Tuesday, April 13, 2010

Social Security Payroll Tax is Very Progressive

Paul Krugman claims here that "The thing to bear in mind is that overall, the US tax system isn’t actually that progressive: the payroll tax is regressive, as are most state and local taxes, which largely offsets the progressivity of the income tax."

Unfortunately for Krugman, the facts suggest otherwise. Andrew Biggs of The American Enterprise Institute presents those facts, including the chart above in this
Enterprise post, which show that the Social Security payroll is extremely progressive, not regressive as Krugman suggests.

The bottom four quintiles (by lifetime earnings) pay negative net tax rates for Social Security, meaning that they receive more in Social Security benefits than they pay in payroll taxes. Only the top income quintile pays more in payroll taxes than they receive in Social Security benefits. The bottom income quintile gets the best deal of all, with a negative net payroll tax rate of almost 27%, meaning that their lifetime Social Security benefits far exceed the payroll taxes they contribute to the Social Security program.

Bottom Line: Just like the extremely progressive income tax (see
CD post here), where the "bottom 40% make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes," the Social Security payroll tax is also extremely progressive - the bottom 80% make a profit from the program.

47 Comments:

At 4/13/2010 8:48 AM, Anonymous CompEng said...

And this is true adjusted for inflation? Every individual who receives SS collects it in fairly inflated dollars.

 
At 4/13/2010 8:51 AM, Anonymous KipEsquire said...

Social Security is not a "tax." It is a *program*, consisting of a tax stream *and* a benefit stream.

What apologists like Krugman ignore is that, regardless of how "regressive" the tax stream may be, the benefit stream is *extremely* progressive:

If Taxpayer A pays twice as much SS tax as Taxpayer B, Taxpayer A will receive *far less* than twice as much in benefits than Taxpayer B, ceteris paribus. More benefits, yes -- but not twice as much.

Netting the tax stream and the benefit stream out, the *system* still remains obscenely progressive.

 
At 4/13/2010 8:52 AM, Blogger misterjosh said...

Maybe Krugman's already let go of the idea of the payroll tax going to a pension fund & thinks it's just another tax.

Maybe he's the smart one here. :P

 
At 4/13/2010 9:07 AM, Anonymous morganovich said...

aren't we ALL supposed to get more SS payments than we pay in?

i thought this was supposed to be a retirement savings program, not a redistributionist social one.

this is exactly why you cannot ever let the federal government get "the camel's nose under the tent". once they do (as they now have in healthcare" it's just a matter of time until whatever program they have put in place, no matter how well intentioned or safe it one appeared becomes both rapacious and redistributionist.

SS was originally voluntary and put funds into a protected trust fun. contributions were tax deductible (like today's IRA) and benefits received were not taxed.
payouts were based tightly on pay in.

none of these things are true any longer.

this is just another monstrously progressive wealth transfer program.

ps. what's the deal with krugman these days? he seems hell bent on refuting the implications of the theory that won him a nobel and descending into keynsian populism. is this just an epic sell out or did he get hit in the head or something?

 
At 4/13/2010 9:29 AM, Anonymous Lyle said...

What is observed is precisly what the formula for benefits provides, in that the rate of return has bend points where the return decreases:
Take the wage growth adjusted average monthly income for 35 years, then 90% of the first 700 or so dollars, 32% of the next 3000 or so and 15 % up to the limit. That has been the design since the 1940s. SS was designed to help the low end I suspect that what will happen is the limit will be removed and a new bend point to 5% will be introduced at the current limit.
If one wants details go to the SS web site.

 
At 4/13/2010 9:36 AM, Anonymous Anonymous said...

"To take from one because it is thought that his own industry and that of his father’s has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association—the guarantee to every one of a free exercise of his industry and the fruits acquired by it." - Thomas Jefferson

 
At 4/13/2010 9:38 AM, Anonymous Anonymous said...

morganovich,

payouts were based tightly on pay in.

From wiki:

The first monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92.

 
At 4/13/2010 10:00 AM, Anonymous Anonymous said...

I don't think Krugman calculated the net of tax and benefits. If you do that across the board we all get more than we pay, as long as we are running a deficit.

If we stop running a deficit, you will no doubt calim taxes are too high.

The social security tax itself is not prgressive since it is capped.

To be in the top .01 of earners in 1979 you would have earned more than $1.8 million. To be in that bracket today, you would need to earn more than $8.9 million. You would pay more taxes in dollars but your tax rate would have fallen from the mid 40's to around 32% today.

