Bill Gates and I Pay Equally--and This Is Supposed to Be a Fair System?

Microsoft’s Bill Gates and I have two things in common: We both work, and we both paid the same amount of Social Security taxes this year. The government took about $8,500 from each of us to support Social Security’s retirement and disability programs.

Of course, that’s where the similarity ends. You see, I made about $85,000 in 1998, while he made $18 billion. Consequently, about 10% of my income disappeared into the Social Security system, but only a minuscule fraction of Gates’ income was snared for that purpose. Moreover, compared with Gates’ $58-billion fortune, my net worth is negligible.

I would not mind the Social Security payroll tax so much if Social Security were simply a forced savings mechanism that took my tax “contributions” and gave them back to me with interest when I retired or became disabled. But the current Social Security system is wildly redistributive. It takes money from current workers and gives it to current beneficiaries.

In 1998, for example, individuals paid 6.2% of their first $68,400 in wages to the Social Security Administration, and their employers paid matching amounts, for a combined rate of 12.4%. Social Security benefits are linked by formula to each worker’s Social Security contributions, but the link is actually quite loose and can vary dramatically based on such factors as family status, income and age. For example, Social Security favors current retirees over future retirees, low earners over high earners and one-earner couples over two-earner couples. In short, not every worker gets his or her money’s worth out of Social Security. There are winners and losers, and workers like me--with higher-than-average earnings--are losers.

Mind you, I’m not automatically opposed to all forms of government redistribution. But it seems to me that the government must bear the burden of justifying its redistributive mandates. Redistribution on the basis of need seems the most justifiable. Consequently, it could make sense to have a social security system that redistributes economic resources from rich to poor.

But a payroll tax is not the proper tool to achieve such redistribution. In particular, payroll taxes simply do not reach trust-fund kids and other nonworking investors. Why should higher-than-average wage-earners be the only ones required to support low-income Social Security beneficiaries? And why should Gates have to pay this tax on only an insignificant fraction of his compensation? If redistribution is called for, it would be far more appropriate to use the income tax system or a wealth tax system.

Not convinced? Well, next year the Social Security wage base will jump to $72,600. So I will have to pay another $520 in payroll taxes, for a total in excess of $9,000. That’s a whopping 6% increase in my payroll tax liability next year.

Why so much? Well, it turns out that the Social Security tax base is linked to the average wage level, and that level rose by more than 6% last year. Consequently, even though inflation was only about 1.3% last year, the payroll tax base jumped by 6.14%. The net effect is that Social Security benefit levels will go up by an almost negligible 1.3% next month, but my payroll tax liability will jump by more than 6%. It just doesn’t seem fair.

Nor will I draw much solace from the fact that the law, in its majestic equality, will also require Gates to pay another $520 in payroll taxes next year. After all, he tops the Forbes list of the 400 richest Americans, and he makes about $2.1 million an hour. So what’s another $520 here or there?

But for the rest of America, the payroll tax is an ever increasing burden. In short, the payroll tax is an unfair way to finance a redistributive Social Security system. Consequently, if Congress ever does get around to reforming Social Security, I hope that the members remember to include a payroll tax cut for workers like me, even if that means raising taxes on income or wealth. After all, the last time I checked, our votes count as much as Gates’ and all those trust-fund kids put together.