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Tuesday, October 21, 2014
S.567: Schatz Proposes Largest Tax Hike in US History
By Selected News Articles @ 8:56 PM :: 5976 Views :: Congressional Delegation, Taxes

REMOVING THE CAP ON U.S. SOCIAL SECURITY

The effect on Hawaii’s Small Business

by Tisha Panter, Hawaii Senate Minority Research Office, October 21, 2014

When Franklin Roosevelt first proposed Social Security in 1935, the law was primarily designed to provide retirement benefits for low-income workers. In the 1950s, the social security program was expanded to include disability insurance benefits for those who were too disabled to work.

Today social security is becoming more of a welfare program and without any comprehensive changes the social security DI trust fund will be exhausted in 2017, and the OASI trust fund was exhausted in 2013.   The only way to make the social security program solvent again may be to restore the program to its original intent.

1. SOCIAL SECURITY FACTS

Social Security is the single largest federal program, with outlays of $808 billion in fiscal year 2013.

The program has two parts: The Old-Age and Survivors Insurance program pays benefits to retired workers and to their dependents and survivors, and the Disability Insurance program that pays benefits to disabled workers and to their spouses and survivors.

Social Security benefits are financed by a payroll tax on current workers, half paid by the worker and half paid by the employer. The Congressional Budget Office (CBO) regularly examines various possible changes to Social Security outlays or receipts.

A. Program Overview:

Program

Beneficiaries (2013)

Net Federal Spending (2013)

Funding Mechanism

Federal Funding Source

OSAI (Old-Age and Survivors Insurance)

40.6M are retired workers incl. families; 6.4M are spouses of deceased workers

$ 671B

Federally Funded

Payroll taxes (96%) ; income taxes on higher-income program beneficiaries (4%)

Disability Insurance (DI)

11.2M

$137B

Federally Funded

Payroll taxes

Total

58M

$808B

 

 

B.  Significance to Hawaii:

In Hawaii, about 240,000 individuals receive social security benefits. This amounts to approximately $3.3B in federal spending that flows into Hawaii (2013).

C. Fiscal Health of the Trust Funds – Billions $[1]:

  Actual Projected
  2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Total Income 851 890 919 986 996 1041 1088 1133 1177 1222 1266 1307
Total Outlays 813 850 889 937 993 1054 1121 1193 1269 1348 1430 1516
                         
Net Cash Flow                        
OASI - Trust Fund 69 69 60 51 38 21 2 -23 -51 -81 -115 -156
DI-Trust Fund -31 -29 -31 -32 -34 -35 -36 -38 -41 -45 -49 -53
Total: 38 40 29 19 4 -14 -34 -61 -92 -126 -164 -209
                         
Trust Fund Balances                        
OASI - Trust Fund 2655 2726 2785 2836 2874 2895 2898 2875 2824 2743 2628 2471
DI-Trust Fund 100 71 40 8 0 0 0 0 0 0 0

0

2. RECENT PROPOSED FEDERAL LEGISLATION

Hawaii’s Senator Schatz co-sponsored the "Strengthening Social Security Act of 2013," also known as the Harkin-Schatz bill (s.567).  An identical bill was introduced in the U.S. House of Representatives by Congresswoman Sánchez of California (H.R. 3118). According to the Library of Congress, S.567 was referred to finance committee on March 14, 2013,[2] and H.R.3118 was referred to a congressional committee on September 17, 2014.  It is unlikely that either of these bills will receive any hearing, as they are controversial even for Democrat standards. Most Democrats, even former President Clinton, have long argued against removing the payroll cap.  GovTrack, which is federal legislation tracking website, predicts S.567 and H.R.3118 has a 0% chance of passing out of committee and a 0% probability of being enacted.[3]

S.567 and H.R.3118 propose two major changes:

1. Increases taxes on high-income earners by removing the current payroll tax cap.

  • The current payroll cap increases each year due to changes in the national average wage index.  In 2014, the payroll cap amounts to $117,000.
  • The current cap covers about 84% of total earnings in the USA.
  • The Harkin-Schatz bill proposes to eliminate the cap, making all taxable earnings subject to payroll taxes.

2. Increases monthly social security supplemental income benefits by changing the way the Cost of Living Allowance (COLA) is calculated.