The rich pay more taxes today than ever, becauase they make (and keep) more than ever.

I have heard (but not verified) that you can earn more than 95% of the population and the 5% above you will still earn more than 95% of the income, and they also hold a very large percent of all capital.

Sorry, I make a good income, and I cannot feel sorry for the rich.

 
At 4/13/2010 10:03 AM, Anonymous Anonymous said...

The first monthly payment was issued on January 31, 1940 to Ida May Fuller

Yep, so what?

I had four grandparents that probably all started social security soon after. Probably I would have wound up supporting them one way or another. I count the benefits they recieved pretty much the same as mine.

 
At 4/13/2010 10:06 AM, Anonymous Anonymous said...

"once they do (as they now have in healthcare" it's just a matter of time until whatever program they have put in place, no matter how well intentioned or safe it one appeared becomes both rapacious and redistributionist."

Bills have to pass a cost benefit analysis before they are passed, but once passed we have no further quality control. The original cost benefit analysis should include metrics for future measure, and once those metrics fall below the previously promised standard the bill would be brought up for review.

 
At 4/13/2010 10:17 AM, Blogger juandos said...

anon @ 4/13/2010 10:06 AM says: "Bills have to pass a cost benefit analysis before they are passed..."...

Bills like ObmaCare?!?!

What sort of loaded cost benefit analysis was done there?

 
At 4/13/2010 10:17 AM, Anonymous Lyle said...

Anon at 10:03 catches the point, that for a lot of folks SS represents a way to ensure that their parents have a decent life without making them directly responsible for their upkeep. My parents felt that way about my dads parents in the 1960s. So yes it is a transfer payment but helps the middle class from having to support a lot of their parents in the parents old age. (Enables independence of the parent as well)

 
At 4/13/2010 10:20 AM, Anonymous Anonymous said...

The pre-tax progressivity is even more progressive on after-tax benefit basis. Bigg's model can't perform after-tax analysis.

Low income quintile earners are more likely to be exempt from federal tax on benefits whereas high income quintile earners are likely to pay federal tax on 85% of benefits.

State taxation of benefits is all over the map.

 
At 4/13/2010 10:22 AM, Blogger juandos said...

"So yes it is a transfer payment but helps the middle class from having to support a lot of their parents in the parents old age"...

Is that what they're calling outright theft of earnings now a days, eh?

How come those that think this socialist nanny state nonsense foisted off onto the productive citizens don't volunteer to pay more so the rest of us could do with our earning what we want?

 
At 4/13/2010 10:33 AM, Anonymous Anonymous said...

I had four grandparents that probably all started social security soon after. Probably I would have wound up supporting them one way or another. I count the benefits they recieved pretty much the same as mine.

What complete bullshit. And even if this were true, so what? The support of your family is your responsibility. Providing for the people you love is what you should be working for, sorry if it interferes with your nights out.

If the government is going to require us to save for our old age, we should be doing so in our own individual accounts and given the opportunity to realize market interest rates on those savings. To confiscate the savings of peoples entire productive working lives and knowingly use them to perpetuate a Ponzi scheme is not caring or compassionate, it's evil. But that is exactly what FDR and the Democrats did with Social Security and what Johnson and the Democrats did with Medicare.

 
At 4/13/2010 10:55 AM, Anonymous Newman said...

This brings up another point, and that is which groups see the largest return in benefits from government expenditures for the tax dollars they pay. A 2007 Tax Foundation study (http://www.taxfoundation.org/publications/show/2282.html) reported on that very issue. Using data from 2004 (the latest available at the time of the study) researchers found that, considering local, state and federal tax and expenditures, those in the bottom quintile of income distribution received back $8.21 in benefits from government expenditures for each tax dollar they paid. Those in the middle quintile received $1.30 in expenditure benefits per tax dollar paid, while those in the top income quintile received $0.41 in expenditure benefits per tax dollar paid.

 
At 4/13/2010 11:10 AM, Anonymous Newman said...

Here's a link to a more recent Tax Foundation study of taxes paid vs. benefits received from government expenditures, by income group.

http://www.taxfoundation.org/publications/show/25195.html?loc=interstitialskip

 
At 4/13/2010 12:19 PM, Blogger Max said...

There's a mathematician where I work who is looking at retirement. Because he spent most of his career outside the United States he looked very closely at the way social security benefits are calculated, and even gave a small presentation on the subject. The formula Lyle gives is the formula (take total of the highest earning 35 years of a person's career (up to an inflation-adjusted maximum amount per year) -- and if the person hasn't worked a full 35 years, just add up what you have -- divide by 35, and then apply a progressive formula and you've got your annual payment.

