Social Security Taxation - Term Paper Example

SOCIAL SECURITY TAXATION SOCIAL SECURITY TAXATION INTRODUCTION One of the key revenues for the government, taxation refers to the charges levied on specific or general masses by the government, for the provision of social welfare, health and recreation facilities, infrastructure and other services. The government has several means of generating revenue but the largest pools to contribute to the revenues are taxes. Taxes can be direct or indirect, direct being the ones levied on a certain group of people like the salaried class or a certain income bracket. Indirect taxes refer to taxes that are collected directly from one person who collects it from large group of people for example cumulative sales tax collected from merchants. The ultimate beneficiary of tax collections are the masses who are given services like quality health services, public schooling, safety and security, cleaner neighborhood, better road and other infrastructural developments. Thus, it can be said that the government uses the people’s money and put it into use that can be translated into better facilities for them. One such taxation is that of social security taxation, the proceeds of which are pooled into to provide old-age benefits, pensions, child health and unemployed. Thus, the key beneficiaries of this kind of taxation are the most vulnerable classes of the society. This paper will shed light on the whole system of social security taxation, its pros and cons and its efficiency in fulfilling its intended purpose. In order to clarify the present day social security system it is imperative to study its evolution over time. BRIEF HISTORY The concept of social security was pioneered in 1935 when the American association for Social security led by Abraham Epstein coined the word social security. The actual payments were started in the January of 1937 as retirement funds. However these were only given to the primary working member of the family. It was only in 1939 when the survivors benefit for spouses and children were introduced. With time, more benefits were added to the scope of social security for example, benefits for the disabled were initiated in 1956 and it was followed by a major milestone in the year 1965, when the congress signed the social security law to add medical care to its portfolio of benefits. In order to ensure that people pay this kind of taxation for their own good in the long run, social security number was issued. These numbers became the basis of identification after some time and was used by the civil service commission and revenue boards by 1962. SOCIAL SECURITY TAXATION AUTHORITY In the United States, the social security administration authority (SSA) is the sole independent government agency that administers the social security measures in the country. The central office of the SSA is located in Maryland and is considered the central office for social security claims and issuance. Apart from the central office, the SSA has about 1300 subsidiary offices that employ up to 62000 people. Initially the signing of the Social security Act of 1935led to the creation of a board called the Social Security Board. The temporary office was taken up in 1936 in Texas however; construction for a better infrastructure for this agency was underway in Washington. Upon completion, World War 2 had been initiated and the building was taken up by the US Army. Thus, deeming the location unsafe for the administering of public welfare, they took up their permanent headquarters in Woodlawn, Maryland. The importance of the function of the SSA can be determined by the facts that social security taxation provides the government with 37% of its total revenues and sums up to 7% of the total GDP. CURRENT AND FUTURE PROBLEMS WITH SOCIAL SECURITY TAXATION Currently, the social security taxation is levied on an income ceiling after which they taxes are not imposed, called the taxable earnings base. In this way the rich who do not pay as much they earn, reap the rewards that are equal to the ones who have had lesser earnings but had to pay drastically. Thus, there is an imbalance between the capacity of payment and the outflow. The new age of employees aged 18 and above showed lack of confidence in the feasibility of the social security system by the time they retire. This shows that they do not see their money’s worth and are hesitant to avail social security taxation. Another problem is that of discrepancy in the years of coverage. For example, employees who retired in 1960 took 2.8 years to recover the taxation amount they have paid in collaboration with their employers. The retirees of 2003 are expected to take an average of 17.4 years for recovery and the future prediction of recovery years for 2020 is 21.6 years. This poses a major problem that contributes towards the prevalent doubts about the current system. Since social security taxation is levied on the salaried personnel or self-employed individuals, it is highly impacted by the low life expectancy and fertility levels in the country, which brings us to the first problem. With the change in cultures and trends, both the parents are now a part of the working class. However, they tend to have lesser children due to lower fertility levels and life expectancy level. This is because the number of people expected to step into the professional world by a certain time to fill up the gap that is created by the amount of people retiring, is decreasing (Vernon, 2013). Thus, there is a possible gap between demand and supply of funds that may possibly widen over time. According to a research, the current social security is only feasible till 2033 after which, without any reforms it will be able to only give 75% of the promised benefits to the masses. By that time people who have aid their social security taxes throughout their life will be threatened by less or no benefits, increasing the chances of a public revolt or national unrest. THE EVOLUTION OF THE SOCIAL SECURITY TAX CAP: Since the beginning of social security practice, there has been an income ceiling that limits the payment of social security to a certain limit. This income tax cap is also known as the ‘tax max’. In the year 1937 it was levied on $3000 of the earnings. President Roosevelt’s committee of economic security had proposed social security tax cap with the intention of reducing the amount of pressure on low-middle income groups and providing them with relief that can help them when they are their most vulnerable. However, when the congress sat down to determine an amount they settled at $3000 yearly which also included the individual earning $250 per month, compromising the ultimate goal of the tax max concept by the president. The first change took place in 1951 when the congress justified an increase in the taxable amount to cover the additional benefits that the social security would cover. By the year 2011 the limit reached to $106800 of the total earnings (Ssa.gov, 2014). The changes and increases in the tax max limit were justified by the congress by giving reasons like it was for the sustainability and financial feasibility of the social security program and that it will also help justify the social security benefits that are offered to both ends of the income brackets. The change also accounted for the varying average incomes over the years. Policy makers over the years have