Security: A Macroeconomic Issue
2005 - The issue of how to save Social Security crosses the
fields of accountancy, economics, and sociology. With the
first batch of baby boomers starting to retire within the
next five years, and for 20 years thereafter, tremendous demographic
changes will affect all aspects of life within the United
States, including how we provide for retirees and disabled
a result of the stock market crash of 1929 and the subsequent
bank failures, especially during the period 1932–1934,
tremendous wealth was lost in the United States. While this
affected many Americans, it affected older Americans more
because they would not have a long time horizon to recover
this lost wealth before retirement. Social Security was
originally set up as an immediate response to this loss
of wealth to retired and soon-to-be-retired people. Having
a “government pension” financed by a tax was
of utmost concern in 1935; it was an immediate response
to this huge “evaporation” of wealth.
Social Security payment itself is a transfer payment. The
recipient does not have to do anything currently to receive
this check (e.g., perform a service); all recipient must
do is reach the retirement age of 65. In this sense, therefore,
it is no different from unemployment insurance or income
Social Security tax was set up in a cumbersome way, however,
because the tax is shared by both the employer and the employee.
Currently it is 6.2% each on the first $90,000 worth of
income; self-employed individuals pay both portions, for
a total of 12.4%. In a sole proprietorship, there is a deduction
for adjusted gross income (AGI) of one-half of the Social
Security tax remitted. Corporations can deduct Social Security
taxes as an operating expense. In 2005, the maximum amount
that can be withheld per employee is $5,580 ($11,160, including
the employer portion ).
Social Security tax is inherently a regressive tax. For
example, A earns $25,000 per year, B earns $90,000 per year,
and C earns $350,000 per year. The marginal tax rates based
on disposable income are as shown in the Exhibit.
For convenience, the example uses a 10% marginal tax rate
for A, a 25% marginal tax rate for B, and a 40% tax rate
the $90,000 cap, the tax becomes very regressive. Therefore,
the Social Security burden is heavier for middle-income
people than for upper-income people. Also, A is probably
not saving that much for retirement, and B and C are saving
a great deal more. In this scenario, B and C would probably
rely more on their 401(k) and other retirement accounts
than on Social Security. A is at the mercy of the Social
Security payment and probably would have very little retirement
income from other sources.
this background, consider the following:
Individual discretionary retirement accounts are quite
risky and would hurt low-income individuals more than
they would middle-income and upper-income individuals.
If wealth were to somehow “evaporate” again,
as in the Great Depression, where would A go for retirement
Capital markets are by their nature very volatile. Interest
rates, the state of the economy, corporate profits, and
psychological perceptions play an important role in stock
and bond valuations. For example, if baby boomers start
taking stock outflows in 2010 that exceed the inflow of
nonretirees’ savings, stock market valuations would
deteriorate by the nature of supply and demand.
The $90,000 taxability ceiling should be eliminated. Unfortunately,
many people would argue that this would create an economic
slump. In the same respect, however, we have a progressive
income tax system in place. As soon as we stop thinking
of Social Security as insurance and start thinking of
it as a tax, the perspective of having an actual limit
would no longer make sense. (A similar tax, that for Medicare
insurance, stands at 1.45% on all income.)
Raise the retirement age. Life expectancies have increased
significantly since Social Security was enacted. I suggest
full retirement benefits at age 70 and partial benefits
at age 65. People today can work much longer than before.
Many people in their 60s, 70s, and 80s can work part-time
jobs as part of their “retirement” lifestyle.
enact this, perhaps we should use the current age of 60
as the cutoff point. In other words, people under 60 (i.e.,
the baby boomers, Generation X, and the millennial generations)
will probably have accumulated more wealth and transfers
of wealth than any prior generation. Therefore, I would
keep the current system intact for people 60 and older and
switch to this new system for people under 60.
is no quick-fix solution to Social Security. This issue
will still take many years to resolve fully. Let us hope
it is fixed by 2010, the year that the first baby boomers
will retire and start receiving benefits. I look forward
to comments from other accountants and economists.
Rothenburg, CPA, is an associate professor of accounting
and economics at Kingsborough Community College of the City
University of New York.