The Greatest Retirement Crisis in the History of the World

From noted pinko rag Forbes:

We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans.

That dire prediction, which I wrote two years ago, is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry - the decades many elders will spend in forced or elected “retirement” will be grim.  (Update: In response to readers’ questions about the lower number, Teresa Ghilarducci, a professor of economics at the New School for Social Research, estimates that 75% of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts.)

...

Americans today are aware that corporate pensions have been virtually eliminated and that the few remaining private, as well as the nation’s public pensions, are in jeopardy. Even if you are among the lucky few that have a pension, you cannot rest assured that it will be there for all the years you’ll need it. Whether you know it or not, someone is busy trying to figure how to screw you out of your pension.

Americans also know the great 401k experiment of the past 30 years has been a disaster. It is now apparent that 401ks will not provide the retirement security promised to workers. As a former mutual fund legal counsel, when I recall some of the outrageous sales materials the industry came up with to peddle funds to workers, particularly in the 1980s, it’s almost laughable—if the results weren’t so tragic.

All of which is why we need to increase Social Security benefits, starting now.

More on Social Security and 401(k)s

Ryan Cooper at Political Animal is another person who wants to increase Social Security benefits, and suggests a different way of financing them.

There is another source of funding we could tap for a Social Security increase before we talk about raiding other pots of money [such as Medicare, as per Josh Barro]: the 401k tax exemption. Originally this was supposed to usher in the neoliberal free market retirement utopia. It failed (instead we’ve created yet another set of rent-seeking parasites, this time in the form of objectively useless mutual funds).  

The 401k exemption costs somewhere around $200 billion per year (depending on the estimation), and it doesn’t work. That money could be plowed into Social Security right away, and if that’s still not enough to keep most seniors out of poverty, we can talk other funding sources. Because as [Duncan] Black says, lots of people are set to retire right now without nearly enough to make it. Regardless of whose fault that is, shall we let them starve? 

I say no.

Hmmm. As 401(k)s cap out at $17,000 (for 2012), I don't think they're the worse thing in the world. Basically, they offer a nice opportunity to the higher reaches of the middle as well as the upper class. But they offer no benefit to the median American household, which only made $50,500 (in 2011).

And 401(k)s also require some sophistication, especially around balancing the portfolio (and moving more and more to bonds as the investor ages). And most people, God love 'em, don't have it. So I wouldn't mind see this replaced by pensions (which we don't have anymore) or increased Social Security benefits.

Another big source for new Social Security funding would be to have FICA taxes apply to income, period. Not just earned income, but investment income as well. As we wrote a while back:

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%. 

But it gets worse in terms of Social Security, because these things have ... never been taxed at all. 

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $62 billion in revenue. 

And all of this increase would be on income -- literally -- that no one worked for.

$62 billion —which is just a guesstimate —is a lot less than the $200 billion Cooper's talking about. So maybe it's time to talk about scaling back the 401(k) — that's a conversation I'd be willing to have.

To put things into perspective, in January 2013, Social Security paid 46 million people $55 bilion dollars in old-age benefits. Annualized, this works out to be $660 billion a year. So what Cooper is talking about is a 30% increase in retirement benefits. As the average monthly benefit was $1200, we're talking about how giving old folk (on average) a whopping $1560 a month, or $18,720 a year.

So I think we're in agreement with Cooper on the amount, and now it's just a question of paying for it. Fortunately, we now have a couple of good ideas on the table.

Amen, Part 2

Josh Barro at Bloomberg:

Back in December, I wrote that applying chained CPI to Social Security is the wrong solution to our budget problems: It’s just a way of dressing up a cut to retirement benefits at a time when retirement insecurity is rising. Despite its problems, Social Security is the best-functioning component of the U.S.'s retirement-saving system. Instead of cutting, the federal government should be expanding its role in retirement saving.

I'm always struck when people talk about Social Security as "just" an insurance program, when it's in fact the most important retirement-saving vehicle. The chart below, adapted from a 2012 paper by Boston College Professor Alicia Munnell, shows the financial situation of a "typical" pre-retirement household. These are the mean holdings of a household in the middle net worth decile among households headed by people age 55 to 64. 

