I’m concerned about the state of the Social Security and Medicare. As I understand it, a person only pays Social Security tax on the first $80,000 of income. Why not have people pay the tax on their total gross income, even at a reduced graduated rate after some set amount? I think it is about time those making millions of dollars annually pay their fair share of Social Security and Medicare taxes. — M.S.
From the editor, Mary Johnson:
What you propose is one of several ideas that have been put forward to address the rapidly growing financing problems of Social Security. Although workers (and their employers) already pay Medicare tax on total earnings, in 2004 they will pay Social Security tax on a maximum of only $87,900. This means Bill Gates, the CEOs of big drug companies, your elected Members of Congress, as well as other high earners, pay Social Security taxes on only the first $87,900 of the hundreds of thousands, millions, or even billions they earn annually.
According to the American Academy of Actuaries, eliminating the cap on earnings could solve a very substantial share of Social Security’s financing problems — almost 77%. There has been virtually no public debate on the proposal in recent years, however, which has been dominated instead by debate over proposals to allow individuals to invest a portion of their Social Security taxes into private retirement accounts.
Opponents of the proposal say that taxation of total earnings would make Social Security an even worse deal for higher-income workers. Under the current system lower-income workers get back a higher portion of what they pay in as benefits. In addition, opponents say this proposal would place an onerous new tax burden on employers who are responsible for one half of the current 12.40% payroll tax, and that, they say, could lead to slower wage growth and recessionary economic pressures.
On the other hand, with record-high deficits forecast over the next 10 years, and the first Baby Boomers to start retiring in just eight years, our nation can no longer afford to exclude consideration of this proposal to focus solely only on private retirement accounts which take the revenues needed to pay benefits to current beneficiaries out of the system. Although lower-income workers may receive a higher percentage in benefits than they paid in, under the current system higher-income workers receive higher benefits in terms of real dollars.
This proposal merits greater consideration than it has received in the past.
June 2004
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