Reply #26: Here's one reason why the FICA income cap makes sense ... [View All]

FICA is insurance ... insuring the replacement/continuation of a corresponding income level to that earned by one's labor. It's like insuring a house or car ... the correlation of premiums to the amount insured is the hallmark of any insurance. (Likewise, any insurance premium is used to pay current claimants. It's not a savings account.)

(I won't go into the fact that, as the "bottom 90%" receive less and less of the income pie, we're seeing the 'starvation' of FICA as a SECONDARY effect of the incresing INEQUITY in what people are paid. The rich getting richer and the working poor receiving less and less for their efforts to enrich the rich. The PRIMARY problem is the fact that lower income working people are getting a bigger and bigger screw job - shown by the increasing Gini Ratio.)

Now ... let's say someone with an income averaging $950,000 argues that they're entitled (in equity) to a similarly 'scaled up' benefit. Would we not, then, face the prospect of arguing that it's too great a burden on the system to pay THOSE people OASDI benefits 5 or 6 times as great as the $95,000 earner?

Yes... the intention is that it's a "safety net" ... but the structure is tilted to provide a scale of benefits that are, to some degree, correlated to the payroll levels taxed.

Here's a graph that shows the (Lorenz curve) distribution of OASI benefits in December 2003. The measure of equity in that distribution is NOT flat (i.e. Gini Ratio of zero) ... but it's nowhere nearly as 'bellied' as the payroll distribution upon which it's based, which has a Gini Ratio of somewhere around 0.45. (Note that the bottom 50% of the beneficiaries receive about 33% of the benefits.)




Here's another chart showing a distibution of benefits, perhaps easier for some to understand.