Wipe Out!

One tax cut after another has been eaten up by the tax no one will touch.


I often wonder whether my in-laws are unique. When my father-in-law retired a couple of years ago, my mother-in-law actually refused to apply for Social Security payments.

Mom is the hard-working sort, but she never took many jobs outside the home. She and her husband knew she hadn't paid much into the Social Security system; actually, they had been pleasantly surprised at the size of the check Pop alone received. They thought they could live on Pop's Social Security check plus the tiny pension they would get from an aerospace company where Pop had spent a decade many years ago.

So when friends told them that Mom qualified for Social Security benefits of her own, they were skeptical. "I never worked, so why should I be receiving Social Security?" said Mom.

For a full year, she stayed away from the Social Security office. Finally, she made the trip. The benefits were just too good to turn down. With amazement in her voice she told me, "We almost do better now after taxes than we did when Dad was working."

I'm proud of Mom and Pop for their reluctance to take government money. And I'm glad they're now well off. But their generation's gain, unfortunately, is their children's loss—especially if their children want to have children of their own.

Real after-tax incomes of working people over the last decade and a half have fallen significantly below not just the levels of the 1970s but even the levels of the mid-1960s. And the culprit is the same program that is making Mom and Pop well-to-do.

Sometimes it's hard to believe that working people are poorer today than they used to be. After all, real income per capita continued to increase even after the oil shock of 1973 brought the Vietnam era boom to an ignominious end.

Unfortunately, however, working folks are poorer today than they have been at any time since the 1960s. They face a villain that doesn't affect the retired in quite the same way—that old certainty, taxes. Even after several Reagan-era cuts, taxes remain so much higher than they were in the '60s and early '70s that they've wiped out all the rest of the economy's gain for average working people, especially those with families.

Tax reformers just haven't attacked the main problem. What is killing off economic progress for working people is my mother-in-law's benefactor, the sacred cause for which thousands of government-subsidized "senior center" programs in church basements lobby—Social Security and Medicare.

If you listen to the common wisdom, you may blame defense spending for America's fiscal plight. There is plenty of waste in the Pentagon, but if you look back more than a couple of years you'll see that over the long run the generals' portion of the national income has hardly increased at all.

How about welfare free-loaders? By the most inclusive methods of counting, the increase in spending for the poor has never been more than a small portion of the increase in spending for the elderly.

The real villains are Social Security and Medicare. In 1985 they paid out $254 billion, almost seven times more than 15 years earlier, after adjusting for inflation. And if you believe it's "politically impossible" to reverse the rise of Social Security and Medicare, you're condemning today's working people to an overtaxed future.

The Biggest Tax
The effect of Social Security and Medicare on working people is easy to gauge because we pay for these programs with a special tax. Economist Joseph Minarek of the Urban Institute in Washington, D.C., has calculated the burden on median-income families of ordinary federal income taxes and Social Security taxes (which also fund Medicare).

Tax changes from 1954 to 1984 hurt median and just-below-median income families badly. Ordinary income taxes rose from about six percent of the median wage earner's income back in 1954 to more than twice that in 1981, finally falling off to a bit more than 10 percent in 1984. But this rise in ordinary income taxes was a mere blip compared to the increase in Social Security taxes. Over the same 30 years, workers' direct Social Security taxes rose from a little less than two percent of income for median families to a full seven percent—almost as big a bite as regular income taxes. (See the figure below.)

But even that increase grossly understates what employed people pay for Social Security. Politicians perpetrate a sleazy scam regarding Social Security tax collections. The direct tax you see on your pay stub (as the FICA contribution) is matched by another tax collected from your employer.

Congress tells you: The Social Security tax is "only" seven percent. But it tells your boss: For every dollar you pay an employee, take out seven cents in direct tax on the employee and then pay us an additional seven cents. So the tax on a dollar's wages is really 14 cents. The median worker faces far more in Social Security tax alone than the entire 10.29 cents on the dollar he now pays to support the rest of the federal government. And the so-called "employer's share" of Social Security has risen just as fast as the direct Social Security tax—more than 320 percent since 1954, even after adjusting for inflation!

Unlike ordinary income taxes, both sorts of Social Security taxes start with the first dollar of wages. No private employee, from an inner-city teenager bagging groceries after school to the president of General Motors, is exempt. (Actually, Social Security taxes hit poorer people harder because income above a certain level, a level that Congress has steadily increased, isn't subject to Social Security taxes.) By increasing the cost of hiring a new worker, high employer taxes not only decrease salaries, they increase unemployment.

Without Social Security tax increases, life would be far easier for working people—probably about as easy as it was before the recessions of the 1970s.

The Good Old Days Really Were Good
Before taxes, the median male full-time employee made $24,000 in 1984, slightly less, adjusting for inflation, than the $24,700 he made in 1971. (See figure below.) When you add back the employer "contribution" to Social Security, median pretax incomes are even closer to the level of 1971—$25,700 in 1984, compared to $25,800 in 1971.

