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Can the rich, famous save Social Security?
Dennis Cauchon
June 03 2005

Can Tiger Woods save Social Security?

The question is not as far-fetched as it sounds. President Bush broke political orthodoxy April 28 when he proposed that Social Security benefits grow more slowly for "better off" workers than low-income workers.

The president's proposal raised the tantalizing question: Can Social Security be fixed on the backs of the wealthy - leaving most Americans unscathed?

The populist theme of targeting the affluent has become one of the most talked-about approaches for solving the retirement system's financial problems. Like his call for individual investment accounts, the president's willingness to discuss treating the rich and poor differently has opened a new chapter in the Social Security debate.

Taxing all income and capping benefits would fix Social Security - mathematically, at least. The program would run a permanent surplus if all income - including the millions earned by athletes, movie stars and corporate tycoons - were subject to the 12.4% Social Security tax and if benefits for the affluent were capped at current levels, according to the Social Security Administration.

Americans say they like the idea of making the rich pay more and get less. More than two-thirds support cutting benefits for the affluent and applying the Social Security tax to all income, not just the first $90,000 earned, according to a USA TODAY/CNN/Gallup Poll in February. These extreme changes have little political support in Washington today because they would impose a $100 billion-a-year tax increase on the wealthy and turn Social Security into more of a welfare program than a pension plan.

But the idea offers a measure of how radically the system must be restructured to make it financially sound and how politically difficult it will be to do so.

Simply trimming benefits for the wealthy does little to help Social Security. The rich are too few in number and get limited benefits already.

Small increases in the amount of income subject to the Social Security tax - such as lifting the cap from the current $90,000 to $140,000 - don't help much either. For the soak-the-rich strategy to work, higher taxes must be aimed at the super-rich.

How it would work

Call it the Tiger Woods effect. The nation's highest-paid athlete - $80 million last year, Forbes magazine estimates - illustrates how Social Security tax hikes and benefit cuts would work:

•Cut Woods' benefits The golfer's benefit would be reduced by about $3,500 a year starting in 2042 when Woods turns 67, under the plan mentioned by Bush.

•Tax Woods' first $140,000 of income. The golfer would pay an extra $6,200 a year if the amount of income covered by the Social Security tax were raised from $90,000 to $140,000, a figure on the high end of recent proposals.

•Tax all of Woods' earnings. The golfer would pay $10 million in Social Security taxes a year, up from $11,160.

Social Security's long-term deficit - $3.7 trillion over 75 years - is so severe that little short of $10 million a year from Tiger Woods and comparable amounts from other rich people will bring the system into balance.

If the wealthy paid 12.4% payroll taxes on all their income but kept their current benefits, Social Security's deficit immediately would become a projected $540 million surplus, the Social Security Administration estimates.

Even if the rich got higher benefits to reflect their bigger tax bite, Social Security would close its long-term deficit by 93%.

Outside the general public, the idea of taxing all earnings and cutting benefits for the affluent has little support.

Liberals such as Sen. Edward Kennedy (news, bio, voting record), D-Mass., oppose it because they fear it will undermine political support for the program and recast Social Security as a welfare system rather than a pension program.

Conservatives such as the president oppose taxing all income because it would raise taxes $100 billion a year immediately, push the top federal tax rate to 50% and could damage the economy.

Even those who favor making the wealthy pay more are cautious.

"People with money are going to have to carry more of the burden," says Bob Dole, the former Republican presidential nominee and Senate majority leader, himself a multimillionaire. "It just can't go so far that Social Security looks like a welfare program."

Social Security is well known for helping reduce the number of elderly living in poverty from 35% in 1960 to 10% today. Less well known is the program's payoff for the affluent.

The program's biggest benefit checks go to retirees living in the 1.5 million households that enjoy $100,000 or more in annual income. These households receive an average of about $19,781 a year in Social Security benefits, according to the Internal Revenue Service. That's about $6,000 a year more than households earning less than $100,000. Dole, 81, says he gets $2,120 a month.

But even ending all payments to households with incomes above $100,000 - the top 5% of households getting benefits - would have saved only about $30 billion of the $415 billion in retiree payments made in 2004.

Taxing the rich, famous

For the tax-the-rich strategy to work, the dart must be aimed at the highest of all earners - star athletes, corporate chiefs, investment bankers, movie stars, trial lawyers.

Major League Baseball's payroll alone would provide $275 million a year in new Social Security taxes - the same as 220,000 workers earning an average of $100,000.

Taxing all of Wall Street's bonuses - $15.9 billion in 2004 - would reap nearly $2 billion a year. That's the same as 1.6 million workers earning $100,000.

