AP's Ohlemacher: Taxing All Earned Income to 'Save' Social Security Would Be 'Modest Change'

Democratic President Franklin Delano Roosevelt signed the Social Security Act on August 14, 1935.

In anticipation of the New Deal-era program's 80th anniversary, the Associated Press's Stephen Ohlemacher presented as facts several unfortunately widely believed distortions. His worst offense against common sense was an item in his list of "modest changes" which could "save" the actuarially bankrupt (to the tune of at least $10.6 trillion) program. The AP reporter included in his list of what he claimed would be "modest changes" the idea of applying the 12.4 percent payroll tax to absolutely all earned income. Modest, schmodest.

Here are excerpts from Ohlemacher's exercise in reality avoidance (bolds and numbered tags are mine):

Social Security at 80: Modest changes could save program

As Social Security approaches its 80th birthday Friday, the federal government's largest benefit program stands at a pivotal point in its history.

Relatively modest changes to taxes and benefits could still save it for generations of Americans to come, but Congress must act quickly, and even limited changes are politically difficult.

The longer lawmakers wait, the harder it will become to maintain Social Security as a program that pays for itself, a key feature since President Franklin Roosevelt signed the Social Security Act on Aug. 14, 1935.

... The options fall into broad categories: benefit cuts, tax increases or a combination of both.

None is popular.

... Options:

apply the payroll tax to all wages, including those above $118,500. This option would wipe out 66 percent of the shortfall.

The top federal tax rate is currently 42.5 percent, consisting of the 39.6 percent federal income tax rate and the 2.9 percent Medicare tax which, unlike the payroll tax, has no earnings limit. Throw in a rough 6.5 percent average top bracket for state taxes (in states like New Jersey and Califorinia, the figure is much higher, while states like Florida and Texas have no income tax), and you're at 49 percent.

Ohlemacher's "modest change" would add 12.4 points to that top rate, bringing the greedy hand of government's average total take on each marginal dollar of earned income to 61.4 percent.

Ohlemacher's "modest change" is an average 25.3 percent tax increase (12.4 divided by 49) on all earned income above $118,000 per year.

Ohlemacher's "modest change" is an average 24.3 percent tax decrease in take-home pay (12.4 divided by the current 51 percent average remainder after taxes) affecting all earned income above $118,000 per year. (In California, where the top income tax rate is 12.3 percent, the reduction in take-home pay would be over 27 percent.)

The daily koolaid delivery to the offices of the Associated Press must be especially strong if Stephen Ohlemacher really believes that this "modest change" would "wipe out 66 percent of the projected Social Security shortfall." Such an increase would do serious harm to the economy, holding back economic growth, overall employment, and tax collections. The degree of the "wipe out" would be far, far less than 66 percent.

If Stephen Ohlemacher thinks that a 24 percent decrease in take-home pay is a "modest change," then he must think his economic decisions and behavior wouldn't change a bit if he was forced to accept a 24 percent cut in take-home pay. You should know better, sir. How can you be so dense as to pretend that it won't negatively affect the choices and behavior of those affected by this "modest change"?

Three other obvious errors in Ohlemacher's report include the following:

  • The pretense that the Social Security system has $2.7 trillion in "money." It doesn't; all it has is that much in IOUs from the rest of the government. The government facetiously and deceptively characterizes the balances in the various Social Security "Trust Funds" as "reserves." They are obviously no such thing.
  • Ohlemacher failed to note that the program's annual financial performance has serious deteriorated since Barack Obama took office in 2009. The system has paid out much more in benefits than it has collected in taxes for the past five calendar years, i.e., the program does not "pay for itself," — something which has never happened before. This has occurred primarily because the economy's post-recession recovery is the worst by far since World War II.
  • Ohlemacher also ignored the fact that the system's long-term viability has badly deterioriated during Obama's presidency. The year in which serious benefit cuts will have to take place if no action is taken has gone from 2041 in 2008 (i.e., 33 years down the road) to 2034 (i.e., only 19 years from now) — and there is strong reason to believe that certain actuarial errors, if corrected, would bring the current cutback date even closer.

Cross-posted at BizzyBlog.com.

Congress Economy Social Security Taxes Media Bias Debate Bias by Omission Labeling Wire Services/Media Companies Associated Press Stephen Ohlemacher Barack Obama

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