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Tax Day Revelations
By
David Hogberg, THE AMERICAN SPECTATOR
Published 4/15/2005 12:05:38 AM
Well, that day we all look forward too has arrived, my friends. Now might be
as good a time as any to inform you that you could have paid a 115% tax rate on
some of your income if you are currently receiving Social Security benefits.
That is one of the eye-popping revelations in Joseph Fried's
book, How Social Security Picks Your Pocket: A Story of Waste, Fraud, and
Inequities (Algora Publishing, 2003; 260 pages, $28.95).
Social Security wastes our tax dollars in ways that most people are unaware of.
Rep. Charles Rangel (D-N.Y.) recently told a reporter, "The progressive nature
of being able to get returns [from Social Security] means that lower-income
people benefit more than higher-income people." Yet Fried reveals that Social
Security actually redistributes income upward. The reason is:
A married worker with a stay-at-home spouse gets a benefit increase of up to 50% over other workers -- regardless of need. It's called a "spousal benefit," and it works like this. At age 62, the worker's spouse can apply for a benefit based on her own work record or, if greater, a benefit equal to one half that of her husband's benefit. She qualifies for that benefit whether or not she ever worked, and whether or not the couple is wealthy. This benefit is rare, or nonexistent, in private retirement plans.
The spousal benefit results in upward redistribution because wives that stay
at home are more likely to be married to high-earning husbands.
The "survivors' benefit" is the other part of Social Security that leads to
upward redistribution. Most private retirement plans permit couples to take
joint benefit upon retirement, but when a couple elects to do this their monthly
benefit is reduced to reflect the longer payout period of two lives versus one.
Social Security makes no such adjustment, and, according to Fried, "this amounts
to a very substantial extra benefit."
Fried notes that Harvard economist Jeffrey Liebman's examination of the data
suggests "the wealthiest 20% of workers receive about 90% more from spousal and
survivor benefits (in present value dollars) than do the poorest 20%." Fried
estimates that "$71 billion per year, in the form of spousal and survivor
benefits, will be transferred to people with career wages above 70% of the
career wage earnings of all other retirees."
So how does one pay a 115% tax? It is due to the part of Social Security called
the senior citizens earnings penalty. This applies to people who have taken
early Social Security, have not yet reached 65 (or 67, depending on when they
were born) and earn more than $11,520 annually. For every two dollars you earn
over that amount, one dollar is deducted from your Social Security benefit. As
Fried puts is, "This is the equivalent of a nasty, 50% federal tax rate, on top
of all the other taxes you have to pay." He then gives an example of a
63-year-old woman living in Ohio whose income is $11,000 from a current job,
$500 in interest, $17,500 from a private pension, and $16,000 from Social
Security. This woman would like to earn an extra $5,000 to help her daughter
with college expenses. As Table 1 ( re-created from Fried's book, page 79)
shows, she'll pay $5,749, or 115%, in taxes on that $5,000! As a certified
public accountant, Fried has experience with seniors who have no idea that the
government is taking them for a ride. [See table 1, below.]
From disability fraud, to dead recipients, to unions that want to preserve the
Social Security status quo but keep their own members exempt from payroll taxes,
Fried's book is chock full of examples that both anger and entertain. It is also
meticulously researched and written in an easy-going style, making it a good
read for both layperson and policy wonk alike. If you want to get a solid grasp
of how Social Security doesn't work, this book is the best place to
start.
David Hogberg is a senior research analyst at the
Capital Research Center.
He also hosts his own website,
Hog Haven.
TABLE 1
| Type of tax | Amounts to pay on $5,000, using 2001 tax rates | |
| Amount | Percent | |
|
Loss of SS benefits, due to earnings penalty |
$2,500 | 50.0 |
| Extra federal income tax | 2,543 | 50.9 |
| Ohio income tax | 223 | 4.5 |
| Municipality income tax | 100 | 2.0 |
| Social Security tax | 310 | 6.2 |
| Medicare tax | 73 | 1.4 |
|
Grand total |
$5,749 | 115.0 |
To see same chart using 2004 rate, click here>>