"Believe what ya like. Think what ya like. You'll be judged for what you do."
-- Tim Minton, Eyrie

Sunday, December 11, 2011

It's Not Nice to Fool Social Security

     The good news:  In 2012 senior citizens will receive a Social Security cost of living adjustment, banking bigger payments for the first time since 2009. The increase for retirees is slated to be 3.6%, or an average of $43 more per month.

     The bad news: There's no way the government is paying for it, except to add it to our credit card bill.

     Up until this year, the payroll tax -- which pays for Social Security -- sliced off 12.4% from the first $106,800 of an individual's salary. Income above $106,800 was exempt from Social Security tax. (There's an additional tax to help pay for Medicare, which brings the total payroll tax up to 15% for most workers.) Half of the Social Security tax, or 6.2%, was paid by the employer, the other half by the worker.

     For 2011, President Obama and Congress got together and passed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. (Snappy title, isn't it?) The act lowered the worker's part of the payroll tax from 6.2% to 4.2%. The objective was to put more money into people's pockets, and hope they would spend it to spur our faltering economy. No one knows for sure if this strategy has worked. Democrats argue yes; Republicans argue no. But it's hard to believe that it didn't have some impact on the economy. The tax reduction left average American families almost $100 a month more in their paychecks. And you know, most of them spent it.

     The Administration hoped that lowering the payroll tax would help the economy. But it also recognized the lower tax would take funds away from Social Security -- to the tune of about $120 billion for the year -- and Social Security is already paying out more than it takes in via the payroll tax. So the Tax Relief act was voted in for only one year, as a temporary measure. In the meantime, the missing payments to Social Security would be made out of general government funds ... meaning the government would borrow more money to pay into the Social Security system.

     On January 1, 2012, the temporary tax reduction is scheduled to expire. President Obama and the Democrats are worried that bumping the payroll tax back up from 4.2% to 6.2% will hurt the economy -- and will be seen by voters as a tax increase. So they're pushing not only  to keep the lower tax rate, but lower it further, to 3.1%. That will let workers take home still more money, about $500 per year per family. It will, theoretically, allow consumers to buy more products and help the economy. But that's yet another $500 a year denied the Social Security fund -- to be made up by the government borrowing yet more money.

     In the meantime, the amount of salary subject to the payroll tax is inching up from $106,800 to $110,100. Applying the tax to this additional $3,300 will make up for a small portion of the money lost to the tax reduction.

     Most Republicans are against the Obama proposal to lower the payroll tax. Presumably, Republicans are fiscally responsible and do not want to incur more government debt. Besides, they argue, the program hasn't worked, and Social Security is already looking at a huge deficit looming on the horizon as Baby Boomers retire. Lowering the payroll tax will make future deficits even bigger and more unwieldy.

     But, let's face it, many Republicans are philosophically opposed to having the federal government finance people's retirements. They consider it socialism. They want to do away with Social Security entirely, and for better or worse let people manage their own retirement funds.

     Some liberal Democrats have worried that the payroll tax reduction will, in fact, actually undermine Social Security. Up until now, Social Security has paid for itself. People pay into the system, then they take out benefits. It's a retirement program, not a welfare program. But if general government funds start paying for Social Security, the system might get tainted as welfare program and lose the support of young people, the upper middle class -- anyone who pays into the system but won't get anything out of it.

     As a response Senate Majority Leader Harry Reid proposed a new tax on Americans earning more than $1 million a year. It would be a temporary tax, to cover the temporary payroll tax cut. But the proposal doesn't seem to be going anywhere. It's hard to say; the situation is still very fluid.

     Does this temporary payroll tax deduction seem like a good idea to you? Most of us are Social Security recipients. Does it make you feel more comfortable that the government is borrowing more money to pay your monthly benefit?

     Honestly, I can't decide. The economy needs help. So do American families. But it's a dangerous game to starting fooling around with Social Security.

     I, myself, am eligible to collect Social Security. I'm trying to hold out for a couple of years -- to get a bigger benefit when I'm older. But I'm beginning to wonder if that's such a good idea. Maybe I should take the money now ... because in 20 years, when I'm in my 80s, the money might not be there.


stephen Hayes said...

Take the money and run. You're right, it probably won't be there later on.

schmidleysscribblins,wordpress.com said...

Nice article about a difficult subject.

I think the whole argument is supid becasue no matter how much they dither, the Congress will extend the payroll tax cut in January, and have probably destroyed it. We get used to what we have and one way or another it will never be politically feasible to reinstate this important tax.

Meanwhile, the increse in our Medicare premium will absorb most of the so-called rise in SS this January.

We do need to keep SS alive, but we also need to overhaul the entire tax code and SS. Like it or lump it Simpson Bowles had the answers.


Anonymous said...

First off, it's insanity to cap the Social Security tax to only $106,00 or $110,000 of income. ALL income should be taxed. Give me a break!

Secondly, what you forgot to mention is that the 3.6% increase soc security recipients get is reduced and taken away by the larger medicare deduction/tax/ they have to pay. So, the increase is a moot point. They're NOT coming home with $43 more a month.

And lastly, wasn't George Bush criticized because he told Americans to go out and shop? Isn't Obama and the dems telling Americans to do the same thing? Only this time they have the insanity to tell Americans to spend their retirement money NOW, rather than later?????

