Social Security is not the problem...

Robert Reich points out that the 'problem' with social security is part of the same trend-line that's been affecting our society for the past three decades. Growing income inequality.

Budget Baloney (1): Why Social Security Isn't a Problem, and the Best Way to Fix the Small Piece of It That Needs Fixing:
from Robert Reich
"New Jersey Governor Chris Christie, a Republican presidential hopeful, says in order to “save” Social Security the retirement age should be raised. The media are congratulating him for his putative “courage.” Deficit hawks are proclaiming Social Security one of the big entitlements that has to be cut in order to reduce the budget deficit.

This is all baloney.

In a former life I was a trustee of the Social Security trust fund. So let me set the record straight.

Social Security isn’t responsible for the federal deficit. Just the opposite. Until last year Social Security took in more payroll taxes than it paid out in benefits. It lent the surpluses to the rest of the government.

Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.

But why should there even be a problem 26 years from now? Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.)

Greenspan’s commission must have failed to predict something. But what? It fairly accurately predicted how quickly the boomers would age. It had a pretty good idea of how fast the US economy would grow. While it underestimated how many immigrants would be coming into the United States, that’s no problem. To the contrary, most new immigrants are young and their payroll-tax contributions will far exceed what they draw from Social Security for decades.

So what did Greenspan’s commission fail to see coming?


Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission’s predictions. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income.

The reason it went from 90 percent to 84 percent is a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.

Presto. Social Security’s long-term (beyond 26 years from now) problem would be solved.

So there’s no reason to even consider reducing Social Security benefits or raising the age of eligibility. The logical response to the increasing concentration of income at the top is simply to raise the ceiling.

Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn’t make it into the President’s budget."

Don't worry, they'll stay...

I hear the argument that "You can't raise state (local) taxes on the rich, because if you do they'll just leave. What good is that?" It's basically an anti-tax talking point. And why, not? It's pretty persuasive.

Below is evidence that suggests rich people haven't actually left when their taxes were increased.

Tax-Flight Arguments (Still) Don’t Add Up:
"Two governors are proposing this week to raise taxes on their state’s wealthiest residents. Today, Minnesota’s Mark Dayton proposed higher income tax rates on taxable incomes above $150,000 and a surtax on incomes over $500,000; tomorrow, Connecticut’s Daniel P. Malloy is expected to propose a higher rate on incomes over $1 million.

Some critics will surely claim, as they have in other states, that higher-income people will flee from the state. No such flight has occurred in other states that raised top rates, but that won’t stop these attacks, as some recent examples show:

  • A Bloomberg News story headlined “New Jersey Population Growth Slows as Taxes Push Some to Flee” noted that the Garden State’s population grew much more slowly between 2000 and 2010 than most other states. It suggested that New Jersey’s top income tax rate — now 8.97 percent — was to blame.
    But the 8.97 percent rate affects only a tiny share of New Jersey filers — the 1.2 percent with taxable incomes over $500,000 — and those folks aren’t leaving. Quite the contrary, there’s strong population growth within that bracket: during roughly the same time period (1999-2008), the number of New Jersey filers with incomes over $500,000 grew by more than two-thirds.

    As two Princeton University researchers, Cristobal Young and Charles Varner, conclude in a new report on a 2004 measure that set the 8.97 percent rate: “While in principle it is easier for tax avoiders to migrate out of state than out of country, the reluctance of people to do so gives states significant room to tax top incomes. Indeed, we estimate that New Jersey’s new tax raises nearly $1 billion per year, and tangibly reduces income inequality, with little cost in terms of tax flight.”

  • A Connecticut Policy Institute report contends the state’s top income tax rate of 6.5 percent is causing residents to flee. But as Robert Frank pointed out in the Wall Street Journal, the state’s population of top-income households is growing, not shrinking (as in New Jersey). And many of those who leave go to New York, where tax rates are higher.

  • An Ocean State Policy Research Institute report claims that Rhode Island’s estate tax (which applies to estates worth more than about $850,000) is the main driver of out-migration from the state. But the report’s spurious reasoning earned it a “false” rating from PolitiFact Rhode Island and a stinging rebuttal from The Poverty Institute of Rhode Island. Among other problems, the study argues that many residents are fleeing Rhode Island for Florida because the latter lacks an estate tax, even though the number of migrating residents actually fell in the years after Florida eliminated its estate tax.

States are addressing huge, recession-induced revenue shortfalls by cutting everything from kindergarten funding to services for Alzheimer’s patients — and more deep cuts are on the way. Policymakers should ask those who can best afford it to pay somewhat more, solid in the knowledge — and despite assertions to the contrary — that they won’t flee from higher income taxes. In short, policymakers should base taxes on the cost of meeting real needs, not on unfounded fears."