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Recent articles by Liz Pulliam Weston: • Smart -- and stupid -- ways to pay for your remodel, 6/3/2003 • The myth of the marriage penalty, 6/1/2003 • Would your home survive a natural disaster?, 5/26/2003 More... |
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Related Articles The myth of the marriage penalty The 2003 tax bill: See what's in it for you Related Resources Decision center: Make tax time less taxing Sign up for MSN Money's tax newsletter Hunt for deductions Related Sites American Academy of Actuaries |
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| The tax cut that taxpayers need most | |||||||||||||||
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While virtually every other category of tax has been reduced, the levies for Social Security and Medicare -- which hit the working poor hardest -- have only gone up since their inception. By Liz Pulliam Weston With all the tax-cutting going on, theres still one extremely expensive levy thats never been touched: payroll taxes. Congress has trimmed virtually every other category of tax -- income, corporate, capital gains, estate -- but the amount of your paycheck you have to contribute for Social Security and Medicare has only gone up since the programs inceptions. This is no small matter. Consider:
The hit to younger workers Your employer contributes an equal amount, for a total tax rate on most earnings of 15.3%. If our taxes were enough to fund Social Security and Medicare, that would be one thing. But the brightest minds out there say we will need to raise payroll taxes by at least two percentage points -- and maybe by as many as 10 -- just to fund the benefits weve already promised todays workers. And its not like these workers are getting any great deal. Virtually all young workers will pay five to seven times more into Social Security than theyll ever get out, according to Boston University economist Laurence J. Kotlikoff.
Obviously, we cant solve everybodys problems with Social Security and prevent the systems impending implosion simultaneously. But if were serious about wanting to give working families a break, chopping payroll taxes is the way to go. The Bush administration's tax cuts benefit most the people who pay the most in taxes. The working poor typically dont pay income taxes, so they cant get much out of a bill that decreases them. One solution, proposed by tax expert and University of Southern California law professor Edward J. McCaffery, involves exempting the first $10,000 of wages from payroll taxes. That would give most people who work a $765 tax cut while proportionately benefiting the lowest-wage employees the most. Another approach would be to roll back the payroll tax by a percentage point or two. It doesnt take a genius to realize these changes would make Social Securitys fiscal imbalance even worse. To compensate, wed have to take some drastic measures -- but drastic measures are going to be called for, anyway. Privatizing Social Security could be one solution -- or it might not. The political realities probably will preclude entirely privatizing the system, anyway, which means well still need a patchwork quilt of other reforms. How effective would the fixes be? The American Academy of Actuaries created a calculator, available on its Web site (see link at left) , that allows you to play with various proposed solutions to the Social Security deficit to see how much of the gap each would eliminate -- either by itself or in combination with other reforms. Three of the biggest fixes: Reducing benefits for retirees whose incomes exceed $45,000 would, the actuaries say, fix 85% of the deficit. The Social Security system has always been designed to benefit low-income workers proportionately more than higher income workers, under the theory that higher-income workers are better able to save for retirement on their own. Reducing benefits further could preserve the safety net for the lowest-income workers. Eliminating the wage cap on Social Security taxes and paying benefits on the additional taxed earnings would clear up 77% of the problem. Right now, the maximum amount of earnings that are considered in determining your benefit is equal to the maximum earnings that are taxed -- in other words, $87,000 for 2003. Making all wages subject to Social Security would more than offset the additional cost of computing benefits based on high-earners actual salaries. Raising the retirement age to 70 and indexing it to increasing life spans thereafter, the actuaries say, would solve 68% of the current Social Security imbalance. We work safer jobs, enjoy better health and live much, much longer than we did in the 1930s, when Social Security was designed. Shoving off the full retirement age -- now 67 for those born in 1960 and after -- makes sense for most workers, although we may need to make accommodations for those with age-related disabilities or in dangerous jobs. If we cut payroll taxes, wed likely need to employ all three solutions to keep the Social Security ship afloat. None of these approaches is particularly appetizing -- especially for high-wage earners who will pay the most and benefit the least. If we want to trim taxes for most working families, though, and preserve the Social Security safety net for those who most need it, this is the way to go. | |||||||||||||||
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