Jane the Actuary Retirement

Forbes post, “Beating A Dead Horse, Etc.: Here’s More Research On Public Pensions and the ‘Contracts Clause’”

Originally published at Forbes.com on February 27, 2020.

 

Yes, readers, I have other topics I want to address than Illinois pension reform. But I am also attempting to clear out a dreadfully long list of draft articles and bookmarks, among them an article at MuniNet Guide from last August, by James Spiotto, “What Illinois Can Learn From the Supreme Court of Rhode Island and Even Puerto Rico About Public Pension Reform.”

Readers will recall that I had earlier this month cited some commentary at Wirepoints with respect to the contention made by pension reform opponents that, notwithstanding the clause in the Illinois constitution that protects past and future pension accruals and benefit increases, the Contracts Clause in the U.S. Constitution prevents the state from making any reductions even if an amendement were passed. But what makes Spiotto’s article worth sharing, and summarizing, is that it delves into the issue far more extensively to make the case that this is not so.

Again, reform opponents say that the U.S. Constitution prohibits any sort of reform that affects existing benefits, full stop. Spiotto writes,

“[T]he U.S. Supreme Court and virtually all state courts have recognized that the police powers of a government to impair contractual obligations for a higher public good, the health, safety and welfare of its citizens and its continued financial survival, cannot be waived, divested, surrendered, or bargained away. . . .

“Since 2011, there have been over 25 major state court decisions dealing with pension reforms. Over 80% (21 out of 25) of those decisions affirmed pension reform which provided reductions of benefits, including COLA (“Cost of Living Allowance”), or increases of employee contributions, as necessary, and many times citing the Higher Public Purpose of assuring funds for essential government services and necessary infrastructure improvements. Of the four states that did not permit public pension reform efforts, two states, Oregon and Montana, cited the failure of proponents of reform to prove a balancing of equities in favor of reform for a Higher Public Purpose.”

Of the two remaining failed reforms, one of these was, yes, Illinois. (I wrote at length about the Illinois Supreme Court’s decision in January.) The other was Arizona, which, like Illinois, had an explicit pension protection in its constitution. Unlike Illinois, however, all parties — state workers, legislators, and local governments — came together to pass an amendment enabling reform.

Spiotto also explains that the Illinois Supreme Court interpreted the constitutional protection of pensions as so strong as to mean that, unlike the acknowledged ability of the state to modify other contracts in the interest of a Higher Public Purpose, pension promises were unique in being fixed and permanent regardless of any such needs. But, Spiotto writes,

Virtually every other analysis has recognized that governments, state and local, could not surrender or bargain away an essential attribute of their sovereignty, namely, the police power of a government to be able to impair contractual obligations for a Higher Public Purpose for the preservation of government and the health, safety and welfare of its citizens. The U.S. Supreme Court for over two centuries has so held that the police power to impair contracts for a Higher Public Purpose cannot be divested, surrendered or bargained away as the cases of Stone v. Mississippi, 101 U.S. 814, 817 (1880), U.S. Trust Company of N.Y. v. New Jersey, 431 U.S. 1, 23 (1977) and their progeny have so eloquently ruled. Likewise, numerous state courts consistently have so held, most recently in the State of Rhode Island’s Supreme Court decision of Cranston Police Retirees Action Committee v. The City of Cranston, et al., Rhode Island Supreme Court, 208 A.3d 557 (June 3, 2019).”

The Cranston, Rhode Island, case deserves special mention; its pension plan was less than 60% funded, and the city responded by suspending the COLA adjustment for 10 years for police and fire retirees. Retirees filed suit and the courts, including the Rhode Island Supreme Court, decided in favor of the city, that is,

“The Rhode Island courts found that there was a contractual relationship that was substantially impaired by the 2013 Ordinance, but that the impairment was permitted as reasonable and necessary to fulfill an important public purpose. The court recognized the precarious financial condition of the city compounded by a reduction in state aid rendering a budgetary shortfall that resulted in reduction in salaries, public employees and services.”

