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URL:  http://boards.fool.com/quotthe-benefit-formula-uses-ss-taxed-income-in-20121272.aspx

Subject:  Re: Is Jesus a Democrat? Date:  1/9/2004  12:56 AM
Author:  rbednarski Number:  104734 of 196729

"The benefit formula uses SS taxed income in its calculation, and clearly SS taxes paid are based on SS taxed income, so it seems to be some odd semantic argument to claim that the amount of SS you get in retirment is unrelated to how much you contributed."

Did I say unrelated? I don't think so. But you cannot take the amount of taxes paid and compute the benefit, which is how I interpreted "Your contributions determine your payout rate at retirement". It is a lot more complicated than that and it is possible for two people to be age 65, have paid in exactly the same amount, and receive much different benefit amounts.

The formula uses an indexed earnings figure in which very early years' income is indexed up with inflation. SS Taxes were paid on the original amounts, not the indexed amounts used for the benefit calculation. My point is that no one can look at the amount they were taxed (a much more accurate representation than "contributed") and compute their benefit. And it is possible for people to have paid exactly that same amount in taxes yet get very different benefits because of the incidence of the taxes.

"Disagree. As long as their is a maximum amount of earned income that is taxed, it is clearly regressive."

I said the overall system, not just the tax system. You agreed that the benefit portion is progressive but then you assess the total system by considering only the tax portion of the system. Nowhere in your "analysis" do you take into account the fact that the person earning 90,000 will receive a benefit that is much larger, as a percent of pay, than Shaq. And even more relevant, since I hardly think anyone is too worried about the guy making $90K, the person making 30,000 gets a benefit that is a larger percent of pay than the person making 90,000.

I said in so many words that the tax portion of the program is regressive. But in looking at the overall program you have to look at both the tax and benefit sides. And the benefit side is extremely **progressive**. The benefit formula is a three step formula based on AIME (Average Indexed Monthly Earnings). The annual earnings on which this average earnings figure is based have the same caps as were used on the tax side. The formula for the benefit is then 90% of the first $x of AIME plus 32% of the next $y of AIME plus 15% of the balance of AIME. x and y are indexed yearly and since I have been out of the pension business for 5 years I don't have the current values at my fingertips. But it should be obvious from the structure of the formula that people with lower AIME's get a benefit that is substantially larger, as a percentage of AIME, than the benefit the person with a higher AIME receives.

Now, does the higher benefit compensate for the higher taxes? That would take a pretty extensive study, but it is not obvious on its face whether the totality of the SS program, taxes *and* benefits, is progressive or regressive.

God bless,

Rich
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