Kiker: Balancing the Budget by Cutting Entitlements–Part 1: Social Security

By Charles Kiker

Robert J. Samuelson, columnist for The Washington Post, has a column in the November 4, 2013 edition entitled “We need to stop coddling the elderly.”  His claim that Social Security and Medicare make up the largest portion of federal expenditures is statistically correct. In 2012 expenditures in those two programs comprised some 38% of federal outlays. But this is only a half truth. And a half truth can conceal the whole truth more effectively than an outright lie. The other half of that truth is that Social Security and Medicare are self-funding. Money out for these programs is money in. And actually more money comes in than goes out. It is projected that that surplus will cease within the next few years, but there are other ways than across the board cuts to solve that problem.

“The Social Security tax rate is currently the same for the poorest wage earner and the wealthiest.” That’s another half-truth. The tax rate is the same. But the poorest wage earner pays the SS tax on the first dollar, but the tax is capped for the wealthy, who pay only on the first $113,700 of so called earned income. Capital gains and other investment income are excluded from the SS tax. (Information from Social Security web site.) And investment income gets preferential treatment on income tax as well. Thus Warren Buffett, one of the wealthiest men in America, can truthfully claim that his secretary pays a higher tax rate than he does.

One way of maintaining the surplus in the Social Security fund would be to eliminate the distinction between earned income and investment income. Why should those who gain wealth through the machinations of their minds receive preferential treatment over those who earn their bread by the sweat of their brow?

Another way would be to raise—or eliminate—the income cap on the Social Security tax.

Many congressmen prefer a third way: cut Social Security benefits for the elderly. President Obama has said he would be open to a “chained CPI” (Consumer Price Index) that would reduce cost of living raises to Social Security. Others have proposed privatizing social security. This would subject SS income to the vagaries of the market and the investment wisdom, or lack thereof, of retirees. Incidentally—or not?—it would also provide a windfall for investment companies.

Mr. Samuelson agrees with the need to keep the SS safety net for elderly who really need it, while cutting benefits for the wealthier. This might be accomplished by some sort of means testing by which benefits would be reduced or eliminated for the wealthier. This would inevitably increase the resentment between wealthier and poorer people in our country.

There is already in place a form of means testing. Higher income retired people are required to declare as income a portion of their Social Security receipts. I have never reached that income threshold.

One thought on “Kiker: Balancing the Budget by Cutting Entitlements–Part 1: Social Security

  1. Regarding earned vs. unearned income, I am not sure about the contrast drawn between “sweat of their brow” vs. “machinations of the mind.” Intellectual work is subject to income tax because it is work, after all. However, investment income is not exactly earned by “machinations of the mind”, is it? So the point remains, as once an investment is decided on, the machinations are done; there is no further “labor”. Yields and returns accrue on their own (or don’t); the effort it takes to make investment decisions is not insubstantial, but there is no direct relation between the time they take and the money earned, as there is with hourly or salaried wages. Therefore, investment income is deemed “unearned”.
    That is why I see no rational argument for not taxing capital gains at the same rate (if not greater) than wages and salaries. After all – the stock market is essentially a form of gambling, like the lottery. Casino and lottery winnings are subject to income tax, so why not investment income?

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