In fact, subsequent to this article’s publication, in December, the United States Supreme Court weighted in, by declining to hear the case.

What’s more, Spiotto suggests that, in the case of Illinois, the court had come to its decision because the state had not increased taxes to solve the problem, so that “public pension unfunded liabilities were perceived by the Supreme Court of Illinois to be a self-inflicted crisis not borne out of the notion of poverty or inability to pay.” However, since that time, the state of Illinois has indeed raised taxes considerably and intends to raise them further with a graduated income tax. Therefore, “Any reluctance to permit reasonable and needed modifications of pension benefits due to the failure to increase taxes or the mistaken belief the unfunded liabilities are affordable should, for all practical purposes, be overcome and resolved by recent action at the state and various local levels demonstrating the limits of taxation and the unaffordable nature of certain pension benefits.”

And I’ll end this brief summary with a sentence with which Spiotto begins his argument:

“One of the hallmarks of a mature and successful society is the continued capacity for growth and change.”

Casting public pensions as immutable, even with respect to potential changes which minimize harm to their participants, regardless of the degree to which they stand in the way of the well-being of residents of the state or locality, is, to the contrary, a hallmark of a society on the decline.

Update: as it happens, James Spiotto passed away the very same day as I published this article. For the interested reader, here’s more about the man the Bond Buyer called “a legendary voice in the municipal industry for his bankruptcy and restructuring expertise that influenced governments, investors and federal lawmakers.”

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “It’s Time To End Social Security Opt-Outs For Everyone”

Originally published at Forbes.com on February 26, 2020.

 

Earlier this month, I wrote about the Windfall Elimination Provision and the Government Pension Offset, two provisions in Social Security which are designed to prevent double-dipping by workers who participated in both Social Security (directly or as a spouse) as well as another retirement system which opted out of Social Security.

Who are these workers?

Federal government workers who were hired before 1984 and who in 1984 declined to make a switch when offered the option, are covered by the Civil Service Retirement System, and

Public employees in 15 states, including California, Texas, and Illinois. (In Illinois, most direct state employees are covered by Social Security, depending on classification; employees at schools and universities as well as municipal workers are not.)

In addition, clergy and religious workers who complete Form 4361 and declare that they conscientiously/religiously opposed to social insurance, are exempt from FICA taxes for their ministerial income, and forego not just Social Security but also Medicare, which personal finance expert Dave Ramsey says he would do “in a nanosecond” but the site The Pastor’s Wallet issues strong cautions. For most of us, however, this is merely a bit of trivia.

To be sure, when Social Security was first enacted, far more workers were excluded: self-employed workers, government, farm, domestic, and non-profit workers were all added later. 1950 amendments added farm workers, domestic workers, and the self-employed; in each case with subsequent adjustments loosening the eligibility requirements. Also in the 1950 amendments, non-profit employers were included if two-thirds of their employees elected to be covered; in 1984, coverage was extended to all non-profit employees, except that religious groups who, as an organization, object to Social Security, are permitted to opt out as an entity; however, their workers must still pay in as if self-employed, except for those exempt as objecting clergy.

(And here’s an incidental piece of information on the question of coverage: it has long been claimed that the exclusion of farm and domestic workers was due to the demands of racist Congressmen from the South, because they wanted to keep black workers bound to low-paying jobs in their fields and kitchens; however, the record shows that their actual objection was to the social assistance provisions of Social Security rather than the social insurance elements earned by work history.)

