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How to afford a raise for retired workers: A flat tax for social security

In January 2012 America’s 55 million Social Security beneficiaries will get their first raise in three years, a 3.6% cost of living adjustment.  For the 35 million retired workers among them, that amounts to an average increase of about $50 per month, or $600 per year.

Of course, in real terms that’s not a raise at all.  All it does is help people catch up with rising prices.  But it helps.

A legacy of the Great Depression, Social Security put an end to the widespread poverty of America’s retired workers.  For over seventy years we have provided a secure retirement income to for people who spent their lives building our country.  Support for retired workers is the single largest category of Social Security benefits, accounting for over 63% of all cash benefits paid in 2010.

Some people think of Social Security as a personal pension or insurance policy.  It’s not.  The Social Security budget is what we spend every year to make sure that elderly and disabled Americans (and their dependents) can live with dignity.  On that score, it’s money well spent.

Between 1935 and 1973 average social security payments rose steadily.  Company pensions rose along with them.  By 1973 the average monthly benefit for a retired worker was $1218 (adjusted for inflation to 2010 dollars).  That’s wasn’t a fortune, but it was enough to live on, especially if you had a private pension to top it up.

Today, those private pensions are disappearing or gone forever.  An increasing number of Americans (now over one-third) are retiring on social security alone — if they retire at all.  Among Americans aged 65-69, 36% of men and 26% of women now stay in the labor force.

Considering these trends, it’s a good thing that average social security benefits have risen since 1973.  The average monthly benefit for a retired worker is now up to $1391.  That’s a whopping $173 raise over a 37 year period.

News flash: it’s 2011.  The twenty-first century.  Shouldn’t people be retiring better now than they were in 1973?

All told, Social Security benefits for retired workers increased on average less than 0.49% per year over the past 37 years (adjusted for inflation).  Over that same period, increases in national income per person in America (GDP per capita) averaged 1.66% per year.  Seen in that light, Social Security benefits just haven’t kept up.

A lot of Washington policy people are talking about reducing the rate of growth in Social Security benefits.  They think a 3.6% cost of living adjustment in one year is just too much.  They’re just plain wrong.

If Social Security benefits for retired workers had kept up with GDP growth since 1973, the average benefit would now be $2244 a month.  That comes to just under $27,000 a year.  Next year’s cost of living adjustment gets us nowhere near that level.

Even after next year’s increase, the average benefit for a retired worker will be under $18,000 per year.  Technically, that’s enough to keep them out of poverty.  But let’s face it: who wants to retire on less than $18,000 a year?

Right now we’re in a recession, and budgets are tight.  But the real purchasing power of social security retirement benefits — adjusted for inflation — has hardly budged since 1973.  Retirees deserve more than just a cost of living increase.  They deserve to live better than they did in 1973.

Can we afford an increase?  Sure we can.  All we have to do is equalize the Social Security tax rate for everyone.

In 2012, American workers will pay Social Security taxes on their first $110,100 of wages.  For most Americans, that’s all of their wages.  Only a lucky 10% of Americans make more.

Let that lucky 10% pay Social Security taxes on all of their wages, just like the rest of us do.  Make Social Security a flat tax on all wages instead of a regressive tax on low and medium wages.

A flat Social Security tax would generate over $100 billion more every year than the current regressive tax.  In a time of high debt and budget deficits, that’s money the government could desperately use.  It’s money that retirees could use even more.

No one wants to pay taxes.  But when we have to choose between a tax break for those making over $110,100 per year or a benefits increase for those receiving under $18,000 per year, the choice is clear.  It’s time to make Social Security a flat tax.

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Sydney-based globalization expert Salvatore Babones is available to speak on the Chinese economy (demographics, growth, technology), the Belt & Road Initiative, global trade networks, and Australia-China relations. Contact: s@salvatorebabones.com