Interesting Stuff

However, the income tax is only one of three main federal taxes that individuals pay: income, Social Security and Medicare. Would you be surprised to learn that a person who earns $1 million per year actually pays a lower percentage in total taxes to the federal government than a person who earns $87,900?

This happens because the Social Security tax, or payroll tax, is very regressive. That is, minimum-wage workers pay 12.4 percent of their income for Social Security tax, whereas someone earning $1 million pays only 1.1 percent.

Although your pay stub may only show a 6.2 percent tax, your employer pays a matching 6.2 percent. The formula says everyone pays the same 12.4 percent rate on the first $87,900 of income, and then pays 0 percent on everything above that. So a person who earns $1 million pays the same number of dollars as someone who earns $87,900.

Does that seem fair to you?

The federal government could collect the same total amount for Social Security by eliminating the income limit and lowering the tax rate. This would restore a progressive nature to the total federal taxes that individuals pay. Notice, however, that in the 1980s when the Social Tax rates were being raised to pay for future retirees, the income tax rates were lowered. And again in response to the budget surpluses of 1998 to 2001, Congress lowered the income tax rates, mostly helping the upper brackets.

There is a lot of talk in Washington these days about the impending “crisis” in Social Security caused by the large number of baby boomers. However, according to the Congressional Budget Office, the Social Security system has run a surplus (taxes minus payouts) for the last 20 years, and is projected to keep having surpluses until 2018.

In theory these surpluses are accumulating in a trust fund that will keep the whole system going until 2048. By the time the Social Security Trust Fund is scheduled to run out of money in 2048, most of the baby boomers will be dead.

Over the last 20 years the Social Security system has accumulated a total net surplus of $1,464 billion. In contrast, the rest of the federal budget has run a deficit in 18 of the last 20 years, for a total net deficit of $4,048 billion. In fiscal year 2003, for example, the Social Security system had a $156 billion surplus, whereas the rest of the budget had a $531 billion deficit. Doesn’t it seem strange to you that the politicians are so very worried about a projected Social Security deficit in 2048 that is smaller than the current spending deficit this year?

Using the standard magician’s trick, the politicians in Washington are trying to divert your attention from the real problem. The Social Security surpluses that are supposed to be accumulating in a trust fund are really being spent on current expenses, leaving behind some IOUs saying one account within the government owes another account some money — a lot of money, actually. The real crisis is that politicians in Washington have gotten used to spending the Social Security surpluses, and they have no idea how they are going to pay it back.