Compromise: Fix Social Security On The Backs Of New Jersey Workers
BusinessWeek says Congress and the White House are inching toward a compromise on Social Security. Private accounts will not be part of the plan. Instead, the compromise would include (a) reducing the rate of growth in benefits paid to upper-income beneficiaries (as President Bush has suggested) and (b) sharply increasing taxes on upper-income taxpayers ( those that earn more than $90,000 per year). Via MalkinAs we have pointed out before, high cost of living – high income states are disproportionately hurt by federal income taxes rates. A “compromise” on Social Security that would remove the payroll tax wage cap would further place an unfair burden on New Jersey workers and effectively turn the program into another welfare plan.
Federal tax deductions for state, property and other local taxes are becoming a thing of the past for many taxpayers in high cost of living states such as New Jersey because of the Federal Alternative Minimum Tax (AMT). The more state and local taxes you pay, the more federal income you’re forced to pay. With a lift of the Social Security payroll tax cap, New Jersey workers would be forced to shoulder an even larger burden of federal programs.
Like the AMT, eliminating the wage cap to “fix” Social Security is just another one of those stick it to the “wealthy” ideas, but as in all “tax the rich” schemes, the truly wealthy are never touched. The rich derive their wealth and incomes from sources other than wages – property, stock and bond investments – sources of income not taxed under Social Security. People that have high incomes from wages, often for a brief period in their lives, are the ones that pay the penalty under these “tax the rich” programs.
Social Security produces a lousy return on investment for many American workers as it is now. Eliminating the wage cap will not improve the program’s long term sustainability, but will certainly hurt the individual trying to save their own money for retirement, not to mention the negative repercussions a tax increase would have on the economy.
Scuttling private accounts funded by a portion of payroll taxes, eliminating the payroll tax maximum and reducing Social Security benefits for those that pay the most into the system is a raw deal for New Jersey workers. How bad? Read Bruce Bartlett‘s The Stealth Tax.- Excerpts below:
Since the Social Security system was created, the payroll tax has applied only to a portion of total wages. Originally, the limit was $3,000, which Congress raised from time to time. Since 1972, the wage base has been indexed and rises automatically each year. Starting on Jan. 1, the taxable wage base will rise to $90,000.When you hear a politician say tax the rich, understand what they really mean – tax the workers of New Jersey.
As it is, there is already an increasingly tenuous relationship between [Social Security] taxes paid and benefits received by workers with incomes equal to or greater than the taxable base. According to the Congressional Research Service, in 1980 a retiree with lifetime earnings at or above the Social Security wage cap got back all of his and his employer's contributions in 3.1 years. By 2000, it took 24.9 years, and by 2010 it will take 35.3 years. Under current projections, a worker retiring in 2030 will need 55 years worth of benefits to get back all his contributions.
If the cap is removed and benefits are limited to current levels, the return for workers taxed at the maximum will become nonexistent. This means that Social Security will no longer be a pension system to which one earns benefits, but will instead be nothing but a welfare program.
Of course, another consequence of raising the cap is that it will constitute a massive marginal tax rate increase. The top rate on wages will, in effect, rise by 12.4 percent, raising the de facto top rate from 38 percent to more than 50 percent (including the 2.9 percent Medicare tax, which has applied to all wages since 1993).
Even if benefits are frozen, the revenue gain from lifting the wage cap isn't that great. According to Matt Moore of the National Center for Policy Analysis, it would only increase the life of the Social Security trust fund by seven years.