I initially thought the formula was somewhat silly (really, the people who write these things need to find better ways to entertain themselves). But after thinking about it more, I realize the formula *almost* guarantees that nobody will get more in benefits than they originally paid in (if you're retired for more than 35 years, though, you might come out ahead).

So, yes, assuming the person does not die before the magic retirement age, retirees who never made much in their careers get more of their money back than highly-paid retirees. And this is by design.

 
At 4/13/2010 12:29 PM, Anonymous Anonymous said...

What sort of loaded cost benefit analysis was done there?

Precisely.

you should see what GAO has to say about Cost Benefit analyses done by EPA.

Now, what sort of rules for performing cost benefit analyses should we have? Rules that both sides can agree to?

Now remember, conservatives blasted Congressional Budget Office for the Obamacare analysis, but they have also previously accepted CBO studies when it suits them.


Cost Benefit studies mostly come under attack for setting unrealistic values on unpriced items. But the problem is, once you spend money in a certain way, that is exactly what you have done.

Lat year EPA lowered the value of SVHL (statistical value of human life) and environmentalists went nuts because they figured it would lower the value of their proposed programs and make them harder to pass.

But EPA lowered the value based on previous history of actual results.

So to argue that the price is "too high" or "too low" is meaningless.
Either event means you are spending too much on the wrong thing and valueing one life at more than another.

Likewise, environmentalists want to see a high value put on the price of CO2 permits because they think that will buy them more CO2 protection.

Talk about not understanding economics!

When I mentioned CBA you jump to the conclusion that the other guy has it rigged. So, you need to let them cut the pie and have them give you first pick of the pieces, or vice versa.

You have to have a game you agree to play. When I listened to the speeches at the Sothern Republican Leadership conference I was apalled. All they talked about was getting back into power so they could stick it to the other guy and get what they want.

Listening to them, I can't believe they are looking out for me. Any more than the other side.

So, what aI want to see is better estimates up front, and then I want to see a plan for continuous monitoring, so we know when to shut a bad idea off.

So here is the question. What rules for CBA would you propose such that you would accept a CBA from the other side providing those rules were followed? Would you expect them to accept your CBA under the same terms?

 
At 4/13/2010 12:32 PM, Anonymous Anonymous said...

I think Max is right. SS is not great, but it is not as bad as some would have us believe.

 
At 4/13/2010 12:40 PM, Anonymous Anonymous said...

Is that what they're calling outright theft of earnings now a days, eh?

It is only theft if your property is taken for public use (sociil scurity sounds like public use) without compensation. Otherwise government has the right to promote the public welfare.

You will ostensibly get some compensation eventually.

You have two arguments. Is the cost of SS greater than the benefits? Are there people who are treated grossly unfairly, and can they be compensated and still achive a social net benefit?

The way it is running now, probably not, but hat doesn't mean we should scrap it, or that such an idea is politically possible.

 
At 4/13/2010 12:43 PM, Anonymous Anonymous said...

How come those that think this socialist nanny state nonsense foisted off onto the productive citizens don't volunteer to pay more so the rest of us could do with our earning what we want?

=============================

You think you can craft as entence that is not a necklace of emotionally laden words that makes some semblance of ratonal sense?

 
At 4/13/2010 1:03 PM, Blogger Walt G. said...

I've never seen a progressive and regressive tax defined on benefits received before. It is commonly defined as a percentage rate of taxes paid on income: Is it not? What kind of argument do we have when we say something is something else so it isn't?

 
At 4/13/2010 2:53 PM, Anonymous Anonymous said...

Now remember, conservatives blasted Congressional Budget Office for the Obamacare analysis, but they have also previously accepted CBO studies when it suits them.

No, conservatives blasted the way that the Democrats manipulated the CBO scoring process for Obamacare. They used 10 years of revenue to fund 6 years of benefits. They counted money from future cuts in Medicare, and put Medicare reimbursement increases into another bill. Republicans objected to these deceptions.

 
At 4/13/2010 2:55 PM, Anonymous Anonymous said...

You think you can craft as entence that is not a necklace of emotionally laden words that makes some semblance of ratonal sense?

Can you craft one with proper spelling?

 
At 4/13/2010 2:55 PM, Blogger OA said...

Anonymous said...
I think Max is right. SS is not great, but it is not as bad as some would have us believe.



