Tuesday, July 15, 2014

Cashing TF bonds impacts top 10 percentile tax payers most -- the opposite of FICA cap

If we don’t want to raise the FICA cap — currently at 83 percentile income — we should shy away from cashing Trust Fund bonds with income tax (the only way to cash them). Income tax is not much applied to bottom 47 percentile incomes (as noted by a recent Republican nominee), meaning Trust Fund payout would fall on the top 17 percentile -- most heavily on the top 10 percentile!

If we honestly wish to minimize the impact of Social Security payout on top 10 percentile incomes, then, the logical resort may be to gradually raise the FICA cap as the shortfall comes along — best we can do.

If this generation of retirees needs a Trust Fund that will last as long as they do, why wont every succeeding generation require the same size, multi-decade Trust Fund?

Practical reality: a Trust Fund that can cover FICA short fall for five years — until Congress gets around to closing the collections gap — is the only practical need (happened a couple of times).

The only practical advantage of today’s multi-decade monster may have been reaped by politicians: spared the need to raise the FICA rate for 60 years — 35 diverting FICA surplus to non-Social Security expenses to pay for bonds — projected 25 years cashing bonds to cover growing FICA shortfall.

Third way out?  Since we may cash bonds with printed money for decades, when bonds finally run out maybe we will print more of them too — out of force of habit (the Fed actually writes checks to make money).  :-)

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If Congress in 1983 had set the FICA tax rate so that collections were just a bit above then current payout the Trust Fund bonds would have come into play very quickly -- and been exhausted very quickly.

If Congress in 1983 had set the FICA rate much higher than it did Trust Fund bonds might have accumulated of another 50 years before coming into play.

If -- a much more plausible could-have-been (should-have-been!) -- working incomes (the 83% that pay FICA) had shared equally in the near 50% per capita income growth since 1983 (83s keep popping up) -- and continued into the future keeping up with what hopefully would be reasonably good per capita growth -- then, the Trust Fund bond accumulation could theoretically grow, diverting retirement taxes to on budget items, never to payout a single dime, forever.

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