Let’s Not Forget About the Middle
2006 - The May 2006 CPA Journal’s theme of
Social Security reform was timely and relevant. It addressed
the Social Security insolvency problem, noted the issue of
the fund’s being insolvent earlier than most government
economists had forecast, and discussed possible solutions.
However, the articles were somewhat unbalanced. They were
skewed toward high-net-worth individuals and ignored the lower
and middle classes.
one must understand why Social Security was created. As
a direct result of the stock market crash of 1929 and the
subsequent collapse of the U.S. banking system, many people
were left with nothing. Their stock market investments,
as well as any depository accounts they might have had,
evaporated. The government realized that many retired people
were left penniless. Social Security was formed primarily
for the people who had not saved enough for retirement or
who had seen their retirement “wealth” evaporate.
Social Security was not formed for the top 20% of people
in the United States who earned income and held wealth.
It was for the other 80%.
the same respect, following World War II, the GI Bill and
places like Levittown, Long Island, were not intended for
the superwealthy. They were intended for middle- and lower-income
individuals. Keynesian policy was used for the masses and
not for one economic class.
Rise of ‘You’re on Your Own’ Government
many of our government officials today believe in the classical
school of economics. If we look at the recent federal tax
cuts, we see capital gains and dividend reductions that
basically cater to the upper class. We do not see an interest-income
deduction that would help middle- and lower-income Americans.
In addition, more and more post-Keynesians, including renowned
economist Jared Bernstein, have suggested that government
tax policy and Social Security policy essentially say “you’re
on your own” to the middle class. Remember, in the
1950s through the 1970s, it was the middle class that made
the United States an economic world power via productivity
gains, consumption patterns, and the like.
supply-side theory that many government officials now follow
will only cause larger income gaps between upper- and lower-income
groups. The middle class is quickly evaporating in the United
States. (By middle class, I refer to people in urban areas
of the United States whose adjusted gross income is between
$40,000 and $150,000.)
if someone invested in the Nasdaq 100 in 2000 and planned
to retire in 2006? They would be in deep trouble. I realize
that portfolio theory, developed by University of Chicago
economist Harry Markowitz, might mitigate these problems.
The minute one starts diverting retirement savings into
funds that are volatile (including index funds), however,
we are again repeating the errors of the 1920s. There is
no guarantee of principal and dividends upon retirement.
Past history cannot always be extrapolated to the future.
For example, look at oil and gold prices today. Not even
the most astute economist would have anticipated these conditions
five years ago. Even fewer would have forecast what has
happened to the U.S. automobile industry.
the Journal would have had a more balanced view
to Social Security reform that would have addressed middle-
and lower-income individuals. Many wealthy people use their
monthly Social Security checks as petty cash.
for the Future
the following reforms of the Social Security system:
Full Social Security benefits should begin at 70, partial
benefits at 65.
Contributions should be regressed as income increases
(e.g., 6.2% on the first $100,000 of income, 2% on the
next $100,000 of income, and 1% on any income over $200,000.
Maybe then, as suggested, people will have an incentive
to work and not think they are being unreasonably taxed.
A balance sheet and income statement should be prepared
for an individual upon the initial date of retirement.
Based upon that, benefits would be allocated based upon
need—not based upon contributions. For those who
would say this is inequitable, remember that other taxes
paid into the system don’t always benefit the taxpayer
directly. For childless couples or for married couples
whose children have finished schooling, property taxes
that pay for schools do not directly help the taxpayer.
this is only a start. I look forward to feedback and suggestions
from other CPAs, academicians, and economists. Let us keep
Social Security intact for the middle- and lower-income
classes of the United States. A little redistribution of
wealth will not hurt the rich that much.
Rothenburg, CPA, is an associate professor of accounting
and economics at Kingsborough Community College of the City
University of New York.