All Ponzi schemes look ok early on. How many people reading this blog will ever see the full benefits their SS statements project?

The last projection was the trust fund would be depleted by 2037. That's less than 10 years after I'm first eligible to retire. Anyone born after 1975 starts out with the trust fund already gone and incoming taxes the only source for a payout.

The only way this will work is Congress will substantially alter the program between now and 2037. The sooner the better because I doubt any politician will have the guts to cut benefits for anyone who's made it over the line and started collecting.

Frankly, boomers should face means testing for benefits. Many worked in the full pension era, paid much lower SS taxes for much of their careers, and have ended up the richest generation in history. Yes, it would suck that they were lied to about SS, but better to realize that now when there is a trust fund, than later when Medicare, SS, and Obamacare are all bankrupt.

 
At 4/13/2010 3:04 PM, Anonymous Anonymous said...

The returns for high income earners are much worse than is being acknowledged here. There is no "trust fund" or, as Al Gore would have it, "Lock Box". The monies paid into the system have been squandered. Future payments will be made increasingly from general revenues. This means that having already paid the lions portion of the payroll taxes used to support this Ponzi scheme, it will fall to higher earners to bear the secondary cost of it's support through higher income taxes. At that point, "Social Security" becomes little more than welfare.

 
At 4/13/2010 3:20 PM, Blogger grant said...

Where and when were these statements published by Paul Krugman so i can look them up to gain a better understanding of his reasoning.

 
At 4/13/2010 3:33 PM, Anonymous Anonymous said...

If a private investment company were running this Ponzi scheme, the left would being in a pique of moral outrage. They would be demanding congressional investigations and long prison sentences for the perpetrators. They would be on TV, 24/7, insisting that the existence of such a scheme is evidence of capitalist greed and an indictment of the free market. It would be fodder for Hollywood movies and TV series. Books would be written, and leftist college professors would wield the lurid details of the scheme like a club with which to beat any belief in free market capitalism out of the heads of their young, impressionable charges. Instead, this criminal enterprise, is the crown jewel of state socialism. So, leftists, and their media lap dogs, do all they can to defend and sustain it. Anything to avoid taking responsibility and acknowledging the crime that they have committed.

 
At 4/13/2010 3:37 PM, Anonymous Anonymous said...

Here's the link to Krugman

http://krugman.blogs.nytimes.com/2010/04/08/lucky-ducky-redux/

 
At 4/13/2010 4:03 PM, Blogger grant said...

Where and when were these statements published by Paul Krugman so i can look them up to gain a better understanding of his reasoning.

 
At 4/13/2010 4:21 PM, Blogger grant said...

Thankyou anon for link!
I am having having a bit of trouble following the reasoning and argument here.
Why don't you just dump all this crap and introduce a safety net that everyone falls into when they have a low income. The idea that payouts are based on contributions from wages is a good one because it rewards workers and tends to bar parasites.Isn't SS based on a low risk approach to investment to investment of contributors funds.Why can't 5% be moved to high risk to earn larger returns in the capital markets to increase benefits.

 
At 4/13/2010 4:40 PM, Blogger PeakTrader said...

Here's what Martin Feldstein said about Social Security:

A simplified example will indicate the magnitude of the tax wedge implied by the Social Security program. Consider an employee who contributes $1,000 to Social Security at age 50 to buy benefits to be paid at age 75. With a 2.6 percent yield, the $1,000 grows to $1,900 after the 25 years. In contrast, a yield of 9.3 percent would allow the individual to buy the same $1,900 retirement income for only $206. Thus, forcing individuals to use the unfunded system dramatically increases their cost of buying retirement income.

In the example, a funded plan would permit the individual to buy the same retirement income with a 2.5 percent contribution instead of the 12 percent payroll tax. The 9.5 percent difference is a pure real tax for which the individual gets nothing in return.

 
At 4/13/2010 4:48 PM, Anonymous LAD said...

I'm taking this data with a grain of salt. I recall that Milton Friedman calculated that the Social Security tax burden falls disproportionately on the poor and the payouts flow disproportionately to the wealthy. Dr. Friedman may be wrong, but I wouldn't bet against him without a better understanding of this data.

 
At 4/13/2010 6:39 PM, Anonymous Anonymous said...

I recall that Milton Friedman calculated that the Social Security tax burden falls disproportionately on the poor and the payouts flow disproportionately to the wealthy.

He says that the tax component is a regressive tax on wages:

Here is Friedman on Social Security

 
At 4/13/2010 8:35 PM, Anonymous Anonymous said...

