Should people who work past retirement age be exempted from Social Security taxes?

Posted: Friday, May 14, 2010

Social Security tax penalizes workers

ARLINGTON, Va. - Most Americans will pay thousands of dollars per year in Social Security taxes during their working lives on the promise that they'll receive a government pension when they reach a certain age.

Their employers will contribute an equal amount.

When they finally become eligible for these benefits, however, they will learn another reality: If they or their spouse are still working and their earnings exceed a certain threshold, the government will tax their Social Security benefits.

This double taxation is not only unfair and imposes punitive tax rates on seniors who choose - or are forced by economic circumstances - to stay in the workforce, it also harms the economy. As our most experienced workers, seniors contribute greatly to workplace productivity; discouraging their labor force participation through punitive taxation harms everybody.

Social Security is in dire financial condition, already operating in the red - eight years earlier than the program's trustees expected. The program must be reformed. But any reform should, for both simple fairness and to promote economic growth, repeal the 1993 tax on Social Security benefits.

Historically only 50 percent of Social Security benefits were taxable: the part paid by employers. Since 1993, however, individual seniors with incomes exceeding $34,000 and couples with more than $44,000 in income have been taxed on 85 percent of their Social Security benefits. Because these threshold amounts aren't indexed to inflation, the unfair levy hits more and more seniors every year.

For most Americans the 25 percent marginal tax rate kicks in this year at $34,000 - meaning they will pay $25 in taxes for every $100 they earn above that. A senior earning the same $34,000 will pay a higher rate. For every additional $100 the senior earns, he or she will pay $25 in income taxes, plus an additional $21.25 on the previously untaxed Social Security benefits - 25 percent of the 85 percent that are now taxable, or 21.25 percent overall. This gives the senior an effective marginal tax rate of 46.25 percent.

This double-taxation creates a strong incentive for some of America's most knowledgeable and productive workers to cut back or leave the labor force.

We learned - or should have - from earlier tax cuts during the Kennedy and Reagan administrations that marginal income tax rates have an enormous impact on economic growth.

High marginal rates encourage some our best workers to stop working. Employers are forced to replace them with less experienced workers who produce less, slowing the growth of both the company and the economy - thus resulting in fewer jobs.

The Social Security system for the first time this year will send out more in payments than the government collects in taxes. Some will argue that this is good reason to continue double-taxing Social Security benefits. It isn't.

Social Security's premature financial woes have been caused primarily by the bad economy; ending the double taxation of Social Security benefits would help give the economy a lift.

Social Security's financial problems can only be solved with economically sound, fair policies that don't rely on gimmicks like the 1993 double-taxation provisions. The system needs to be modernized in a way that promotes economic investment and growth, preferably through individual retirement accounts that would give workers a better deal than the current system even promises.

More taxes, fees or benefit cuts would only exacerbate the biggest problem with Social Security, which is that it offers a meager return to workers who deserve better.

The best way to finance the transition to a reformed Social Security system is to reduce excessive federal spending, not punish seniors with an unfair, discriminatory double tax.

• Phil Kerpen is vice president for policy at Americans for Prosperity, a conservative organization in Arlington, Va.


Taxes keep our frayed safety net from unraveling

WASHINGTON - A vast majority of the seniors who work past retirement age are comfortably upper middle-class - not only owning their homes, but often a second one on a golf course or near a beach.

Their stock portfolios alone - even accounting for the market's recent decline - far surpass the lifetime savings of most Americans. More often than not they drive expensive foreign cars - Mercedes, Lexus, BMW's and others.

Like a latter-day Midas they continue working not because they need more money for life's necessities, but simply because they want to accumulate more wealth and stoke their aging, but still muscular egos.

The nation's capital is a prime example and the posh suburb of Chevy Chase, Md. - clusters of multi-million-dollar homes surrounding several of the world's most expensive country clubs - is the crown jewel of conspicuous self-aggrandizement by super-rich seniors.

Now at the time when the country's official unemployment rate is holding steady at just-under 10 percent and its real jobless numbers - the one that includes those who have given up looking for work - hovers at nearly 20 percent, rich seniors are prodding their conservative friends in Congress to exempt them from Social Security taxes altogether.

Rather than give back some of their stockpiled treasures to help shore up America's frayed social safety net, the geriatric ungrateful look past the legions of suffering poor like someone ignoring a wino panhandler on Park Avenue.

A destitute America struggling through the worse economic downturn since the Great Depression simply can't tolerate such haughty self-indulgence.

As the progressive Dean Baker and the conservative Kevin Hassett pointed out recently in a brilliant column, the nation is in such woebegone straits that it may well be time to embrace what once was an unthinkable concept: job sharing.

With the typical stretch of unemployment now lasting the better part of two years, they noted, this prolonged recession "clearly threatens to do permanent damage to the careers of a generation of workers, and policy action is urgent." In calling for national work-sharing, Hassett and Baker suggest that firms forgo simply laying off workers, but instead "spread a small amount of pain across many workers." The policy has been highly successful in protecting jobs both in Germany and the neighboring Netherlands, where companies routinely reduce the hours of work by 20 percent or more to avoid laying off workers.

In both countries wise governments have provided those working fewer hours under work-sharing with unemployment benefits to cushion workers' reduction in pay. For example, 100 workers might find their hours reduced by 20 percent to prevent 20 of their workplace friends from being laid-off, but government then would provide enough unemployment benefits to make the reduction in real wages come to 5 percent or 10 percent.

A variation of this concept of shared sacrifice - something Americans accepted unhesitatingly in the Great Depression and World War II - already has been employed in the furlough policies of state and local governments and many newspapers across the U.S.

Shared-sacrifice ought to be targeted at America's most wealthy seniors as well. Rather than exempting them from Social Security taxes, Congress should consider imposing a "blessings of liberty" surtax on those oh-so-comfortable seniors who have accumulated their own mini-Fort Knoxes, in part because they live in such an unfettered, free market economy.

The money collected from such winter patriots no doubt would run to the billions of dollars - and could be used to alleviate the woes of the chronic unemployed andunderemployed.

Even if they paid an extra 20 percent to 25 percent in taxes, America's elderly rich would still be far wealthier than their counterparts in any other country on Earth. Like Scrooge awakening on Christmas morning, they might well find a profound joy in helping the unfortunate among us.

• Wayne Madsen is a contributing writer to the progressive Online Journal (

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