Paul Jacob

Is it possible that I’m smarter than Warren Buffett?

Well, not likely. There’s so much evidence to the contrary, at least of the "if you’re so smart, why aren’t you rich?" kind.

But, on my side, I didn’t let myself be interviewed by Tom Brokaw and say that I should be taxed at a higher rate. Buffett compared the federal taxes he pays to the taxes his office workers pay. Relating these tax amounts to the respective incomes, he then figured rates:

Mine came to — 17.7 percent. The average for the office was 32.9 percent. There wasn’t anybody in the office, from the receptionist on, that paid as low a tax rate. And I have no tax planning, I don’t have an accountant, I don’t have tax shelters. I just follow what the U.S. Congress tells me to do.

Brokaw immediately eggs Buffett on, asking about why there’s no outrage about this. Buffett is philosophic:

. . . I think what people don’t realize is that almost one third of the entire budget comes from payroll taxes. And payroll taxes on income, just like income taxes are taxes on income.

What Warren Buffett has done, of course, is lump Social Security contributions (payroll taxes) with the federal income tax. Then, he complains (so to speak) that his Social Security taxes aren’t high enough. His claim makes no sense if Social Security taxes are excluded. Considering the basic federal income tax only, he pays at a higher rate than his assistants. Far more.

But he lumps the two together for a specific set of purposes. And we can expect to hear a lot more of this kind of talk as the days of Social Security insolvency come nearer. What is not being made clear by Mr. Buffett, nor the myriad other Democrats who make this pitch, is what a revolution they are proposing in the very concept of Social Security. And what they are sweeping under the rug.

You see, Social Security is indeed a tax — it is a forced expropriation of wealth from individuals to government. But it is a tax designed to support a safety net pension program. It was not designed to fund highways or rockets or indoor rain forests.

Further, from the very beginning, Social Security mimicked in a few crucial ways private pension accounts. The more you contributed, the more you got out of it. Even as the first few recipients of its largesse gained thousands and thousands off of meager contributions, that feature was well-ensconced into the fabric of the system.

So, a professional restaurateur making a hundred thou per year would have higher contributions to the system than a minimum wage fry cook; at retirement, that fry cook would take much less home than the richer restaurateur.

Is this unfair? Well, Karl Marx might say yes, but it’s just life. The more you have, the more you can save. The more you’ve saved and invested, the more you can reclaim later in life, at retirement. Social Security did not set out to equalize incomes in America, just narrow them at retirement, providing a floor of poverty below which it would be hard to sink.

The trouble, of course, is that the system was not run like a modified tontine, with invested funds then shared by the narrowed ranks of the longest lived. It has been a pay in, pay out system, without investment. Well, other than the “investments” made by giving the surplus funds to Congress to spend. (The money thus turned into IOUs, which only meant that future taxpayers would have to pay future Social Security retirees by increased federal taxes.)

What most of us non-rich folk may forget (as Warren rightly remarks) is that, after $102,000 of income, the government stops taking out FICA withholding, which is the lion’s share of the payroll tax. That’s because, as the government rightly figures, after one has paid for one’s contributions to a pension system, one reserves one’s income for other things.

Mr. Buffet’s incredulity notwithstanding, it should not be shocking to discover that the richer person spends a lower percentage of his or her income on necessities like food, transportation, health insurance — and retirement — than does the poorer person. That’s yet another reason why we’d all prefer to be rich.

But better than being rich is being independent. That’s what is at stake here.

If individual Americans were able to own their own Social Security accounts, its basic features could be provided not by expropriated funds (taxes), but by invested funds. And, after you’ve paid for your safety net pension, and then your main pension or retirement nest-egg, you expect, as you get richer, to pay less of a percentage of your income toward pensions.

I mean, rich people don’t really need pensions. If they hit a cash flow crunch, they simply sell off some of their accumulated assets. The reason we common folk need pensions is that we haven’t accumulated enough assets. Indeed, our pension funds are there to act as our accumulated assets, invested specifically for the one purpose: retirement.

What Warren Buffett proposes, apparently, is to remove the cut-off point, and extend the FICA tax. In Buffett’s case, to his entire $66 million a year in income. Though, Buffett clearly expects no commensurate increase in his Social Security benefits upon retirement (and might be shocked were anyone to suggest it).

Buffett’s idea would, on paper, “save the Social Security System.” But it would be a monumental tax increase, the side-effects of which would likely be disastrous.

What such a move would do is transform the system from a mimicry of private pensions to a straight welfare program, taking from richer people and giving to the poorer. Any pretense that the Social Security System was one of paying our own way would go out the window.

And, under the rug, nestled like the wisest of serpents, would be the one thing not necessary to ever mention again: the fact that, for two thirds of a century, our so-called representatives of both parties squandered our retirement nest egg, our “safety net,” with no thought for the future.

They would be saved by the rich.


Paul Jacob

Paul Jacob is President of Citizens in Charge Foundation and Citizens in Charge. His daily Common Sense commentary appears on the Web and via e-mail.