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Home Publications Blogs Beat the Press A 10 Percentage Point Tax Increase: Help for Homeowners, Washington Post Style

A 10 Percentage Point Tax Increase: Help for Homeowners, Washington Post Style

Friday, 02 July 2010 13:09

The huge baby boom cohort is just approaching retirement. Workers in their 50s and 60s have just seen much of the wealth that they were able to accumulate destroyed with the collapse of the housing bubble and the resulting plunge in the stock market. As a result of this loss of wealth the overwhelming majority of baby boomers will be relying on Social Security for the overwhelming majority of their retirement income.

Thankfully the Washington Post has the perfect remedy. It proposes to immediately start to raise the normal retirement age to 67 (from 66) for those just about to retire and to continue raising it until it hits 70 for workers born in 1971. This increase in retirement age would be equivalent to roughly a 5 percent cut in benefits for those just now reaching retirement age and a 15 percent cut in benefits for those retiring in 25 years.

Since Social Security will be the overwhelming source of income for most near retirees a cut in benefits is the same as a tax increase of the same amount. So, the Washington Post is effectively proposing to help homeowners near the age of retirement with the equivalent of an income tax increase of 5-15 percentage points.

It is remarkably that the editorial does not include one word about the loss of wealth from the collapse of the housing bubble. The Washington Post's news and editorial departments were completely unable to recognize the $8 trillion housing bubble prior to its collapse (columnist Steven Pearlstein is a partial exception). Apparently, they still don't know anything about the bubble even after its collapse led to the largest economic downturn in 70 years.


Comments (11)Add Comment
a subtle form of default
written by David Cay Johnston, July 02, 2010 2:02
UNmentioned in the UNsigned WashPost news section piece is that this proposal to hike the normal retirement age would be a subtle form of default, the first in our government's history.

Given that since 1983 workers have paid in advance for their benefits, taking from them at the peak more than half of their capacity to save (because FICA collected 4 percentage points of wage income more than was needed to pay benefits) on a pay as you go basis, it is also fair to view this as stealing.

It also ignores the reality that while many office and white collar workers can work more years, blue collar workers from ditchdiggers and carpenters to cops and landscapers generally cannot for reasons of health, injury or employer policy.
written by diesel, July 02, 2010 4:22

Thank you DCJohnston, you are the first literate person I've ever encountered who acknowledges that some forms of work cause wear and tear on the body. Of course, the WaPost writers couldn't be aware of that since they don't perform what a physicist would define as work i.e. move a weight through a distance in a certain time--though they could counter that their proposal is weighty and that the mental effort of foisting it on the public is taxing.
Good way to frame it...
written by scathew, July 02, 2010 4:30
That's a good way to frame it - delaying retirement is a "tax increase". I like that. I'll have to remember it.

BTW - these -holes.
That was supposed to be...
written by scathew, July 02, 2010 4:31
[unprintable] these [unprintable]-holes!

But HTML ate it!
written by izzatzo, July 02, 2010 4:56
And we thought the death panels were only about health care. Now they've whipped out the real ones.
Keep Social Security self-sufficient.
written by AndrewDover, July 02, 2010 8:06
DC Johnson:
The notion that "FICA collected 4 percentage points of wage income more than was needed to pay benefits" is misleading as a argument that workers have paid enough for their expected benefit level. A population bulge should create a large trust fund level which will shrink as the burge retires.

However, the projections show the SS Trust fund going to zero somewhere around 2037 with estimated SS income only covering about 75% of scheduled benefits. That would not happen if workers had fully paid enough to cover their future benefits from 1983 to 2037.

In order to meet the scheduled benefits in the 2030s some combination of tax increases, benefits reductions or use of general funds will be needed.
written by skeptonomist, July 03, 2010 8:33
It should always be made clear that the stealing described by David Cay Johnston is absolutely not the government stealing from the people, it is the rich stealing from wage-earners. While boomers paid excess payroll taxes, the rich were enjoying huge tax cuts. Now the contract under which boomers were to get their money back is to be cancelled so the rich can get more tax cuts (yes, if the Bush cuts are extended this will legally be new cuts). If this is made clear to voters there would be no threat to SS.

SS bashers are not basing their attacks on the projected mismatch of income and benefits in 30 years when the Trust Fund runs out, they are using various lies and distortions about how the program will be "bankrupt" at that time, how it is causing deficits, etc. The idea that economists can project anything 30 years into the future is laughable, but anyway the principle of SS is simple; take money in from wage-earners and pay it out to retirees. As age ratios and productivity change some adjustments will always be necessary, but this is not a crisis that has to be addressed 30 years in advance.
written by Some Guy, July 03, 2010 10:41
The savings from increasing the full retirement age to 70 would probably be lower than one would imagine, since many retirees would qualify for Disability between 66 and 70. And because prior entitlement to Disability means that Retirements benefits are usually unreduced, the savings aren't likely to be that great.

My solution would be a phased in increase in withholdings (and employer match) at a fixed percentage of median annual wage growth until actuarial balance is achieved. A mostly imperceptible increase in the tax combined with a tweaking of the cap should make the road to full scheduled benefits mostly painless.

The best solution would be a downward distribution of income. If wage growth is concentrated to earners already making over the cap, then the increase in SS payments (which are indexed to wage growth prior to retirement, inflation afterwards)aren't offset by a corresponding increase in revenue.
Effect of various policy options
written by AndrewDover, July 03, 2010 11:40
http://www.ssa.gov/OACT/solven...index.html has numbers on various policy options.

Seeing as the primary problem is unemployment, I would reject options that increase taxes on the majority of employed workers.

The following choices would remove 1.37% of the 2% of payroll long-range actuarial gap.

0.60 Raise the cap of taxable earnings per E2.10
0.49 Lower COLA by 0.3% per year per A3
0.28 Tax social security benefits per H1.

Then we can see how things are looking in 2020.
written by Some Guy, July 03, 2010 2:31
Drastically raising the cap makes social security more like welfare than social insurance. Personally, I'm not opposed to a limited increase, but I think all beneficiaries deserve a reasonable rate of return on what they pay in. Making SS a social welfare program would be inconsistent with the intent of the Act. (Though I wouldn't fault anyone for saying that SS should be more like welfare.)

It would be fun to thumb our noses at Peter Peterson types by spreading the wealth, but I think redistributional social security would add fuel to the fire. "They're stealing our money to pay poor people," has a lot more zing than, "My rate of return is so low."

Taxing SS benefits is a form of means testing.

Lowering the COLA is a benefit cut. And while the existing COLA formula might be a bit generous, it seems that the basket of goods that comprises seniors' consumption grows at a higher rate than chained CPI, or whatever.

A withholding increase that's tied to wage growth (and set to start in a few years as this doesn't need to happen in 2010 or 2015 even) guarantees that the effects of the increase won't be felt for most people. It would be less than the annual growth of most workers' income.
written by CathyG, July 03, 2010 10:49
If we were to walk around the floor of the WaPo press room, how many grey heads would we see? Until employers can be made to stop getting rid of older, more experienced, but more expensive, employees, talk of people working until age 70 is just silliness. Given that we can't create enough jobs to accommodate new entrants into the job market, even as the economy moves into supposed recovery, what kind of policy idiocy does it take to require older workers to continue to stay in the workplace, taking positions that young people desperately need?

These multiple attacks on government spending, from social security to continuation of unemployment benefits to denying the need for additional stimulus aren't about government spending. It's all about preserving what remains of the nation's treasure for continued looting by the rentier class. And if we let them get away with it, we deserve the outcome.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.