Social Security and "Progressivity Squared"
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Yesterday I blogged the following:
Let me explain. Up until the day a person retires his FICA taxes translate into a fixed benefit formula. That's the progressivity I said already exists: two otherwise identical workers who are the same age, work the same number of years, retire on the same day, etc., but where one earned twice as much as the other and paid twice as much in Social Security taxes receives far less than twice as much in benefits on the day they retire. We can call this "accrual progressivity."
The President's proposal, also known as the "Pozen Plan," refers not to progressivity in the accumulation of benefits, but rather to a new progressivity in the indexing of the growth of those benefits. Our two hypothetical retirees may receive different benefits today based on their different tax burdens over their working lives, but their benefits currently grow at the same percentage rate after they retired, based on the average growth in wages in the country.
The Pozen Plan changes that. It calls for benefits of lower-income retirees to grow faster than benefits for higher-income retirees after retirement. This is a new post-retirement progressivity that supplements the accrual progressivity already built into the system before retirement.
Viewed in isolation, the Pozen Plan might not seem so insidious. Everyone's benefits increase over time after retirement, just at different rates. And given that there is a very real and very imminent Social Security crisis, something simply has to be done. Right?
But on the other hand, the system already incorporates progressivity. So this isn't "progressivity." It's "progressivity squared."
And Social Security benefits are subject to federal income tax, which is itself progressive. Progressivity cubed.
And the plain language of the President's remarks suggests the wage cap may be scrapped. Progressivity to the fourth power.
And don't forget the Alternative Minimum Tax. Progressivity to the fifth power.
Keep racking up the exponents and, asymptotically you merely get the Penny in Your Pocket Rule.
Tell me it's necessary. But don't dare tell me it's fair.
[The President] said that the benefit schedule would be changed such that poor workers get more benefits for their taxes than "the well off." Um, we already have that. It's called "progressive redistribution." Someone who pays twice as much Social Security taxes gets far less than twice as much in benefits (and pays taxes on those benefits to boot). Is the Administration proposing making the system even more progressive? More details please...Well, thanks to the White House website and various bloggers, most notably Peter Mork, I now have those details. The progressivity proposed by the President regards growth in benefits after retirement rather than determination of benefits before retirement.
Let me explain. Up until the day a person retires his FICA taxes translate into a fixed benefit formula. That's the progressivity I said already exists: two otherwise identical workers who are the same age, work the same number of years, retire on the same day, etc., but where one earned twice as much as the other and paid twice as much in Social Security taxes receives far less than twice as much in benefits on the day they retire. We can call this "accrual progressivity."
The President's proposal, also known as the "Pozen Plan," refers not to progressivity in the accumulation of benefits, but rather to a new progressivity in the indexing of the growth of those benefits. Our two hypothetical retirees may receive different benefits today based on their different tax burdens over their working lives, but their benefits currently grow at the same percentage rate after they retired, based on the average growth in wages in the country.
The Pozen Plan changes that. It calls for benefits of lower-income retirees to grow faster than benefits for higher-income retirees after retirement. This is a new post-retirement progressivity that supplements the accrual progressivity already built into the system before retirement.
Viewed in isolation, the Pozen Plan might not seem so insidious. Everyone's benefits increase over time after retirement, just at different rates. And given that there is a very real and very imminent Social Security crisis, something simply has to be done. Right?
But on the other hand, the system already incorporates progressivity. So this isn't "progressivity." It's "progressivity squared."
And Social Security benefits are subject to federal income tax, which is itself progressive. Progressivity cubed.
And the plain language of the President's remarks suggests the wage cap may be scrapped. Progressivity to the fourth power.
And don't forget the Alternative Minimum Tax. Progressivity to the fifth power.
Keep racking up the exponents and, asymptotically you merely get the Penny in Your Pocket Rule.
Tell me it's necessary. But don't dare tell me it's fair.
Related Posts (on one page):
- Social Security: Are Private Accounts Dead?
- The Decline and Fall of Social Security Reform
- Social Security and "Progressivity Squared"
Posted by KipEsquire on
29 April 2005
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