Study: Women, minorities pay higher effective social security rate

2nd February 2015   ·   0 Comments

By Paul Kleyman
Contributing Writer

(Special from New America Media) — Improving retirement security was among the many proposals in President Barack Obama’s State of the Union message on Tuesday. But advocates for older Americans say Obama should ask Congress to strengthen the nation’s principal middle-class retirement support – Social Security—especially for women, minorities and low-income workers.

“He could lift or ideally call for the elimination of the Social Security cap on how much income can be taxed,” said Eric Kingson, co-author of the new book, Social Security Works: Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All.

Kingson, a Syracuse University sociologist and leading analyst of Social Security policy, explained that the amount of anyone’s wages subject to the payroll tax this year is limited to the first $118,500. Anything made over and above that amount is not taxed.

Because more of the nation’s earnings have shifted to the richest Americans and wages have stagnated for workers at the bottom, fewer earnings have been taxed to support Social Security.

“That is the major reason we have a projected shortfall in the Social Security trust fund and dramatic increases in inequality over the past 30 years,” Kingson stated.

Millionaires Stop Paying By Valentine’s Day

A new report from the Center for Economic and Policy Research (CEPR) shows how today’s limit on earnings subject to the Social Security tax actually widens the U.S. wealth gap. While wealth above $118,500 goes untaxed, Social Security goes deeper in debt, leaving those on the lower rungs of the wage scale – women and minorities disproportionately – to take bear the burden of any future cuts in the program.

The CEPR report shows that increasing the amount of taxable earnings above $118,500 – or even “scrapping the cap” entirely, as Kingson and others urge – would not only close or eliminate Social Security’s long-term funding shortage, but would end an effective tax discount that more affluent Americans now receive.

For instance, the CEPR report explains, people who make twice today’s $118,500 limit –or $237,000 per year – “pay the Social Security tax on only half of their earnings, so they no longer pay it after July 1st.” And those who rake in over $1.2 million dollars annually finish their Social Security tax obligation by Feb. 6 – more than a week before Valentine’s Day. In effect, they pay a far smaller Social Security tax rate than those who pay through New Year’s Eve.

“In other words, workers who earn $118,500 or less per year pay a higher Social Security payroll tax rate than those who make more,” say the authors of CEPR’s report, Nicole Woo, Cherrie Bucknor and John Schmitt. They produced the study based on U.S. Census Bureau’s latest (2013) data from the American Community Survey.

CEPR’s economists note that the Social Security Administra­tion’s Chief Actuary analyzed Democratic legislation proposed last year to phase out the income ceiling over five to 10 years. He found that the plan would reduce Social Security’s long-term shortfall by 70 to 80 percent.

Others in Congress have proposed lifting the cap – not ending it. For instance, recent legislation to increase the amount subject to the Social Security payroll tax to $250,000 is similar to a proposal by former U.S. Senator Barack Obama, during his 2008 presidential campaign. This plan would eliminate about 80 percent of the long-range shortfall, say CEPR’s economists.

Few Latinos, Blacks Earn Enough to Pay More

According to their analysis, just more than nine million U.S. workers (6.1 percent) earn more than the $118,500 taxable limit. (That’s not counting unearned income, such as from stocks.)

Among them are a higher percentage of whites (7.4 percent, or 7.2 million people), and 10 percent of Asian workers (1 million). That compares with only 2.4 percent of Latino taxpayers (381,000), and 2.3 percent of African Americans (383,000).

The racial divide widens, says the study, farther up the wealth ladder. If the Social Security payroll tax tapped up to $400,000, merely 0.2 percent of Black and Latino taxpayers would have to pay more, compared with 2 percent of white and Asian earners.

Men pocket the lion’s share of savings in the current system, according to the study. In 2012, 6.9 million U.S. male workers (8.8 percent) made $118,500 or better, versus 2.1 million (3.1 percent) of women.

CEPR’s economists explain that the Social Security trust fund is now large and growing, but it will peak soon at about $2.9 trillion, before being drawn down by the retirement of the huge baby boom generation. Without change, says the report, after 2033 there would only be enough in the program to pay retirees about 75 percent of promised benefits.

The report stresses that fully funding Social Security’s future obligations would cost only an additional one percent of U.S. Gross Domestic Product (GDP) spread over the next 75 years. At its peak — in 2035, when the youngest boomers surpass age 70 — the program’s spending will amount to just over six percent of GDP.

Kingson, also cofounder of the advocacy group Social Security Works, noted that while President Obama proposed to help Americans save more to supplement Social Security for a more secure retirement, he also should address the need for greater equity in the program itself.

“He could talk about Social Security as an instrument of justice and decency that is fully affordable as our economy continues to grow,” Kingson said.

This article originally published in the February 2, 2015 print edition of The Louisiana Weekly newspaper.