Source: Center for Retirement Research at Boston College 

Social Security is dominant: Forty-nine percent of this household’s wealth is in the form of the expectation of drawing government benefits in the future. The next largest slice, 23 percent, is accrued benefits in traditional pension plans. But that figure is skewed by a handful of workers who are lucky enough to participate in such plans; as of 2010, only 14 percent of U.S. workers were earning benefits in such a plan.

We're not psyched about how Barro wants to finance this (Medicare cuts), but at least he's identified an important issue.

Amen, Part 1

Atrios:

A big point I'm trying to make on Social Security is that the 401K experiment has been a failure. We have a set of policies - including big tax expenditures for tax deductible employer/employee retirement benefit contributions - which are supposed to lead to the majority of seniors being able to retire in relative comfort and security. And what we're seeing now, decades later, is that experiment is a failure. 

All this gets beaten back by the glibertarian crowd as "people should just save and invest, blah blah blah." Well, fine, but they aren't. Not enough. For whatever reason. So we're going to have a bunch of seniors in poverty and near poverty. What are we going to do about it, now and for the future?

Good But Not Good Enough for Social Security

Tom Edsall has a good piece in the New York Times:

Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year. Simply by eliminating the payroll tax earnings cap — and thus ending this regressive exemption for the top 5.2 percent of earners — would, according to the Congressional Budget Office, solve the financial crisis facing the Social Security system. 

So why don’t we talk about raising or eliminating the cap – a measure that has strong popular, though not elite, support? 

When asked by the National Academy of Social Insurance whether Social Security taxes for better-off Americans should be increased, 71 percent of Republicans and 97 percent of Democrats agreed. In a 2012 Gallup Poll, 62 percent of respondents thought upper-income Americans paid too little in taxes.

And:

The Medicare and Social Security taxes are jointly known as FICA (for Federal Insurance Contributions Act) — or payroll — taxes. The combined FICA taxes are highly regressive. The non-partisan Tax Policy Center found that the poorest quintile pays a 7.3 percent FICA rate, while the top quintile pays 6.8 percent. The top 1 percent of the income distribution pays a 2 percent rate, and the top 0.1 percent pays just 0.9 percent. In other words, the rate paid by the poorest quintile is 8.1 times as high as the rate paid by the top 0.1 percent. 

But he doesn't explain why this is, or what should be done about it. Fortunately, we do.

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.  

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.

And all of this increase would be on income -- literally -- that no one worked for. 

Remember that Romney guy and his taxes?

Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments.  

None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.

The New York Times did end up finding about $710,000 in earned income. So Romney ended up paying $42,000 in FICA taxes on income of $42 million, or about 0.1%. If there were no cap and all income were taxes, he would have paid out about $6.1 million. Which he can afford.

Hey, Atrios

From Eschaton:

I'll admit that, for the most part, during the great and glorious benevolent rule of the Kenyan Muslim Socialist, I've been a bit unsure just what I should be advocating for. 

I've found my groove. We need to increase Social Security Benefits. The Professional Left needs to sign on to this. All the oldsters need to vote for it. Congressional candidates need to get on board.

From How to Save America in Several Easy Steps, last November:

But what is we weren’t satisfied with saving Social Security. What if we … wanted to make it better.

Consider that CNN has recently reported that:

A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live.  

It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans. 

While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement.

For whole lot of folk, the economic stagnation, combined with the downturn in the housing market, means that retirement is looking harder and harder to achieve. Here’s the chart for the S&P 500 for the last twenty years.

Ah, the Clinton years; they were so good to us. Unfortunately, we’ve not been able to get back to those heights – even though eleven years have passed. So if you had a retirement fund keyed solely to the S&P 500 (and which included neither dividends nor additional capital contribution), your performance would be as shown below.

Since January 1, 2000, you would have experienced a negative return of $179, or about -13% over almost eleven years. That is not how to build a retirement plan.