All of which is context for an article from late January profiling the situation for teachers in Alaska, “No Social Security? For Alaska teachers, that’s just the way it is.” (The article is bylined as “Presented by NEA-Alaska” rather than being the product of a reporter at the Anchorage Daily News, where it’s published.) I’ve written before about the Illinois Tier 2 pensions, in which newly-hired teachers may accrue pension benefits lower than they would have under Social Security, and school districts may find themselves failing the “adequacy test” for public systems that don’t participate in Social Security. In Alaska, the legislature created a different sort of retirement system reform for teachers hired after 2006, a defined contribution system in which the employer contributes 7% of pay into workers’ accounts. That’s not in addition to Social Security benefits — that’s instead of Social Security.

At the same time, teachers and other public employees aren’t permanently excluded from Social Security. As the article explains:

“’Any single district can allow a vote to opt back into Social Security,’ [NEA Alaska President Tim] Parker said. “That option is right there in front of us.” From there, teachers in the district would decide the matter, either a straight up-or-down vote or an opt-in vote that would allow in those who wished to join, while other positions would be phased into Social Security as employees left and were replaced.

But, he added, a school district that wanted to opt in to Social Security would have to be prepared to pay for it.

“‘They’re on the hook for 6.2 percent for every one of their employees, every year,’ Parker said. ‘The employee is also on the hook for 6.2 percent. These things all happen in addition to the numbers that are going in on the defined contribution side.’

“At a time when state funding is tight, he acknowledged that might be a tough sale.

“’Where do you find an extra 6.2 percent?’ Parker asked. ‘It’s not an easy thing. Our budgets are very tight.’

“Still, Parker said he wouldn’t be surprised to see some of the state’s smaller districts, where teacher turnover is especially high, opt in to Social Security as a way to attract candidates.”

And that’s the key:

In the same way as federal employees were moved to the Social Security system in 1984, so, too, for state and local public employees to be moved into Social Security should not be a choice left to be made by school districts or teachers focused on the short-term expense of an additional a 6.2% of pay each.

After all, to revisit the nonprofit workers: in 1951, they were provided a mechanism to opt into Social Security. In 1981, over 20% of those workers were still not a part of the system, necessitating the 1984 legislation mandating their inclusion.

And I’ll point out that my longstanding proposal to move Social Security to a flat benefit system would solve the issue nicely. But that’s hardly the only way to get from here to there: although the system initially excluded all state and local workers due to federalism concerns (that it, it was seen as inappropriate for the federal government to tax state or local governments), and only in the 1950s permitted states to elect participation, the federal government’s power relative to state governments has expanded to such a degree (whether directly or in the guise of withholding grant money to states) that it’s hard to find this rationale credible any longer.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest

Forbes post, “It’s ‘America Saves Week’ – Should You Have A Savings Account?”

Originally published at Forbes.com on February 25, 2020.

It’s America Saves Week, an initiative to, yes, promote savings. Yesterday’s theme was “save automatically” and today’s theme is “save with a plan.” A variety of banks and community groups are on board with promoting savings.

But — can we be honest about something?

I’m so old that . . .

when I got my first “grown-up” bank accounts, after leaving grad school and the university credit union, we were persuaded to get a separate savings account, in addition to the checking account, with the lure of a higher interest rate.

You laugh, but it was true. I even looked it up in our old financial records.

The interest rate on that first bank statement was 1.60% for the checking account, and 2.81% for the savings account.

In our most recent bank statement, the savings account likewise earns more interest than the checking account, four times as much, in fact.

Yes, the savings account earns 0.04% and the checking account, 0.01%.

Now, to be sure, we bank at a large national bank, and enjoy the conveniences it offers. Higher rates still exist on online banks, but, of course, without the convenience. And even smaller “neighborhood” banks don’t offer a magic formula for higher rates: to take a few local examples, offering rates of 0.01%, 0.05%, or 0.15%.

Now, at the same time, our first mortgage had an interest rate, if I remember correctly, of 8.5%. The current rate at Quicken Loans is 3.625% for a 30 year fixed mortgage. That’s made monthly payments far more affordable for homebuyers. And this is all a part of a larger macroeconomic picture.

