by Karl Denninger, Market Ticker:
The obfuscation and willful disregard exposed here is outrageous — and dangerous.
The Social Security 2100 Act would fund these expanded benefits in two ways. First, the 12.4 percent Social Security payroll tax – which is already the biggest tax paid by most households – would be increased to 14.8 percent over the next 24 years. That’s a nearly one-fifth increase in the payroll taxes deducted from each working family’s paycheck, money they use to pay bills and save for the future.
Second, the Social Security 2100 Act would phase out the wage ceiling on which payroll taxes apply. This payroll tax ceiling, which has existed since Social Security was founded by President Franklin D Roosevelt in 1935, exists for a reason: as Bill Clinton reminded us during the late 1990s, high earners already pay higher income tax rates.
Today, Franklin D Roosevelt’s birthday, Congressman John Larson (D-CT), Chair of the US House of Representatives’ Social Security Subcommittee of the Ways and Means Committee introduced the Social Security 2100 Act. If passed, it would be the biggest improvement to Social Security in more than 35 years, increasing benefits and strengthening the Social Security Trust Fund. And, it already has more than 200 co-sponsors!
Note that this is not a new proposal; Larson has introduced this bill before several times, by the same name.
Now let’s analyze it.
Social Security currently runs an approximate ~14% cash deficit on benefit payments. That is, it pays out more than it takes in from FICA taxes by about that amount. The bill in question seeks to close that gap through a modest but real increase in the FICA tax rate. One way or another that gap has to be closed; either through benefit reductions, tax increases or both. If it isn’t then it will be closed by destroying the purchasing power — that is, the wealth — of everyone in the nation so anyone who believes that this problem “can be evaded” is lying. We are merely arguing over how to allocate the change, not whether it will happen.
Unfortunately Larson has refused, like most “good” Demoncraps, to stop at the necessary and has insisted on producing a demonization bill intended to harm certain people for political purposes. Specifically, Social Security was designed to be progressive via two methods — first, you get more for the first few dollars of tax you pay when you retire than for larger amounts as your salary increases, and second, both contributions and payouts are capped.
As a result those who are in the lower economic strata but working get a much larger percentage of their contribution back on a dollar-for-dollar basis than do those in the middle class and upward.
Larson’s bill would upend this in two ways; first, he wants to make the payouts even more progressive — that is, he wants to lift the bottom end of the scale by a huge amount, instead of the moderate amount currently present. That makes the system less able to pay out benefits and will get progressively worse if we don’t stop importing H1bs and offshoring middle-class jobs. To keep that from being both the primary subject of conversation and mathematical analysis (and ultimately dooming the bill) he then removes the cap for those making over $400,000 a year, exposing those people to both FICA tax (which lifts their effective tax rate right near 50% all on its own!)
The latter may be politically popular but it won’t actually make any money. Why? Because those with earned income in that bracket can evade paying FICA on it by shifting that income to “non-W2/non-active” means — and they will.
Therefore the “revenue” portion of that bill will not materialize from the rich but the benefit cost lift will materialize instantly and permanently. The result will be that the system will be in worse shape than it is now.
If Larson had simply incrementally increased the FICA rate to 7% and indexed the cap to nominal GDP as it goes upward, with an immediate 10% increase, the “solvency” issue would likely be permanently resolved. Another alternative would be to immediately lift the cap by some amount (say, 10%), incrementally increase the 6.2% to 7% over the next eight years (0.1% a year) and then, for as long as the actuaries report the fund still has a sinking date lift the cap by 5% annually or the increase in GDP, whichever is greater, in any year in which that is reported until it stops.
That would both be predictable and not result in either gross diversion of income (which will screw Treasury, along with the States in multiple orifices over time) or other byproducts of class-warfare. However, the lack of class-warfare features means the Demoncraps won’t support it.
Much worse, however, is that this bill does exactly nothing to address the not 13-14% shortfall on a cash basis in Social Security but the 75% cash basis shortfall in Medicare! That is the one that is going to blow up the economic structure of both the economy and the Federal Government and it is going to happen within the next six years.
That omission is not an accident — you simply cannot play “class warfare” with the medical system scam; there’s not enough money You’d have to multiply the Medicare tax (which already has no cap) by five, from the first dollar, to get anywhere near solvency — and not incrementally either, as there’s no time — it would have to be done all at once, right now.
That would be the mother and father of all regressive taxes on the lower-earning working person, likely sufficient to literally put them out of a place to live and under a freeway overpass. The health care problem — including Medicare and Medicaid — can only be resolved by attacking cost and not in a small way either; costs must come down by approximately 80%.