When Will the Media Stop Pushing the Idea That Social Security Is a 'Regressive' Tax?

December 20th, 2006 10:02 AM

I know there's only so much space, but today's subscription-only editorial in the Wall Street Journal missed a BIG chance to tell people something that the formerly Mainstream Media never gets around to telling people -- Social Security, contrary to popular belief, is a "progressive" tax system in its own right. Though the payroll tax taken in isolation is "regressive" because it is not assessed above a certain income level (at annual earnings above roughly $90,000), the fact that the more you make, the less you get in retirement benefits (compared to what you earned while you were working) more than offsets any nominal "regressiveness."

You doubt? Though the below from my classroom presentations changes every year, and still needs to be updated for the benefit increase announced in November, it makes the point (Warning: Mood-swing alert for upper-middle and greater income earners -- Ed.):


Translation (looking at the two rectangles on the graph):

  • If your earnings in your final year of work were $30,000 and you retire this year at Age 65 years and 8 months (SocSec's Full Retirement Age this year, which is gradually increasing to 67 over the next 18 years), and if that earnings level reflects in real terms what you have consistently made throughout your working career, your first-year Social Security benefit will be roughly $13,500 (45% x $30K), or about $1,125 per month (benefits increase with inflation in successive years).
  • If your final year's earnings were $60,000 and everything else stays the same, your first-year benefit will be roughly $20,000 (about one-third of $60K), or about $1,700 per month.
  • The higher earner is getting a benefit that is less than 50% greater than the lower earner ($6,500 more divided by $13,500), even though he or she has paid twice as much into the Social Security system.

These are approximations (but pretty good ones). Social Security actually looks at your highest inflation-adjusted 35 years of earnings for the purpose of calculating your benefits. There are many other nuances not worth getting into here that most affect people who aren't in the workforce during an entire working career.

Call this setup fair if you are are a wealth redistributionist (as you might imagine, the vast majority of people in my classes don't see it that way!), but in terms of what people get out of the system compared to what they put in, it is NOT regressive. For better or worse, as with the income-tax system, Social Security is, and has been since its inception, "progressive." It would be nice if the people whose job it is to inform us would let us know that, at least once in a while.

Cross-posted at BizzyBlog.com.