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 the income tax.
Here’s the deal. Bush 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 include as income the value of employer-paid health insurance, currently tax-free. The exclusions would be exempt not only from federal income tax, but from 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. According to the White House Press Office, that $4,500–30 percent of $15,000–is based on the couple being in the 15 percent income-tax bracket and also paying 15.3 percent in Social Security andMedicare taxes.
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 of today’s taxpayers, who would in effect be trading reduced 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.
Got that? 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. The way the formula works, someone who pays Social Security tax to the max each year–for 2007, it’s on $97,500 of income–would see his benefit shrink by less than 15 percent if he excluded $15,000 from Social Security tax. But low-paid 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 in Washington. That 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 typically supplement Social Security with 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 problem posed by baby boomers’ retiring en masse. 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 nonpartisan Congressional Budget Office projected a $172 billion deficit for the current fiscal year; that’s 52.5 percent less than it would have been 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 use it to reduce the reported budget deficit. But Washington has its own logic, and its own math.
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.
