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Wednesday, May 25, 2005

Compromise: Fix Social Security On The Backs Of New Jersey Workers

If there's any truth to this compromise on Social Security – you’d better write your Congressman and our Senators. New Jersey workers are about to be screwed again:

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 Malkin
As 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.

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.
When you hear a politician say tax the rich, understand what they really mean – tax the workers of New Jersey.


At 8:18 AM, Blogger The One True Tami said...

When you hear a politician say tax the rich, understand what they really mean – tax the workers of New Jersey.

The workers of New Jersey who make over $90,000 a year. Can't we afford it? I don't understand why high-income earners should be exempt from a tax that lower income earners pay.

At 9:42 AM, Blogger Fausta said...

Excellent analysis.
And no, people who make $100,000-150,000/yr in NJ can't afford yet more taxes. It's not as if they're not paying social security taxes at all.

At 10:43 AM, Anonymous pawnking said...

If this rumor is true, then I do not know what to say. I am a Republican, but this sort of thing is exactly why we don't want to "save" social security yet again. Change it fundamentally, or leave it alone. That way, the pressure to change it will build. We cannot afford the program as it exists, and small cuts will not solve the basic problem. Ironically, "blue" states will be hardest hit by these changes, while "red" states will benefit the most. Why are the Democrats against real reform again? Does it make any sense to anyone?

At 12:24 PM, Blogger Enlighten said...

Tammi wrote: “The workers of New Jersey who make over $90,000 a year. Can't we afford it? I don't understand why high-income earners should be exempt from a tax that lower income earners pay.”

Let us try to answer your questions. First, Social Security is not an income tax. It was supposed to be a plan that allowed workers, along with their employers to “contribute” a portion of an employee’s wages toward a Social Security benefit to be paid during retirement.

Social Security benefits are calculated based upon the total amount the worker and his employers paid into the system over the years. The more money a worker and his employers paid into the program the greater the monthly benefit received by the retiree. This is the basic promise of Social Security.

High income earners and their employers are not exempt from paying Social Security taxes. Everyone pays the tax on their payroll earnings up to $90,000. Each year, the maximum is increased. Last year the maximum was $87,900. Prior in 1994 the Medicare tax was included as part of the total Social Security tax. Beginning in 1994, workers began paying the Medicare tax on all their payroll earnings.

If the payroll tax cap were lifted, Social Security would no longer pay workers a benefit based upon their contributions. At that point Social Security payroll taxes would become an additional income tax, paid only on wages. Income from other earnings such as investments, etc. would not be subject to this additional income tax. Do we want to create a seperate income tax for workers?

Eliminating the Social Security payroll tax cap would effectively turn Social Security into a plan that redistributes income from one person to another. That would be a fundamental change to the premise of the program.

Whether or not Social Security should become a welfare program is something the American people need to decide.

At 2:07 PM, Blogger The One True Tami said...

Well, these are all facts I know. I suppose that calling Social Security without a wage cap on it a "welfare program" isn't completely unfair, but it would be a welfare program that pays out to people of all levels of income, not just the lowest. Even if the scale is adjusted, actual welfare doesn't pay out anything to those who have enough of their own to get by on.

I guess the long and the short of it is that I'm willing to put up cash in this particular manner, and other people think that there's a better way. I await their proposals for a better way.

At 2:17 AM, Blogger 贝贝 said...

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