How the heck can people keep voting in these lamebrains? Even if the repubs appoint a giraffe to run against Obama, I'm voting for the giraffe. At least the giraffe has more sense and knows how to stick hi neck out properly.

No pun intended.

I'm taking my Soc Security at age 62. I ain't no dummy. I'll save it for the days when social security is just a pipe dream, which at this rate, won't be too far off.

#1Nana said...

My plan is to wait until I am 66, I don't need that income now so I'm trusting that our government will live up to its promises and the money will be there when I need it.

Roberta Warshaw said...

It is very confusing. Everyone tells me to wait, but I think more and more people will opt for taking it at 62 rather than wait. It could be like lemmings following one another blindly off the cliff, in which case it may not be there at all in a few years.


Catch Her in the Wry said...

I tell my clients to sign up at age 62. The rules and benefits regarding social security will certainly change in the coming months, and those already in the system will most likely be "grandfathered" in. Take a sure thing while you can. Reduced benefits and higher retirement ages are part of the future.

Jono said...

I think people will take any extra money, if there is any, and spend it on necessities like food, clothing and shelter. For the economy to get going again we need to have enough "extra" money consume frivolous things. Eventually, things will get better I hope. Personally, I have never made enough money to notice a tax cut or increase, so while it's nice to hear the politicians tell us what they think we want to hear, it has never made much difference in my day to day living.

Dick Klade said...

I think you would be wise to wait as long as possible to take your SS benefit. Just by staying up with the news, you can tell if a big change is in the wind and sign up then.

SS will be around in all our lifetimes; it would be political suicide for any leader to make a determined effort to do away with it. Ask the several Repubs who sent out strong feelers about "privatizing" the most successful social program American has produced.

Tom said...

Dick, I don't believe political leaders will do away with SS; but I do think over time they will chip away at it. Still, I'm going to try to hold out for a cpl. more years to get the bigger check later on, b/c I doubt (cross my fingers!) that anything drastic will happen in the next few years.

Meanwhile I agree with you, Morrison, having the salary cap makes the tax regressive. SS should exempt your FIRST $10,000 in earnings from the payroll tax, not everything above $110,100.

Catch Her in the Wry said...

If you delay signing up until you read the news that Congress is making changes to SS, you run the risk that they will make the changes retroactively. They pass laws all the time with retroactive dates. But you should do whatever you are comfortable with based on your lifestyle and private savings. Just be aware of the risks.

JHawk23 said...

Social Security isn't going to disappear, and the government to my knowledge has never passed legislation affecting people retroactively.
The financial and retirement experts pretty unanimously say if you don't need the money right now, hang on for at least a couple of years because your benefits will be considerably greater in the long run.

Of course, the same experts always tell you not to pay off your mortgage early because "you can invest it at a better return." Many of us (I included) still want to get the out from under the shadow of a mortgage sooner rather than later, so we ignore the experts' advice. By analogy, there will be those who decide to take their SS as soon as they're eligible.

If I were eligible for SS when I turned 65, I would have waited as you are doing. But I gave my wife, who was eligible, that same advice, and she nevertheless signed up for benefits as soon as she could.

Catch Her in the Wry said...

@JHawk23: "the government to my knowledge has never passed legislation affecting people retroactively."

Here's some examples of retroactive legislation:

The 1913 Revenue Act

The 1976 tax reform act

The Superfund law passed in 1980 imposed penalties on businesses prior to the effective date.

Retroactive tax increase in 1993 during Clinton's presidency.

Housing & Economic Recovery Act 2008 - passed in July retroactive to January 1

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 - Passed in December 2010, retroactive to January 2010

There are many more.

Douglas said...

First, let me point out that average American family makes less than $50,000 per year, that is the median figure. And the benefit of the 2 point drop in the workers' share amounts to $19.23 per week for that median income figure. I am unsure how that $19.23 is handled income tax wise but I suspect it then becomes part of your gross income which means the $19.23 is somewhat less than that.

The COLA adjustment for SS recipients in 2012 is nice and will help pay the increased Medicare costs in one pocket and out the other) and the president will tout his largesse on the campaign trail.

You are being taken to the cleaners, folks. And some of you are going happily. Which makes me sad.

Robert the Skeptic said...

From an article that appeared in the LA Times"

So what are the facts?

Social Security has not contributed one penny to the very serious deficit situation the United States faces. Social Security is fully funded by the payroll tax that workers and their employers pay; it's not paid for by the Treasury.

According to the latest report of the Social Security Administration, the program will be able to pay all of its promised benefits for the next 26 years. After 2037, Social Security will still be able to pay about 78% of promised benefits.

Today, that cap is at $106,800; no matter how much money you make, Social Security taxes are only deducted on the first $106,800. But by removing the cap on incomes of $250,000 or more, we can make Social Security fully solvent for generations to come.

My wife and I decided to take out SS early at age 62, that started this fall. In deciding if we wanted to wait for a higher benefit, we considered the amount of money we wouldn't be receiving over the coming months and years if we waited. It was roughly a wash. We have some debt so the money we receive now goes to retire that debt and saves us interest. Our view is a bird in the hand is worth two in the bush years later.

Good article, though. Thanks for posting it.

Steve in Los Angeles said...

As I will not be eligible for Social Security retirement benefits for a bit more than six years from now, I am forced to wait for a while. When I get relatively close to age 62, then I will think much more seriously about when I will begin benefits (assuming Social Security still exists).