ASHINGTON - While presidential aspirants George W. Bush and Al Gore debate their Social Security plans, both men are ignoring what some consider the biggest inequity of the American retirement system: It is funded disproportionately by lower- and middle-income people.
Bush, the likely Republican nominee, is expected to announce tomorrow that he endorses the concept of allowing younger workers to put part of their Social Security payment into private investment accounts. Gore, certain to be the Democrats' candidate, calls that a ''risky scheme,'' and instead proposes plowing hundreds of billions of dollars into the program to keep it solvent and to expand it, mostly to help widows.
But neither man wants to change the way Americans pay Social Security taxes, which means the bottom line won't change for many workers.
The Social Security tax, along with a lesser Medicare fee, is often called a ''hidden tax'' because it never passes through a worker's hands. But the impact is huge: three-quarters of American workers pay more in Social Security and Medicare tax than they do in income tax, according to the labor-financed Citizens for Tax Justice.
Indeed, your pay stub probably doesn't show all the Social Security tax that you pay. Typically, your paycheck shows that you pay 6.2 percent of your earnings for Social Security, but doesn't show that your employer is required to pay another 6.2 percent on your behalf.
In other words, directly or indirectly, you are paying 12.4 percent of your earnings in Social Security taxes. But here's the rub: You pay that amount only on income up to $76,200. If you earn more, there is no further Social Security tax. (The 2.9 percent Medicare tax, also split between employer and employee, has no income cap.)
The result? Unlike income taxes, which rise with your earnings, Social Security taxes actually are lower on a percentage basis as your income rises. A person earning $944,000, who obviously can afford to pay a higher tax, only pays 1 percent of earnings in Social Security taxes, not the 12.4 percent paid by those making less than $76,200 a year.
So here is a little-understood fact of American tax policy: the people earning $76,200 and $944,000 pay exactly the same Social Security tax. Indeed, the person earning $76,200 and multibillionaire Bill Gates pay the same Social Security tax.
Is that fair? That is the question - but not one being asked in the current debate in the presidential campaign.
In fact, some analysts say the question is unfair. After all, while Gates may pay a minuscule portion of his income in Social Security taxes compared with most Americans, he also receives no extra benefits. If the Social Security tax cap was lifted, and if Gates paid the full 12.4 percent tax on his billions, then the Social Security administration might have to send him monthly retirement checks of $1 million or more.
Still, some members of Congress such as Representative Jerrold Nadler, a New York Democrat, have decried what they call the regressive nature of the Social Security tax system. They believe that wealthier Americans can afford to pay to help shore up the system, just as they pay more to help provide other social programs for lower-income people.
Nadler can't understand the resistance. First, he notes that raising the earnings cap above $76,200 would only affect the wealthiest 7 percent of Americans. (The other 93 percent already pay the Social Security tax on all of their wages.) Moreover, unlike some proposals, the Nadler plan would allow these wealthier Americans to receive higher Social Security benefits.
Nadler says his plan - which he says helps correct the very regressive nature of Social Security - would bring in enough money to make the system solvent for 75 years and avoid raising the retirement age, which Bush has not ruled out under his privatization plan.
Of course, those earning below $76,200 may wonder whether they have any stake in this debate. In fact, they may have the most at stake; a populist-oriented variation of Nadler's proposal would lower everyone's Social Security tax rate, with the difference made up by extending the tax to all salaried income.
So if it is possible to make Social Security solvent relatively easily, why are not Congress and the candidates backing it? Simply put, it is because they are concerned that raising the earnings cap would be perceived as a tax increase.
But, in fact, the earnings cap already is raised every year. This year, for example, many Americans faced a tax increase that they never read about. With little fanfare, the Social Security earnings cap went up from $72,600 last year to $76,200 this year - a $447 tax increase, according to the libertarian Cato Institute. The maximum Social Security tax is now at $9,449 per year, far more than most people pay in state and federal taxes.
For those who are used to investing in 401(k) retirement plans, the prospect of having even a portion of another $9,449 per year to invest in the stock market may be enticing, especially considering that the average return on Social Security is 1.9 percent. That goes far in explaining why Bush believes many Americans, especially younger workers, will support his plan to allow some portion of Social Security payments to be put into a private investment account. Bush is expected to suggest that two percentage points out of the 12.4 percent tax be put in private accounts.
Indeed, the Social Security system is not a great investment when compared to the stock market, bonds, or even to certificates of deposit. But supporters of the current system note that it is supposed to give workers back about the same amount as they pay in, although there is no guarantee.
For lower-income Americans, who receive considerably more in benefits than they contribute, the return is 4 percent. But lower-income Americans also tend to die sooner, so this average can be meaningless because they may get far fewer lifetime benefits.
For upper-income Americans, those earning well above the $76,200 threshold, the return on their Social Security investment is about zero percent. But they can afford the contributions and don't depend on the benefits like lower-income people.
The program's inequities are mostly felt among the solid middle class, those earning around the $76,200 maximum and paying the full 12.4 percent of income in Social Security tax. For them, Social Security returns less than 1 percent. Not coincidentally, that is the group targeted in the Bush plan.
''To be honest, Social Security reform is not much of an issue for the wealthy either way if you privatize it,'' said Michael Tanner, a senior fellow at the Cato Institute who supports a variation of the Bush privatization plan. ''The debate is really how to help the middle-income worker.''
But it is concern about the wealthy that keeps politicians from backing any plan that would address fundamental questions of fairness in the Social Security system, says Representative Peter DeFazio, an Oregon Democrat who has proposed removing the earnings cap.
''Both Gore and Bush ... are playing around the margins in order to make certain they don't offend anyone who might write a $1,000 campaign contribution,'' he said. ''I find that pathetic.''
