Wednesday, November 28, 2012

Social What?

In the United States, there is a federal government program called the Old-Age, Survivors, and Disability Insurance (OASDI) program.  It is the largest governmental program in the world, and in the U.S. it is the single greatest expenditure of tax monies, greater even than federal defense spending.  It is also the greatest redistribution of income in the country--from the poor to the rich.  Yes, the poor to the rich.  It is known as the Social Security program.

Consider another U.S. government program--the federal income tax program.  The federal income tax program is described as a progressive tax, i.e., the greater the amount of income, the higher the rate of tax.  So higher income wage-earners pay a higher percentage of their income to the federal government than lower income people.  Why?  The belief is that if a person has a high income, they are likely to be able to pay a higher rate of income tax because it is less of a sacrifice for them.  This is often considered tax fairness.  But, surprisingly, when it comes to Social Security, people with higher income pay a lower tax rate than do those with lower income.

If one's income is $25,000 per year, one pays 6.2% of it to the Federal Insurance Contributions Act tax, called FICA on your pay receipt.  But for someone who earns a $250,000 salary, they pay only 2.7% of their income to FICA.  For a $500k salary, the FICA tax rate drops to 1.4%, and a million dollar salary is required to pay less than 1% to FICA.  So lower income wage-earners pay over 6 times the tax rate of millionaires.  Those who can least afford it are subsidizing those who can best afford it.  Why is this tax regressive instead of progressive as the income tax?

The FICA tax is actually a 12.4% flat tax, half paid by the employee and half by the employer.  However, in 2012 it is limited to the first $110,100 earned.  Any income above that threshold is FICA tax-free.  Compare that to the 2.9% Medicare flat tax for health care insurance for seniors, again half paid by the employee.  There is no maximum income threshold for Medicare tax.

If you purchase a car, the sales tax is applied to the price of the car, regardless of the amount of the price.  There is no price limit.  A low-priced Kia is taxed at the same rate as a high-priced Mercedes Benz.

The fund that holds all the FICA tax is being depleted and, depending on the analysis, could use up all it funds in 20 years or less.  So there is much discussion about reducing benefits or raising the retirement age in order to make the funds last longer.  Why?

The obvious solution to the continuation of funding Social Security is not to cut benefits.  It is to eliminate the income limit on which the tax is applied.  Why is this not being considered, or even discussed by our elected U.S. Senators and Representatives whose individual salary is at least $174,000 per year, or in the case of the Speaker of the House over $223,000?  Wait--how much?

Why is this not being considered?

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