December 18, 2004 - Let’s imagine a family of four. The father is the 36 year old owner of a small retail business which he has incorporated. He takes out a salary of $110,000 a year. The mother is a nurse in a local clinic. She earns $48,000 a year. They have a daughter who is 16 and a son who is 12. They have managed to invested $189,000 in a new home and have an additional $46,000 invested in mutual funds and keep $23,000 in a money market account for emergencies. His company distributed earnings to him of $28,000 in addition to his salary. Their savings generated $525.00 in interest. Their mutual fund paid $1,900 in dividends.

This year $5,625 was deducted from his paycheck for Social Security. She had $3,000 deducted from hers. His company and her employer matched that amount and the total Social Security payroll tax paid into the Social Security Trust Fund for them was $17,250.

Under the President’s privatization plan $1,800 of his deductions would be diverted from the Social Security Trust Fund into a private investment account over which he will have limited control. $960 would be diverted into her private investment account. The payroll tax paid by his company and her employer remains the same. Instead of $17,250 being paid into the Social Security Trust Fund only $14,490 is added to the pool out of which Social Security annuities can be paid to beneficiaries – a 16% reduction in the trust fund receipts.

Bringing the trust fund into balance without raising the cap on wages subject to Social Security; raising the retirement age; or increasing the payroll tax rate means that the benefits payable to the couple at retirement must be reduced by at least 16% from present levels. Since the annuity paid to retired workers and the annuities accrued to workers whose retirement is nearing are computed based upon the present level of trust fund receipts their benefits must be reduced as well. There is no getting around those difficult facts.

There is an alternative. 20% of the personal income reported is unearned income not taxed for social security. Add to that the amount of earned income that exceeds the cap and nearly 40% of personal income escapes the tax. Removing the $90,000 cap and extending the tax to all personal income regardless of the source the social security tax base is expanded to the degree that the Social Security Tax Rate can be reduced 20% and still maintain an actuarially sound system. Adopting that plan would let America’s wage earners keep 20% more of their own money for private savings or investment that they and not the government manage while maintaining a sound Social Security System and it would do so without opening the vault doors to Wall Street.