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SOCIAL SECURITY: PRESERVING THE SYSTEM AND EXPOSING THE DESTRUCTIVE FIXES By Emeritus Professor of Mathematics, John M. Bachar, Jr. Email: jmbachar@sbcglobal.net November 2010 Starting with President George W. Bush, there has been an incessant effort by Wall Street, wealthy investors, bankers, conservative politicians, and others, to privatize the Social Security retirement system (official name: OASDI Trust Fund - Old-age and Survivors Insurance and Federal Disability Insurance Trust Fund). OASDI is the most successful government program in US history, but those who would privatize it pass out, knowingly or out of ignorance, a steady stream of misinformation, errors, or distortions of fact. Add to this group still others, who wish to “fix” the system they deem in “crisis”. Amongst the latter group is Alan Simpson (social security “is like a milk cow with 310 million tits”, and, on social security reform, “we’re trying to take care of the lesser people in society …”), co-chair of President Obama’s “National Commission on Fiscal Responsibility and Reform”, whose recent (11/10/2010) Co-Chairs Report would drastically cut retirement benefits and increase the retirement age to 69. Recently (August 2010), the Board of Trustees of OASDI released their annual report. For each of the 73 years of OASDI benefit payments, the annual contributions to the fund have EXCEEDED the benefit payments. Moreover, the OASDI Trust Fund assets at the end of 2009 are $2.54 trillion. The dollar level of the Trust Funds is projected to be drawn down beginning in 2025 until assets are exhausted in 2037. This is primarily due to an aging population. Over the course of the next 20 years, the cost of paying Social Security benefits will rise from its current 4.8 percent of G.D.P. to about 6 percent of G.D.P. There are several easy structural changes that can be made to the OASDI taxation system that will easily provide for sufficient annual contributions and assets growth to take care of the retirement needs of the increasingly aging population, as well as the replacement of the existing 73-year old REGRESSIVE OASDI taxation system by a PROGRESSIVE one (see below), and without reducing retirement benefits nor increasing the retirement age. The detailed analysis of these structural changes is based on the data contained in the collection of US individual income tax returns for the 16 year period of 1993 through 2008. Regrettably, the “privatization” and “fix-it” groups discussed above are clueless about these facts. Every year since the1937 start of retirement/disability payments by OASDI, there has been a "cap" (it changes from year to year) on each person's salary/wage earnings (=earned income) as well as an OASDI tax rate. This means each person pays a payroll tax (at the current OASDI tax rate) on all earned income up to the current cap, but not beyond. Furthermore, non-salary/wage income (=unearned income) is not, nor ever has been, taxed for OASDI purposes. The inherent nature of the taxation system used to acquire contributions to the OASDI Trust Fund is REGRESSIVE. This means that the percentage of gross income (= earned plus unearned income) paid into OASDI DECREASES as gross income INCREASES. The following examples will demonstrate this fact. (The current cap is about $100,000 and the current OASDI rate is 6.2%) Example 1. Earned income below $100,000, no unearned income: percentage of gross income (=$100,000) paid to OASDI equals 6.2%. Example 2. Earned income $200,000, no unearned income: percentage of gross income (=$200,000) paid to OASDI equals 3.1%. Example 3. Earned income $310,000, no unearned income: percentage of gross income (=$310,000) paid to OASDI equals 2.0%. Example 4. Earned income $500,000, $120,000 unearned income: percentage of gross income (=$620,000) paid to OASDI equals 1.0%. Example 5. Earned income $2.2 million, unearned income $4.0 million: percentage of gross income (=$6.2 million) paid to OASDI equals 0.1%. In calendar year 2008, tax returns listing a gross income of over $200 K (= only 3% of all tax returns) held 30% of all US gross income, yet less than 3% of the listed gross income was paid to OASDI; returns listing over $1 Million (= only 0.23% of all tax returns) held 13% of all US gross income, yet less than 0.6% of the listed gross income was paid to OASDI; finally, the $10 million and over Adjusted Gross Income class had an average gross income of $37 million, yet paid an average of less than 0.006% to OASDI! The tables below show the effect of five different progressive tax rate systems (applied to ALL INCOME, not merely to salary/wage income) for OASDI contributions. Typically, these systems LOWER the rate for OASDI payments for 85% of all tax returns (= below $100,000 annually) in comparison to the 6.2% rate now paid to OASDI. This is because the total income of these 85% consists almost entirely of salaries/wages, and everything below the salary/wage cap of $100,000 is taxed at 6.2% for OASDI contributions. Here is a brief description of the five tax rate systems. (Please note that there are INFINITELY many tax systems that can be devised; only five have been chosen). Keep in mind that all five systems tax ALL INCOME MINUS SOCIAL SECURITY BENEFITS, not merely salaries/wages below the cap on salaries/wages (currently about $100,000). Only salaries/wages were taxed for the past 73 years, and only the amount of salaries/wages below the cap level (which changes over time) are taxed. Currently, the tax rate on salaries/wages below $100,000 is 6.2%. Here is a description of tax rate system 1 (the others are all progressive as well). Tax rate system 1: 4% on all income below $30,000 (40.3% of all tax returns in 2008); 5% from $30,00 to $75,000 (24.6% of all tax returns in 2008); 6% from $75,000 to $200,000 (22.1% of all tax returns in 2008; currently, those from $100,000 to $200,000 pay as little as 3% to OASDI); 7% from $200,000 and up (13.0% of all tax returns in 2008; this group pays from below 3% to as little as 0.006% to OASDI). If these five systems had been used during the 16 year period of 1993 through 2008, the following results would have ensued: In addition to providing more than the annual retirement/disability needs produced under the existing regressive taxation system, the annual OASDI Trust Fund assets at the end of 2009, for each of the five systems analyzed, would have INCREASED from the current $2.52 trillion (2008) to: $3.47 trillion for tax-rate system 1; $4.17 trillion for tax-rate system 2; $4.27 trillion for tax-rate system 3; $4.41 trillion for tax-rate system 4; $4.83 trillion for tax-rate system 5. For those who may be interested in the details of the analysis, see the following two tables (request by email)..