Beyond which, of course, savvy savers don’t leave their money in a savings account, but move it to investments of one sort or another, whether directly in the stock market, or in bonds, or mutual funds or the like, leaving in their bank accounts only as much cash as seems necessary for liquidity purposes.

But traditional savings accounts have long been a sort of “training wheels” for saving and investing, a way not just to build up a balance but build up that intuitive recognition that accounts grow with interest. (Folks, when I wrote about the importance of paying off debt before building retirement savings balances, round about this time last year, some of my twitter followers engaged in a discussion about investing, and many of them struggled with concepts around compound interest.)

And, in fact, a recent survey found that 45% of respondents said they have no money in a savings account — but in that same survey, when asked where they save (that is, “store most of their savings”), only 29% said they had no savings at all, 33% used a savings account, and the rest gave answers such as saving directly within their checking account.

So is there a reason to maintain a separate “savings” account even in these days of low interest, or even to have multiple such accounts for different purposes?

The concept of “mental accounting” says yes — or, rather, maybe. It’s intuitively easier to save (whether for a specific objective or just generally for emergency/rainy-day purposes) if the money leaves your checking account for a separate bucket. Financial advice site NerdWallet’s Amber Murakami-Fester even recommends two separate funds, one for general rainy-day needs (e.g., a home repair bill) and the other for more serious emergencies such as a job loss.

“Many people throw extra money into a single savings account and pull from it whenever their checking account balance runs low, [financial planner James] Kinney says.

“[Financial planner Laura] Scharr-Bykowsky calls this the ‘savings blob.’

“’It doesn’t really have a purpose,” she says. “You just dip into it whenever. . . .’

“When real emergencies strike, your general savings account may prove insufficient. You might then turn to expensive ways of borrowing money, such as credit cards or home equity lines of credit.

“Separating savings into buckets of rainy day funds and an emergency fund has an additional benefit: You’ll be far less likely to tap those reserves for purposes other than what they’re meant for.

“That’s due to a phenomenon in behavioral economics called mental accounting, Scharr-Bykowsky says. People tend to stop spending on one category when they know the money in that bucket is gone, even if other funds are available. Making clear savings categories for future expenses means you’ll hesitate before using the medical expense fund on a new phone.”

(At the same time, however, mental accounting has a downside, as explained in Richard Thaler’s book behavioral economics Nudge:

“The sanctity of these accounts can lead to seemingly bizarre behavior, such as simultaneously borrowing and lending at very different rates. David Gross and Nick Souleles found that the typical household in their sample had more than $5,000 in liquid assets (typically in savings accounts earning less than 5 percent a year) and nearly $3,000 in credit card balances, carrying a typical interest rate of 18 percent or more.”)

What it boils down to is this: saving for the future — for retirement, for a rainy day, for a goal of whatever sort — is still important. But with the loss of meaningful interest earnings on ordinary savings accounts, we’ve lost what was once a very useful tailwind in the effort to boost savings.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “No, Gov. Pritzker, Illinois Pension Reform Isn’t A Fantasy”

Originally published at Forbes.com on February 21, 2020.

 

On Wednesday, Illinois Gov. JB Pritzker gave his budget address, an address in which he promises wide-ranging spending boosts paid for by — yes, you guessed it — the same three sources of newfound state wealth of pot legalization, gambling expansion, and a tax hike on the rich subsequent to voters approving a constitutional amendment to permit graduated taxation rates.

And once again, he addressed pensions in a wholly unsatisfactory way. Here’s the full text of this part of his speech:

“One of Illinois’ most intractable problems is the underfunding of our pension systems.

“We must keep our promises to the retirees who earned their pension benefits and forge a realistic path forward to meet those obligations.

“The fantasy of a constitutional amendment to cut retirees’ benefits is just that – a fantasy. The idea that all of this can be fixed with a single silver bullet ignores the protracted legal battle that will ultimately run headlong into the Contracts Clause of the U.S. Constitution. You will spend years in that protracted legal battle, and when you’re done, you will have simply kicked the can down the road, made another broken promise to taxpayers, and left them with higher tax bills.