But, perhaps you’ve got money stuck in your house, and were hoping that would play a key part in your retirement.

According to the Case-Shiler Home Price Indices, your house is now worth what it was eight years ago, in 2003.

Now the loss of a decade’s worth of growth it not something which remedied easily, or even with a lot of work. But we can do something for those people who planning to work for years after they die.

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.

And all of this increase would be on income -- literally -- that no one worked for.

Fixing Social Security is easy -- just get rid of one tax break for wealthy (and well-off). Making Social Security better will take more work, but it's the kind of thing a decent country -- one which doesn't make dead people work -- should consider. And one good place to start would be re-examining the special treatment we give to "unearned income," a.k.a. money no one worked for.

The 47% and the Flat Tax That's Already Here

The conservative wet dream is a flat tax. Cain, Gingrich and Perry endorsed it in the primaries, as it tackles two problems at once: it lowers taxes on the rich, and it gets the 47% to pay up.

Sadly, it's already here. (Click to embiggen.)

As The Atlantic's Matthew O'Brien points out:

We barely have a progressive tax system. People basically pay what they earn -- even the top 1 percent.  (Emphasis added).

So how does this square with Romney's indictment of 47% of America?

Well, there are lots of other taxes, and they're mostly regressive. The payroll tax and state and local taxes all hit poorer households harder than they hit richer households.

In fact:

Once you add up the progressive federal income tax and the regressive federal payroll tax -- which raise roughly the same amount of revenue -- with regressive state and local taxes, you only just get a progressive system overall.

As this graph from the Tax Policy Center shows, payroll taxes made up 40% of federal tax revenue, as opposed to 42% for the individual income tax. Corporate income tax, meanwhile, made up only a meager 9%.

And, just for fun, the amount of taxes paid by corporations has been on the decline for decades.

Revenue from the corporate income tax fell from between 5 and 6 percent of GDP in the early 1950s to 1.3 percent of GDP in 2010.

That's a drop of between somewhere around 75 - 80%. If you're looking for a reason why the deficit's been growing, you might want to look here.

When Romney limited himself to a discussion of income taxes, he gave the game the away. The taxes he pays counts -- and should be reduced. The taxes the rest of pay? Not so much. The 47% include 26% who pay payroll taxes -- you know, the other big revenue stream for the government. And the remaining 21%. They're the poor, the disabled and the elderly, with some students thrown in the mix.

But they still pay taxes! The pay sales taxes, excise taxes, taxes on cell phones. Now, they may not pay much, but that's due in large part to the fact that they have don't have much money.

Undiscussed (with one notable exception) has been the role of tax expenditures. They are (more or less) the flip side of entitlements. The government can subsidize you by paying for something -- your rent, healthcare, etc. -- and that's an entitlement. But the government can also subsidize you in the form of tax breaks. Those are tax expenditures.

When Mitt Romney pays only 14% in federal income taxes because most of his income was from capital gains, he's a beneficiary -- just like someone on welfare. Except that his subsidy is a lot bigger than anything you'll ever see.

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One last point. Conservatives will argue that a lower rate for capital gains is necessary, or else people won't invest and the economy won't grow.

This is horseshit, as we showed here. The vast amount of capital gains are derived from assets purchased in the secondary market, where $0 -- not a typo -- has been invested. When you buy a stock on the open market, betting that it goes up -- that's what you're doing. You're gambling, not investing.

And we have no problem with gambling. We just want the proceeds to be taxed like everything else e.g., earned income. And fully half of these gambling proceeds go to top .1%. Again, not a typo. Not the top 1%, but the top 0.1%. 

But what about the economy? Don't lower tax rates result in more growth? Let's ask our friends at the Congressional Research Service, who just published a helpful little document called Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.

Analysis of [the data] suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced. 

There you go. Conservatives just want a bigger slice.

Edward Conard is a Douche

The New York Times is running an article by Adam Davidson entitled The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy, which addresses arguments around inequality put forth by Edward Conard of Bain Capital.

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.” 

This is the usual defense of the 1 percent. Conard, however, has laid out a tightly argued case for just how much consumers actually benefit from the wealthy. 