  • The purpose of the COLA[4] is to ensure that the purchasing power of Social Security Supplemental Income benefits are not eroded by inflation.
  • Currently, the COLA is based on the percentage increase in the CPI-W[5].
  • Under the Harkin-Schatz proposal, the COLA increases would be based on a different index, the CPI-E[6], which has historically increased 0.2% higher in comparison to the CPI-W.

3. EFFECTS OF S.567 and H.R. 3118

Removing the payroll cap will result in one of the largest tax increases in US history[7] with significant negative impacts because:

  • It will increase the top effective federal marginal income tax rate on labor income to almost 52.5%. If Hawaii state taxes are also taken into consideration, than the state and federal tax burden combined will be approximately 63%.
  • It will also reduce the take-home pay of 10.4 million workers by an average of $3500 annually.
  • It will significantly affect small business owners, since about one-third of those affected by raising the cap would be small business owners. Small business owners pay double tax for social security being 6.2% as the employer, and 6.2% as the employee (12.4% total).
  • The bill’s main intent is to raise taxes on the wealthy in order to fund an increase in social security benefits, but it will likely hurt small businesses and have a trickledown effect on job growth and a shifting of income generated from business to a less taxable form of income.
  • The Congressional Research Service in 2013[8] indicated that a raising of the cap to $214,500 but keeping the rate at 12.4% would increase the payroll tax for the average family by $571 per year, and payroll tax on the top earners would increase by $12,616 per annum.
  • Heritage Foundation calculated in a 2001 study[9] that removing the taxable wage cap on Social Security would amount to the largest tax increase in U.S. history, amounting to $505 billion over five years, and said it would dwarf the 1993, 1990 and 1982 tax increases.  The same study also indicated that with would not stop Social Security from borrowing between 2035 and 2075 in order to maintain benefits.
  • The social security trust funds would gain very little if S.567 was enacted because the proposed COLA increase will offset the gain of removing the cap. Additionally, with the DI trust fund is basically bankrupt any taxation revenue increase would likely be a short-term fix for the DI fund.

It may also weaken the economy by:

  • Creating a disincentive to work; and
  • According to the Heritage Foundation[10] estimates, removing the cap would reduce the rate of economic growth by 2-3 percent.

4. SOCIAL SECURITY REFORMS

The only likely resuscitation for social security is to restore the social security program to its original intent, which was to provide retirement benefits to low-income workers and disability insurance to those who cannot work because of a disability.

It would be appropriate to adopt a balanced, comprehensive and sustainable approach to dealing with social security rather than go for the populist alternatives.  It is recommended that government consider the following possibilities:

1. Raise the retirement age;

2. Make social security a means tested program, by cutting benefits for higher-income retirees; and

3. Tighten the eligibility requirements for the DI program.

4. Provide more avenues for voluntary retirement investment opportunities that will encourage individuals to control a portion of their own retirement.

It is likely there is not one single fix to the social security programs but based on the looming bankruptcy of the DI and OASI programs (collectively known as Social Security), some unpopular decisions will need to be made very soon.

---30---

[1] Source: Congressional Budget Office, Baseline Projections (April, 2014)

[2] https://www.congress.gov/bill/113th-congress/senate-bill/567/all-info

[3] https://www.govtrack.us/congress/bills/113/s567#overview

[4] Cost of Living Allowance

[5] Consumer Price Index-Urban Wage Earners and Clerical Workers

[6] Experimental Price Index for the Elderly, published by the Bureau of Labor Statistics. For more information:http://www.bls.gov/opub/ted/2012/ted_20120302.htm

[7] http://www.heritage.org/research/reports/2001/10/removing-social-securitys-tax-cap-on-wages

[8] http://fas.org/sgp/crs/misc/RL33943.pdf. Congressional Research Service, CRS Report for Congress, February 15, 2013: “Increasing the Social Security Payroll Tax Base:  Options and Effects on Tax Burdens” by Thomas L. Hungerford, Specialist in Public Finance

[9] http://www.heritage.org/research/reports/2001/10/removing-social-securitys-tax-cap-on-wages

[10] Dr. Mark Wilson. "Removing Social Security's Tax Cap on Wages Would Do More Harm Than Good." Heritage Foundation. Oct 18, 2001.

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