The Problem With Social Security

Note – this is US-centric by nature of discussing the US Social Security system..

I’m not going to say much here and I’m going to try to keep this accessible to people who aren’t finance experts (since I’m not either!), but I bet I know how to fix social security taxes – and it doesn’t have to deal with corporate tax return (the number of corporations paying basically no tax is alarming) or creating a means test for benefits.  As an aside, did you know that your family can make millions a year and you can still collect SSDI, the type of income someone who has worked “enough” receives if they become disabled? The same goes for social security retirement. You can! But you can’t own pretty much anything and collect SSI, which is what most long-term disabled people receive.  SSI is means tested, after all, while retirement and SSDI are not.

So you can be a millionare and collect SSDI or social security retirement, but if you have $2,000 in the bank account (less than 3 months “safety cushion” for someone making the typical $721  SSI payment). It should be noted that Vangaurd, in line with most financial planning companies, and a place that doesn’t probably have many clients on SSI, recommends a 3 to 6 month emergency fund: “In a nutshell, you should have at least 3 to 6 months’ worth of expenses—but the exact amount depends on a few variables.” I’m going to guess most of that $721 goes towards expenses for a typical SSI recipient (or tries to – one bad thing happening can easily cost more than an entire social security check, which is why people on low income need an emergency fund even more, because late fees and such end up making the amount owed even bigger!). So that means an SSI recipient should have between $2,163 and $4,326 in a rainy day fund – but of course they would be committing social security fraud if they did (nevermind the impossibility of saving on $721/month). If you’ve ever had a root canal (not covered by medicare typically!) and paid typical prices, you know what the problem here is.  But I digress…

Heck, to fix social security, we don’t even need to trim the military to the spending level of the next, say, 5 largest militaries (today we spend more than the next 8 largest militaries combined!)

No, it’s simpler.  Two minor tweaks to the law that would affect very few people.

First, get rid of the $118,500 (it goes up each year, just slightly) earned income cap on social security taxes. If you make $118,500 in earned income, you pay $7,254.00 in social security taxes.  That is 6.2%.  Your employer matches that.  If you have a part-time job you are raising a family of four on, as a single parent, and you make minimum wage for 30 hours a week ($7.25/hour, or $217.50 for your 30 hour week), you make $11,310 per year, and you pay $701.22 in social security tax.  That’s 6.2%.

But if you make $10,000,000/year in earned income, you pay $7,254.00 in taxes.  So you make 884 times the income of our 30-hour-a-week minimum wage earner (in other words, they seemingly would have to work 884 years to make what you make in one year), but only pay a bit more than 10 times the social security tax.  Their tax rate (remember, the minimum wage worker is taxed 6.2% on social security) is 0.07%.  With the vast majority of wealth in the nation owned by a very small group of people – who pay pretty much nothing in social security tax – after all, they have a lot of uses for that 6.2% – it is no surprise that there are predictions of the social security trust funds running out of money.

But it is worse than it sounds. I kept using a term, earned income, above.  Is there another kind? Of course. Among many types, it includes money made from betting on the stock market (this is one thing called “capital gains”). That’s not considered earned income, but it is income. So you do pay taxes on it. But one tax you don’t pay on it is social security tax.  That’s right, if instead of working to make the $10,000,000/year, our millionaire instead made money investing, he pays $0 in social security tax.  Yep, 0%.

So there you have it – the real story of why the social security system is flawed. The poorer you are, the more of your working income goes to social security – and if you are lucky enough to make enough money to live comfortable off of investment income, you don’t pay a cent.

As an aside, this isn’t a new concept. But it isn’t popular. One of the less-well-known Obama-care changes was that people making over $200,000 earned income (for individuals) have to pay a slightly higher tax rate to medicare than the minimum wage worker. So I guess that’s progress. But it also helped significantly to start to make medicare a sustainable program. Minimum wage workers (indeed, anyone with less than the $200,000 limit for individuals of earned income) pay 1.45% of their income to Medicare. High wage workers pay an extra .9% on any earned income above $200,000.  So for every $100,000 extra they make over $200,000, they pay $900 more in tax than before Obama-care. They still pay nothing for Medicare on income that isn’t earned (capital gains).