The rich and famous would suddenly be a lot less rich:

• NBA star Shaquille O'Neal's three-year, $87 million contract would produce $11 million in new taxes.

• Actress Julia Roberts would pay $2.4 million in additional taxes on a $20 million movie contract.

• Jay Leno and David Letterman would pay a combined $7 million a year in new taxes.

• Billionaire Sumner Redstone, the nation's 20th richest man, would pay $2.7 million in additional taxes on his $21.5 million salary and bonus at Viacom, which owns CBS and MTV.

Invitation to tax dodging?

Imposing the Social Security tax on the ultra-rich would push the nation's top federal tax rate from the current 37.9% to 50.3% - and near 60% in California and other high-tax states. The top federal income tax rate is 35%. The Medicare tax is 2.9% on all income.

This would reverse the economic revolution of the Reagan era that lowered top tax rates to stimulate the economy by encouraging investment and work while reducing tax-dodging.

Some economists warn that high tax rates could devastate economic growth, even if they make Social Security richer. "High marginal rates drag the economy down and result in massive tax avoidance," says Florida State University economist James Gwartney, co-author of Common Sense Economics.

With so much money at stake, the tax would be dodged. "The rats would come out of the basement with all kinds of tax strategies to reclassify salary as another type of income," says Paul Caron, a tax law professor at the University of Cincinnati.

For example, a surgeon earning $1 million might direct his earnings to a corporation he owns. He'd pay himself a $200,000 salary and classify $800,000 as dividends.

But Social Security can be a tough tax to dodge because it is a pure flat tax, skimmed off the top before deductions. It applies to all income earned for services rendered, so its reach is extremely broad, covering endorsements and bonuses.

Caron says athletes would have a hard time avoiding the tax. "A sport that has a salary cap will have a hard time saying it's not paying salaries," he says.

Even if an athlete couldn't elude the Social Security tax, the high tax rate would create a greater incentive to dodge regular income taxes. While Social Security might collect more, "the federal government, as a whole, will collect less money if the top marginal rates return to 60% or 70%," as they were as recently as 1981, Gwartney says.

For example, a professional athlete might spend $1 million on a fancy gymnasium, a deductible business expense, to avoid paying $500,000 in federal and state taxes at a 50% rate.

"You're just inviting people to evade taxes," says Dean Baker, a Social Security expert of the liberal Center for Economic Policy Research. "It's counterproductive and you won't get as much money as you expect."

And the Social Security tax would hardly nick many of the richest people. Microsoft founder Bill Gates, worth $46.5 billion, earns less than $1 million a year in salary. His income comes from dividends and stock sales, which are not subject to Social Security taxes.

In fact, half the income generated in the top 2% of households - the 2.5 million families that earned more than $200,000 in 2003 - would escape the Social Security tax because the money comes from stock sales, dividends and other exempt sources.

'A political disaster'

Taxing all income could create another problem: huge monthly benefit checks for the richest people. That's because Social Security benefits are based on the taxes people pay into the system.

If Social Security taxed all income - not just the first $90,000 - New York Yankees superstar Alex Rodriguez would be entitled to $1.6 million in annual benefits starting at his full retirement age of 67, based on his career earnings, including his current 10-year, $252-million contract, according to a USA TODAY calculation. Woods would stand to get $5.9 million a year.

"It would be a political disaster" for Social Security to pay millions to millionaires, says David John, a Social Security expert for the conservative Heritage Foundation in Washington.

It wouldn't be disastrous for Social Security, though. Based on Rodriguez's life expectancy, Social Security would collect $32.5 million in taxes from the ballplayer and pay the elderly A-Rod only $15 million.

John says denying the affluent benefits for added contributions would be a mistake. "That makes it a welfare program," he says. "It requires abandoning the idea that Social Security benefits are tied to the contributions," he says.

'Breach of faith'?

Liberals take an even harder line at denying benefits to the rich, saying the system should be considered a pension program. "It's a breach of faith to make the wealthy pay and get nothing in return," says Michael Ettlinger, director of economic analysis at the liberal Economic Policy Institute.

The idea that rich and poor are treated alike in retirement programs is so central that Kennedy tried to block the Medicare prescription drug benefit in 2003 because it charged the rich more than the poor. "Hold on to your hat," he declared. "Today, Medicare. Tomorrow, Social Security."

"It's the strangest thing," says Bruce Josten, chief lobbyist for the American Chamber of Commerce and a supporter of cutting benefits for the affluent. "I (mention) cutting benefits for the wealthy everywhere I go, and I can't find anyone willing to buy the argument - not politicians or even well-off people themselves."