The Credit Suisse list of the Top 20 US “tax expenditures” totaled $900 billion for fiscal year 2012. That list includes two items that affect retirement.
The larger category, which comes in at number two on the Credit Suisse Top 20 list, is a $138 billion subsidy for private pensions. It accounts for 15.3 percent of the Credit Suisse Top 20. Number 13 is Social Security at $26 billion, at 2.9 percent of the Credit Suisse $900 billion.
Those private retirement subsidies cost over 5 times as much as Social Security payments. So, if cutting costly tax breaks is the goal, then we get far more savings by putting tax subsidies to private pensions on the chopping block. But for some reason, those private tax breaks are getting a pass, while paying Social Security benefits are taking all the heat.
The campaign against Social Security stems mainly from three misunderstandings about its funding and operation: (1) that Social Security is going bankrupt, (2) that Social Security is essentially the same as private pensions, IRAs, and 401(k)s, and (3) that Social Security is a tax on a par with personal and corporate income taxes. None of these beliefs is correct.
Social Security is solvent, and, even if it were running short of money, there are many ways to ensure that it will continue to provide benefits for the foreseeable future. A recent Forbes Magazine article explains in detail why reports on the demise of Social Security are unwarranted.
Second, however reasonable it may seem to lump Social Security together with tax subsidies provided for private retirement plans because both involve money paid to support older people, fundamental differences between the two make it an untenable equation.
Private pensions are basically savings accounts. They can be funded from voluntary employer and employee payments into pension plans, IRAs, and 401(k)s. The government gives employers and employees tax breaks for those plans to make saving for retirement more attractive.
These retirement programs do not cover everyone who has reached the age of retirement, however. According to the Investment Company Institute, “Four out of 10 US households owned IRAs in 2012. Eight in 10 IRA-owning households also had employer-sponsored retirement plan accumulations or had defined benefit plan coverage. All told, 68 percent of all US households had retirement plans through work or IRAs.”
Moreover, while many people may have IRAs or other forms of tax-subsidized retirement savings, most IRAs are not being funded at a level that will ensure a secure retirement. Only 16 percent of US households contributed to any type of IRA in tax year 2011. In other words, 32 percent of households do not have IRAs, employer-provided retirement savings or pensions. Many more may have some savings, but those savings are wholly insufficient to provide adequate funding for a secure retirement. What this 32 percent does have is Social Security, and so do the 68 percent who also have tax-subsidized pensions and IRAs.
Those lucky enough to have adequately funded private pension and tax-subsidized savings can look forward to comfortable retirements free from money worries. But remember, they are freed from those worries thanks to tax incentives and subsidies paid by all of us. “All of us” includes taxes paid by people who cannot afford to save any money or who could save but have not put money into IRAs or 401(k)s or whose employers do not provide them with pensions or retirement incentives in any form.
Those most likely not to have had tax breaks subsidizing their retirements are contingent workers, contract employees, and those who are paid the least, while those most likely to benefit from those tax breaks are those who earn the most.
It bears repeating – because it is not obvious to most of us – that the 68 percent of us who benefit from tax breaks are being subsidized by those who get no tax breaks and whose retirements will depend solely on Social Security.
Finally, to most of us, Social Security may seem to be no different than private pensions or tax-subsidized savings. In fact, the only similarity is that both involve payments to older people.
Social Security is a benefit that is funded solely through a special payroll tax – FICA – with half paid by employers and half by employees. It guarantees retirement benefits that can start as early as age 62, but those benefits will be lower than those of people who begin receiving retirement benefits when they are older.
The most commonly advocated fix for Social Security is to increase the age at which a person becomes eligible to receive a full Social Security benefit. The most common justifications for increasing the qualification age is to prevent Social Security from running out of money and because people are living longer these days.
These arguments are based on an implicit assumption that those living longer are also healthier than past generations and should continue working and paying into Social Security to shore it up. However, just because average longevity has increased does not mean that everyone is living longer. It also does not mean that those living longer continue to be well enough to work.
Those who can wait longer to apply for a full benefit will disproportionately be those who are in good health and can count on living years longer than those who are too ill to continue to work past age 62. Those two groups may differ based on family longevity, but they will also differ based on wealth and the type of work they have done. The reward for people whose work has involved hard labor under adverse conditions and who are unable to work past their mid-60s will be to receive the lowest payout from Social Security.
Among those most likely to opt for the earlier, but smaller payment are people whose jobs are unhealthy and literally back-breaking. Raising the age to qualify for a full Social Security retirement benefit leaves many in desperate financial straits. For them, the higher age qualification adds insult – and poverty – to injury.
Increasing the age to qualify for a full Social Security benefit in the midst of a multi-year recession with high unemployment rates also harms younger workers. Promoting earlier retirement would free up jobs and bring unemployment down. Instead, we are doing the opposite.
Chained CPI and its effects have recently made the news. Dean Baker from the Center for Economic and Policy Research, provides a good explanation of how chained CPI operates to suppress payouts to Social Security beneficiaries.
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