New Social Security Act Would Take MORE Money Out of Your Paycheck

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Think Social Security is a ripoff? You ain’t seen nothing yet.

Social Security is such a poor investment that even the most conservative of investors could beat its return. See the chart below for example, which shows that even one-year treasury bills are a better investment than Social Security.

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And of course, that’s just U.S. government debt – the safest investment. The geometric average return on the S&P 500 since 1928 has been a healthy 9.5%. Even if we isolate a smaller time frame, from 2006-2015 (a time period where the worst recession since the great depression occurred), we still see a geometric return of 9.03%.

With those facts in mind, why would any rational person choose to “invest” in Social Security if they had the choice to opt-out? Most probably would choose to put their money elsewhere.

Social Security privatization (or even partial-privatization) isn’t going to happen any time soon, but a new Act, the Save Our Social Security (S.O.S.) Act aims to improve the fiscal solvency of the entitlement problem. Proposed by Rep. Reid Ribble (R-WI), the Act includes measures that Republicans have been advocating for decades, such as raising the retirement age and indexing benefits to a more conservative inflation measurement

However, the faults outweigh the benefits by a long shot.

The Daily Signal’s Rachel Greszler and Romina Boccia comment:

The bill’s most harmful provision is a significant increase in Social Security’s payroll tax cap. Currently, Social Security’s 12.4 percent tax only applies to the first $118,500 of workers’ earnings (the cap is adjusted upward with wage growth each year). The S.O.S. Act would increase that level to $308,750 by 2021, and index it thereafter to tax 90 percent of all wage income. For top earners, that’s almost a $22,000 per year tax increase in 2021.

Now, remember that your employer “pays” half of your Social Security contribution. I put “pays” in quotation marks because there is no free lunch – every dollar your employer has to send off to the government for his half of your Social Security tax is a dollar less that you would’ve otherwise received all (or most of) in the form of wages.

It is well understood that employees bear the full burden of the payroll tax, even though half of it comes from employees’ paychecks and half is collected from employers. As payroll taxes consume more of the employees’ compensation, taxable incomes will decline—causing as much as a $5,000 loss in federal income tax revenues and another $1,000 in state income tax revenues.

That only includes the direct impact of raising the payroll tax cap. Excessive marginal tax rates would further diminish taxable wages by reducing the incentive to work. The S.O.S Act would result in a 55 percent marginal tax rate for a two-earner family of four with $125,000 in income (including federal and California state taxes). Marginal rates for higher-income earners could approach 70 percent.

Who thought that our government could figure out a way to make Social Security into even more of a ripoff?

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Matt Palumbo

About Matt Palumbo

Matt is the author of The Conscience of a Young Conservative and In Defense of Classical Liberalism