How China Trade Affects Social Security
If you don’t know this fact about Social Security, join the club. The percentage of earnings for all
U.S. workers combined that is subject to the Social Security payroll tax is falling. Growing income inequality is the reason.
Thirty-five years ago, Social Security taxes were levied on 90 percent of all workers’ earnings. By 2016, this taxable share of earnings had declined to 82.7 percent, according to federal data, and it will continue to drop over the next decade.
The payroll tax is 12.4 percent of an individual worker’s earnings, with half deducted from his paycheck and half paid by the employer. But the tax has a cap: once earnings reach $132,900 – the cap for 2019 – they do not have to pay the tax for the rest of the year.
This is where inequality comes in. Since incomes above the cap are growing much faster than regular workers’ incomes, a bigger share of earnings is escaping the cap every year.
The decline in the taxable share aggravates the existing problem that benefits being paid out by Social Security now exceed the tax revenues coming in.
A recent study identified growing U.S. trade with China as one important factor that is shrinking the share of earnings subject to the payroll tax.
China is now the largest source of U.S. imports. The increase in trade volume over several decades has contributed to U.S. income inequality by sharply eroding earnings for workers in the low-wage, low-skill industries that have lost factory jobs to China. But trade with China has actually been good for workers in the top 1 percent – their earnings have increased slightly. Think of the high-tech entrepreneur selling software to a Chinese manufacturer. These are the types of people who stop paying the payroll tax partway through the year, when their earnings exceed the cap.
Notably, the researchers said that if trade with other countries, in addition to China, were included in their analysis, trade’s impact on inequality – and the taxable share – may be even greater.
International trade is one of many economic factors eroding the taxable share. Identifying others “is of first-order importance to the Social Security program, to the economy, and to society at large,” the researchers concluded.
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.
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We have politicians to thank for growing trade imports with other countries.
Eliminating the cap on Social Security wages and salary income would still limit it to wage and salary income.Not retirement income, investment income, non-wage benefit income. Not the rich. Not public employees with huge benefit packages relative to private sector workers, even though they are richer. Not the richest generations in U.S. history, those now over age 60, who have left those following poorer.The right thing to do is to repeal the payroll tax altogether and replace it with a VAT on EVERYTHING, including public services. Use that for Social Security, Medicare, and other social programs leaving only the very well off to pay income taxes as well.A VAT is paid only by businesses and other organizations, and it is a tax on their sales minus what they purchase from suppliers. Which is equal to a tax on all wages and serf employment income PLUS benefits PLUS profits.Like the payroll tax, a VAT may be shifted to customers in higher prices, who are assumed to pay, or to workers in lower wages, which is who I believe has been paying the "employer" share of the payroll tax, or businesses in lower profits.But there is one big difference. Imports would be subject to the VAT. There is no payroll tax on imports. And exports would be exempt from the VAT. Whatever VAT had been paid on them would be refunded to the exporter -- because it is a tax on consumption in the U.S.Every other country has a VAT. By taxing work in the U.S. but not consumption, Americans have become the people everybody wants to sell to and no one wants to hire.The differences between what we spend and what we earn is the reason for the trade gap, and it has been funded by debt. In fact, rising debts are the reason for both rising inequality and the trade deficit. Data and charts in this post.https://larrylittlefield.wordpress.com/2018/09/06/rising-u-s-debt-is-the-real-cause-of-the-u-s-trade-deficit-and-inequality/
If we hadn’t retired 9 years ago, a bigger share of our earnings would certainly have escaped that cap every year since then. The solution (as it always has been to most issues of inequality) is to retrain those in the low-wage, low-skill industries that have lost factory jobs into today’s marketable, in-demand, higher wage jobs.
Why not explain to us why there was a cap to begin with? There will be no free lunch, so if we eliminate the cap, what effect will that have on the system and folks like me? I suspect my benefits will increase.Personally, give me the Galveston Plan every day and twice on Sunday.
The annual cap amount not only applies to maximum amount of wages subject to Social Security FICA tax (there is no cap for wages subject Medicare's FICA tax), but also to the maximum amount of wages included in the Social Security benefit calculation.The result is that those with very high incomes receive Social Security benefits that are relatively in line with other recipients. Without the cap, they would pay much higher taxes.... and also receive much higher benefits (imagine Bill Gates with a $100,000 per month Social Security benefit!).
Many proposals for reforming Social Security propose both raising the income cap and lowering the top replacement rate in the benefits formula.
There is a combination of solutions to the problem of the aging population that would be helpful now and in the future: 1. Raise the cap now to roughly $150,000. 2. Put in place a system for raising the cap by a factor reflecting the growth in personal consumption expenditures (PCE - the Fed's preferred inflation indicator) 3. Move on to solving the problem of Medicare underfunding, which is a more immediate problem.
Eliminate the cap on payments (tax to support) Social Security. Or raise it to $1 million. That would help replenish the fund for Social Security.In addition, make Social Security Means Tested.A VAT tax is not the answer. It is potentially regressive. And there would need to be provisions to make sure that Seniors receive their monthly benefit checks. As they move into their eighties and nineties, Social Security becomes an increasing large portion of their income.
Wouldn’t it be better to shore up Social Security and Medicare with what the government wastefully spends?