Q. We now understand that Social Security is not a retirement plan, but a social insurance plan that keeps us from destitution in our old age or should we become disabled. The tax rate is flat up to $105,000. This creates the illusion of fairness. In reality, the wealthy pay a great deal less than the middle class or poor as percentage of income.
I wonder what the revenue for Social Security taxes would look like if everyone were taxed at 1 percent of their gross income, with no cap. All income levels would pay the same rate so maybe conservatives could see this as fair. Perhaps Social Security would be solvent. I'd also like to see it segregated from the general fund. —G. R., Austin, Texas
A. Increasing the payroll tax on top earners is a popular idea. It seems like a simple solution to the long-term funding of Social Security, particularly since the big dogs appear to be getting a free ride if their income exceeds the wage base limit of $106,800.
Unfortunately, it’s more complicated than that. Also, adding a 1 percent tax on all income isn't nearly enough to solve the funding problem. Here are some things you may not know:
—The Wage Base Maximum. While income over the $106,800 wage base maximum isn't taxed the 6.2 percent (12.4 percent for combined employer/employee) for Social Security retirement and disability benefits, workers with incomes over that amount also don't accrue any additional benefits over that limit. So income over that amount isn't getting a free ride for retirement benefits. Those workers need to save more of their income to avoid a dramatic drop in income when they retire.
Years ago the Social Security wage base covered about 90 percent of all wages. Today it covers about 86 percent of all wages. Revenue could be increased by raising the wage-base cap, restoring the percentage of all wages taxed to 90 percent. This was recommended by the National Commission on Fiscal Responsibility and Reform, which has been ignored by both parties.
—The Employment Tax Isn't Flat. While the employment tax appears to be flat because it is the same rate on all income up to $106,800, it's actually a sharply graduated tax because the amount of benefits you are credited drops sharply as income rises. Under current law income up to $9,000 is credited at 90 percent, income $9,000 to $64,000 is credited at 32 percent, and income from $64,000 to $106,800 is credited at only 15 percent. Higher income workers pay the same tax rate but get much less in benefits per dollar of taxes paid in.
The result is visible in benefit payments at retirement. While a low income worker can expect Social Security to replace 55 percent of earnings when retired at 65, a worker at the top of the wage base can expect only 27.7 percent— about half as much in benefits for having paid at the same tax rate.
The Medicare portion of the employment tax, a total of 2.9 percent for employer and employee, now applies to all earned income, with no limit. Since we all get the same Medicare coverage, this is another "flat" tax that clearly isn't flat— the big dogs pay a lot more for their Medicare than typical workers.
In terms of our national future, Social Security is a sideshow. The big problem is Medicare.
Q. Could you send me a list of the highest dividend-paying stocks from the biggest companies? I want to start a Roth IRA through a Vanguard brokerage account and would like to buy a stock such as Exxon and just have the dividends reinvested. —B.F., from Dallas
A. If you select from the 100 largest capitalization stocks in the S&P 500 list and require a dividend yield of at least 4 percent, you will have a list of only 7 stocks: ATT, Verizon, Altria, Eli Lilly, Southern Company, Bristol-Myers Squibb, and Merck. You can expand this list relatively easily by adding foreign stocks or by reducing the minimum yield requirement.
One way to expand your search is to Google "dividend aristocrats" to learn about companies with a long history of dividend increases. When you do that the links will also include some of the Exchange Traded Funds that specialize in dividend stocks such as the SPDR Dividend ETF (ticker: SDY). This ETF holds the 60 highest yielding stocks in the S&P 1500 Index that have increased their dividend every year for at least 25 consecutive years. Recently, it was providing a yield of 3.3 percent. (Full disclosure: I own shares of Verizon).