Davidson then goes to completely avoid that tightly argued case, perhaps because it doesn't exist. Davidson does retell a story about how investment and innovation in computers has made them affordable to nearly everyone. And he even gets known pinko Dean Baker of the Center for Economic and Policy Research to acknowledge this is a true.

Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. 

Wow, that's pretty good!

So what's the problem? It has to do with what qualifies as an investment. Providing start-up capital to a new business, or additional capital to an already existing company, is an investment. Buying stock in the secondary market -- what most investors think of investing -- is not. It's gambling.

As we wrote here:

Unless you're involved in a public offering, all of the securities you've purchased have been in the secondary market. This means that not one dollar of the purchase price you paid went to the issuer. Instead, all of the purchase price went to someone who purchased those securities before you. You've made a bet that the security will rise in price and, if you're right, you'll win! But you won't owe taxes on gambling winnings -- which are taxed as regular income. Instead, these winnings are classified as capital gains, and taxed at a much lower rate.

Here is another example of how the tax code works to the betterment of the 1%. Capital gains (and their preferential tax treatment) are very much skewed towards the wealthy. In fact, in 2001, 2002, 2003 and 2007 (the last year for which data is available), more than 10% of all of the capital gains in the country went to just 400 tax payers.  

And those 400 returns represents those filed by the the top 0.00026%. Not the top 1%, but the top 0.026% of the top 1%. The remaining 90% of capital gains is filtered down to the 99.99974% of us.

Except that it doesn't. The top 0.1% ends up with nearly half of all capital gains, so that leaves 50% for the 99.9% of us.  

And all of that is taxed at 15%, the same tax rate which would kick in at $17,000 if you actually worked at a job. So if you made $8.50 an hour (and worked a forty hour week, fifty weeks a year), you'd be taxed at exactly the same rate which applies to the gambling winnings of the nation's wealthiest individuals.  

But it's actually worse than that, because we haven't figured in Social Security and Medicare taxes. As we noted in our discussion of Social Security,  capital gains are currently excluded from Social Security (usually 6.2%, but currently 4.2%) and Medicare (1.45%) taxation, So that's an additional 5.65%. 

This means that the lowest combined tax rate applicable to working stiffs -- 15.65% - will always be higher than the combined tax rate -- 15% -- applicable to the gambling winnings of the well-off. Always.

And it's not like Conard is an investor, at least in his professional capacity at Bain Capital. As we discussed here, private equity firms like Bain Capital are merely the leverage buy-out firms of the '80s with a makeover. Josh Kosman explained to Mike Konzal:

JK: The whole industry started in the mid-to-late 1970s. The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that. 

Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half. Banks, also realizing this tax effect, were willing to finance these deals. At the time, you could also depreciate the assets of the company you were buying — that’s not true today. 

They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same. 

MK: So the business model is based on a capital structure and tax arbitrage? 

JK: Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt.  

James Surowiecki of the New Yorker noted:

The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust. 

And:

[B]etween 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

Spectacular.

Raise Social Security Benefits

Atrios proposes it. Political Animal seconds it. And all because Joe Nocera is screwed.

My 60th birthday is less than a week and a half away, and if there is one thing I can say with certainty it’s that 60 is not the new 50. 

My body creaks and groans. My eyes aren’t what they used to be. I don’t sleep as soundly as I did just a few years ago. Lately, I’ve been seeing a lot of doctors, just to make sure everything still more or less works. 

I’ve also found myself with a sudden urge to get my house in order — just, you know, in case. Insurance, wills, that sort of thing. Sixty is when you stop pretending you’re going to live forever. You’re officially old. Or at least old-ish. 

The only thing I haven’t dealt with on my to-do checklist is retirement planning. The reason is simple: I’m not planning to retire. More accurately, I can’t retire. My 401(k) plan, which was supposed to take care of my retirement, is in tatters.

Last year, CNN reported that:

A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live.   

It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans.  

While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement.

