Tuesday, January 30, 2007

More About Health Care and Social Security

Yesterday, I wrote that Bush's health plan deduction could reduce social security benefits for some people, but how that might happen was a little fuzzy. Well, today I came across this article by Allan Sloan in the WaPo that explains everything in detail.
Here's the deal. Bush, as you probably know by now, wants to let taxpayers who have health insurance exclude $7,500 (for singles) or $15,000 (for married couples) from their taxable income, but would count as income the value of employer-paid health insurance. Those exclusions would apply not only to federal income tax, but to Social Security and Medicare tax, as well.

Bush said his plan would let a couple earning $60,000 a year save $4,500 of taxes. (The actual number is $4,545, but Bush is rounding, of course.) According to the White House press office, that savings number is based on the couple being in the 15 percent income tax bracket and also paying 15.3 percent in Social Security and Medicare taxes. Apply that 30.3 percent combined rate to the $15,000 exclusion, and you get the president's number.

In reality, the couple would probably save only about $3,400 in taxes, because employers pay 7.65 percent of the 15.3 percent Social Security and Medicare tax. So unless Bush's $60,000 family happens to be self-employed, it would save 22.65 percent of $15,000 rather than the 30 percent Bush used. But $3,400 is still serious money.

Now, let me show you how Bush's health-care proposals could reduce future retirement benefits for many of today's taxpayers, who would in effect be trading retirement income tomorrow for help in covering health insurance costs today.

Remember that Bush would let you exclude $7,500 (singles) or $15,000 (couples) from taxes -- but that you'd pay income, Social Security and Medicare taxes on employer-paid health care. So if your employer pays less than $7,500 (or $15,000) toward your health care, you'd pay less Social Security tax than you pay now. (Around 20 percent of taxpayers with employer-paid health care would end up with higher taxes, but we'll set that aside for now.)

Got it? Let's proceed. Paying less Social Security tax would reduce your future Social Security retirement benefit, which is determined by a formula that's based on how much Social Security tax you pay. It's a progressive formula under which you get a benefit of 90 percent of the first Social Security tax dollars you pay, declining to 15 percent of the final tax dollars you pay if you're high-income. If you pay Social Security tax to the max -- for 2007, it's on $97,5000 of income -- you would see your benefit shrink by way less than 15 percent if you exclude $15,000 from Social Security taxation.

But low-income people -- who get much more in benefits per dollar of Social Security tax than maxed-out folks do -- would see benefits shrink by a far higher percentage. "A family earning $30,000 a year could see its retirement benefit cut in half," says Len Burman, director of the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. This would be an especially serious blow, because $30,000 families tend to rely almost entirely on Social Security for retirement income, whereas high-income families rely far less on Social Security because they have retirement accounts, pensions and savings. [emphasis added]

This is no solution, especially for low income families. Why can't Bush just do something because it's the right thing to do?


Anonymous said...

Fed chief Bernanke errs in concluding that boomers soon
to retire is the problem with social security. He told
Congress that in 1983 the Social Security and Medicare
trust funds were replenished by legislation but then the
Congress borrowed the money from and left IOUs, leaving
the funds now less than full as the law was intended.

The clearcut answer is right there: replenish those funds
with a new law which restricts the funds for the American
people. Congress is made up of representatives of we,
the people. They make no sense when to undo the law they
created for us. Bernanke told them about 80 million more
boomers will retire beginning in 2008, and the funds will
be broke in ten to thirty years.

A fund is not a fund if the funds are allowed to be used
for other purposes. So, the Congress we elected created
a law which made the funds solvent and then the same
Congress broke the law which benefited us, the American
people. I doubt they would want their own personal
retirement funds to be treated the way they continue to
treat the Social Security and Medicare funds of the American
people. Our own representatives are robbing us of secure
retirements and continue to tax us for a bogus fund. They
are guilty of creating a Ponzi scheme of the worst dimensions.