“This is not a political football. This is a financial issue that is complex and requires consistency and persistence to manage, with the goal of paying the pensions that are owed.

“That’s why my budget delivers on our full pension payment and then some, with $100 million from the proceeds of the graduated income tax dedicated directly to paying down our pension debt more quickly. We should double that number in subsequent years. Next year would be the first year in state history that we will make a pension payment over and above what is required in statute. It begins to allow us to bend the cost curve and reduce our net pension liability faster.

“At the same time, without breaking our promises, we must relentlessly pursue pension initiatives that reduce the burden on taxpayers. This year, the State’s required payment to the State Employees Retirement System alone will be $32 million less than it would’ve been without the optional pension buyout program. We extended that program last year – because it’s good for taxpayers. That’s why I’ve asked all of the state’s retirement systems to fully implement buyout programs across all our systems.

“What we do to reduce future net pension liabilities for our state and local pension plans has enormously positive benefits for taxpayers. Last year, working with members of this General Assembly, we did what no one had been able to do after more than 70 years of trying: consolidate the investments of the 650 local police and firefighters funds into two statewide systems. Because of their collective size, these funds are projected to see billions of dollars of improved returns over the next 20 years. That means lower property tax pressure on families and businesses across the state.

“This is a great example of how both sides of the aisle can come together with reasonable solutions to address intractable problems. Let’s continue on that path.”

And I will repeat what I have said over and over again (to link merely to the two most recent instances):

Pritzker is deluding himself and misleading Illinoisans when he provides his now-standard set of responses.

The most recent calculation of Illinois’ pensions liabilities stands at a debt of $137.3 billion, as of fiscal 2019 year-end. In 2021, contributions are expected to reach $11 billion, or 27% of the total state spending.

Pritzker’s promise to boost contributions by $100 million in 2021 and $200 million thereafter, if the graduated income tax amendment passes, is a drop in the bucket.

The reduction in liabilities due to the buyout programs are likewise a trivial portion of the total. What’s more, the reform-promoting group Wirepoints has been seeking evidence of the numbers Pritzker has been touting for the programs’ savings, and is being stonewalled.

The consolidation of local police and fire pensions’ asset management that Pritzker boasts of came about not because of his superior leadership skills but because these communities were up against a wall in a way that they hadn’t been in the past due to the 2011 “pension intercept” law and funding ramp causing serious pain in a way that hadn’t been the case before. And, what’s more, even this baby step was only for local pensions, so it makes no dent in the $137 billion, and this was botched even so, with a boost in Tier 2 pensions included with no analysis of the cost.

With respect to a constitutional amendment, he creates a straw man by claiming that reformers’ objective is to “cut retirees’ benefits” when the objective of such an amendment is not to cut benefits at all, but to provide the state with the flexibility to reduce future benefit accruals or increases.

And as to the claim that this will result in a “protracted legal battle that will ultimately run headlong into the Contracts Clause of the U.S. Constitution”? This is repeated over and over again by opponents of reform, and has become the new talking point after Pritzker seems to have abandoned his prior claim that it’s simply impossible to amend the state constitution. And here Mark Glennon at Wirepoints provides a clear explanation of why this claim is not credible, worth quoting in full:

“Pritzker is either dishonest or horribly misinformed. Court rulings and actual experience in other states make it clear that Pritzker is wrong. A pension amendment would almost certainly work to allow for needed reforms to most of our 667 public pensions in Illinois.

“Why? Let’s put this in plain English, without legalese:

“The most recent lesson from the courts came last year in Rhode Island after the City of Cranston lowered certain pension benefits. Some pensioners went to court trying to invalidate the cuts. There was no state constitutional issue there, making the case just like we’d have here after a proper constitutional amendment.

