35,000 every year, so their average income is 35K and their benefit is $16,703.
Line 2 also represents an individual who also works all their life, but their income is only $10,000. Their benefit will be $8,703.
Line 3 is the problem. It represents an individual who has worked overseas for a foreign company where they do not participate in the Social Security system, and then returns to the US at age 57 and works for only 10 years under the system for the same $35,000 per year as the individual on line 1. Their average income over the top 35 years is 10 times $35,000 divided by 35, or $10,000, so their benefit is the same $8,703 as the individual on line 2 who has worked 48 years for that benefit.
The system is designed to give higher benefit rates to those in low income jobs who are unable to plan for their own retirement. That is a good thing. But those who want to “double dip” can use what was designed to be good to hurt the rest of us. That is a bad thing and needs to be corrected.
All of this is because only about one fourth of the first individual’s income is being returned at 90% and the remainder at 32%. If their income was more than $54,204, some would have only been returned at 15%. The second individual has almost all of their income returned at 90% and very little at 32%.
Line 4: There is a simple way to fix this problem. There is no need to change the formula used to calculate the benefits, just change the order in which things are done as illustrated in steps 2 and 3 below.
Under the current system:
The re-ordered system would:
How would this work in the proposed fixed ratio system?
We used the $35,000 and $10,000 income levels in our first example because the $10,000 level is close to the 90% benefit level breakpoint. Now let’s look at the same situation under the new proposed fixed ratio system, but change the higher income level to $59,085 which is the point where the benefit level is approximately the average 40%.
Line1 represents an individual with the income level that earns the average 40% benefit. They pay in 480% of their salary in 48 years and get back the same 480% during their average 12 year retirement.
Line 2 represents an individual who earns considerably less. Note how this individual gets back 1044% of their income for the same 480% contribution. This individual gets back more than twice what was contributed and the system loses more than $56,000.
Line 3 represents an individual who earns $100,000. Their income is higher so their benefit level drops to under 30%, and that is before taxes. They only get back 357% of the 480% that they put into the system and the system makes back more than twice what was lost to the lower income individual.
Line 4 represents the partial participation individual that this section is about. We can’t penalize this individual twice for working only 10 years, so we changed the calculation of the full retirement benefit to be the average of “up to” the top 35 years of income which makes their full retirement benefit the same as the individual who worked the full 35 years. But, in this case, they have worked for only 10 years and plan to retire for 12 which drops their individual make/take ratio to only 0.83 to one and this drops their adjustment factor to only 20.83% instead of the 100% for the others in this example. This drops their benefit level down from 29.8% to only 8.33%. The most important thing to recognize on this line is that they are getting back the exact same 100% that they contributed during their 10 years of non-exempt employment.