Spring Break
Why social security matters
Mike Hubbard
Issue date: 4/4/05 Section: Commentary
In 1935, when Social Security was created, it was only 1 percent of an employee's income and the employer had to match it with an additional 1 percent. The current tax for Social Security is 6.2 percent and including the employer matching funds, it's 12.4 percent. In other words, the initial Social Security tax was only 16 percent of what it is today. This is due to an extension of Social Security benefits, increased lifespan and lower fertility rates. In 1950 there were 16 workers for every Social Security recipient, today there are 3.3 workers for each beneficiary and when Social Security goes bust there will be only two workers for each beneficiary. To compensate for changing demographics, payroll taxes have been repeatedly raised over the years and inevitably, if complacent Congressmen have their way, payroll tax raises will continue to be the makeshift "solution."
Payroll taxes fund Social Security and Medicare. The total payroll tax is 15.3 percent (12.4 percent to Social Security and 2.9 percent to Medicare) and the tax is split between employee and employer. The payroll tax is only on a base amount of an individual's income and this base amount is annually adjusted for inflation. In 2005, for example, the base amount is $90,000. Since all income over the base threshold is not taxed, payroll taxes are a regressive form of taxation. Regressive taxation is when the poor are taxed more than the rich. A possible solution to future Social Security shortfalls is removing the payroll tax cap and extending payroll taxes to all income. However, this is not a solution; it is merely a different way of raising taxes.
For one-third of Social Security recipients, the system accounts for over 90 percent income. Removing Social Security from the wealthy, who maintain a certain income level, is an option. Unfortunately, this would create a disincentive for elderly people to work. Essentially, it would be penalizing the elderly for working and the intangible costs of that need to be accounted for.
Payroll taxes fund Social Security and Medicare. The total payroll tax is 15.3 percent (12.4 percent to Social Security and 2.9 percent to Medicare) and the tax is split between employee and employer. The payroll tax is only on a base amount of an individual's income and this base amount is annually adjusted for inflation. In 2005, for example, the base amount is $90,000. Since all income over the base threshold is not taxed, payroll taxes are a regressive form of taxation. Regressive taxation is when the poor are taxed more than the rich. A possible solution to future Social Security shortfalls is removing the payroll tax cap and extending payroll taxes to all income. However, this is not a solution; it is merely a different way of raising taxes.
For one-third of Social Security recipients, the system accounts for over 90 percent income. Removing Social Security from the wealthy, who maintain a certain income level, is an option. Unfortunately, this would create a disincentive for elderly people to work. Essentially, it would be penalizing the elderly for working and the intangible costs of that need to be accounted for.