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The Basics
How Social Security cheats you to pay the rich
Workers earning minimum wage pay their full
share, while those who pull down a few hundred
grand pay much, much less. How about a tax break
for real people?
By Liz Pulliam Weston
What would you think of a tax system that took
money from the poor to give to the rich?
That�s essentially what�s happening with our
Social Security and Medicare tax system, where
low-income workers are dunned to pay benefits for
high-income seniors.
Before the AARP strings me up for heresy, I�ll
quickly add that lots of folks paying into the
system are better off than lots of folks who get
money out of it. In fact, two-thirds of seniors
rely on Social Security for more than half their
income, and four out of 10 say it comprises more
than 80%.
I�m also not saying there�s anything wrong with
drawing a Social Security check. You paid into
the system, and you�re getting what you were
promised.
But that doesn�t change the fact that some guy
making minimum wage with no health insurance has
to pay 7.65% of every dollar he earns, while some
seniors worth millions get checks and discounted
health care. That�s Robin Hood in reverse.
The rich really do get a deal on Social Security
This is a reality that gets far too little
attention, particularly when Congress is busy
adding to the problem with a Medicare
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I�ll make my biases clear: I work for a living,
so I pay Social Security and Medicare taxes. But
I�m one of the lucky ones, in that my annual
income is above $87,900. That�s the cutoff for
having to pay Social Security taxes in 2004. (I
still have to pay Medicare taxes above that
amount, since that particular tax has no income
limit.) Roughly 20% of households report incomes
above that threshold, according to the Census
Bureau. The total income of that 20% of families
represents half of all U.S. income.
So the proportion of my income that goes to
Social Security and Medicare taxes is actually
smaller than what most of America pays.
The Social Security outlay for folks like me and
Michael Eisner, the chairman of the Walt Disney
Co., is capped at $5,449.80 this year. (He makes
a wee bit more than I do, so we�ll use him as an
example.) This maximum contribution is about half
of one percent of Eisner�s $1 million base
salary. Eisner�s Medicare taxes would be $14,500
-- the same 1.45% of salary as every other worker
pays. All told, his bill would be about 2% of
that base paycheck.
Meanwhile, the average working stiff must give up
6.2% of each dollar earned to Social Security and
1.45% to Medicare, for that 7.65% total.
No Social Security tax cuts
What�s more, when income tax rates are cut, Mike
and I really benefit. (Mike a bit more so than
me, but I won�t begrudge him.)
Social Security and Medicare tax rates, by
contrast, have never been trimmed. Since the
first payroll tax was collected in 1937, the
rates have gone just one way: up.
1937-49 1.00%
1950 1.50%
1951-53 1.50%
1954-56 2.00%
1957-58 2.25%
1959 2.50%
1960-61 3.00%
1962 3.13%
1963-65 3.63%
1966 4.20%*
1967 4.40%
1968 4.40%
1969-70 4.80%
1971-72 5.20%
1973 5.85%
1974-77 5.85%
1978 6.05%
1979-80 6.13%
1981 6.65%
1982-83 6.70%
1984 7.00%
1985 7.05%
1986-87 7.15%
1988-89 7.51%
1990 and later 7.65%
*Medicare taxes were first collected in 1966.
Source: Social Security Administration
Not only haven�t there been any tax cuts, but
there aren�t any credits, exemptions, deductions
or fancy tax shelters to help that guy making
minimum wage shield any of his income from
payroll taxes.
And as he�ll probably tell you, our minimum-wage
worker has no assurance he�ll get anything back
for the money he�s putting in. The system�s
hurtling toward bankruptcy, after all.
The Medicare drug benefit is, well, bizarre
So, Congress just had to go and make matters
worse by adding a drug benefit to Medicare.
The idea was good -- let�s make sure seniors can
afford the drugs they need. But the result was
bizarre, to say the least.
If you haven�t already seen it, it�s a doozy.
First, it doesn�t become available until 2006.
Then, here�s how it�s supposed to work:
How the Medicare drug benefit works
Amount Benefit
First $250 in prescription drug costs No benefit
Prescription costs between $250 and $2,250
Medicare pays 75%
Prescription costs between $2,250 and $3,600
No benefit*
Prescription costs above $3,600
Medicare pays 95%
*This is the infamous �donut hole.�
Source: Social Security Administration
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Now, does that make sense to you? Does it make
sense to anybody?
The only reason to structure the benefit like
that was to ensure that as many seniors as
possible got a piece of the pie -- whether they
needed the helping or not -- while still making
the initial cost of the program halfway
palatable.
And the real costs were off by a third
If the goal were to get benefits to the most
cash-strapped seniors, the plan would have been
means-tested. (That is, as your income increases,
the benefit decreases.) If the goal were to
prevent catastrophic drug bills from bankrupting
older Americans, the deductible could have been
higher, and there wouldn�t be that ludicrous
�donut hole� in the middle.
Reducing the package to cover just those who need
the help, though, wouldn�t have flown
politically.
Meanwhile, we learn that the cost of this added
benefit won�t be a mere $395 billion over the
next decade. The White House now says those
guesstimates were off by one-third. The real
costs now will be $534 billion.
I argued in �The tax cut taxpayers need most�
that working families really need a break from
Social Security and Medicare taxes. We could give
them one by exempting the first $10,000 of income
from payroll taxes -- saving each worker $765 a
year -- or by reducing the payroll tax rate by a
point or two. We could swing such a break only if
we get serious about Social Security reforms.
But, as the prescription drug benefit shows,
there�s no political will to do so. The only
steps Congress seems to be able to make are giant
ones in the wrong direction.
Which means, for the folks paying into the
system, that there�s no relief in sight.
Liz Pulliam Weston's column appears every Monday
and Thursday, exclusively on MSN Money. She also
answers reader questions in the Your Money
message board.
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