“So, the only thing pensioners could base their case on was the U.S Constitution, including the Contract Clause Pritzker referred to. That clause prohibits states from breaking contracts, and pensions are contracts.

“But the Rhode Island Supreme Court ruled against the pensioners. The Contract Clause and other U.S. constitutional matters are not blanket rules against breaking contracts, the court reminded us. The United States Supreme Court has long said that.

“The Rhode Island court weighed all the circumstances in making its decision – how hard off Cranston, RI was, the reasonableness of the reforms and similar matters. Protecting contract rights gives way when there’s a ‘higher public purpose,’ as one nationally recognized legal expert put it.

“That is, government has to be able to provide proper services. Pension costs were squeezing out money for proper services in Cranston, just as in Illinois.

“’We the People,’ in other words, are not bound by a suicide pact because of the Contract Clause or anything else in the U.S. Constitution. Pensioners tried to appeal their loss to the United States Supreme Court but the high court let the Rhode Island decision stand [emphasis mine].

“Then there’s Arizona’s experience. It had a state constitutional pension protection clause just like in Illinois. They’ve amended it twice to cut benefits, mostly with the approval of union pensioners. Unlike Illinois, most of them saw the long-term benefit of reform even for pensioners.

“However, not all pensioners agreed with the cuts. Yet none has sued under the Contract Clause or anything else. Still to this day any one of them could sue if they thought they could win, individually or as a group. They would sue if Pritzker were right about pension amendments being ‘fantasy.’ They haven’t. They know they’d lose.”

So, yes, if the state reduced future accruals or pension increases for arbitrary or capricious reasons, the Contracts Clause would prohibit it. But that’s not what’s under discussion here.

And it’s likewise not acceptable to defer the debt burden to the next generation.

As it happens, separately, I was asked by a reader the other day to explain a statement on the Teachers’ Retirement System website which appeared to say that there was no serious cause for concern and that “current obligations are well met”:

“If all TRS obligations for current retirees and active teachers were called due today, the System could not meet 60 percent of those outstanding pensions and benefits. But that can never happen because not all teachers will retire at the same time. By law, active teachers cannot collect retirement benefits, so TRS must pay out only what is owed to benefit recipients in that year. In fiscal year 2019, TRS paid out $6.7 billion in benefits and collected $8.1 billion in total revenue.”

(To be clear, the reader didn’t believe that to be true but was unsure how to understand this statement.)

This statement points out the very true fact that the system is not insolvent; the system is at no real risk of insolvency unless the state cuts down or abandons its statutory funding requirements, and even then, the plan can pay benefits from its existing assets for quite some time. (See the table at the bottom of my article from January, “Six Key Charts That Prove Why There Is No Alternative To Pension Reform In Illinois.”)

But “not insolvent” is an unacceptably low bar.

It’s not OK for the state’s pension plans to be merely “not insolvent.” It’s not OK to pass the debt on from one generation to the next, and the injustice done to the next generation by saddling them with this debt isn’t justified by the fact that they might, in turn, choose to saddle yet another generation with debt, if they can get away with it. And, again, the existing funding target of 90% in 2045 relies so heavily on a 7% asset return and on the unsustainably-low Tier 2 benefits that, should that rate be cut or the Tier 2 benefits cuts be undone, that 90% will be far more costly to reach than is even the case at present.

All of which comes down to this: it’s not pension reformists who are constructing a fantasy. It’s Pritzker himself.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “The Key ‘Social Security Cap’ Question: Where Are Our Priorities?”

Originally published at Forbes.com on February 19, 2020.

 

Here’s a recap of the leading Democratic candidates’ Social Security proposals:

“Bernie [Sanders]’s Social Security plan would lift this cap and apply the payroll tax on all income over $250,000.” 

Elizabeth Warren’s “plan imposes a 14.8% Social Security contribution requirement on individual wages above $250,000 –– affecting less than the top 2% of earners –– split equally between employees and employers at 7.4% each” and “establishes a new 14.8% Social Security contribution requirement on net investment income that applies only to the top 2% ––individuals making more than $250,000 in annual income or families making more than $400,000 in annual income.” 