Liberals want to have it both ways- they have blamed the "wealthy" for wanting to end social security (because the wealthy would be better off without social security), and then they turn around and blame the wealthy for imposing a "regressive" social security tax. Call Krugman's bluff and see if he would be in favor of ending social security if it is so "regressive". You'd see him change his tune fast.

 
At 4/13/2010 8:40 PM, Anonymous Anonymous said...

A few years ago, Cato concluded that since wealthy people live longer, on average, than do poorer folks, payouts from social security favored wealthier people. I'm assuming that the analysis of "net tax" of Social Security that is the basis of this blog post accounts for differences in life expectancy of people in different income/wealth quintiles?

 
At 4/13/2010 9:01 PM, Blogger Auntie Ann said...

So, most people get back much more than they pay in.

Sounds like a pyramid scheme to me.

 
At 4/13/2010 11:10 PM, Blogger OA said...

Here's the estimation sheet for someone eligible in 2010. You inflate your highest 35 year's earnings at the factor shown, total them up, and divide by 420 to get an average inflated monthly income for those 35 years.

Your benefit would total
90% of the amount up to $761
32% of the amount $761 to $4,586
15% of the amount above that, restricted by the annual cap on taxed earnings.

http://www.socialsecurity.gov/pubs/10070.html#b

 
At 4/14/2010 7:08 AM, Blogger juandos said...

"You think you can craft as entence that is not a necklace of emotionally laden words that makes some semblance of ratonal sense?"...

Well anon @ 4/13/2010 2:55 PM do you think you can take some classes in remedial English?

If YOU think that socialist security is a good thing then YOU should be more than willing to pick up the tab...

You know in simple English, 'put YOUR money where your mouth is'...

Regarding your comment: "you should see what GAO has to say about Cost Benefit analyses done by EPA"...

Again you're missing the point, who cares what one useless government bureaucrat has to say about another useless government bureaucracy?

 
At 4/14/2010 5:13 PM, Anonymous Lyle said...

Just to disprove some of the comments I took my last social security report total of taxes paid, and doubled it, (for the employeer contribution) and divided by the benefit at 65 and it pays out over about 8 years. Life expectancy at 65 for a male according to the census bureau is about 17 years. So for boomers SS is still a good deal. Low inflation of course makes SS less a good deal as the wages do not get raised in the formula. I suggest that one download the program from the SSA web site, and then take run the calculations themselves.

 
At 4/14/2010 5:55 PM, Anonymous Anonymous said...

So for boomers SS is still a good deal.

Hey, genius, it's a Ponzi scheme. You can stuff all the calculations. Boomers will be lucky to colect what has been promised and their kids will get nothing.

 
At 4/15/2010 9:09 AM, Blogger juandos said...

Lyle says: "So for boomers SS is still a good deal"...

Hmmm, so what's good about stealing from your neighbors and people you don't even know?

It seems to me that using 'government' as a proxy for theft doesn't absolve one from that theft...

On top of that the government is/has been stealing from the SS recipient...

Social Security Theft

 
At 4/15/2010 4:10 PM, Anonymous LAD said...

I went back and read "Free to Choose" by Milton Friedman. On pages 106-107 he states that while it's true that the SS benefits schedule is biased in favor of people with lower wages, that effect is more than offset by the fact that the poor tend to pay SS taxes earlier in life and tend to live shorter lives.

I wonder if the data presented here takes these (and other) effects into account. For example, do the rich tend to receive more in survivor's benefits?

 
At 4/15/2010 7:52 PM, Anonymous Anonymous said...

that the poor tend to pay SS taxes earlier in life and tend to live shorter lives.

========================

Good point.


I suspect there is a lot more of that kind of "what goes around comes around" activity built into our systems than those people who constantly feel that they are personally being ripped off recognize.

 
At 4/15/2010 8:01 PM, Anonymous Anonymous said...

a good deal"...

Hmmm, so what's good about stealing from your neighbors and people you don't even know?

=============================

There is a difference between a good deal and a rip-off. A deal occurs when both parties feel that they are coming out ahead. The buyer of a product won't buy it if he thought he could make it cheaper, and the seller won't (ordinarily) sell unless it costs him less to make than he gets.

Every transaction makes both parties wealthier. Done properly this multiplies throughout the system and no one is worse off. Therefore no theft has occurred.

 
At 4/15/2010 8:04 PM, Anonymous Anonymous said...

What if you have a Ponzi scheme with a continuing but fluctuating number of new entries?

 

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