But, as we discussed here,  we can "save" Social Security very easily -- mostly because it's not really in trouble. If we remove the cap on earned income subject to Social Security taxes -- currently set at $106,800 -- we would add about 0.6% worth of GDP back into Social Security. And the expected shortfall is expected to be about 0.6%. It's that easy.

But how could we raise enough money to increase Social Security benefits? We quote ourselves:

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%. 

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.  

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue. 

And all of this increase would be on income -- literally -- that no one worked for.

In 2009, the average Social Security benefit was $1,153 per month (and the maximum was $2,323), and Social Security paid out a total of $686 billion in benefits. So if we were to raise Social Security benefits by 10% -- to a whopping $1268 a month (and a maximum of $2555) -- we'd need another $68.6 billion. As shown above, if we could tax half of unearned income, we'd come up with nearly 90% of that figure. We could probably make up the rest by not invading Iran.

By the way -- ever wonder how much is in the Social Security Trust Fund? It's $2.5 trillion. As the current national debt is about $15.6 trillion, that means that about 16% of our national debt is financed internally, in the form of a special series of Treasury bonds held by the Trust Fund.

How Much Did Mitt Romney Pay in Social Security and Medicare Taxes?

Update: The New York Times was able to find approximately $710,000 in earned income over the two years below. Total FICA taxes paid: about $42,000 on income of $42 million.

Nothing.

Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments. 

None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.

Social Security and Medicare are financed through the FICA (Federal Insurance Contributions Act) tax, which applies only to payroll income. All other forms of income -- the capital gains, interest and dividends referenced above -- are excluded.

If all income were included, as we argued for here, Romney would have paid $3.3 million in 2010 and $2.8 million in 2011.

Full returns available here.

From Talking Points Memo

The 47%

Much has been made of the 47% who, allegedly, don't pay taxes. As better articles will note, this excludes a lot of taxes, such as excise taxes, sales taxes, state income taxes and property taxes, as well as Social Security taxes. What the 53% crowd is trying to say is that 47% of Americans don't pay federal income tax. And why is that?

Kevin Drum did the math and reports that:

• 23% pay nothing because they're poor. A couple making less than $19,000, for example, doesn't owe anything after their $11,600 standard deduction and two exemptions of $3,700 each reduce their taxable income to zero....

• 10% are elderly and pay nothing because their Social Security benefits are [generally] exempt from federal income taxes. 

• 7% pay nothing thanks to provisions in the tax code designed to benefit low-income families: the earned income tax credit, the child credit, and the childcare credit account.

All of which leaves us with about 7% who don't pay federal income tax because of deductions, tax-exempt income and the like.

But everyone who worked paid Social Security taxes.

So a reader asked how much Social Security revenues are attributable to these folks who, allegedly, don't pay taxes. An exact answer is impossible with the data we found, but we can come up with something close.

According to the Social Security Administration, a little over 48% of Americans made less $25,000 last year. Yet this group still managed to contribute $25 billion dollars to Social Security -- some 4.7% percent. That's actually more than the top 1% contributed ($23 billion or 4.3%). Now, sure there are a lot more people making less than $25,000 a year (72 million, give or take) than there are in the 1% (roughly 1.5 million), but that 1% does control 40% of the nation's wealth. So they've got that going for them.

But there is something a bit odd about that 48% -- namely, a full 100% of their earned income was subject to Social Security taxation. In fact, the same is true for the bottom 94% of working Americans. It's really not until the top 1% where you can see the benefit -- to the very well off -- of capping Social Security taxable income at $106,800. At that point, only 9.4% of their earned income is taxed by Social Security -- and none of their income derived from capital gains.


A PDF of the Excel spreadsheet used to divine these numbers can be found here. 

