Tags: Social | Security | Medicare | Tax

Save Social Security and Medicare by Reducing Tax Rates

By    |   Friday, 31 August 2012 07:02 AM

We can preserve Social Security and Medicare for many decades by lowering the tax rate applied to income for both Social Security and Medicare by one-third.

Last month, I indicated the Social Security Administration (SSA) anticipates the depletion of the trust funds for Disability Insurance, Medicare and Social Security by 2016, 2024 and 2033, respectively. After 2033, a 5 percent increase in the payroll tax (above the current 15.3 percent rate) will be required to fund existing benefits for the projected population demographics.

Two weeks ago, I suggested that we can preserve Social Security and Medicare by increasing the amount of income that is subject to Social Security and Medicare taxes. Currently, this amount is $110,000 annually.

In essence, only half of all income is subject to these taxes, according to the Bureau of Economic Analysis. By applying these taxes to all income, we can reduce the rate of taxation by 50 percent to remain revenue neutral. Hence, the new tax rate would be 7.5 percent instead of 15 percent. Incorporating future SSA projections for solvency, we would need to have a rate of nearly 10 percent to preserve these programs over many decades without reducing benefits — a 33 1/3 percent decline from 15 percent.

At 10 percent, those earning under $150,000 would experience a decrease in Social Security and Medicare taxes, while those earning more would receive a tax increase. Increasing the retirement age would permit a lower level of taxation — somewhere between 7.5 percent and 10 percent.

If our society wishes to preserve these programs, this methodology deserves serious consideration.

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Friday, 31 August 2012 07:02 AM
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