Frank Bernheisel: The View From Here
Frank Bernheisel
Frank Bernheisel
Posted 2.18.19
Just Outside Washington


US Social Security Reform

I worked for a salary for the 55 years of my career. Every month my employer deducted payroll taxes from my paycheck. (The current numbers are: 6.2 percent for Social Security and 1.45 percent for Medicare.) My employers paid taxes equal to the amounts withheld from my earnings. If I made more than the maximum taxable ($127,200 currently), there was no Social Security tax on the extra income. However, there is no maximum to the Medicare tax.

Then it gets complicated; there is an additional 2.35 percent tax (1.45 percent regular tax and an additional Medicare tax of 0.9 percent ) on wages over $200,000 for individuals ($250,000 for married couples filing jointly) paid by employees. Whew!

A problem: The annual income into the Social Security Trust Fund -- all those payroll taxes - is less than the payments to retirees. This means the Social Security Trust Fund will run out of money and will not be able to pay retirees. The estimate by the Social Security Trustees is that will happen by 2034.

The chart shows Medicare has the same problem, but let's leave Medicare for another day. These projections are why many people in my daughters' generation, which will reach retirement about then, believe they will not receive Social Security benefits; just one factor in the loss of trust in our government.


Solution 1: Eliminate the payroll tax earnings cap of $127,200, which would reduce the Trust Fund's shortfall by 88 percent according to Elizabeth Bauer of Forbes. In other words, all earned income would be subject to the payroll tax. Based upon US Census Bureau, Current Population Survey 2016, this would impact about 10 percent of the population; that is, those that got the big tax cut in 2017 (the Tax Cuts and Jobs Act (TCJA)). TCJA did not fix anything for the average worker or family; as many will find out when they get a smaller refund this year.

Solution 2: Eliminate the spousal benefits, which would save money and increase the progressivity of Social Security. A number of analysts say Social Security is being "gamed" by the way spousal benefits are claimed and combined. The "game" strategies include "restricted application", where a "retiree" files for Social Security retirement spousal benefits but not his or her own benefit. Instead, the retiree "restricts" the application to a spousal benefit, which increases payout.

Jeffrey Miller, Professor of Economics Emeritus at the University of Delaware, estimates that "free spousal benefits", costs Social Security over $10 billion a year. The spousal benefits were designed in the 1930s when most families had one male worker. Since then we have fewer families, more working women and the rules are not evenly applied; example, same sex marriages.

The two solutions would not solve ALL our payroll tax and Social Security problems. My observation is, the grand solutions that are proposed to solve EVERYTHING rarely get implemented. I favor an incremental approach -- pick a couple of problems, implement changes, observe results and adjust. Hence two solutions proposed above.

The payroll tax system and Social Security are very complicated. Hence, the two solutions I suggest would simplify the system and make it more transparent by reducing the more than 2000 rules that presently govern the system.

Our political representatives and leaders should take a lesson from Abraham Lincoln: "You cannot escape the responsibility of tomorrow by evading it today." Delay will most likely result in an increase in payroll taxes.