But after-tax incomes remain way down where they were back when Lyndon Johnson was just starting to finance the Vietnam war. In 1965, the median full-time working male took home $5,700—the equivalent of about $20,000 today. He was moving up and probably pleased with his paycheck. But 19 years later, he would take home $100 or so less in real terms. Today, looking back on more-prosperous years—1971, for example, with take-home pay of $22,400—he has reason to grumble.

The tax increases of the last generation have not only been large, they've also hit hardest at those working people who need money most—the ones trying to raise families. Back in the 1960s, most of the federal taxes a working person paid on his income were ordinary income taxes. If he had children, he benefited from substantial deductions. The personal exemption was $600 per child at a time when people's pre-inflation incomes were around $7,000 a year. Today, that would amount to a $2,000 exemption on an income of some $23,000. But that's not what fathers and mothers get today. Instead, the personal exemption is just a bit more than $1,000 per child.

The tax reform recently emerged from Congress will address this problem by increasing the personal exemption, eventually to about the 1960s level. But taxes have changed since the '60s. Median families now pay more in Social Security taxes (including the employers' contributions) than they do in ordinary income taxes. And Social Security taxes allow no exemptions at all. Is it any wonder Americans aren't having enough kids to reproduce themselves?

The Big Picture
Looking exclusively at the total tax burdens of ordinary working people exaggerates the effect of Social Security taxes on the nation as a whole. Other programs are funded more by taxes on the rich and the upper middle class. But the exaggeration isn't by much. Total government spending adjusted for inflation increased about fourfold from 1960 to 1985. Today it's composed of:

Trust fund expenditures (Social Security, Medicare, federal employees' pensions, etc.): up 4.7 times since 1960 (adjusted for inflation), and currently running $346.4 billion a year.

Defense spending: up 1.5 times, to $253.8 billion.

National debt interest: up 5.1 times, to $130.4 billion.

All other spending: up 4.1 times, to $347.4 billion.

You can list many programs within "other spending" that can be classified as rapidly growing boondoggles:

• Housing programs, up from $1.4 billion a year (in constant dollars) in 1970 to $25.4 billion today;

• Food and nutrition assistance, up from $2.8 billion in 1970 to $18.7 billion today;

• Health-care programs, excluding Medicare, up from $11.1 billion in 1970 to $27.2 billion today;

• "Revenue sharing," up from nothing in 1970 to an estimated $4.6 billion in 1985.

But it doesn't make sense to spend your life fighting to cut programs that spend a mere $25 billion and treating the $254-billion, ever-increasing, Social Security and Medicare programs as untouchable. American quality expert J.M. Juran taught the Japanese they could make industry run better by "separating the vital few problems from the trivial many." If you attack the big problems, you can make big progress, he said, but if you decide they're hopeless, then your situation is hopeless. The same is true of government spending.

With this kind of bad news, why aren't baby boomers storming Congress to demand cuts in Social Security taxes?

They certainly aren't incited to action by the media, which rarely report on how taxes have blasted the incomes of working people. And reporters aren't likely to trip over the story, because no regularly published statistics tell them the after-tax incomes of ordinary employed people.

True, readily available figures on wages and median incomes reveal that pretax incomes have fallen just slightly since 1973. But statistics on "per capita disposable income," or income after taxes, show an increase over the same period. These disposable-income figures, however, include everybody—working and nonworking alike—and count "transfer payments" such as Social Security just the same as earned income. By lumping together well-off retirees (remember Mom and Pop) and their working kids, these disposable-income figures hide the effects of Social Security taxes.

Lobbyists for elderly people—people in what are rightly called the "golden years"—point out that trust fund payments such as Social Security checks don't increase the federal government's deficit. Therefore, they say, these programs needn't be cut in order to end the government's current spending crisis.

On one level, they're telling the truth. Since Social Security and Medicare have their own outrageous taxes to pay their bills, the checks they issue don't increase the deficit. But that only leads to another question: Why have politicians found it acceptable to raise taxes more than 320 percent on working people over the past few decades to cover only two programs for a single group?

Social Security used to be politically acceptable because working people could expect more money when they retired than they paid in taxes. This is no longer true. In 1960, 4.5 workers were paying taxes to support every individual on Social Security. By 1980, the pyramid had turned upside down; every worker was supporting 3.2 beneficiaries. As the nation gets older and older, we cannot expect working people to accept lower and lower living standards to support more and more people.

Proposals to privatize Social Security need to be taken seriously; some are sloppy, but the idea behind them is important. Baby boomers need to organize, to build pressure groups as strong as the senior citizens' lobby. Otherwise, they will see their futures, and their children's, sacrificed to reelect politicians who prey on old people's fears.

Robert Chapman Wood is a writer and economic analyst based in Scituate, Massachusetts.