emphasized on the increase in taxation for the high earners as it will not only give the needed boost to balance out the taxation now and the benefits redeemed by the current payers but will also help in regard to the consideration of growth inequality. It is known that the individuals earning more than the tax max tend to have higher income growth rates, making it unfair to the people lying within the tax max amount and have to pay social security tax on every cent they earn. That being said, many policy makers also argue that an increase in the tax max amount will deem the program unfeasible as people from the high income bracket will end up paying more than what they will redeem in their future. Even though the trend of the social security taxable income has been increasing since its inception, it is still argues whether it is fair to exempt the high earners from further taxation or justified to tax individuals with low earnings on every cent they earn, building their economic pressures. INCREASING THE TAX MAX The congress has long debated on the feasibility of increasing the tax max in order to meet the expected shortfall in funding’s received and benefits offered. Since the income cap is based on wage indexing it is proposed that another method be employed to calculate feasible modifications in the tax cap. The proposed justification for this is the higher growth rate that is experienced by the high income earnings. Thus, taking into account the fluctuating wages, inflation levels and growth rates can help in reaching a justifiable point in the tax max limit increase. An estimated ten million Americans earn more than $100,000 in a year. The social security taxation has been raised from $113700 in 2013 to $117000 this year (Franklin, 2014). This shows the constant increase in order to fix the financial gaps in the system. However, the benefits offered are also higher with more medical coverage by the social security program. Through these means, the top earners will be paying $200 more in taxes as compared to last year. More than 60 million retirees and disabled people will see a 1.5% increase in the benefits offered, leveling out the excess taxation levied on the high earners. Even though change is adamant, the tax cap still does not account for special taxation for high earners, increasing the pressure on the low and middle income levels further. Currently, the US collects just 82% from the total income pool of the country, losing out on the 18% by not taxing the high earners further (Miller, 2014). If the same situation prevails, the system is likely to collapse by 2033 when social security will only be able to pay 77% of the promised benefits. In order to make the program feasible and sustainable, it is imperative to bring about a change that allows increased taxation for people from high income brackets. There are several implications that such a change might bring about. EFFECT OF THE INCREASE IN TAX MAX By increasing the tax cap level, the government will not only be able to fill the supposed gap that will prevail by the year 2033, but will also be able to protect itself from future debt financing to fill the gap. The current government’s short term measures to cut down on the social security benefits can also be reciprocated by increasing the number of benefits that the social security will cover. The top earners are in a better position to pay increased taxes as they see the taxable amount as meager one as compared to the total amount. This puts undue pressure on the low and middle income levels making them more vulnerable in their earning phase as well. A just society should focus on the welfare of its people equally instead of promoting the accumulation of wealth in the hands of the few top earners (Truth-out.org, 2014). Increasing the tax cap will also help in tackling the retirement security doubts of the current payers who will see in the increased benefits as their money’s worth. In all fairness, the system will only be fair if the people are taxed according to their respective incomes, evenly distributing out the pressures of taxation. According to the Commission to Modernize Social Security and the National Academy of Social Insurance fund in 2011, an increase in the tax cap according to the income levels will help in reducing or eliminating the chances of the predicted shortfall in the funding (Social Security and the 1%, 2014). CONCLUSION In order for the social security taxation to be feasible in the long run many changes need to be made. In order to prevent sever shortfalls in the future that may require additional debt usage to be filled up the recommendations laid out by the American Association of Retired Personnel can be looked into (Vance, 2014). Some of their recommendations include raising the retirement age, reducing benefits for the high earners, covering social security for all newly hired government employees, recalculating the cost of living assessment levels and using longevity indexes. Apart from these proposals, Investing in the newer generation of working class to satisfy them regarding the feasibility of the program will help in clearing their doubts regarding the benefits when their time of retirement comes. The SSA along with the government needs to partner with law makers and other policy makers to devise a long term sustainable plan for the efficiency of the system (Nytimes.com, 2014). The most important step that can help in doing away with the benefits doubts about social security, help prevent the predicted shortfall and evenly distribute the pressure of taxation would be to raise the tax cap in order to account for the increased earnings of the high earning brackets and making the program just and economically feasible in the long run. REFERENCES: Nytimes.com,. (2014). Log In - The New York Times. Retrieved 10 May 2014, from http://www.nytimes.com/2013/03/31/opinion/sunday/social-security-present-and-future.html?_r=0 Vance, L. (2014). The Future of Social Security. Thenewamerican.com. Retrieved 10 May 2014, from http://www.thenewamerican.com/economy/commentary/item/16497-the-future-of-social-security Vernon, S. (2013). The real reason behind Social Securitys problems. Cbsnews.com. Retrieved 10 May 2014, from http://www.cbsnews.com/news/the-real-reason-behind-social-securitys-problems/ Franklin, M. (2014). FICA takes bigger bite out of high earners paychecks in 2014. Investmentnews.com. Retrieved 13 May 2014, from http://www.investmentnews.com/article/20140106/BLOG05/140109955 Miller, M. (2014). Time to raise - or scrap - the Social Security payroll tax cap. Reuters. Retrieved 13 May 2014, from http://www.reuters.com/article/2014/04/15/us-column-miller-idUSBREA3E1HC20140415 Social Security and the 1%. (2014) (1st ed.). Retrieved from http://www.seiu.org/documents/SocialSecurityOnePercentReport.pdf Ssa.gov,. (2014). The Evolution of Social Securitys Taxable Maximum. Retrieved 13 May 2014, from http://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html Truth-out.org,. (2014). Make Wealthy Pay Social Security Taxes on Their Full Salaries -- and Retirement Benefits Could Likely Be Expanded for All. Retrieved 13 May 2014, from http://www.truth-out.org/buzzflash/commentary/lift-the-117-000-income-cap-on-social-security-taxes-and-benefits-could-likely-be-expanded/18419-lift-the-117-000-income-cap-on-social-security-taxes-and-benefits-could-likely-be-expanded Read More