Sunday, February 06, 2005

My Social Security Solution

Today, social security has $1.5 trillion in the bank and takes in more money than it spends. It is in great financial shape, much better than the US government which is $7.5 trillion in debt and spends $400 billion more each year than it earns. Nonetheless, by about 2040 or 2050 social security is expected to have some financial problems. Fortunately, there is a very easy fix that lowers the social security tax for almost everyone.

Today, everyone pays 6.2% of their salary up to $90,000 per year and their employer matches that. The $90,000 limit is called the 'cap.' The vast majority of Americans make less than the cap so, including the employer contribution, almost everyone pays 12.4% of their salary in social security taxes. People who make exactly $90,000 per year pay the most, $11,160. Bill Gates also pays $11,160 -- although he probably doesn't notice.

The simplest way to eliminate the long term social security problem is to eliminate the 'cap.'1 Have everyone pay the same flat rate no matter how much they make. If the rate is kept the same, this would bring in too much money, more than social security needs. This means we could cut the social security tax rate. Although the very wealthy would pay more, the vast majority would see their taxes cut, potentially by quite a bit.

The tax rate will need to go down, but its hard to say by how much, and it may need to change from year to year. This can be done very simply. Every year, look at the previous year. If too much tax was collected, reduce the rate. If too little tax was collected, increase it. Use the $1.5 trillion social security has in the bank to take care of any temporary shortfall.

My plan lowers taxes for almost everyone, keep benefits unchanged, and makes social security financially secure forever with no borrowing and no hidden future taxes. The Republican plan reduces benefits for everyone under 55, requires borrowing trillions of dollars that will require even more trillions in future taxes to pay off, and doesn't actually fix the long term financial problem. The Republican plan does allow some social security taxes to go into private accounts that can be invested in limited ways, but my plan lowers the tax rate and puts money in your pocket.

Which do you think is better?

1. This is not an original idea. I'm sure many have thought of it, but it was brought to my attention by Todd Wipke. This does not mean that Todd necessarily agrees with any part of this post.

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