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March 07, 2008

The phony Social Security crisis-4: What needs to be done

(For previous posts in this series, see here.)

While Social Security is not in a crisis, it does require periodic adjustments to make it work, as the economy and demographics of the population change. It can be made solvent with minor tinkering at the edges such as removing entirely the cap on payroll tax income or increasing the rate of taxation by small amounts or by lowering the annual cost-of-living increases in benefits or, in the worst case, by slightly reducing the benefits. We are not facing the catastrophe the doomsayers predict.

The major problem with Social Security is not with the retirement benefits part but with rapidly rising Medicare costs. Currently the Social Security tax (the part that goes towards retirement benefits) is 12.4% of income up to the cap, which is $102,000 for 2008. The tax rate for Medicare is 2.9% of your gross income. Your employer pays half of this 15.3% total, unless you are self-employed in which case you are responsible for the entire amount.

It is the Medicare costs that are already outstripping Medicare revenues and rising rapidly, and thus straining the government's finances. But this is largely a health care costs problem, caused by the hugely wasteful profit-making health system that currently exists in the US that has resulted in per capita costs that are at least twice as much as the costs in other developed countries and yet produces worse results. Introducing a single-payer system like that which exists in France or Canada would result in savings, greater ability to control costs, and better health care overall. (See the series of posts on health care where these arguments are presented in more detail.)

As far as Social Security is concerned, one thing that could and should be done immediately is to remove the cap on incomes that are taxed for Social Security. The existence of this cap means that people earning more than that pay no Social Security taxes at all on the extra income, and thus pay a smaller proportion of their total income into Social Security than those making less than the cap. Thus the richer you are, the smaller the fraction of your income that goes towards Social Security, making it a very regressive tax.

Social Security and Medicare are programs that can be made solvent for a long time. The 'problem', such as it is, is that the way to do so goes against the dreams of those ideologues who want to privatize Social Security funds and preserve the huge exploitative profits of the health care and health insurance industries. These people have sought to divert more and more wealth to a very few.

So how have their plans worked out? Very well, it turns out. The share of the income of the rich has been increasing at a rapid pace at the same time that their share of taxes has been decreasing. The March 5, 2008 issue of the Wall Street Journal reports:

The nation's top 400 taxpayers reported a total of $85.6 billion of income on their federal income-tax returns for 2005 -- an average of $213.9 million apiece, according to Internal Revenue Service data obtained by The Wall Street Journal.

Just to make the cutoff to join this exclusive club, you had to report income of at least $100.3 million, up sharply from $74.5 million the previous year. The average income among the top 400 in 2004 was $172.8 million.
. . .
Indeed, the top 400 taxpayers have greatly increased their share of individuals' income since the mid-1990s. The group accounted for 1.15% of total income in 2005, up from 1.02% the prior year -- and more than twice as large as its 0.49% share a decade earlier. It's the highest percentage since the early 1990s, which is as far back as the IRS data go.
. . .
The average federal income-tax rate for the group was 18.23% . . . well below the average income-tax rate of nearly 30% back in 1995,

As the article points out, the way the data was collected actually underestimates the wealth since it takes into only the adjusted gross income (AGI).

The assault on Social Security is part of the generalized rhetorical attacks on all public services, including public education, Medicare, Medicaid, and welfare by those who would seek to destroy them. A key strategy in this war is to portray all government as bureaucratic, wasteful, and incompetent. Bush's contribution to this war was to appoint to high positions people who were either actually incompetent (so that they would mess things up, feeding into perceptions of a useless government) or those who were ideologically committed to having the government avoid its obligations.

My worry is that the pro-war/pro-business interests and the Wall Street investment classes may think that they have got all the goodies that they are likely to get from Republican administrations and think that they need a Democratic administration and Congress to be able to overcome the grassroots opposition to attempts to subvert Social Security, Medicare, Medicaid, and all the other government services that try to provide a much needed social safety net.

This is why even greater vigilance will be needed if and when Democrats take control of government. Bill Clinton got away with a lot of things because he was able to talk populism while acting in the interests of Wall Street. That should not be allowed to happen again.

POST SCRIPT: Telephone opera

As readers of this blog know, I am not a big fan of television. But one of my favorite TV programs is Sesame Street. It can't be beaten for its unique combination of great music with clever lyrics, genuine humor, education, and positive messages, all without being preachy. I used to watch it almost every day when my children were younger and now, thanks to YouTube, I can watch again some of my favorite segments.

In this sketch, Placido Flamingo and other Muppets affectionately parody opera.

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Comments

I agree that the Social Security cap should be removed. It's ridiculous!

Posted by Norm Nason on March 7, 2008 10:44 AM

Wonderful information, It is the Medicare costs that are already outstripping Medicare revenues and rising rapidly, and especially in us it was very hihg and it results worst.So we have to take care about the rates.

Posted by Day care insurance on April 1, 2008 02:56 AM