Sunday, April 18, 2010

Social Security: Taxes or Contributions?

NASI's Benjamin Veghte outlines the different ways of looking at Social Security taxes/contributions (I wouldn't want to prejudge things myself…):

April 15th is a day we contemplate our financial relationship to government. It thus provides a suitable occasion to reflect on the distinction between Social Security contributions and income taxes. In discussions of Social Security, many disagreements stem from the fact that we view its funding from within different paradigms, namely some of us see these payments as insurance contributions, others as just another form of income tax.  On this year's Tax Day, this post considers the historical origins of this conceptual distinction, arguments for each of the two paradigms, and their implications for strategies of fiscal reform.

Personally, I don't think it's either/or, and in fact we can also break down the Social Security payment into both a contribution and a tax component (meaning, the contribution you get back while the tax you don't; the tax part is a result of early Social Security participants getting back far more in benefits than they paid in taxes, meaning that future participants would experience the opposite).

In addition, you could break down the contribution component into a pure contribution – meaning, something you personal can expect to receive back – and an insurance premium, which you would receive back only under certain circumstances (disability, death, low lifetime earnings). So really there may be three aspects to what at first glance appears to be a simple tax.

No comments: