Thursday, August 18, 2011

Misinformed At Augustana

One of the great frustrations I have is seeing how many misinformed people there are in this country.

This was in evidence yesterday with a question that President Obama got from a college student from Augustana College in Illinois.

The student stated that he thought it was very unfair that the Social Security FICA tax was capped on annual earnings (currently $107,000) and stated that he thought it was not right that someone like Mitt Romney should not have to pay more since he is obviously a millionaire.

He concluded with this question for President Obama, "Can we look forward to you telling the Republicans that it's time the wealthy pay their fair share".

President Obama responded, "Well, first, this is a very well informed man here."

You can see the video here.

Unfortunately, the student is not very well informed at all.

First of all, I do not think that Mitt Romney is employed. Therefore, he has no income from salaries and wages.  The FICA taxes that fund Social Security are applied only to earnings.  They do not apply to dividends, capital gains and other forms of investment income that I am sure make up the vast bulk of Romney's income.  Therefore, a change in the annual earnings limit would have no effect on what Romney pays for Social Security taxes.  If you read my post, The Person Behind The Tree, the same can be said for most other millionaires.  They are millionaires not due to their salaries.  They are millionaires because of their investments.  It used to be referred to as CAPITALISM in this country.

Second, Social Security was not set up to be a welfare redistribution of income system.  It was specifically established as a social insurance program for all Americans.  The formula determining the Social Security benefits that an individual receives is dependent on the contributions the worker (and his employer) have made into the system.  The more you contribute, the higher the benefit.  Under the Social Security law as it has existed since it was first enacted, if the earnings maximum is increased then the worker is entitled to a higher benefit.  This link between the taxes workers pay into the system and the benefits they receive has been considered a foundational principle since the program was first proposed by President Franklin Roosevelt.

The maximum annual Social Security benefit today for someone who has paid at the annual earnings limit is slightly over $25,000.  However, if there was no earnings limit someone making $1 million per year would be entitled to $162,000 per year in benefits.  $400,000 per year would equal about $72,000 per year.

This drives competing policy questions surrounding increasing the wage limit.  Is it wise to be paying these large payments to well-to-do people when Social Security was designed to be a floor of protection for retirement?  On the other hand, if you tax the high earners but don't provide an additional benefit you have undermined the core principles that have governed Social Security for almost 75 years.  You have turned it into yet another wealth redistribution program. Social Security was supposed to bind Americans of all earnings level together for retirement income protection.

The Congressional Research Service has an entire paper on the subject written in 2010 if you want to be informed about the pros and cons of raising or eliminating the taxable earnings base for Social Security.

We have some very difficult challenges ahead of us.  If we are going to solve our problems, people need to be informed about the issues.  Most importantly, our leaders have a duty to make sure the people know the facts.  It appears that we are failing on both points.

I know Augustana College to be a great school.  Can someone set this student straight?

An interesting footnote to this story...
Ed Henry of Fox News spoke to the student after he questioned the President and reports that he was wearing a tag that said "Volunteer" on it.

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