Our Truly Regressive Tax: Social Security

A reader asked me a good question last week, after reading my jumbled rant on systemic problems, and the individual tactics that aren't going to solve them. What, short of running for public office, can we citizens do to encourage systemic solutions?

I have to admit that stumped me a bit. Thinking about changes to the system is nice. Actually coming up with plans to do so is harder.

Executing them? Who even knows how to do that?

So let's give that a try today. Let's talk about the system we use to fund most Americans' retirement: Social Security, one of the few truly regressive taxes out there.

Social Security currently taxes employees 6.2% on all wages up to $132,900. It also taxes employers the same amount on each dollar earned. But then, each dollar earned above $132,900 is taxed at the oh-so choice rate of....0%.

So the tax system has two tiers, and they're backwards: the more you make, the lower your effective tax rate. This results in a Social Security tax system that looks like this:

The working poor, middle class earners, and people earning $132k annually all pay the same flat rate of 6.2%. But then after that point, the more you earn, the lower percent of your wages go to Social Security taxes.

It doesn't seem fair that someone earning minimum wage would pay a higher percent of their income into the system than someone earning a million dollars.

Luckily, the Democrats have a proposal coming through the House that is sure to address this nonsense. It's called the Social Security 2100 Act and I'm sure it'll fix everything. Systemic solution nirvana, here we come.


So, flipping through the high level details it, um...

• Leaves Social Security Taxes at 6.2% for everyone earning up to $132,900
• Starts applying that same 6.2% on income over $400,000
• But then creates a doughnut hole where all income between $132,900 and $400,000 is still taxed at 0%
• Over the next 24 years, payroll taxes would increase from 12.4% (split evenly between employees and employers) to 14.8%, on income up to $132,900 and above $400,000
• Over time, the $132,900 income cap would increase, shrinking the doughnut hole and eventually eliminating it altogether, effectively creating a truly flat tax at 7.4% for the employee.

Yikes. I thought we were the party that knew how to reform tax law.

Here's what the Social Security 2100 Act would do to effective tax rates in its first year. (Rates would very slightly increase every year after that, until flattening at 7.4%.)

While it's nice to see that income above $400,000 would start to be taxed above, you know, 0%, the doughnut hole keeps the effective tax rates of high earners much lower than the rates that everyone earning less than $132,900 is paying. Even someone earning a million dollars pays a lower percent of his income into Social Security than a minimum wage worker.

Look, I'm sympathetic to the parts of the bill which increase the minimum benefit to the poorest retirees. It's a worthy goal. And I love the idea of making systemic changes to Social Security to ensure it's properly funded going forward.

But I can't for the life of me understand why this was thought to be the best approach to fixing the system. In what world should the worker earning $400,000 (not as a family, mind you: an individual worker) pay the lowest Social Security tax rate of anyone in America?

Even the Republican wet dream of a truly flat tax would be a better approach. What if they just taxed all earned income at 6.2% right out of the gate, instead of messing with a doughnut hole?

This would at least be far more fair than either the current regressive system or the strange, doughnut-hole-to-flat-tax incrementalism the Social Security 2100 plan proposes.

Still, I think we can come up with a better solution. Why not implement a progressive tax system, and stop taking 6.2% from the working poor altogether, while still providing them the same level of benefits in retirement? 

And to those wondering where the money would come from if we stopped taking $1,240 in taxes a year from someone making $20,000 (a sum that means little to the federal government but means a ton to someone trying to live on the minimum wage), why not try to make up the delta by going after people who are making serious money?

And if we're going to put a cap on the system for the wealthy, why not cap benefits at the level of someone earning $132,900 but continue to tax the income above that level?

Here's a half baked plan that copies from our progressive income tax system.

Which would create effective tax rates that look like this:

People much smarter than me would need to, you know, run numbers to see if sufficient funds would be collected to properly fund Social Security. 

But the solution to a two-tiered regressive tax, like we have with Social Security, isn't a doughnut hole that still rewards everyone earning in the six figures. It's not a flat tax. With Democrats in control of a house of Congress I think they should have the guts to push for a truly progressive tax system.

If Democrats are going to have an income band where people pay a zero percent tax rate, it shouldn't be on the income between $133,000 and $400,000: the income band where people pay zero percent should be down where people are making close to zero dollars. 

Maybe I'm naive and greedy, and am asking too much of the Democratic party. But is it too much to ask to create a system where the working poor pay a lower rate than the guy earning a million a year?

As always, thanks for reading.

Side note: If you'd like to nudge your representative to come up with a bolder, more progressive policy solution to shore up Social Security, you can find his or her contact information here. 

*Photo is from the Fabricator of Useless Articles, which is coincidentally also what my mom calls me when telling her friends her son is a blogger, at Flickr Creative Commons.