Schansberg: Social Security and ‘the 47%’

October 1, 2012

by ERIC SCHANSBERG, Ph.D.

Social Security turned 75 this year, having paid its first beneficiaries in 1937. It was conceived under the Social Security Act of 1935 and was established to provide an income to those who had worked and were at least 65 years old.

Since then, Social Security has expanded to make payments to the worker’s family members (if divorced or disabled) and to the disabled. (This is a relatively small but still significant part of the program.) In dollar terms, it is the largest government program in the world and the single greatest expenditure in our federal budget. Social Security is funded through “payroll” or FICA taxes on income: 12.4 percent of every dollar earned up to an inflation-adjusted cap ($110,100 in 2012). The “income tax” is its much more famous cousin, given its IRS enforcement and annual April 15th filing deadline. “Payroll taxes” on income are generally withheld from one’s check, making them a lot less obvious.

The “income tax” has higher marginal tax rates, making it seem more painful. But it also exempts a lot of income from taxation — through various deductions, exemptions, and tax credits. As a result, one will be in a relatively high “tax bracket” but will have a relatively low average tax rate.

This explains the common observation — most recently made by presidential candidate Romney — that half of all workers (“the 47 percent”) don’t pay any (federal) “income taxes.” For example, with only the basic exemptions and deductions, a family of four earning under $45,400 won’t pay a dime in “income taxes.”

But the same family loses nearly $5,600 to payroll taxes on their income. Often, people imagine that companies are burdened by “its half” of FICA. But firms shift the burden to workers, as surely as gas stations shift the burden of gas taxes to customers. So, although payroll taxes are far less famous, it turns out that they are usually (much) more painful for workers. These workers are not a part of “the 47 percent” but they’re still paying a lot of taxes on their income.

What are the benefits of Social Security? It provides a consistent stream of income to those who are elderly, supporting them financially in their later years. But there are two huge problems with the system as it’s currently structured.

Given the immense burden that Social Security places on the working poor and middle class, why don’t we talk about this more often?

First, most people are often unaware of these facts. Second, politically, on the one side, there is a desire to demagogue an issue for political gain. Any efforts to talk about substantive reform are met with cheap accusations. And on the other side, there is a lack of courage to address a “sacred” program in the face of political opposition.

Voters should become educated about the pros and cons of Social Security — and we should ask more of our elected officials, especially in an election season.

D. Eric Schansberg, Ph.D., is an adjunct scholar of the Indiana Policy Review Foundation an author of “Turn Neither to the Right nor to the Left.”

 



Comments...

  • Will Bocock says:

    Governor Romney’s assertion that 47% of the adult population pay no income tax is a reflection of his age cohort. The older generations consider FICA to be a contribution to a retirement annuity–not a “payroll tax,” as members of the “means-test” generation view FICA.
    As the “means-test” generations approach retirement, Social Security Retirement will become increasingly another Federal welfare program. The dissociation of FICA withholding amounts from SS retirement payment amounts is being promulgated by the 2011-12 reduction in FICA withholdings and by proposals to lift the income cap on FICA withholdings and the proposed concomitant cap of monthly payment amounts.

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