How many Social Security checks fit inside one tax break?

The Congressional deficit reduction committee has numerous government programs on the chopping block, and we may soon see some very severe spending reductions. The committee must agree upon, and Congress must pass, $1.2 trillion in spending cuts and/or tax increases by November 23, or automatic, across-the-board spending cuts will go into effect in 2013. I hope that cuts to Social Security are not among the committee’s recommendations, but fiscal hawks are beating the drum harder than ever with their insistence that spending on the program must be reduced soon.

The Social Security issue came to mind a week or two ago, when I read James B. Stewart’s article in the New York Times on possible changes in the way the federal government taxes certain kinds of investment income.  Stewart’s article makes the point that some of the wealthiest taxpayers benefit greatly from the special tax rate of 15 percent that currently applies to capital gains* and dividends:

“The IRS reports that for taxpayers with the top 400 adjusted gross incomes, capital gains in 2008 amounted to an eye-popping average of $154 million for each of these taxpayers…and this in a year when the stock market plunged.”

Suppose the government taxed capital gains at the same rate as “ordinary income” (wages, salaries, most interest payments, etc.). For the 400 ultra-wealthy taxpayers mentioned in the quote above, a marginal tax rate of 35 percent would have applied to this income, instead of the special rate of 15 percent. Hence, if all 400 had been required to count their capital gains as ordinary income for tax purposes, their tax bills would presumably have been about $31 million higher on average than they actually were. It seems that the special, reduced rate for capital gains yields a large amount of tax savings for these 400 income tax filers, along with others who report capital gains on their income tax forms—who make up a fairly wealthy group themselves.

This brings us back to Social Security and to the relatively modest benefits that it offers. Social Security literature available on the web  lists the 2009 primary insurance amounts (PIAs) for covered workers with various income levels. (By the way, 2010 numbers can be found at this link.) This is the monthly payment to which a worker is currently entitled if he or she retires at the current full retirement age of 65 years old (not including Medicare, any applicable spousal benefits, etc.). Here are three examples:

Probably, few readers will be surprised that these monthly payments are not extravagant. But they are tiny in comparison to the capital gains tax breaks mentioned above. One can see this by dividing the amount of the average individual tax break for the 400 taxpayers mentioned in the Times by the three amounts shown in the table above:

$30.8 million ÷ $889.40       = 34,630 Social Security benefit payments

$30.8 million ÷ $1,509.60   = 20,403 Social Security benefit payments

$30.8 million ÷ $2,346.30  = 13,127 Social Security benefit payments

In other words, the average amount saved by each of the 400 highest-income taxpayers because of the special 15-percent tax rate on capital gains would be enough money to pay for 34,600 Social Security checks in the amount paid each month to a hypothetical minimum-wage retiree, and so on. (These results are not exact, as I am using figures from two different years in my calculations.)

There is nothing wrong with low taxes per se, but tax breaks that can run to such large amounts for just one tax return appear to be an unfair and inefficient way of aiding the economy, in comparison with the much-smaller checks that make up each month’s Social Security benefit outlays. Moreover, people who have substantial investments in the stock market and elsewhere benefit nonetheless from the availability of Social Security checks based on their earnings, especially if their investments do not perform well over the long haul. The program is vital for most other old people.  The deficit reduction committee and Congress should keep the size of Social Security checks and other small but crucial outlays in perspective.

*Roughly speaking, capital gains are investment income that comes from increases in the value of an investment that a taxpayer owns.