Inequality in America -- 2011

Your fun facts on inequality for 2011.* 

Median income for 2010	$26,364
Median income for 2007 (in 2010 dollars)	$27,034
Percentage increase in median income from 2007 to 2010	-2.5%
Percentage increase in number of individuals making more than $1,000,000 from 2009 to 2010	18%
Percentage of the gain in wealth since 1983 which went to the top 1%	40.2%
Percentage of the gain in wealth since 1983 which went to the top 5%	81.7%
Percentage of the gain in wealth since 1983 which went to the bottom 60%	-7.5%

From the Economic Policy Institute

Median household net worth -- 2007	$125,000
Median household net worth – 2009	$96,000
Percentage increase in median household net worth from 2007 to 2009	-23.2%
Percentage increase in median household net worth for members of the House of Representatives, 1984 to 2009 (excluding housing)	158.9%
Percentage increase in median household net worth for the rest of America, 1984 to 2009 (excluding housing)	-0.004%
Percentage of all households with no or negative net worth	24.6%
Percentage of black households with no or negative net worth	39.9%
Median household net worth for white families	$97,900
Median household net worth for black families	$2,200
Ratio of top 1% household net worth to median household net worth	225:1

Years in which there was a greater disparity

0

Years in which there was a greater disparity

0

From The State of WorkingAmerica's Wealth: 2011
by Sylvia Allegretto (Economic Policy Institute)

Home equity as a percentage of home value – Q1, 2006	59.5%
Home equity as a percentage of home value – Q4, 2009	36.2%
Number of years in which the home equity percentage was less than 50%	0

From The State of WorkingAmerica's Wealth: 2011
by Sylvia Allegretto (Economic Policy Institute)

Percentage of the nation’s wealth held by the top 5%	63.9%
Percentage of American households in 2007 which owned no stocks at all (either directly, or through mutual funds or 401(k) plans)	49.1%
Percentage of American households in 2007 with direct ownership of stocks	17.9%
Average earned income for the top 1% in 2010	$1,140,044.76
Total aggregate earned income for the top 1% in 2010	$389,732,281,801.22
Percentage of the total aggregate earned income for the top 1% which was not subject to Social Security taxes	90.6%

Hoping next year is better for all of us. Even the 1%.


* Links are to reports from the Federal Reserve, the Social Security Administration, the Economic Policy Institute and a Washington Post article. In addition, we performed some basic math to come up with some of the numbers, such as the percentage decrease in median income from 2007 to 2010, and aggregate earned income figures.

Taxes -- The Semi-Concise Summary

So ... how to fix America's personal income tax problems?

1. Expand the number of brackets to what they were during the early Reagan years, and bring the top marginal rate back to the 50% it was back then. It was good enough for St. Ronnie; it's good enough for today. 
2. Get rid of the capital gains tax. Treat all income as ordinary income. 
3. Junk the mortgage interest deduction. OK, just phase it out then.
4. Set the trigger for the alternative minimum tax at $250,000 (for a household) and adjust it automatically for inflation.

The result will be a much simpler tax code that raises considerably more money, with nearly all of that additional revenue coming from the top 1% or so. And, with a little luck, we should be able to offer some mild tax relief for the poor and middle class. 

One last thing. One of the more pernicious lies bandied about this past year was that 47% of American didn't pay federal taxes. In fact, everyone who gets paid to work paid federal taxes in the form of FICA -- Social Security and Medicaid taxes. But because these taxes are tallied separately from income taxes, they get forgotten. 

And this really doesn't make sense, because Social Security and Medicaid is what a lot of what the federal government does.

2010 Federal Budget -- Outlay by Category

In 2010, Social Security and Medicaid accounted for about 28% of the federal budget -- and everyone helped pay for it. 

(If you add in Medicare and defense spending, you end up accounting for about two-thirds of the budget -- which is why government is sometimes called "an insurance company with an army.")

It's time for the lie to die. So from now on, FICA taxes are rolled into general personal income taxes. Nothing under the hood will change -- FICA taxes will still be deducted from paychecks as they have been. Technically, your marginal rates will go up, but the FICA taxes you already paid will offset them entirely. You'll net out, but it will be now be clear how much you're actually paying to keep the government going.

Saving Social Security

Note: To become your neighborhood's expert on Social Security, you really only need to read one article: Roger Lowenstein's excellent A Question of Numbers, written for the New York Times in 2005. It includes a good history of the program (and the vitriolic criticism is has incurred over the last seventy years) and an excellent discussion of the state of its finances.

