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    Economics: Eliminating Social Security Taxes For Older People Would Create A Stronger Tax Base?
    By News Staff | August 30th 2012 05:04 PM | 13 comments | Print | E-mail | Track Comments
    Social security is in a crisis even worse than Medicare. Because Congress has consistently spent contributions, social security is always on the edge of insolvency and now that the Baby Boomers have begun retiring, the crisis is going to get worse, with not enough workers to fund the retirees.

    Ideas such as raising the retirement age are floated by University of Michigen economists have a more positive approach; they say if we stop collecting social security payroll taxes when workers are 55-years old, their take-home pay would jump by 10.6 percent, older people would work 1.5 years longer on average and end up still paying more in income taxes and helping to reduce the Federal deficit while not drawing retirement.

    Basically, they say that if every U.S. worker got that automatic 10 percent pay raise at age 55, due to no longer paying into social security, most people would work quite a bit longer to enjoy the extra income before they retired. A large net gain.

    "People are living longer, healthier lives, and so far have opted to take most of that extra time as additional retirement rather than work," says economist John Laitner, who conducted the analysis with Dan Silverman."We are proposing a way of responding to this situation through targeted tax-rate changes that would reward older workers for staying on the job and also benefit the economy as a whole."


    Using data from the University of Michigan Institute for Social Research (ISR) Health and Retirement Study and from the Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics, Laitner and Silverman analzyed how tax cuts targeted at older workers would affect the likelihood of working longer and the size of the federal deficit.

    "Our idea is to lower the taxes on an individual precisely at the time of life when people are making decisions about whether to work longer or retire," Silverman said.

    Workers would need to pay about one percent higher payroll taxes a year until age 55 in order for the Social Security system to break even, the researchers show. This would mean that over their lifetimes, households would pay about $15,000 more in Federal income tax, providing welcome reductions in the Federal deficit.

    And workers age 55 and over would see their after-tax earnings increase by a healthy 10.6 percent – inducing them to work longer and enjoy the extra income. Work years beyond age 54 would not affect benefits, and as in the current system, workers could claim benefits as early as age 62 although waiting until full retirement age would continue to be rewarded with higher benefit levels.

    "Not everyone would benefit," Laitner said. "Households with a strong preference for very early retirement would pay the slightly higher payroll tax before age 55, but leave the labor force before gaining much from the elimination of the payroll tax after that. Late retirees would, by the same token, be big winners. And the point of the reform, after all, is to encourage work by rewarding it."


    Their analysis appears in The Journal of Public Economics.

    Comments

    Gerhard Adam
    And workers age 55 and over would see their after-tax earnings increase by a healthy 10.6 percent – inducing them to work longer and enjoy the extra income.
    What kind of a shell game is this?  Since the social security tax is 15.30% [with half (7.65%) being paid by the employer], I'm not clear on why there should only be a 10.6% change.
    Mundus vult decipi
    Hank
    My guess; there is a cap on how much earnings you pay social security on and maybe the average income of older people is above it.
    Gerhard Adam
    Since the cap is $110,000, that seems like a pretty optimistic salary consideration for an economic prediction.  I would willingly bet that few people would be in this category [at least to consider it the basis for making the reference in the article].  In fact, they would have to make considerably more than $110,000 in order to have those percentages drop like that.

    Sounds like more economic voodoo to me.
    Mundus vult decipi
    The suggestion to raise the rates until age 55 as a revenue measure is counterproductive. Payroll taxes of 15% kill jobs. The employer share makes it more expensive to hire workers. The employee share reduces consumer spending which provides 70% of the fuel for our economic engine. Encouraging later retirement is almost as bad as raising taxes. It does not cost Social Security anything to pay for a longer retirement because the monthly payments are simply adjusted down. Early retirement also has the obvious benefit of giving a job to a younger person.

    Without raising any more in taxes we can replace payroll taxes with a 2% net wealth tax (excluding $15,000 and retirement funds) and lower the individual income tax rate to 8%. The blend of net wealth taxes and income taxes is progressive even though rich and poor would pay the same rate. Capital gains, estate and gift taxes are unnecessary with a wealth tax. A 4% value added tax (VAT) and 8% corporate rate would complete the essential elements of the 2-4-8 Tax Blend.

    Instead of slowing the economy with higher taxes and hurting people with less benefits, every aspect of the 2-4-8 Tax Blend encourages productive business without more taxes or more government spending. The net wealth tax is a healthy negative reinforcer (as in "use it or lose it") in so far as it encourages assets to be used for productive investment rather than remain idle. The elimination of capital gains and the low 8% income tax rates enables the elimination of tax expenditures ("tax loopholes") and encourages trade and reinvestment of assets without negative tax consequences. The 4% VAT and 8% income tax would be the lowest business tax rate in the developed world and still generate about 20% of federal government revenue.

    It also corrects the unintended redistribution of wealth which has left half the country with only 1.1% of the wealth and $3 for every $10 they had in 1995. The expanded tax base enables the lowest rates mathematically possible and eliminates any short term need to reduce Social Security or Medicare benefits.

    Independent leaders must show those on the political left how business freedom and low tax rates will encourage business and show those on the political right how helping the poor and middle class will be good for business and wealth creation.

    Read more at TaxNetWealth.com

    But, but, but, how about the young looking for jobs? If the older generation hangs on to jobs longer, where will the new comers find jobs?

    Hank
    Economies expand unless government wants them not to (taxes, regulations, bans).   That same argument could have been made 40 years ago otherwise.
    Gerhard Adam
    The pertinent question is which country's economy is expanding. 
    Mundus vult decipi
    Hank
    Not ours in any meaningful way, but as I said, that is a choice.
    Fantastically stupid idea.

    Most people don't make important choices for tax reasons. To the extent that it has some effect, this system would tend to make people stop work EARLIER, not LATER. Their expenses are less, so they'll need less gross income in retirement.

    If you want to encourage socially-beneficial behavior, it would make vastly more sense to cut taxes on the YOUNG. This would give them an incentive to have more kids, and it might give them an incentive to start saving earlier. The earlier you start, the less pension you need later on.

    Hank
    Economics may work that way but psychology does not.  This is why economics is wrong in just about everything. Young people with lower incomes and higher percentage of expenses are not going to donate money for something they do not need for 40 years; this is why government healthcare has to make it mandatory for young people who do not need it and do no want to pay for it. Likewise, young people are needed from moment one to fund social security because the contributions from former generations were spent by the Congress of the moment.
    Gerhard Adam
    Agreed.  Of course, these things need to be mandatory, because they aren't intended to simply exist when you need them.  It would be like arguing that only people that have car accidents should be required to have insurance.  Insurance works on the principle that everyone pays although only a few collect.

    Similarly the whole reason social security exists is precisely because people didn't save for their retirements.  This idealized notion that people will save money rather than spend it is a fantasy. 

    This is already the problem with young people not wanting to purchase insurance despite the fact that they are the ones that will use it due to unexpected injuries, pregnancies, and early child care.  The idea that someone doesn't need it simply flies in the face of reality.
    Mundus vult decipi
    MikeCrow
    The other side of this is that some(most?) people will require 10's to 100's of thousands of dollars in healthcare before they die.
    The only way to afford that is to collect while people don't need it.
    Never is a long time.
    Gerhard Adam
    It still won't work, but it would be worse without everyone paying.
    Mundus vult decipi