Thursday, November 1, 2012

Are Social Security payroll taxes regressive?

That’s the claim made by Paul Krugman, among others.

But it’s not true when you count the benefits they generate, argue Kip Hagopian and Lee Ohanian in the Wall Street Journal. While taxes are a flat rate capped at earnings of around $110,000, benefits are paid on a progressive basis.

“Given the design of Social Security, the only way the program could be regressive is if the mortality rate differences between the group of higher-income and lower-income workers were so large that higher-income people received greater lifetime benefits for each dollar contributed. But this is not the case, according to a 2009 study by the Social Security Administration's Office of Retirement and Disability Policy. Rather, the study concludes that ‘Social Security is modestly progressive on a lifetime basis; currently, the program lies approximately halfway between paying a benefit directly proportional to lifetime taxable earnings and paying a flat dollar benefit to each retiree.’"

For anyone interested, the SSA study was written by me, Mark Sarney and Chris Tamborini during the time I was at the agency. Both Mark and Chris continue their good work at Social Security.

1 comment:

WilliamLarsen said...

Payroll tax is flat and is not progressive. The payroll tax has no barring what soever on the benefit paid to an individual.

The OASI benefit is based on wages subjected to the OASI tax. The base limits the size of a wage earners benefits. The benefit has two bend points. The first bend point replaces 90 cents on the dollar up to the first bend point. The formula replaces 34 cents on the dollar between the first and second bend point while any amount over the the second bend point is replaced at 15 cents on the dollar.

90% replacement is far more than the amount taken out currently at 10.6% can provide for. This is clearly progressive in nature.

at the 34% replacement it is regressive.

At the 15% replacement rate, it is clearly twice as regressive.

It is a ponzi scheme.