What Bush Didn't Say About Social Security
Sometimes what people don't say about a topic is more interesting than what they do say. Consider, if you will, President Bush's State of the Union address. Social Security, the focus of his speech two years ago, got only a few fleeting mentions. But if you delve into the details of Bush's health-care proposals, you discover a plan embedded in them that would effectively trim future Social Security retirement benefits for some people, while reducing their current Social Security tax payments to help pay for health insurance.
I'm not attacking this idea, the way I went after Bush's Social Security "reforms" of a few years ago. It's just that I'm a Social Security junkie, and that aspect of Bush's health proposals interests me -- if only because it points out how high Social Security taxes are for many families, relative to income tax.
Here's the deal. Bush, as you probably know by now, wants to let taxpayers who have health insurance exclude $7,500 (for singles) or $15,000 (for married couples) from their taxable income, but would count as income the value of employer-paid health insurance. Those exclusions would apply not only to federal income tax, but to Social Security and Medicare tax, as well.
Bush said his plan would let a couple earning $60,000 a year save $4,500 of taxes. (The actual number is $4,545, but Bush is rounding, of course.) According to the White House press office, that savings number is based on the couple being in the 15 percent income tax bracket and also paying 15.3 percent in Social Security and Medicare taxes. Apply that 30.3 percent combined rate to the $15,000 exclusion, and you get the president's number.
In reality, the couple would probably save only about $3,400 in taxes, because employers pay 7.65 percent of the 15.3 percent Social Security and Medicare tax. So unless Bush's $60,000 family happens to be self-employed, it would save 22.65 percent of $15,000 rather than the 30 percent Bush used. But $3,400 is still serious money.
Now, let me show you how Bush's health-care proposals could reduce future retirement benefits for many of today's taxpayers, who would in effect be trading retirement income tomorrow for help in covering health insurance costs today.
Remember that Bush would let you exclude $7,500 (singles) or $15,000 (couples) from taxes -- but that you'd pay income, Social Security and Medicare taxes on employer-paid health care. So if your employer pays less than $7,500 (or $15,000) toward your health care, you'd pay less Social Security tax than you pay now. (Around 20 percent of taxpayers with employer-paid health care would end up with higher taxes, but we'll set that aside for now.)
Got it? Let's proceed. Paying less Social Security tax would reduce your future Social Security retirement benefit, which is determined by a formula that's based on how much Social Security tax you pay. It's a progressive formula under which you get a benefit of 90 percent of the first Social Security tax dollars you pay, declining to 15 percent of the final tax dollars you pay if you're high-income. If you pay Social Security tax to the max -- for 2007, it's on $97,5000 of income -- you would see your benefit shrink by way less than 15 percent if you exclude $15,000 from Social Security taxation.
But low-income people -- who get much more in benefits per dollar of Social Security tax than maxed-out folks do -- would see benefits shrink by a far higher percentage. "A family earning $30,000 a year could see its retirement benefit cut in half," says Len Burman, director of the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. This would be an especially serious blow, because $30,000 families tend to rely almost entirely on Social Security for retirement income, whereas high-income families rely far less on Social Security because they have retirement accounts, pensions and savings.
I'm not offering you Burman's opinion (or mine) on Bush's health-care proposals, because plenty of people are holding forth about them. But not many are dealing with their Social Security aspect.
For that matter, few people these days are dealing with Social Security at all. That's unfortunate, because the longer we wait to come to grips with Social Security, the harder it will be to fix the well-recognized problem posed by baby boomers reaching retirement age. And the more Social Security will continue to distort federal budget numbers by making the deficit look smaller than it is.
Last week's update by the Congressional Budget Office projected a $172 billion deficit for the current fiscal year. That's 52.5 percent less than it would be without the $190 billion Social Security surplus. That $190 billion -- in theory, at least -- is committed to future Social Security beneficiaries. Logic suggests that we can't both commit that money to Social Security and also use it to reduce the reported budget deficit. But Washington has its own logic.
Sure, keep an eye on the health-care debate. But don't forget Social Security. It may be on the back burner for now -- but it's still cooking.
Sloan is Newsweek's Wall Street editor. His e-mail address email@example.com.