The American Spectator

Well, that day we all look forward too has arrived, my friends. Now might be as good a time as any to inform you that you could have paid a 115% tax rate on some of your income if you are currently receiving Social Security benefits. That is one of the eye-popping revelations in Joseph Fried’s book, How Social Security Picks Your Pocket: A Story of Waste, Fraud, and Inequities (Algora Publishing, 2003; 260 pages, $28.95).

Social Security wastes our tax dollars in ways that most people are unaware of. Rep. Charles Rangel (D-N.Y.) recently told a reporter, “The progressive nature of being able to get returns [from Social Security] means that lower-income people benefit more than higher-income people.” Yet Fried reveals that Social Security actually redistributes income upward. The reason is:

The spousal benefit results in upward redistribution because wives that stay at home are more likely to be married to high-earning husbands.

The “survivors’ benefit” is the other part of Social Security that leads to upward redistribution. Most private retirement plans permit couples to take joint benefit upon retirement, but when a couple elects to do this their monthly benefit is reduced to reflect the longer payout period of two lives versus one. Social Security makes no such adjustment, and, according to Fried, “this amounts to a very substantial extra benefit.”

Fried notes that Harvard economist Jeffrey Liebman’s examination of the data suggests “the wealthiest 20% of workers receive about 90% more from spousal and survivor benefits (in present value dollars) than do the poorest 20%.” Fried estimates that “$71 billion per year, in the form of spousal and survivor benefits, will be transferred to people with career wages above 70% of the career wage earnings of all other retirees.”

So how does one pay a 115% tax? It is due to the part of Social Security called the senior citizens earnings penalty. This applies to people who have taken early Social Security, have not yet reached 65 (or 67, depending on when they were born) and earn more than $11,520 annually. For every two dollars you earn over that amount, one dollar is deducted from your Social Security benefit. As Fried puts is, “This is the equivalent of a nasty, 50% federal tax rate, on top of all the other taxes you have to pay.” He then gives an example of a 63-year-old woman living in Ohio whose income is $11,000 from a current job, $500 in interest, $17,500 from a private pension, and $16,000 from Social Security. This woman would like to earn an extra $5,000 to help her daughter with college expenses. As Table 1 (re-created from Fried’s book, page 79) shows, she’ll pay $5,749, or 115%, in taxes on that $5,000! As a certified public accountant, Fried has experience with seniors who have no idea that the government is taking them for a ride.

From disability fraud, to dead recipients, to unions that want to preserve the Social Security status quo but keep their own members exempt from payroll taxes, Fried’s book is chock full of examples that both anger and entertain. It is also meticulously researched and written in an easy-going style, making it a good read for both layperson and policy wonk alike. If you want to get a solid grasp of how Social Security doesn’t work, this book is the best place to start.