2 Social Security Plans and Inequality: Black coffee and stale bread.
Washington, D.C. technocrats have advanced two Social Security reform plans to address projected future deficits. But there is a shared problem with both plans. The Diamond-Orszag plan and the Bowles-Simpson plan (p.48) reinforce and increase pre-existing income inequality.
1. Both plans do not ask equivalent and proportionate inputs of revenue from all contributors. Wealthy persons’ incomes are shielded from paying payroll taxes. Asking everyone to pay their fair share is a solution; means testing is not the answer.
There is inequality between what is asked of the mass of recipients and what is asked from the rich. Both plans shield those wealthy groups from revenue collection. The cap on the FICA tax is slowly raised a fractional amount by the Bowles-Simpson plan until 2050.
In the D-O plan, the amount of the proposed tax above the FICA cap is a mere 3%. Everyone earning incomes under the FICA cap eventually pays a proposed 15.4% FICA tax under the D-O plan. There’s a big difference in the payroll tax between the tax paid by the mass of people receiving modest benefits and the tax paid by the wealthy who earn so much more and pay so much less in payroll tax.
In addition, the income from the financial sector of the economy, which generates capital gains personal income, is not taxed. Wall Street does not pay its fair share once again. Massive amounts of personal income are shielded from taxation by being called a different kind of income.
2. Both plans make the middle and low-income earners responsible to pay for the gap between past inputs and future benefits.
Because the FICA payroll tax cap did not rise high enough in the past to tax enough income, and because of rising numbers of high income earners whose incomes were not taxed, a gap was created between revenues and the projected cost of future benefits. To place the burden of repayment to close that gap, onto the shoulders of those who have already paid their full share, is exploitative and unfair.
To close four-fifths of the deficit gap, Bowles-Simpson plan makes benefit cuts, COLA cuts, and progressive indexing (cuts) compared to small efforts to raise revenue from those who earn more income than is currently taxed by the SS FICA tax. Included in those cuts are raising the retirement age 2 more years to 69 for FRA, and 64 for ERA. CEPR established that raising the retirement age is an upward redistribution of wealth from lower income groups.
The Diamond-Orszag plan cuts the amount of benefits but leaves the age of retirement intact. However, in a sleight of hand, the D-O plan collects 128% of the revenue necessary to close the gap in the projected SS deficit. By doing so a future claimant is paying more for the same insurance. e.g. like going to purchase a 15K “valued” car (final SS benefits at retirement)at 0% interest and the sticker on the car is for 22.5K dollars (payroll tax paid every week). Under the D-O plan, that extra payroll tax you would pay into the SS fund goes to fund a SS trust fund of 3.178 trillion dollars in 2078. Not toward paying for future received benefits in accord with the current, more generous, benefit formulas.
3. Both plans flatten the benefit payments so that benefits are disconnected from earnings history. The large mass of future benefit recipients will be paid a more narrowly corralled benefit payment .
The B-S plan uses progressive indexing to radically flatten the benefits within a narrow 9 to 15K range. See Fig 2 of the CBPP study.
The D-O plan flattens the benefits surreptitiously, through overpricing the purchase of Social Security benefits through excessive payroll taxes, and then finally through offering a reduced Social Security benefit at retirement (10% cut for current 25 y.o.s).
(Figure 2. is used with permission from CBPP.)
4. Neither plan updates the “poverty level” to current costs for housing, food, energy, transportation and medical expenses.
Both reform plans offer a ‘basic benefit‘ which hover around the existing poverty line as measured forty some years ago and which has never been upgraded to account for what it actually costs to live here. The Bowles-Simpson plan has the audacity and arrogance to advance a retrograde CPI which would gradually guarantee a decline over time in the value of benefits as inflation progresses while benefits hold at lower levels.
FDR’s stated reason for developing Social Security was to bring older people out of poverty. The inevitable fate of 50% of older unemployed persons for whom there were no jobs and no family to fall back on was crushing poverty. Both of the proposed ‘reforms’ will channel more and more individuals onto a poverty trajectory. If 20K in 2078 is the new 10K poverty line from 2012, what will SS benefits of 9 to 15K be like to live on? Black coffee and stale bread.