Thursday, April 25, 2013

Munnell: Don’t Scrap the Cap

Boston College Professor Alicia Munnell, writing for Marketwatch, argues that progressives should think twice about trying to fix social Security by “scrapping the cap,” that is, the $114,000 ceiling on which payroll taxes are levied and benefits are calculated. While eliminating the cap may seem fair in one sense – that high earners would “pay taxes for the full year” – it also would mean that high earners would pay a lot more in taxes than they’d ever receive back in benefits. In Social Security’s context, which tries to not be too progressive, that approach could backfire.

It’s a thoughtful piece – check out the whole thing here.

8 comments:

WilliamLarsen said...

I guess few people realize that Social Security OASI's 10.6% payroll tax applied to wages for those born after 1985 is equivalent to borrowing money at 4 to 6% and loaning it to OASI with the hope, not guarantee that OASI will pay scheduled benefits with COLA and without any further increases in retirement age or payroll taxes.

However, the math to analyze this is simple. It does not take a financial planner to do this analysis. The OASI benefit formula is identified clearly on the SSA website. The math shows that by cohorts (all workers paying into OASI and based on cohort life tables) the payroll tax based on historical US Treasury Rates would be less than 6 to 7%. The payroll tax is currently 10.6%. The question should not be "should we raise the cap, but should we help all workers out by repealing OASI?

Arne said...

The math is simple. The administrative costs are far less than private insurance, so SS is a good deal.

It is also easy to do the math wrong. You do need to understand that paying benefits to current retirees does have value to current workers.

Wayne Deer said...

Thank you for sharing this blog on the social security reform. I was wondering if you could tell me about an Orlando social security disability attorney? I'm trying to find one for my parents. Thank you for your help!

WilliamLarsen said...

Arne,

How does "It is also easy to do the math wrong. You do need to understand that paying benefits to current retirees does have value to current workers. "

This work? How does paying benefits to current retirees using my resources help me in the future? Do I then ask my kids to pay not 10.6% of their wages to me but now ask 18.5% of their wages be paid to me? How does this benefit me or them?

Yes administration costs are less than private insurance. However I do not have private insurance, but equities and income producing assets to provide my needs during retirement. My costs are $7 to buy and sell equities. When it comes to mutual funds, my costs are 1% to 1.5%. Since 1973 my ROR has beat the US Treasury rate by twice. while during this same period of time the US Treasury rate that was paid to SS-OASI will produce a negative rate of return to me since they cannot pay full benefits past 2031.

So I pay lower admin costs in order to achieve a negative ROR.

Arne said...

"How does paying benefits to current retirees using my resources help me in the future?"

It helps you now. Not needing to pay for poor houses anymore is one obvious way.

WilliamLarsen said...

If I compare poor houses to SS, you are saying that to keep the poor out of the poor house costs $600 Billion a year. half of all SS-OASI goes to those with income far above $75K without SS included. Of the 42 million beneficiaries there are nearly 8 million with assets exceeding $1 million.

So you are in favor of helping all even though they are millionaires?

No do not get me wrong, I think millionaires are great, good for them. The problem is we have a program that pays all far more than they paid in regardless of need.

Maybe we could means test and decide who needs help, set the minimum at let us say 110% of the SS-OASI benefit, increase it not by CPI, but by the change in the US Average Wage and reduce the number of people drawing benefits. This would allow the SS-OASI tax rate to decrease by 25%. Within five years we would have new cohorts who were able to save 2.5% more of their OASI taxes which should reduce those needing help early on. By the end of 35 years, we would only be helping 9 to 10% of those over age 67 at any given time. This means the SS-OASI tax could be cut from 10.6% to 1% or less.

Arne said...

William is basically simultaneously complaining that SS is a bad deal for the rich and that it gives them too much.

Arne said...

"are saying that to keep the poor out of the poor house costs $600B"

No, administrative expenses are $6.2B. That is a better estimate of the cost.