Financing of Social Security-Progressive or Class Rigidifying?

[Ken Diamond <kd@bmwinc.com>]

> [Social Security] puts the greatest tax burden of supporting the 
> retirement benefits of those at the lower levels of earnings on 
> those who are only middle class themselves, while leaving high 
> wage earners and those with other types of income without any 
> tax responsibility for these lower earners. In short, it is 
> progressive only within the middle class.

Walter Hart has expressed something mostly ignored about Social
Security; the cost of its progressive wage distribution excludes all but
the middle class. But I go further. It also excludes middle class who
work in exempted government jobs and it excludes the middle class that
are that way because they have capital assets that contribute to that
middle class status. Some one of that last descripton could work only
part time because they have non-wage income to live off (like a couple
of rental houses)and yet receive a Social Security redistribution at the
expense of those whose income is no more but is from earned wages. 

True wealth is rarely a function of income attributable to earned
income. It is usually the function of capital accumlation because, as
has been expressed inumerable times in this forum, the power of
compounding interest. But it is also because capital is taxed at a lower
rate than income and not subject to FICA tax. Worse yet, much of it is
never taxed at all because of one of the worst abuses in the tax code
often called the "angel of death." Inherited capital assets enjoy a
stepped up basis that makes all their never taxed appreciation tax-free.
If your hard working,self employed father dies with a few hundred bucks
to his name without having paid his quarterly taxes, his estate will owe
any unpaid income taxes. If, on the other hand, he has some stocks worth
a half million that he paid 25 grand for, you get it all tax free.
Despite the increased number of people who own some equities in this
defined benefit world, a concentration of capital wealth among a
relatively small portion of the population still exists. The "angel of
death" along with a slew of obscure loopholes allows this priveliges
group to escape the taxes they should owe.

While taxes that lack progressivity, like flat income tax proposals, are
often termed regressive, OASDI is truly a regressive tax excluding the
truly wealthy with their non-wage income from sharing in burden of
providing the quality of life for the old and disabled who can't or
don't provide it for themselves and that our society has deemed through
the political process they should have. Their failure to share in this
social cost means middle class worker forced to participate in the
Social Security system will receive a smaller return on the taxes they
paid than a system that distributed the burden over more members of
society.

How is it that as large a social insurance/ social welfare program as
Social Security asks so little from a very priveliged section of the
society? I think the the status quo is aided the mixing it with pension
and insurance benefits so that it is incomprehensible to the average
person. This confusion helps those who avoid sharing in these costs and
the element that believes that, if it was widely understood, the social
welfare provisions would end. 

Reed Davis wrote in the "Values" forum
http://www.network-democracy.org/social-security/nd/archive/ndss/msg00182.html,
"...we "intellectuals" know that this safety-net should be supported but
that the masses do not.  Should we therefore develop a clear rationale
with which we can convince the masses to support a safety-net?  No, this
argument implies that we must fool them into supporting the safety-net
by hiding it inside a retirement program. 

What Roberts Greenstein of the Center for Budget Policies and Priorities
and a frequent congressional witness wrote about the Archer-Shaw plan
support Mr. Davis's conclusion. http://www.cbpp.org/4-28-99socsec.htm 
 
"There is a high degree of risk the plan would lead over time to a
substantial weakening of support for Social Security. This is one of the
plan's most significant weaknesses - over time, it could undermine the
system it seeks to save. Under the plan, many middle- and
upper-middle-income workers would receive only a modest Social Security
benefit, which would equal the difference between the annuity payment
from their individual account and the Social Security benefit level to
which they are entitled. Social Security would appear to provide little
in return for the 12.4 percent of wages these workers and their
employers pay into the Social Security system.

"Moreover, the plan could invite misleading comparisons. Many retirees
would likely compare the annuity benefit their individual account would
provide - which would have been financed with annual deposits equal to
two percent of their wages - to their Social Security benefit, financed
with 12.4 percent of their wages. They could conclude Social Security
was a bad deal and the law should be changed to shift large sums from
Social Security to individual accounts. As a number of leading Social
Security analysts have written, however, such a comparison would be
highly misleading; it would ignore the fact that Social Security payroll
taxes must finance benefits to previous generations of workers, pay for
disability and survivors insurance, and finance the provision of more
adequate benefits to low-wage workers and to spouses who spent years out
of the labor force raising children, among others."

It's a truly perverse vision of a democratic republic when public policy
is made needlessly confusing excluding the average person from fairly
assessing whether those policies accord with their own values.