This is not rocket science, and does not need reduction
of benefits nor increase of taxes. The answer is simple
and not even Economics 101. Stop the talk and just do it:
fund the funds and leave the money in The Social Security
and Medicare Funds. Leave the funds alone for the
American people.

Anonymous said...

I'm a bit perplexed by your perplexity. If people pay less in payroll taxes, they'll get less in Social Security benefits. What is the surprise about this?

What is the alternative? Should people get benefits on taxes they didn't pay?

Also, let's remember that this is what happens now. Any time your employer gives you health benefits in lieu of wages, you're not taxed on that amount, and you don't earn Social Security benefits on that amount. This is the way it's always been. All the Administration's proposal does is to apply the same policy to everyone.

Finally, there is a mistake in the entry above. Even if a family's taxable compensation dropped from $30 K to $15 K, this wouldn't cut their Social Security benefits in half. Social Security provides a higher return on that first $15 K than the second $15 K because of its progressive benefit formula. So several of the statements above reflect a misunderstanding of how Social Security benefits are treated under current law.

Anonymous said...

One additional comment on the comments by "anonymous." While it's certainly true that Social Security would be in better shape if the government didn't spend the Social Security surplus, Social Security would still be insolvent even if all that money had been saved. The so-called "insolvency date" of 2040 is calculated on the presumption that the money was saved and earned interest. Since it isn't, the real crash date is 2017.

Also, the spending of past Social Security surpluses from 1984 through the present has already occurred, and nothing can change it now. Even if the government did manage to save the few remaining surpluses through 2017, it wouldn't, at this point, make a big dent in the problem.

There were two significant problems with the 1983 reforms. One is that the system wasn't sustainable even if everything had worked as planned -- they attained paper solvency but not permanent sustainability. The second is that they (inadvertently) achieved solvency via the average of large near-term surpluses followed by large long-term deficits, but didn't create a mechanism for saving the money. The Trust Fund is not such a mechanism. It is, by law, invested in the current operations of the federal government.

Fixing Social Security for good means also fixing the system so that the money can be saved -- which means establishing a savings mechanism such as personal accounts. Congress was unwilling to do this last year, citing the "transition cost" of giving up the right to spend that money. "Transition costs" became the most explosive part of the Social Security debate, but essentially it's code for "We don't want to give up the right to spend Social Security money now." If this practice is to stop, people need to understand that "transition costs" are actually a virtue, in that they require the government to tighten its belt for no longer having access to Social Security money.

Kathy said...

I don't usually respond to anonymous comments, but I decided to make an exception in this case. I don't care about the problems and/or steps we need to take to fix social security in this country. Well, I do care, but that was not my point when I posted this. My point was that the health deduction was a mixed blessing. It would provide a person with the opportunity and means to purchase insurance, but the trade off for low income people is a possible reduction in social security.

The amount of that reduction is irrelevant too. I don't care if it's 1% or 50% of a person's social security. What I care about is the fact that we aren't really lifting up a person and helping them. Health care for low income people should not cost them their future retirement benefits - period.

We say we're a Christian nation, and our leaders brag about their values, but do they ever read their bible? They might want to start with this verse:

He raises up the poor from the dust; he lifts the needy from the ash heap, to make them sit with princes and inherit a seat of honor. For the pillars of the earth are the Lord's, and on them he has set the world.

- 1 Samuel 2:8-8

Pete said...

Thank you for the information. You might like to know that Dean Baker wrote about this implication too:

"...there is a flip side to this tax break. If workers pay less money into Social Security, they would also get less back. To take an extreme case, imagine a worker whose pay averages $20,000 a year. Currently, this would salary would get this worker $11,000 if she started collecting benefits at the normal retirement age. Under President Bush’s proposal, the worker would only be credited with $5,000 a year towards her Social Security benefits, getting her $4,500 a year when she retires. This is a big difference."

Dean said this plan is DOA. I hope someone else steps up with a plan soon. We need serious suggestions put forth and not some half-baked ideas that won't go anywhere.