“The Biden Plan will put the program on a path to long-term solvency by asking Americans with especially high wages to pay the same taxes on those earnings that middle-class families pay.” (No further details given.)

“Pete [Buttigieg]’s plan will [require that] . . . individual wage earnings above $250,000 (which means family wage earnings above $500,000 for equal-earning couples) will face additional Social Security taxes and earn modest Social Security benefits for their extra contributions. . . . Pete will work with Congress to develop options for enshrining a process of automatically adjusting high earners’ contributions to keep Social Security solvent without ever cutting benefits or ever sabotaging the program via privatization.”

“Senator Klobuchar supports subjecting income above $250,000 to the payroll tax and extending the solvency of Social Security.”

For each of these candidates, the additional tax would be directed both to make up projected Social Security shortfalls as well as to boost benefits, both for the poor and across-the-board.

What’s more, the Social Security 2100 Act, H.R. 860, sponsored by Rep. John Larson of Connecticut with 208 Democratic co-sponsors, but lacking the bipartisan elements that would have allowed it to become law, had a similar provision: a surtax on wage income of over $400,000. That income would earn Social Security benefits at the rate of 2% (compared to 90%/32%/15% in current law) — a rate so small as to be of no significance at all.

What’s also noteworthy about the Social Security 2011 Act is this: the $400,000 income threshold for the “excess wages” would not increase with inflation. In fact, this gap between the existing earnings limit and this “excess wages” level is intended to close, until the income level which is now a cap on both tax and accrual becomes simply a new bendpoint at which the benefit accrual drops to insignificance.

None of these five candidates’ proposals specify whether they, too, see their $250,000 threshold as a gap which closes over time, or whether they intend to preserve this gap between the ceiling and the surtax. It could be either, I suppose, bearing in mind that it’s entirely reasonable for this level of detail to be omitted from a webpage or white paper, and that these candidates’ proposals are not simply carbon copies of the Larson bill, but, at the same time, every variant of an above-cap tax that’s otherwise been proposed in detail includes a benefit accrual rate that’s so low as to be a farce and simply deceitful to claim it’s a meaningful rate.

But consider the current marginal tax rates:

A single worker earning $250,000 pays a 35% tax on income above $207,351. A married couple pays 35% tax starting at an income of $414,701. These rates increase to 37% for income above $518,401 or $622,051.

At the same time, the current FICA tax of 6.2% employee/6.2% employer is, in reality, a 12.4% tax on the workers with half of this hidden from view. The Warren proposal increases the rate paid to nearly 15%. Buttigieg’s proposal? Who knows?

And, again, the Social Security tax up to the current ceiling has some reasonable connection to benefits earned, though above the top bendpoint, this connection is already shaky. This connection between contribution rates and benefits accrued is a standard piece of the way social insurance works in most developed countries, and, in fact, the ceiling in the United States is unusual for being higher than others, not lower. A 12.4% — or 14.8% or some changeable unknown rate — rate for high earners with a farcically-small level of benefit accrual, is a tax, and nothing other than that.

So we’re left with two fundamental questions:

Should the tax rate for upper middle class earners be set at 50% of wages (plus state income tax on top)?

And if that’s the case, are we really sure that we want to spend that money wholly on boosting Social Security benefits — especially in the across-the-board manner that the various candidates are proposing — or forestalling their cuts despite increased longevity and unfavorable demographics, rather than, at least in part, meeting such needs as anti-poverty programs, childcare for low-income parents, parental leave, improved services for the disabled, and so on, or even simply reducing the deficit?

The bottom line is this: Social Security funding and spending simply must be considered alongside all other spending objectives, rather than seeing the elimination of the earnings ceiling as a source of Social Security-specific free money.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.