Social Security has come under a lot of criticism lately, be it Gov. Perry’s  claim that it is a Ponzi scheme, or Herman Cain’s claim that it will go bankrupt in 2037. Even less addled folk have chimed in, calling for raising the age of eligibility, reducing benefits or … even having to raise payroll taxes.

This is all … bullshit. Social Security is doing very well, thank you, but it could use a little assistance in dealing with bump in expenditures that will be caused by the retirement of the baby-boomers. After that, it’s clear sailing as far as the eye can see.

If you'll open up your copy of the 2010 Social Security Board of Trustees Report to page 15, you’ll find the graph above. From about 2015 to 2030, Social Security expenditures are expected to rise – but after that, they stay flat all the way out to 2080. Hardly a crisis.

But it would still be a good idea to help out this essential social program, so let’s see how big a problem it is and what we can do about it.

According to the Congressional Budget Office Director’s blog:

Under current law, the resources dedicated to financing the program over the next 75 years fall short of the benefits that will be owed to beneficiaries by about 0.6 percent of gross domestic product (GDP). In other words, to bring the program into actuarial balance over the 75 years, payroll taxes would have to be increased immediately by 0.6 percent of GDP and kept at that higher rate, or scheduled benefits would have to be reduced by an equivalent amount, or some combination of those changes and others would have to be implemented.

So Social Security isn't going to go bankrupt, though it will start running a deficit, one which have to be picked up by the federal government -- or addressed by things like raising the eligibility age or cutting benefits.

But the problem, while sizable, hardly constitutes a crisis. This is all due to the Social Security reforms under Reagan, which saw -- among a bunch of other reforms -- an increase in payroll taxes to address the strain to be caused by retiring baby-boomers. That means the problem which we face --a gap of 0.6% of  GDP -- is as small as it is.

Nicely, the folk over at the Social Security Administration analyzed thirty options and published a graph with their findings. 

Now take a look at fourth line down, the one that says “Eliminate the Taxable Maximum.” In English, this refers to getting rid of a tax break which allows the wealthy (and the fairly well off) from having to pay Social Security taxes on all of their earned income. Right now, if you make $1 million, you only have to pay Social Security taxes on the first $106,800. For the remaining $893,200 -- hey, no worries!

By junking this one egregious tax break, we’d be able to add 0.6% GDP back into Social Security. Now, according to the CBO Director’s blog, the shortfall we’re facing is…. 0.6% GDP!

Holy shit. We’re done!

The retirement age stays the same; no screwing around with benefits. All we need to do is close one tax loophole.

But what is we weren’t satisfied with saving Social Security. What if we … wanted to make it better.

Consider that CNN has recently reported that:

A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live.  

It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans. 

While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement.

For whole lot of folk, the economic stagnation, combined with the downturn in the housing market, means that retirement is looking harder and harder to achieve. Here’s the chart for the S&P 500 for the last twenty years.

Ah, the Clinton years; they were so good to us. Unfortunately, we’ve not been able to get back to those heights – even though eleven years have passed. So if you had a retirement fund keyed solely to the S&P 500 (and which included neither dividends nor additional capital contribution), your performance would be as shown below.

Since January 1, 2000, you would have experienced a negative return of $179, or about -13% over almost eleven years. That is not how to build a retirement plan.

But, perhaps you’ve got money stuck in your house, and were hoping that would play a key part in your retirement.

According to the Case-Shiler Home Price Indices, your house is now worth what it was eight years ago, in 2003.

Now the loss of a decade’s worth of growth it not something which remedied easily, or even with a lot of work. But we can do something for those people who planning to work for years after they die.

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.

And all of this increase would be on income -- literally -- that no one worked for.

Fixing Social Security is easy -- just get rid of one tax break for wealthy (and well-off). Making Social Security better will take more work, but it's the kind of thing a decent country -- one which doesn't make dead people work -- should consider. And one good place to start would be re-examining the special treatment we give to "unearned income," a.k.a. money no one worked for.